GREENWICH, CT, Aug. 7, 2014 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") announces its financial results for the third fiscal quarter ended June 30, 2014.
Third Fiscal Quarter 2014 Financial Highlights
- Net investment income for the quarter ended June 30, 2014 was $34.7 million or $0.25 per share, as compared to $34.2 million or $0.25 per share for the quarter ended March 31, 2014;
- Net asset value per share was $9.71 as of June 30, 2014;
- We funded $197.8 million of investments during the quarter ended June 30, 2014; and
- The weighted average yield on our debt investments remained stable from the previous quarter at 10.8%.
Dividend Declarations
On July 2, 2014, our Board of Directors declared the following dividends, reflecting a $1.10 per share annualized dividend run rate and a 10% increase from the prior dividend:
- $0.0917 per share, payable on September 30, 2014 to stockholders of record on September 15, 2014;
- $0.0917 per share, payable on October 31, 2014 to stockholders of record on October 15, 2014; and
- $0.0917 per share, payable on November 28, 2014 to stockholders of record on November 14, 2014.
Portfolio and Investment Activity
Our Board of Directors determined the fair value of our portfolio at June 30, 2014 to be $2.6 billion, as compared to $1.9 billion at September 30, 2013. Total assets at June 30, 2014 were $2.7 billion, as compared to $2.1 billion at September 30, 2013.
During the quarter ended June 30, 2014, we closed $177.3 million of investments in seven new and five existing portfolio companies, and funded $197.8 million across new and existing portfolio companies. This compares to closing $266.3 million in nine new and eight existing portfolio companies and funding $236.6 million during the quarter ended June 30, 2013. During the quarter ended June 30, 2014, we received $176.7 million in connection with the full repayments of five of our debt investments, all of which were exited at or above par. We also received an additional $48.3 million in connection with syndications of debt investments to other investors and sales of debt investments in the open market.
At June 30, 2014, our portfolio consisted of investments in 125 companies, 108 of which were completed in connection with investments by private equity sponsors and 17 of which were in private equity funds. At fair value, 94.6% of our portfolio consisted of debt investments (82.3% of our portfolio consisted of senior secured loans). Our average portfolio company debt investment size at fair value was $24.4 million at June 30, 2014, versus $22.1 million at September 30, 2013.
"We are pleased to report solid June quarterly results. We experienced several prepayments in early July including our largest investment, Desert NDT. This, combined with our successful equity capital raise, provides significant dry powder for the third and fourth calendar quarters. Our earnings should also benefit from continuing to fund and grow our new JV entity and from having a more robust pipeline for the remainder of the calendar year," stated FSC's Chief Executive Officer, Leonard M. Tannenbaum.
Our weighted average yield on debt investments at June 30, 2014 was 10.8%, and included a cash component of 9.8%. At June 30, 2014 and September 30, 2013, $1.8 billion and $1.2 billion, respectively, of our debt investments at fair value were at floating interest rates, which represented 72.4% and 67.4%, respectively, of our total portfolio of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended June 30, 2014 and June 30, 2013 was $74.3 million and $58.1 million, respectively. For the quarter ended June 30, 2014, the amount primarily consisted of $64.4 million of interest income from portfolio investments. For the quarter ended June 30, 2013, the amount primarily consisted of $46.4 million of interest income from portfolio investments. For the quarter ended June 30, 2014, PIK interest income net of PIK collected in cash represented only 7.5% of total investment income.
The increase in our total investment income for the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013 was primarily attributable to a higher average level of outstanding debt investments, which was principally due to a net increase of 23 debt investments in our portfolio and fee income related to investment activity, partially offset by amortization payments received during the period.
Expenses for the quarters ended June 30, 2014 and June 30, 2013 were $39.6 million and $27.7 million, respectively. Expenses increased for the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013 primarily due to increases in the base management fee, the Part I incentive fee and interest expense.
Liquidity and Capital Resources
As of June 30, 2014, we had $74.7 million in cash and cash equivalents, portfolio investments (at fair value) of $2.6 billion, $17.5 million of interest and fees receivable, $225.0 million of SBA debentures payable, $535.2 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $409.9 million of unsecured notes payable, $45.8 million of secured borrowings and unfunded commitments of $212.3 million. Our leverage ratio at June 30, 2014 was 0.82x, excluding SBA debentures. As adjusted for expected prepayments and the closing of our JV entity in early July 2014, our leverage ratio was at the low end of our target leverage range of 0.6x to 0.8x.
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
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, which was paid on May 30, 2014 to stockholders of record on May 15, 2014;
- $0.0833 per share, which was paid on June 30, 2014 to stockholders of record on June 16, 2014;
- $0.0833 per share, which was paid on July 31, 2014 to stockholders of record on July 15, 2014;
- $0.0833 per share, payable on August 29, 2014 to stockholders of record on August 15, 2014;
- $0.0917 per share, payable on September 30, 2014 to stockholders of record on September 15, 2014;
- $0.0917 per share, payable on October 31, 2014 to stockholders of record on October 15, 2014; and
- $0.0917 per share, payable on November 28, 2014 to stockholders of record on November 14, 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 June 30, 2014 and September 30, 2013, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows:
| June 30, 2014 | September 30, 2013 | |||||
| Investment Ranking | Fair Value | % of Portfolio | Leverage Ratio | Fair Value | % of Portfolio | Leverage Ratio |
| 1 | $113,271 | 4.31% | 2.24 | $122,769 | 6.49% | 2.67 |
| 2 | 2,508,318 | 95.45 | 4.70 | 1,770,277 | 93.51 | 4.70 |
| 3 | 6,228 | 0.24 | NM (1) | — | — | — |
| 4 | — | — | — | — | — | — |
| Total | $2,627,817 | 100.00% | 4.58 | $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. |
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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 June 30, 2014, we had modified the payment terms of our investments in 16 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 June 30, 2014, there was one investment with a fair value of $6.2 million on which we had stopped accruing PIK interest. As of June 30, 2013, there were no investments on which we had stopped accruing income.
Recent Developments
In July 2014, we invested $51.7 million in SLF JV I Funding, LLC ("JV") to facilitate the acquisition of $171.1 million principal amount of senior secured loans, a portion of which were purchased from us. To date, the JV has drawn $104.7 million under its $200.0 million revolving credit facility with Deutsche Bank AG, New York Branch. These transactions were in connection with our agreement in May 2014 with Kemper Corporation to provide $100.0 million of subordinated notes and equity to the JV, with us providing $87.5 million and Kemper providing $12.5 million. The JV invests in middle market and other corporate debt securities.
On July 2, 2014, our Board of Directors declared the following dividends:
- $0.0917 per share, payable on September 30, 2014 to stockholders of record on September 15, 2014;
- $0.0917 per share, payable on October 31, 2014 to stockholders of record on October 15, 2014; and
- $0.0917 per share, payable on November 28, 2014 to stockholders of record on November 14, 2014.
Effective July 14, 2014, our principal executive offices are located at 777 West Putnam Avenue, 3rd Floor, Greenwich, CT 06830.
On July 15, 2014, we completed a follow-on public offering of 13,250,000 shares of our common stock at the public offering price of $9.95 per share. The net proceeds totaled $129.7 million after deducting underwriting commissions of $1.9 million and offering costs of $0.3 million.
| Fifth Street Finance Corp. | ||
| Consolidated Statements of Assets and Liabilities | ||
| (in thousands, except per share amounts) | ||
| (unaudited) | ||
|
June 30, 2014 |
September 30, 2013 |
|
| ASSETS | ||
| Investments at fair value: | ||
| Control investments (cost June 30, 2014: $295,813; cost September 30, 2013: $207,518) | $308,307 | $215,502 |
| Affiliate investments (cost June 30, 2014: $38,497; cost September 30, 2013: $29,807) | 41,274 | 31,932 |
| Non-control/Non-affiliate investments (cost June 30, 2014: $2,282,099; cost September 30, 2013: $1,622,326) | 2,278,236 | 1,645,612 |
| Total investments at fair value (cost June 30, 2014: $2,616,409; cost September 30, 2013: $1,859,651) | 2,627,817 | 1,893,046 |
| Cash and cash equivalents | 74,661 | 147,359 |
| Interest and fees receivable | 17,503 | 10,379 |
| Due from portfolio company | 1,927 | 1,814 |
| Deferred financing costs | 21,167 | 19,548 |
| Other assets | 621 | 187 |
| Total assets | $2,743,696 | $2,072,333 |
| LIABILITIES AND NET ASSETS | ||
| Liabilities: | ||
| Accounts payable, accrued expenses and other liabilities | $3,927 | $1,166 |
| Base management fee payable | 13,116 | 9,625 |
| Part I incentive fee payable | 8,609 | 7,175 |
| Due to FSC CT, Inc. | 2,214 | 840 |
| Interest payable | 12,219 | 2,939 |
| Payables from unsettled transactions | 10,000 | 35,716 |
| Amounts payable to syndication partners | 4,193 | — |
| Advances received from portfolio companies | 7,233 | — |
| Credit facilities payable | 535,181 | 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 $45,750 and $0 at June 30, 2014 and September 30, 2013, respectively) | 45,805 | — |
| Total liabilities | 1,392,375 | 703,461 |
| Commitments and contingencies | ||
| Net assets: | ||
| Common stock, $0.01 par value, 250,000 shares authorized; 139,189 and 139,041 shares issued and outstanding at June 30, 2014 and September 30, 2013, respectively | 1,391 | 1,390 |
| Additional paid-in-capital | 1,511,055 | 1,509,546 |
| Net unrealized appreciation on investments and net unrealized depreciation on secured borrowings | 11,353 | 33,395 |
| Net realized loss on investments and interest rate swap | (153,571) | (154,591) |
| Accumulated overdistributed net investment income | (18,907) | (20,868) |
| Total net assets (equivalent to $9.71 and $9.85 per common share at June 30, 2014 and September 30, 2013, respectively) | 1,351,321 | 1,368,872 |
| Total liabilities and net assets | $2,743,696 | $2,072,333 |
| Fifth Street Finance Corp. | ||||
| Consolidated Statements of Operations | ||||
| (in thousands, except per share amounts) | ||||
| (unaudited) | ||||
|
Three months ended June 30, 2014 |
Three months ended June 30, 2013 |
Nine months ended June 30, 2014 |
Nine months ended June 30, 2013 |
|
| Interest income: | ||||
| Control investments | $3,741 | $1,279 | $9,354 | $3,037 |
| Affiliate investments | 1,108 | 741 | 2,971 | 2,050 |
| Non-control/Non-affiliate investments | 53,248 | 40,356 | 148,242 | 109,829 |
| Interest on cash and cash equivalents | 3 | 6 | 9 | 15 |
| Total interest income | 58,100 | 42,382 | 160,576 | 114,931 |
| PIK interest income: | ||||
| Control investments | 2,563 | 719 | 7,513 | 936 |
| Affiliate investments | 211 | 316 | 752 | 1,080 |
| Non-control/Non-affiliate investments | 3,523 | 3,009 | 9,115 | 9,795 |
| Total PIK interest income | 6,297 | 4,044 | 17,380 | 11,811 |
| Fee income: | ||||
| Control investments | 1,536 | 3,379 | 4,070 | 3,592 |
| Affiliate investments | 12 | 12 | 194 | 36 |
| Non-control/Non-affiliate investments | 8,135 | 7,656 | 35,044 | 32,138 |
| Total fee income | 9,683 | 11,047 | 39,308 | 35,766 |
| Dividend and other income: | ||||
| Non-control/Non-affiliate investments | 194 | 577 | 471 | 2,012 |
| Total dividend and other income | 194 | 577 | 471 | 2,012 |
| Total investment income | 74,274 | 58,050 | 217,735 | 164,520 |
| Expenses: | ||||
| Base management fee | 13,345 | 9,186 | 39,139 | 26,123 |
| Part I incentive fee | 8,609 | 7,343 | 26,163 | 20,983 |
| Professional fees | 863 | 959 | 2,775 | 2,931 |
| Board of Directors fees | 135 | 173 | 431 | 423 |
| Interest expense | 14,737 | 9,154 | 37,782 | 24,072 |
| Administrator expense | 715 | 695 | 2,105 | 2,294 |
| General and administrative expenses | 1,434 | 1,168 | 4,688 | 3,762 |
| Total expenses | 39,838 | 28,678 | 113,083 | 80,588 |
| Base management fee waived | (229) | (1,022) | (463) | (2,321) |
| Net expenses | 39,609 | 27,656 | 112,620 | 78,267 |
| Net investment income | 34,665 | 30,394 | 105,115 | 86,253 |
| Unrealized appreciation (depreciation) on investments: | ||||
| Control investments | 1,958 | 10,680 | 4,510 | 14,151 |
| Affiliate investments | (314) | 158 | 651 | 94 |
| Non-control/Non-affiliate investments | (15,330) | 2,224 | (27,148) | (7,843) |
| Net unrealized appreciation (depreciation) on investments | (13,686) | 13,062 | (21,987) | 6,402 |
| Net unrealized appreciation on secured borrowings | (45) | — | (55) | — |
| Realized gain (loss) on investments: | ||||
| Control investments | (299) | (11,223) | (299) | (11,223) |
| Non-control/Non-affiliate investments | (348) | (6,227) | 1,319 | (5,748) |
| Net realized gain (loss) on investments | (647) | (17,450) | 1,020 | (16,971) |
| Net increase in net assets resulting from operations | $20,287 | $26,006 | $84,093 | $75,684 |
| Net investment income per common share — basic | $0.25 | $0.26 | $0.76 | $0.81 |
| Earnings per common share — basic | $0.15 | $0.22 | $0.60 | $0.71 |
| Weighted average common shares outstanding — basic | 139,138 | 118,271 | 139,134 | 106,353 |
| Net investment income per common share — diluted | $0.25 | $0.25 | $0.74 | $0.79 |
| Earnings per common share — diluted | $0.15 | $0.22 | $0.60 | $0.70 |
| Weighted average common shares outstanding — diluted | 146,928 | 126,061 | 146,924 | 114,143 |
| Distributions per common share | $0.25 | $0.29 | $0.74 | $0.87 |
About Fifth Street Finance Corp.
Fifth Street Finance Corp. is a leading specialty finance company that provides custom-tailored financing solutions to 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. FSC'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, an SEC-registered investment adviser and leading alternative asset manager with $5 billion in assets under management. Fifth Street Management received the 2014 ACG New York Champion's Award for "Senior Lender Firm of the Year" and was named both 2013 "Lender Firm of the Year" by The M&A Advisor and "Lender of the Year" by Mergers & Acquisitions. With a track record of more than 16 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.