GREENWICH, CT, Aug. 10, 2015 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") announces its financial results for the third fiscal quarter ended June 30, 2015.
Third Fiscal Quarter 2015 Financial Highlights
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Net investment income for the quarter ended June 30, 2015 was $32.5 million, or $0.21 per share, as compared to $29.5 million or $0.19 per share for the quarter ended March 31, 2015;
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Net asset value per share was $9.13 as of June 30, 2015 as compared to $9.18 as of March 31, 2015; and
- We closed $227.4 million of investments during the quarter ended June 30, 2015.
Portfolio and Investment Activity
Our Board of Directors determined the fair value of our investment portfolio at June 30, 2015 and September 30, 2014 to be $2.3 billion and $2.5 billion, respectively. Total assets at June 30, 2015 and September 30, 2014 were $2.6 billion and $2.7 billion, respectively.
During the quarter ended June 30, 2015, we closed $227.4 million of investments in seven new and five existing portfolio companies, and funded $226.9 million across new and existing portfolio companies. This compares to closing $177.3 million in seven new and five existing portfolio companies, and funding $197.8 million during the quarter ended June 30, 2014. During the quarter ended June 30, 2015, we received $214.3 million in connection with the full repayments of nine of our debt investments, all of which were exited at or above par. We also received an additional $157.3 million in connection with syndications and sales of debt investments.
At June 30, 2015, our portfolio consisted of investments in 132 companies, 112 of which were completed in connection with investments by private equity sponsors, one of which was in Senior Loan Fund JV I, LLC ("SLF JV I") and 19 of which were in private equity funds. At fair value, 94.1% of our portfolio consisted of debt investments (78.8% of our portfolio consisted of senior secured loans). Our average portfolio company debt investment size at fair value was $20.5 million at June 30, 2015, versus $24.2 million at September 30, 2014.
As of June 30, 2015, SLF JV I had $348.9 million in assets, including senior secured loans to 27 portfolio companies. The joint venture generated income of $3.9 million to FSC during the third fiscal quarter, which represented a 17.6% weighted average annualized return on investment. Subsequent to quarter end, SLF JV I closed on $200 million of additional leverage, which should allow SLF JV I to expand up to $600 million of assets.
Our weighted average yield on debt investments at June 30, 2015, including the return on SLF JV I, was 10.9% and included a cash component of 10.3%, as compared to 10.7% at March 31, 2015. At June 30, 2015 and September 30, 2014, $1.7 billion and $1.6 billion, respectively, of our debt investments at fair value bore interest at floating rates, which represented 76.1% and 70.0%, respectively, of our total portfolio of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended June 30, 2015 and June 30, 2014 was $70.2 million and $74.3 million, respectively. For the quarter ended June 30, 2015, the amount primarily consisted of $59.3 million of interest income from portfolio investments. 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, 2015, PIK interest income net of PIK collected in cash represented only 3.9% of total investment income.
Net expenses for the quarters ended June 30, 2015 and June 30, 2014 were $37.7 million and $39.6 million, respectively. Net expenses decreased for the quarter ended June 30, 2015 as compared to the quarter ended June 30, 2014, due primarily to decreases in net base management fee, which was attributable to an 11.1% decrease in our investment portfolio, at fair value, for the year-over-year period.
"We are pleased by the initial results of our strategic review, initiated earlier this year, which was focused on driving consistent and sustainable performance at FSC. For the second straight quarter, our net investment income exceeded our quarterly dividend, generating excess earnings and enhancing our operating flexibility," stated Todd G. Owens, Chief Executive Officer, adding, "The credit profile of our portfolio was stable this quarter with no new investments placed on non-accrual. Additionally, we plan to begin utilizing our share repurchase program in the coming days."
Liquidity and Capital Resources
As of June 30, 2015, we had $181.7 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.3 billion, $12.8 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $315.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.3 million of unsecured notes payable and $21.9 million of secured borrowings.
As of September 30, 2014, we had $109.0 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.5 billion, $15.2 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $317.4 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $409.9 million of unsecured notes payable and $84.8 million of secured borrowings.
Dividend Policy
On August 4, 2015, our Board of Directors declared the following dividends:
- $0.06 per share, payable on September 30, 2015 to stockholders of record on September 15, 2015;
- $0.06 per share, payable on October 30, 2015 to stockholders of record on October 15, 2015; and
- $0.06 per share, payable on November 30, 2015 to stockholders of record on November 16, 2015.
Dividends are paid primarily from distributable (taxable) income. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividend distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders. 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 would 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.
Stock Repurchase Program
Our Board of Directors previously authorized a stock repurchase program to acquire up to $100 million of the outstanding shares of our common stock. Stock repurchases under this program are to be made through the open market at times, and in such amounts, as our management deems appropriate. Unless extended by our Board of Directors, the program will expire on November 20, 2015 and may be limited or terminated at any time without prior notice.
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, 2015 and September 30, 2014, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows:
| June 30, 2015 | September 30, 2014 | |||||
| Investment Ranking | Fair Value | % of Portfolio | Leverage Ratio | Fair Value | % of Portfolio | Leverage Ratio |
| 1 | $ 50,893 | 2.18% | 1.08 | $ 65,268 | 2.61% | 1.94 |
| 2 | 2,240,418 | 95.93 | 4.74 | 2,424,290 | 97.14 | 4.84 |
| 3 | 10,173 | 0.44 | NM (1) | — | — | — |
| 4 | 33,927 | 1.45 | NM (1) | 6,356 | 0.25 | NM (1) |
| Total | $ 2,335,411 | 100.00% | 4.64 | $ 2,495,914 | 100.00% | 4.75 |
| _____________ | ||||||
| (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 June 30, 2015, we had modified the payment terms of our investments in 13 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, 2015, there were three investments on which we had stopped accruing cash and/or PIK interest and OID income.
Recent Developments
On July 7, 2015, SLF JV I closed on a $200.0 million credit facility with Credit Suisse AG, Cayman Islands Branch, bringing SLF JV I's total debt capacity to $400.0 million. The facility has a maturity date of July 7, 2023 and borrowings under the facility bear interest at a rate equal to LIBOR plus 2.50% per annum.
Effective July 10, 2015, our Board of Directors promoted Steven M. Noreika to Chief Financial Officer, replacing Richard A. Petrocelli.
On July 14, 2015, we announced that we finalized a waiver with our investment adviser, in which our investment adviser agreed to waive a portion of its base management fee for increases in capital relating to the issuances of new equity. The initial term of the waiver is effective until January 1, 2017, at which point it is the intention of the adviser to renew the waiver annually. Assuming new shares are issued, the blended fee, which will be between 1% and 2%, will be applied in the same manner as currently applied under our investment advisory agreement. All stockholders will be treated equally in the benefit of the fee reduction, regardless of when they invested.
On August 4, 2015, our Board of Directors declared the following dividends:
- $0.06 per share, payable on September 30, 2015 to stockholders of record on September 15, 2015;
- $0.06 per share, payable on October 30, 2015 to stockholders of record on October 15, 2015; and
- $0.06 per share, payable on November 30, 2015 to stockholders of record on November 16, 2015.
| Fifth Street Finance Corp. | ||
| Consolidated Statements of Assets and Liabilities | ||
| (in thousands, except per share amounts) | ||
| (unaudited) | ||
| June 30, | September 30, | |
| 2015 | 2014 | |
| ASSETS | ||
| Investments at fair value: | ||
| Control investments (cost June 30, 2015: $281,808; cost September 30, 2014: $387,625) | $ 268,884 | $ 394,872 |
| Affiliate investments (cost June 30, 2015: $37,421; cost September 30, 2014: $37,757) | 41,810 | 40,764 |
| Non-control/Non-affiliate investments (cost June 30, 2015: $2,067,252; cost September 30, 2014: $2,069,301) | 2,024,717 | 2,060,278 |
| Total investments at fair value (cost June 30, 2015: $2,386,481; cost September 30, 2014: $2,494,683) | 2,335,411 | 2,495,914 |
| Cash and cash equivalents | 180,576 | 86,731 |
| Restricted cash | 1,171 | 22,315 |
| Interest, dividends and fees receivable | 12,840 | 15,224 |
| Due from portfolio companies | 2,992 | 22,950 |
| Receivables from unsettled transactions | 60,946 | 4,750 |
| Deferred financing costs | 16,471 | 20,334 |
| Other assets | 317 | — |
| Total assets | $ 2,610,724 | $ 2,668,218 |
| LIABILITIES AND NET ASSETS | ||
| Liabilities: | ||
| Accounts payable, accrued expenses and other liabilities | $ 4,173 | $ 3,908 |
| Base management fee payable | 11,966 | 12,372 |
| Part I incentive fee payable | 8,095 | 9,309 |
| Due to FSC CT | 3,127 | 2,464 |
| Interest payable | 10,675 | 5,797 |
| Amounts payable to syndication partners | 10,269 | 3,817 |
| Payables from unsettled transactions | 74,301 | — |
| Credit facilities payable | 315,295 | 317,395 |
| SBA debentures payable | 225,000 | 225,000 |
| Unsecured convertible notes payable | 115,000 | 115,000 |
| Unsecured notes payable | 410,254 | 409,878 |
| Secured borrowings at fair value (proceeds of $22,075 and $84,750 at June 30, 2015 and September 30, 2014, respectively) | 21,944 | 84,803 |
| Total liabilities | 1,210,099 | 1,189,743 |
| Commitments and contingencies | ||
| Net assets: | ||
| Common stock, $0.01 par value, 250,000 shares authorized; 153,340 shares issued and outstanding at June 30, 2015 and September 30, 2014 | 1,533 | 1,533 |
| Additional paid-in-capital | 1,649,086 | 1,649,086 |
| Net unrealized appreciation (depreciation) on investments and secured borrowings | (50,940) | 1,178 |
| Net realized loss on investments, secured borrowings and interest rate swap | (182,232) | (152,416) |
| Accumulated overdistributed net investment income | (16,822) | (20,906) |
| Total net assets (equivalent to $9.13 and $9.64 per common share at June 30, 2015 and September 30, 2014, respectively) | 1,400,625 | 1,478,475 |
| Total liabilities and net assets | $ 2,610,724 | $ 2,668,218 |
| Fifth Street Finance Corp. | ||||
| Consolidated Statements of Operations | ||||
| (in thousands, except per share amounts) | ||||
| (unaudited) | ||||
| Three months | Three months | Nine months | Nine months | |
| ended | ended | ended | ended | |
| June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | |
| Interest income: | ||||
| Control investments | $ 6,152 | $ 3,741 | $ 18,631 | $ 9,354 |
| Affiliate investments | 1,085 | 1,108 | 3,254 | 2,971 |
| Non-control/Non-affiliate investments | 48,641 | 53,248 | 143,437 | 148,242 |
| Interest on cash and cash equivalents | 16 | 3 | 36 | 9 |
| Total interest income | 55,894 | 58,100 | 165,358 | 160,576 |
| PIK interest income: | ||||
| Control investments | 1,631 | 2,563 | 5,070 | 7,513 |
| Affiliate investments | 216 | 211 | 643 | 752 |
| Non-control/Non-affiliate investments | 1,582 | 3,523 | 5,675 | 9,115 |
| Total PIK interest income | 3,429 | 6,297 | 11,388 | 17,380 |
| Fee income: | ||||
| Control investments | 561 | 1,536 | 1,568 | 4,070 |
| Affiliate investments | 12 | 12 | 36 | 194 |
| Non-control/Non-affiliate investments | 7,600 | 8,135 | 30,132 | 35,044 |
| Total fee income | 8,173 | 9,683 | 31,736 | 39,308 |
| Dividend and other income: | ||||
| Control investments | 2,274 | — | 5,250 | — |
| Non-control/Non-affiliate investments | 429 | 194 | 909 | 471 |
| Total dividend and other income | 2,703 | 194 | 6,159 | 471 |
| Total investment income | 70,199 | 74,274 | 214,641 | 217,735 |
| Expenses: | ||||
| Base management fee | 12,145 | 13,345 | 39,364 | 39,139 |
| Part I incentive fee | 8,095 | 8,609 | 24,149 | 26,163 |
| Professional fees | 849 | 863 | 2,995 | 2,775 |
| Board of Directors fees | 175 | 135 | 544 | 431 |
| Interest expense | 14,191 | 14,737 | 42,995 | 37,782 |
| Administrator expense | 611 | 715 | 2,606 | 2,105 |
| General and administrative expenses | 1,822 | 1,434 | 5,260 | 4,688 |
| Total expenses | 37,888 | 39,838 | 117,913 | 113,083 |
| Base management fee waived | (179) | (229) | (401) | (463) |
| Net expenses | 37,709 | 39,609 | 117,512 | 112,620 |
| Net investment income | 32,490 | 34,665 | 97,129 | 105,115 |
| Unrealized appreciation (depreciation) on investments: | ||||
| Control investments | (2,217) | 1,958 | (20,170) | 4,510 |
| Affiliate investments | 1,184 | (314) | 1,382 | 651 |
| Non-control/Non-affiliate investments | (748) | (15,330) | (33,512) | (27,148) |
| Net unrealized depreciation on investments | (1,781) | (13,686) | (52,300) | (21,987) |
| Net unrealized appreciation (depreciation) on secured borrowings | 79 | (45) | 184 | (55) |
| Realized gain (loss) on investments and secured borrowings: | ||||
| Control investments | (4,384) | (299) | (4,384) | (299) |
| Affiliate investments | — | — | 72 | — |
| Non-control/Non-affiliate investments | (5,953) | (348) | (25,505) | 1,319 |
| Net realized gain (loss) on investments and secured borrowings | (10,337) | (647) | (29,817) | 1,020 |
| Net increase in net assets resulting from operations | $ 20,451 | $ 20,287 | $ 15,196 | $ 84,093 |
| Net investment income per common share — basic | $ 0.21 | $ 0.25 | $ 0.63 | $ 0.76 |
| Earnings per common share — basic | $ 0.13 | $ 0.15 | $ 0.10 | $ 0.60 |
| Weighted average common shares outstanding — basic | 153,340 | 139,138 | 153,340 | 139,134 |
| Net investment income per common share — diluted | $ 0.21 | $ 0.25 | $ 0.63 | $ 0.74 |
| Earnings per common share — diluted | $ 0.13 | $ 0.15 | $ 0.10 | $ 0.60 |
| Weighted average common shares outstanding — diluted | 161,131 | 146,928 | 161,131 | 146,924 |
| Distributions per common share | $ 0.18 | $ 0.25 | $ 0.61 | $ 0.74 |
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. 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 a subsidiary of Fifth Street Asset Management Inc. (NASDAQ:FSAM), a nationally recognized credit-focused asset manager with over $6 billion in assets under management (as of March 31, 2015) across multiple public and private vehicles. With a track record of over 17 years, Fifth Street's platform has the ability to hold loans up to $250 million and structure and syndicate transactions up to $500 million. Fifth Street received the 2015 ACG New York Champion's Award for "Lender Firm of the Year," and other previously received accolades include the ACG New York Champion's Award for "Senior Lender Firm of the Year," "Lender Firm of the Year" by The M&A Advisor and "Lender of the Year" by Mergers & Acquisitions. 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.