GREENWICH, CT, Aug. 09, 2016 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") today announced its financial results for the third fiscal quarter ended June 30, 2016.
Third Fiscal Quarter 2016 Highlights
- Net investment income of $29.1 million, or $0.20 per share;
- Net asset value per share of $8.15;
- Closed $276.6 million of new investments; and
- Repurchased 1.9 million shares of common stock in the open market at an aggregate cost of $10.0 million.
“We benefited from an increase in origination volumes in the June quarter, resulting in higher new investment activity and a modest rebound in profitability, compared to the previous quarter. We continued to execute on our strategic objectives and for the sixth consecutive quarter our net investment income, excluding incremental professional fees, covered our dividend,” stated Todd G. Owens, FSC's Chief Executive Officer, adding, “We also continue to maintain a disciplined approach to capital allocation and repurchased $10 million in FSC shares during the quarter, bringing our total repurchases for the fiscal year to over $25 million. Importantly, we are focused on bringing leverage levels back within our targeted range and remain committed to delivering strong returns to our stockholders. Finally, as we announced last week, we are also pleased to have reached a settlement of the outstanding class action and related lawsuits.”
Portfolio and Investment Activity
FSC's Board of Directors determined the fair value of our investment portfolio at June 30, 2016 to be $2.2 billion, as compared to $2.4 billion at September 30, 2015. Total assets were $2.5 billion at June 30, 2016, as compared to $2.6 billion at September 30, 2015.
During the quarter ended June 30, 2016, we closed $276.6 million of investments in 11 new and five existing portfolio companies and funded $269.1 million across new and existing portfolio companies. This compares to closing $227.4 million in seven new and five existing portfolio companies and funding $226.9 million during the quarter ended June 30, 2015. During the quarter ended June 30, 2016, we received $63.2 million in connection with the full repayments of three of our debt investments, all of which were exited at or above par. We also received an additional $183.8 million in connection with paydowns, syndications and sales of debt investments.
At June 30, 2016, our portfolio consisted of investments in 133 companies, 115 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 17 of which were in private equity funds. At fair value, 91.6% of our portfolio consisted of debt investments and 78.8% of our portfolio consisted of senior secured loans. Our average portfolio company debt investment size at fair value was $19.1 million at June 30, 2016, versus $20.7 million at September 30, 2015, with only 1.2% of the portfolio's fair value invested in the energy sector and no exposure to CLO equity.
At June 30, 2016, SLF JV I had $399.0 million in assets, including senior secured loans to 37 portfolio companies. The joint venture generated income of $4.7 million to FSC during the third fiscal quarter, which represented an 11.6% weighted average annualized return on investment.
Our weighted average yield on debt investments at June 30, 2016, including the return on SLF JV I, was 10.6% and included a cash component of 9.9%. At June 30, 2016 and September 30, 2015, $1.7 billion of our debt investments at fair value bore interest at floating rates, which represented 81.8% and 77.5%, respectively, of our total portfolio of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended June 30, 2016 and June 30, 2015 was $64.0 million and $69.9 million, respectively. For the quarter ended June 30, 2016, the amount primarily consisted of $49.6 million of cash interest income from portfolio investments. For the quarter ended June 30, 2015, the amount primarily consisted of $54.7 million of cash interest income from portfolio investments. For the quarter ended June 30, 2016, payment-in-kind ("PIK") interest income net of PIK collected in cash represented 4.8% of total investment income.
Net expenses for the quarters ended June 30, 2016 and June 30, 2015 were $34.9 million and $37.6 million, respectively. Net expenses decreased for the quarter ended June 30, 2016 as compared to the quarter ended June 30, 2015, due primarily to a $2.1 million decrease in base management fees, which was attributable to the permanent fee reduction that we agreed to with our investment adviser effective January 1, 2016, and a $1.0 million decrease in interest expense. These expense reductions were partially offset by a $1.1 million increase in professional fees.
Net realized and unrealized losses on our investment portfolio for the quarters ended June 30, 2016 and June 30, 2015 were $34.3 million and $11.7 million, respectively.
Liquidity and Capital Resources
At June 30, 2016, we had $158.1 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.2 billion, $18.8 million of interest, dividends and fees receivable, $12.4 million of receivables from unsettled transactions, $14.6 million of amounts payable to our syndication partners, $225.0 million of U.S. Small Business Administration ("SBA") debentures payable, $568.3 million of borrowings outstanding under our credit facilities, $410.5 million of unsecured notes payable, $18.6 million of secured borrowings and unfunded commitments of $234.4 million. Our regulatory leverage ratio was 0.84x debt-to-equity, excluding the debentures issued by our small business investment company ("SBIC") subsidiaries.
At September 30, 2015, we had $143.5 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.4 billion, $15.7 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $427.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.3 million of unsecured notes payable, $21.2 million of secured borrowings and unfunded commitments of $305.3 million. Our regulatory leverage ratio was 0.72x debt-to-equity, excluding the debentures issued by our SBIC subsidiaries.
On April 1, 2016, we repaid in full the $115.0 million of outstanding unsecured convertible notes on their maturity date. The convertible notes bore interest at a rate of 5.375% per annum and were repaid using cash on hand and borrowings under our ING revolving credit facility.
Dividend Declaration
In addition to our previously declared dividend of $0.06 per share, which is payable on August 31, 2016 to stockholders of record on August 15, 2016, our Board of Directors met on August 3, 2016 and declared the following distributions:
- $0.06 per share, payable on September 30, 2016 to stockholders of record on September 15, 2016;
- $0.06 per share, payable on October 31, 2016 to stockholders of record on October 14, 2016; and
- $0.06 per share, payable on November 30, 2016 to stockholders of record on November 15, 2016.
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.
Stock Repurchase Program
On November 30, 2015, our Board of Directors authorized a common stock repurchase program to acquire up to $100 million of the outstanding shares of our common stock through November 30, 2016. Common stock repurchases under this program are to be made through the open market, privately negotiated transactions or otherwise at times, and in such amounts, as our management deems appropriate, subject to various factors, including company performance, capital availability, general economic and market conditions, regulatory requirements and other corporate considerations, as determined by management. The repurchase program may be suspended or discontinued at any time, and we expect to finance the stock repurchases with existing cash balances or by incurring leverage. We repurchased 5.0 million shares of our common stock during February, March and April 2016 under the program for an aggregate cost of $25.1 million.
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, 2016 and September 30, 2015, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows (dollars in thousands):
| Investment Ranking | June 30, 2016 | September 30, 2015 | |||||||||||||||||||||||||
| Fair Value | % of Portfolio | Leverage Ratio | Fair Value | % of Portfolio | Leverage Ratio | ||||||||||||||||||||||
| 1 | $ | 89,942 | 4.00 | % | 2.00 | $ | 215,095 | 8.95 | % | 1.85 | |||||||||||||||||
| 2 | 2,124,864 | 94.55 | 4.88 | 2,040,006 | 84.91 | 4.94 | |||||||||||||||||||||
| 3 | 2,967 | 0.13 | 5.35 | 122,128 | 5.08 | 5.54 | |||||||||||||||||||||
| 4 | 29,682 | 1.32 | NM | (1 | ) | 25,266 | 1.06 | NM | (1 | ) | |||||||||||||||||
| Total | $ | 2,247,455 | 100.00 | % | 5.12 | $ | 2,402,495 | 100.00 | % | 4.60 | |||||||||||||||||
_____________
(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, 2016, we had modified the payment terms of our investments in 17 portfolio companies. Such modified terms may include increased PIK interest rates 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, 2016, there were five investments on which we had stopped accruing cash and/or PIK interest or original issue discount ("OID") income that represented 0.76% of our debt portfolio at fair value in the aggregate.
Recent Developments
We have entered into agreements to settle previously disclosed legal proceedings, including consolidated securities class actions filed on behalf of our shareholders and shareholder derivative actions filed on behalf of us. Each of the proposed settlements is subject both to the plaintiffs’ completion of additional discovery and to approval by the applicable court.
The proposed settlement of the securities class actions calls for a payment of $14.1 million to the settlement class, with approximately 99% of the settlement amount covered by insurance. The proposed settlement of the shareholder derivative actions provides for Fifth Street Management LLC’s waiver of fees charged to us in the amount of $1.0 million for each of ten consecutive quarters starting in January 2018 and maintenance of the previously announced decrease in the base management fee from 2% to a maximum of 1.75% for at least four years. The proposed settlement also calls for us to adopt certain governance and oversight enhancements. We further agreed not to oppose plaintiffs’ request for an award of $5.1 million in attorneys’ fees and expenses, which will be covered entirely by insurance.
| Fifth Street Finance Corp. | |||||||
| Consolidated Statements of Assets and Liabilities | |||||||
| (in thousands, except per share amounts) | |||||||
| (unaudited) | |||||||
| June 30, 2016 | September 30, 2015 | ||||||
| ASSETS | |||||||
| Investments at fair value: | |||||||
| Control investments (cost June 30, 2016: $453,520; cost September 30, 2015: $333,520) | $ | 396,022 | $ | 318,893 | |||
| Affiliate investments (cost June 30, 2016: $35,240; cost September 30, 2015: $36,637) | 40,110 | 40,606 | |||||
| Non-control/Non-affiliate investments (cost June 30, 2016: $1,903,313; cost September 30, 2015: $2,102,781) | 1,811,323 | 2,042,996 | |||||
| Total investments at fair value (cost June 30, 2016: $2,392,073; cost September 30, 2015: $2,472,938) | 2,247,455 | 2,402,495 | |||||
| Cash and cash equivalents | 138,111 | 138,377 | |||||
| Restricted cash | 19,975 | 5,107 | |||||
| Interest, dividends and fees receivable | 18,797 | 15,687 | |||||
| Due from portfolio companies | 4,994 | 2,641 | |||||
| Receivables from unsettled transactions | 12,395 | 5,168 | |||||
| Deferred financing costs | 12,345 | 16,051 | |||||
| Insurance recoveries receivable | 19,079 | — | |||||
| Other assets | 877 | 131 | |||||
| Total assets | $ | 2,474,028 | $ | 2,585,657 | |||
| LIABILITIES AND NET ASSETS | |||||||
| Liabilities: | |||||||
| Accounts payable, accrued expenses and other liabilities | $ | 4,029 | $ | 5,006 | |||
| Base management fee and Part I incentive fee payable | 17,832 | 16,531 | |||||
| Due to FSC CT LLC | 1,906 | 2,965 | |||||
| Interest payable | 9,762 | 4,300 | |||||
| Amounts payable to syndication partners | 14,608 | 1,316 | |||||
| Payables from unsettled transactions | — | 3,648 | |||||
| Legal settlements payable | 19,150 | — | |||||
| Credit facilities payable | 568,295 | 427,295 | |||||
| SBA debentures payable | 225,000 | 225,000 | |||||
| Unsecured convertible notes payable | — | 115,000 | |||||
| Unsecured notes payable | 410,519 | 410,320 | |||||
| Secured borrowings at fair value (proceeds June 30, 2016: $19,289; proceeds September 30, 2015: $21,787) | 18,551 | 21,182 | |||||
| Total liabilities | 1,289,652 | 1,232,563 | |||||
| Commitments and contingencies | |||||||
| Net assets: | |||||||
| Common stock, $0.01 par value, 250,000 shares authorized; 145,304 and 150,668 shares issued and outstanding at June 30, 2016 and September 30, 2015, respectively | 1,453 | 1,507 | |||||
| Additional paid-in-capital | 1,603,947 | 1,631,523 | |||||
| Treasury stock, 423 shares at September 30, 2015 | — | (2,538 | ) | ||||
| Net unrealized depreciation on investments and secured borrowings | (143,880 | ) | (69,838 | ) | |||
| Net realized loss on investments and secured borrowings | (251,058 | ) | (180,945 | ) | |||
| Accumulated overdistributed net investment income | (26,086 | ) | (26,615 | ) | |||
| Total net assets (equivalent to $8.15 and $9.00 per common share at June 30, 2016 and September 30, 2015, respectively) | 1,184,376 | 1,353,094 | |||||
| Total liabilities and net assets | $ | 2,474,028 | $ | 2,585,657 | |||
| Fifth Street Finance Corp. | ||||||||||||||||
| Consolidated Statements of Operations | ||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
| (unaudited) | ||||||||||||||||
| Three months ended June 30, 2016 | Three months ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 | |||||||||||||
| Interest income: | ||||||||||||||||
| Control investments | $ | 4,863 | $ | 4,190 | $ | 12,518 | $ | 12,073 | ||||||||
| Affiliate investments | 1,016 | 1,085 | 3,092 | 3,254 | ||||||||||||
| Non-control/Non-affiliate investments | 43,650 | 49,388 | 134,265 | 148,583 | ||||||||||||
| Interest on cash and cash equivalents | 111 | 16 | 262 | 35 | ||||||||||||
| Total interest income | 49,640 | 54,679 | 150,137 | 163,945 | ||||||||||||
| PIK interest income: | ||||||||||||||||
| Control investments | 1,517 | 1,340 | 3,577 | 4,079 | ||||||||||||
| Affiliate investments | 203 | 216 | 618 | 643 | ||||||||||||
| Non-control/Non-affiliate investments | 1,820 | 1,582 | 5,772 | 5,675 | ||||||||||||
| Total PIK interest income | 3,540 | 3,138 | 9,967 | 10,397 | ||||||||||||
| Fee income: | ||||||||||||||||
| Control investments | 1,183 | 561 | 2,402 | 1,569 | ||||||||||||
| Affiliate investments | 37 | 12 | 308 | 36 | ||||||||||||
| Non-control/Non-affiliate investments | 2,220 | 7,500 | 14,730 | 15,670 | ||||||||||||
| Total fee income | 3,440 | 8,073 | 17,440 | 17,275 | ||||||||||||
| Dividend and other income: | ||||||||||||||||
| Control investments | 2,255 | 3,581 | 6,373 | 9,179 | ||||||||||||
| Non-control/Non-affiliate investments | 5,151 | 429 | 4,795 | 909 | ||||||||||||
| Total dividend and other income | 7,406 | 4,010 | 11,168 | 10,088 | ||||||||||||
| Total investment income | 64,026 | 69,900 | 188,712 | 201,705 | ||||||||||||
| Expenses: | ||||||||||||||||
| Base management fee | 10,049 | 12,145 | 31,847 | 39,364 | ||||||||||||
| Part I incentive fee | 7,864 | 8,035 | 15,689 | 21,562 | ||||||||||||
| Professional fees | 1,971 | 849 | 13,395 | 2,995 | ||||||||||||
| Board of Directors fees | 176 | 175 | 775 | 544 | ||||||||||||
| Interest expense | 13,149 | 14,191 | 41,034 | 42,995 | ||||||||||||
| Administrator expense | 488 | 611 | 1,602 | 2,606 | ||||||||||||
| General and administrative expenses | 1,233 | 1,822 | 3,525 | 5,259 | ||||||||||||
| Loss on legal settlements | 19,150 | — | 19,150 | — | ||||||||||||
| Total expenses | 54,080 | 37,828 | 127,017 | 115,325 | ||||||||||||
| Base management fee waived | (81 | ) | (179 | ) | (258 | ) | (401 | ) | ||||||||
| Insurance recoveries | (19,079 | ) | — | (19,079 | ) | — | ||||||||||
| Net expenses | 34,920 | 37,649 | 107,680 | 114,924 | ||||||||||||
| Net investment income | 29,106 | 32,251 | 81,032 | 86,781 | ||||||||||||
| Unrealized appreciation (depreciation) on investments: | ||||||||||||||||
| Control investments | (24,024 | ) | (1,271 | ) | (42,872 | ) | (16,552 | ) | ||||||||
| Affiliate investments | 1,237 | 1,184 | 901 | 1,381 | ||||||||||||
| Non-control/Non-affiliate investments | 33,651 | (1,480 | ) | (32,204 | ) | (25,512 | ) | |||||||||
| Net unrealized appreciation (depreciation) on investments | 10,864 | (1,567 | ) | (74,175 | ) | (40,683 | ) | |||||||||
| Net unrealized (appreciation) depreciation on secured borrowings | (374 | ) | 79 | 133 | 184 | |||||||||||
| Realized gain (loss) on investments and secured borrowings: | ||||||||||||||||
| Control investments | — | (4,384 | ) | (8,148 | ) | (4,384 | ) | |||||||||
| Affiliate investments | 3 | — | 3 | 72 | ||||||||||||
| Non-control/Non-affiliate investments | (44,817 | ) | (5,868 | ) | (61,968 | ) | (24,186 | ) | ||||||||
| Net realized loss on investments and secured borrowings | (44,814 | ) | (10,252 | ) | (70,113 | ) | (28,498 | ) | ||||||||
| Net increase (decrease) in net assets resulting from operations | $ | (5,218 | ) | $ | 20,511 | $ | (63,123 | ) | $ | 17,784 | ||||||
| Net investment income per common share — basic | $ | 0.20 | $ | 0.21 | $ | 0.55 | $ | 0.57 | ||||||||
| Earnings (loss) per common share — basic | $ | (0.04 | ) | $ | 0.13 | $ | (0.43 | ) | $ | 0.12 | ||||||
| Weighted average common shares outstanding — basic | 145,569 | 153,340 | 148,354 | 153,340 | ||||||||||||
| Net investment income per common share — diluted | $ | 0.20 | $ | 0.21 | $ | 0.53 | $ | 0.56 | ||||||||
| Earnings (loss) per common share — diluted | $ | (0.04 | ) | $ | 0.13 | $ | (0.43 | ) | $ | 0.12 | ||||||
| Weighted average common shares outstanding — diluted | 145,569 | 161,130 | 153,585 | 161,130 | ||||||||||||
| Distributions per common share | $ | 0.18 | $ | 0.18 | $ | 0.54 | $ | 0.61 | ||||||||
Conference Call Information
We will hold a conference call at 10:00 a.m. (Eastern Time) on Tuesday, August 9, 2016, to discuss our quarterly financial results. All interested parties are welcome to participate. Domestic callers can access the conference call by dialing (877) 290-1655. International callers can access the conference call by dialing +1 (531) 289-2889. All callers will need to enter the Conference ID Number 48919350 and reference "Fifth Street Finance Corp." after being connected with the operator. All callers are asked to dial in 10-15 minutes prior to the call so that name and company information can be collected. An archived replay of the call will be available approximately four hours after the end of the conference call and will be available through August 16, 2016 to domestic callers by dialing (855) 859-2056 and to international callers by dialing +1 (404) 537-3406. For all replays, please reference Conference ID Number 48919350. An archived replay will also be available online on the "Investor Relations" section of our website under the "News & Events - Calendar of Events" section.
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 $5 billion in assets under management across multiple public and private vehicles. With a track record of over 18 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
Some of the statements in this press release constitute forward-looking statements, because they relate to future events or our future performance or financial condition. Forward-looking statements may include statements as to the future operating results, dividends and business prospects of FSC. Words such as "believes," "expects," "seeks," "plans," "should," "estimates," "project," and "intend" indicate forward-looking statements, although not all forward-looking statements include these words. These forward-looking statements involve risks and uncertainties. Actual results could differ materially from those implied or expressed in these forward-looking statements for any reason. Such factors are identified from time to time in FSC's filings with the Securities and Exchange Commission and include changes in the economy and the financial markets and future changes in laws or regulations and conditions in the Company's operating areas. FSC undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.