WHITE PLAINS, NY, May 8, 2014 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("Fifth Street" or "we") announces its financial results for the second fiscal quarter ended March 31, 2014.
Second Fiscal Quarter 2014 Financial Highlights
- Net investment income for the quarter ended March 31, 2014 was $34.2 million or $0.25 per share, as compared to $36.2 million or $0.26 per share for the quarter ended December 31, 2013;
- Net asset value per share was $9.81 as of March 31, 2014, as compared to $9.85 as December 31, 2013;
- Net funded originations for the quarter ended March 31, 2014 were $233.6 million;
- Our average leverage ratio for the quarter ended March 31, 2014 was 0.66x, excluding SBA debentures;
- No investments were on non-accrual status as of March 31, 2014; and
- We continued to strengthen our capital structure by accessing the institutional high-grade bond market to issue $250 million of five-year unsecured notes at a fixed coupon of 4.875%.
Calendar Year 2014 Dividend Declarations
To date, our Board of Directors has declared monthly dividends, which reflect a $1.00 per share annual run rate, for calendar year 2014 as follows:
- $0.0833 per share, which was paid on January 31, 2014 to stockholders of record on January 15, 2014;
- $0.0833 per share, which was paid on February 28, 2014 to stockholders of record on February 14, 2014;
- $0.0833 per share, which was paid on March 31, 2014 to stockholders of record on March 14, 2014;
- $0.0833 per share, which was paid on April 30, 2014 to stockholders of record on April 15, 2014;
- $0.0833 per share, payable on May 30, 2014 to stockholders of record on May 15, 2014;
- $0.0833 per share, payable on June 30, 2014 to stockholders of record on June 16, 2014;
- $0.0833 per share, payable on July 31, 2014 to stockholders of record on July 15, 2014; and
- $0.0833 per share, payable on August 29, 2014 to stockholders of record on August 15, 2014.
Portfolio and Investment Activity
Our Board of Directors determined the fair value of our portfolio at March 31, 2014 to be $2.7 billion, as compared to $1.9 billion at September 30, 2013. Total assets at March 31, 2014 were $2.8 billion, as compared to $2.1 billion at September 30, 2013.
During the quarter ended March 31, 2014, we closed $466.6 million of investments in 19 new and six existing portfolio companies, and funded $458.2 million across new and existing portfolio companies. This compares to closing $362.8 million in 15 new and four existing portfolio companies and funding $334.8 million during the quarter ended March 31, 2013. During the quarter ended March 31, 2014, we received $63.6 million in connection with the full repayments of four of our debt investments, all of which were exited at or above par. We also received an additional $122.4 million in connection with syndications of debt investments to other investors and sales of debt investments in the open market.
At March 31, 2014, our portfolio consisted of investments in 124 companies, 108 of which were completed in connection with investments by private equity sponsors and 16 of which were in private equity funds. At fair value, 95.1% of our portfolio consisted of debt investments (83.2% were senior secured loans). Our average portfolio company debt investment size at fair value was $25.0 million at March 31, 2014, versus $22.1 million at September 30, 2013.
"Our strong March quarterly results demonstrate the value of our affiliation with a leading middle market credit origination platform," stated our Chief Executive Officer, Leonard M. Tannenbaum, adding "The results of our continued focus on senior secured investments and the multiple steps taken to create a low-cost and flexible liability structure with a significant amount of longer-term unsecured debt enable us to generate attractive risk-adjusted returns for our shareholders. These attributes were recognized by Standard & Poor's Rating Services, who recently revised our outlook to 'positive', as well as by fixed income investors who we met with prior to closing our $250 million unsecured institutional debt offering in February."
Our weighted average yield on debt investments at March 31, 2014 was 10.8%, and included a cash component of 9.9%. At March 31, 2014 and September 30, 2013, $1.9 billion and $1.2 billion, respectively, of our debt investments at fair value were at floating interest rates, which represented 74.0% and 67.4%, respectively, of our total portfolio of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended March 31, 2014 and March 31, 2013 was $72.1 million and $54.7 million, respectively. For the quarter ended March 31, 2014, this amount primarily consisted of $59.5 million of interest income from portfolio investments (which included $5.5 million of PIK interest). For the quarter March 31, 2013, this amount primarily consisted of $41.7 million of interest income from portfolio investments (which included $4.0 million of PIK interest). For the quarter ended March 31, 2014, PIK interest income net of PIK collected in cash represented only 5.5% of total investment income.
The increase in our total investment income for the quarter ended March 31, 2014 as compared to the quarter ended March 31, 2013 was primarily attributable to a higher average level of outstanding debt investments, which was principally due to a net increase of 22 debt investments in our portfolio and fee income related to investment activity, partially offset by amortization repayments received and a decrease in the weighted average yield on our debt investments from 11.4% to 10.8% during the year-over-year period.
Expenses for the quarters ended March 31, 2014 and March 31, 2013 were $37.9 million and $25.4 million, respectively. Expenses increased for the quarter ended March 31, 2014 as compared to the quarter ended March 31, 2013 primarily due to increases in the base management fee, the incentive fee and interest expense.
Liquidity and Capital Resources
As of March 31, 2014, we had $45.4 million in cash and cash equivalents, portfolio investments (at fair value) of $2.7 billion, $19.0 million of interest and fees receivable, $225.0 million of SBA debentures payable, $576.7 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $409.9 million of unsecured notes payable, $47.8 million of secured borrowings and unfunded commitments of $221.4 million.
As of September 30, 2013, we had $147.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.9 billion, $10.4 million of interest and fees receivable, $181.8 million of SBA debentures payable, $188.0 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $149.5 million.
Calendar Year 2014 Dividends
As noted above, our Board of Directors has declared monthly dividends for calendar year 2014 to date as follows:
- $0.0833 per share, which was paid on January 31, 2014 to stockholders of record on January 15, 2014;
- $0.0833 per share, which was paid on February 28, 2014 to stockholders of record on February 14, 2014;
- $0.0833 per share, which was paid on March 31, 2014 to stockholders of record on March 14, 2014;
- $0.0833 per share, which was paid on April 30, 2014 to stockholders of record on April 15, 2014;
- $0.0833 per share, payable on May 30, 2014 to stockholders of record on May 15, 2014;
- $0.0833 per share, payable on June 30, 2014 to stockholders of record on June 16, 2014;
- $0.0833 per share, payable on July 31, 2014 to stockholders of record on July 15, 2014; and
- $0.0833 per share, payable on August 29, 2014 to stockholders of record on August 15, 2014.
Dividends are paid primarily from distributable (taxable) income. Our Board of Directors determines dividends based on estimates of distributable (taxable) income, which differ from book income due to temporary and permanent differences in income and expense recognition and changes in unrealized appreciation and depreciation on investments.
Our amended dividend reinvestment plan ("DRIP") provides for reinvestment of dividends, unless a stockholder elects to receive cash. As a result, if our Board of Directors declares a cash dividend, our stockholders whose shares are registered in their name and who have not "opted out" of our DRIP will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving cash dividends. We provide up to a 5% discount on newly-issued shares purchased through the DRIP (provided that shares will not be issued at less than net asset value per share). If you are a stockholder and your shares of our common stock are held through a brokerage firm or other financial intermediary and you wish to participate in the DRIP, please contact your broker or other financial intermediary.
Portfolio Asset Quality
We utilize the following investment ranking system for our investment portfolio:
- Investment Ranking 1 is used for investments that are performing above expectations and/or capital gains are expected.
- Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain materially consistent with the potential risks at the time of the original or restructured investment. All new investments are initially ranked 2.
- Investment Ranking 3 is used for investments that are performing below our expectations and for which risk has materially increased since the original or restructured investment. The portfolio company may be out of compliance with debt covenants and may require closer monitoring. To the extent that the underlying agreement has a PIK interest provision, investments with a ranking of 3 are generally those on which we are not accruing PIK interest.
- Investment Ranking 4 is used for investments that are performing substantially below our expectations and for which risk has increased substantially since the original or restructured investment. Investments with a ranking of 4 are those for which some loss of principal is expected and are generally those on which we are not accruing cash interest.
At March 31, 2014 and September 30, 2013, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows:
| March 31, 2014 | September 30, 2013 | |||||
| Investment Ranking | Fair Value | % of Portfolio | Leverage Ratio | Fair Value | % of Portfolio | Leverage Ratio |
| 1 | $ 112,521 | 4.20% | 2.67 | $ 122,769 | 6.49% | 2.67 |
| 2 | 2,557,461 | 95.27 | 4.79 | 1,770,277 | 93.51 | 4.7 |
| 3 | 14,316 | 0.53 | NM (1) | — | — | — |
| 4 | — | — | — | — | — | — |
| Total | $ 2,684,298 | 100.00% | 4.69 | $ 1,893,046 | 100.00% | 4.57 |
| _______________ | ||||||
| (1) Due to operating performance this ratio is not measurable and, as a result, is excluded from the total portfolio calculation. | ||||||
We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of March 31, 2014, we had modified the payment terms of our investments in 17 portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.
As of March 31, 2014, there were no investments on which we had stopped accruing cash interest, PIK interest or OID income. As of March 31, 2013, we had stopped accruing cash and/or PIK interest on three investments, including two that had not paid all of their scheduled cash interest payments for the period ended March 31, 2013.
Recent Developments
On May 2, 2014, one new lender joined our ING-led credit facility and one existing lender increased its commitment, increasing our borrowing capacity to $670 million from $650 million.
On May 2, 2014, we and Trinity Universal Insurance Company ("Trinity"), a subsidiary of Kemper Corporation, entered into a limited liability company agreement to co-manage Senior Loan Fund JV I, LLC ("SLF JV I"). We and Trinity have committed to provide $100 million of subordinated notes and equity to the joint venture, with us providing $87.5 million and Trinity providing $12.5 million. In addition, SLF JV I intends to seek up to $200 million in third party financing. SLF JV I is expected to invest in middle market and other corporate debt securities.
| Fifth Street Finance Corp. | ||
| Consolidated Statements of Assets and Liabilities | ||
| (in thousands, except per share amounts) | ||
| (unaudited) | ||
| March 31, | September 30, | |
| 2014 | 2013 | |
| ASSETS | ||
| Investments at fair value: | ||
| Control investments (cost March 31, 2014: $273,078; cost September 30, 2013: $207,518) | $ 283,614 | $ 215,502 |
| Affiliate investments (cost March 31, 2014: $38,624; cost September 30, 2013: $29,807) | 41,715 | 31,932 |
| Non-control/Non-affiliate investments (cost March 31, 2014: $2,347,502; cost September 30, 2013: $1,622,326) | 2,358,969 | 1,645,612 |
| Total investments at fair value (cost March 31, 2014: $2,659,204; cost September 30, 2013: $1,859,651) | 2,684,298 | 1,893,046 |
| Cash and cash equivalents | 45,396 | 147,359 |
| Interest and fees receivable | 18,950 | 10,379 |
| Due from portfolio company | 6,095 | 1,814 |
| Receivables from unsettled transactions | 14,788 | — |
| Deferred financing costs | 22,244 | 19,548 |
| Other assets | 544 | 187 |
| Total assets | $ 2,792,315 | $ 2,072,333 |
| LIABILITIES AND NET ASSETS | ||
| Liabilities: | ||
| Accounts payable, accrued expenses and other liabilities | $ 4,089 | $ 1,166 |
| Base management fee payable | 13,501 | 9,625 |
| Incentive fee payable | 8,500 | 7,175 |
| Due to FSC CT, Inc. | 2,008 | 840 |
| Interest payable | 4,907 | 2,939 |
| Payables from unsettled transactions | 3,937 | 35,716 |
| Amounts payable to syndication partners | 8,028 | — |
| Advances received from portfolio companies | 7,729 | — |
| Credit facilities payable | 576,681 | 188,000 |
| SBA debentures payable | 225,000 | 181,750 |
| Unsecured convertible notes payable | 115,000 | 115,000 |
| Unsecured notes payable | 409,878 | 161,250 |
| Secured borrowings at fair value (proceeds of $47,750 and $0 at March 31, 2014 and September 30, 2013, respectively) | 47,760 | — |
| Total liabilities | 1,427,018 | 703,461 |
| Commitments and contingencies | ||
| Net assets: | ||
| Common stock, $0.01 par value, 250,000 shares authorized; 139,138 and 139,041 shares issued and outstanding at March 31, 2014 and September 30, 2013, respectively | 1,391 | 1,390 |
| Additional paid-in-capital | 1,510,547 | 1,509,546 |
| Net unrealized appreciation on investments and secured borrowings | 25,084 | 33,395 |
| Net realized loss on investments and interest rate swap | (152,925) | (154,591) |
| Accumulated overdistributed net investment income | (18,800) | (20,868) |
| Total net assets (equivalent to $9.81 and $9.85 per common share at March 31, 2014 and September 30, 2013, respectively) | 1,365,297 | 1,368,872 |
| Total liabilities and net assets | $ 2,792,315 | $ 2,072,333 |
| Fifth Street Finance Corp. | ||||
| Consolidated Statements of Operations | ||||
| (in thousands, except per share amounts) | ||||
| (unaudited) | ||||
| Three months | Three months | Six months | Six months | |
| ended March 31, 2014 | ended March 31, 2013 | ended March 31, 2014 | ended March 31, 2013 | |
| Interest income: | ||||
| Control investments | $ 3,194 | $ 876 | $ 5,613 | $ 1,758 |
| Affiliate investments | 1,098 | 725 | 1,864 | 1,309 |
| Non-control/Non-affiliate investments | 49,699 | 36,019 | 94,995 | 69,473 |
| Interest on cash and cash equivalents | 3 | 5 | 6 | 8 |
| Total interest income | 53,994 | 37,625 | 102,478 | 72,548 |
| PIK interest income: | ||||
| Control investments | 2,542 | 108 | 4,950 | 216 |
| Affiliate investments | 207 | 308 | 542 | 765 |
| Non-control/Non-affiliate investments | 2,721 | 3,631 | 5,592 | 6,786 |
| Total PIK interest income | 5,470 | 4,047 | 11,084 | 7,767 |
| Fee income: | ||||
| Control investments | 1,967 | 114 | 2,534 | 213 |
| Affiliate investments | 12 | 12 | 181 | 24 |
| Non-control/Non-affiliate investments | 10,508 | 11,800 | 26,909 | 24,483 |
| Total fee income | 12,487 | 11,926 | 29,624 | 24,720 |
| Dividend and other income: | ||||
| Non-control/Non-affiliate investments | 181 | 1,089 | 276 | 1,435 |
| Total dividend and other income | 181 | 1,089 | 276 | 1,435 |
| Total investment income | 72,132 | 54,687 | 143,462 | 106,470 |
| Expenses: | ||||
| Base management fee | 13,735 | 8,891 | 25,794 | 16,937 |
| Incentive fee | 8,500 | 7,001 | 17,554 | 13,640 |
| Professional fees | 887 | 784 | 1,912 | 1,972 |
| Board of Directors fees | 141 | 122 | 296 | 251 |
| Interest expense | 12,833 | 7,761 | 23,046 | 14,917 |
| Administrator expense | 538 | 670 | 1,391 | 1,600 |
| General and administrative expenses | 1,499 | 1,455 | 3,252 | 2,594 |
| Total expenses | 38,133 | 26,684 | 73,245 | 51,911 |
| Base management fee waived | (234) | (1,300) | (234) | (1,300) |
| Net expenses | 37,899 | 25,384 | 73,011 | 50,611 |
| Net investment income | 34,233 | 29,303 | 70,451 | 55,859 |
| Unrealized appreciation (depreciation) on investments: | ||||
| Control investments | 2,132 | 4,693 | 2,552 | 3,471 |
| Affiliate investments | 182 | 93 | 965 | (63) |
| Non-control/Non-affiliate investments | (4,897) | (2,106) | (11,818) | (10,067) |
| Net unrealized appreciation (depreciation) on investments | (2,583) | 2,680 | (8,301) | (6,659) |
| Net unrealized appreciation on secured borrowings | (10) | — | (10) | — |
| Realized gain (loss) on investments: | ||||
| Non-control/Non-affiliate investments | (1,540) | (149) | 1,666 | 478 |
| Net realized gain (loss) on investments | (1,540) | (149) | 1,666 | 478 |
| Net increase in net assets resulting from operations | $ 30,100 | $ 31,834 | $ 63,806 | $ 49,678 |
| Net investment income per common share — basic | $ 0.25 | $ 0.28 | $ 0.51 | $ 0.56 |
| Earnings per common share — basic | $ 0.22 | $ 0.30 | $ 0.46 | $ 0.49 |
| Weighted average common shares outstanding — basic | 139,138 | 106,022 | 139,132 | 100,394 |
| Net investment income per common share — diluted | $ 0.24 | $ 0.27 | $ 0.50 | $ 0.54 |
| Earnings per common share — diluted | $ 0.21 | $ 0.29 | $ 0.45 | $ 0.48 |
| Weighted average common shares outstanding — diluted | 146,928 | 113,812 | 146,922 | 108,266 |
| Distributions per common share | $ 0.25 | $ 0.29 | $ 0.49 | $ 0.58 |
About Fifth Street Finance Corp.
Fifth Street Finance Corp. is a leading specialty finance company that provides custom-tailored financing solutions to small and mid-sized companies, primarily in connection with investments by private equity sponsors. The company originates and invests in one-stop financings, first lien, second lien, mezzanine debt and equity co-investments. The company's investment objective is to maximize its portfolio's total return by generating current income from its debt investments and capital appreciation from its equity investments. The company has elected to be regulated as a business development company and is externally managed by Fifth Street Management LLC. Named both 2013 "Lender Firm of the Year" by The M&A Advisor and "Lender of the Year" by Mergers & Acquisitions, Fifth Street Management is an SEC-registered investment adviser and leading alternative asset manager with over $4 billion in assets under management. With a track record of more than 15 years, Fifth Street's nationally recognized platform has the ability to hold loans up to $150 million, commit up to $250 million and structure and syndicate transactions up to $500 million. FSC's website can be found at fsc.fifthstreetfinance.com.
Forward-Looking Statements
This press release may contain certain forward-looking statements, including statements with regard to the future performance of the company. Words such as "believes," "expects," "estimates," "projects," "anticipates," and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and these factors are identified from time to time in the company's filings with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.