Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC") and Fifth Street
Senior Floating Rate Corp. (NASDAQ:FSFR) ("FSFR") released the
January 2015 newsletter today.
Fundamentals Strong Despite Capital Markets
Volatility
Throughout the fall, share prices across the business
development company ("BDC") landscape were under pressure. During
December, the industry came under additional pressure due to
concerns regarding exposure to the energy sector, a sell-off in
high yield markets and tax loss selling. As a result, BDCs on
average ended the calendar year down 5.4% on a total return basis,
with valuation multiples at about 0.87x price to net asset
value.1
Despite capital markets volatility, the middle market lending
environment remains relatively healthy and somewhat insulated from
trends in the broadly syndicated lending market. During
periods of volatility, borrowers have relied less on the syndicated
market, which should provide us with an opportunity to win
financing mandates with our senior stretch and unitranche
products. The one-stop solution can provide our private equity
sponsor clients a more seamless transaction with a greater
certainty of close. At Fifth Street, we saw this trend during
the periods of volatility in the December quarter, with strong
volumes of one-stop transactions.
In the December quarter, we have seen spreads widen in certain
circumstances. This can be seen by the increase in the average
middle market loan spread for issuers with $50 million of EBITDA or
less, from LIBOR plus 496 basis points in November to LIBOR plus
515 basis points in December, as reported by S&P Capital IQ
LCD.
De Minimis Energy Exposure Across the
Platform
As mentioned above, the BDC sector has come under pressure due
to concerns about exposure to energy-related industries. In
December, KBW estimated that approximately 7.0% of overall BDC
portfolios were invested in energy-related businesses. At both
FSC and FSFR, investments are diversified across a wide variety of
industries and both portfolios have modest exposure to the energy
sector. As of September 30, 2014, FSC's exposure to the energy
sector was 3.8% of investments at fair value, comprised of senior
secured loans to four portfolio companies in the oil and gas
equipment services sector. Since then, two of the four
businesses with exposure to the energy sector have been sold at
fair value. Pro forma for these sales, FSC's energy exposure
is now 2.5%. During the same time period, FSFR's exposure was
only 1.1% of investments at fair value, comprised of one senior
secured loan in the oil and gas equipment services
sector.
We believe Fifth Street is appropriately positioned for the
recent decline in energy prices. Our credit committee has
consistently limited FSC's and FSFR's exposure to the energy sector
as well as other cyclical sectors. Our remaining investments
in oil and gas equipment services have been stress tested based on
current oil prices and we believe the reduced valuation of oil
should have a minimal impact on the fair value of FSC's and FSFR's
respective investments in the energy sector. Additionally, we
have a number of investments in the portfolio which should directly
benefit from the recent decrease in oil prices, including our
aircraft leasing holdings at FSC.
Active December Quarter Leads to Strong
Originations
Historically, the December quarter has been the most active for
originations. Driven by our leading middle market origination
platform, which sources loans with strong risk-adjusted returns
across the capital structure, we closed approximately $1.3 billion
in originations across the Fifth Street platform during the
December quarter. We closed all of the deals in our pipeline
that were expected to fund before calendar year end, which is
unusual, since typically a handful of deals slip from one quarter
to the next. That was not the case during the December
quarter, and as a result, FSC generated over $675 million in gross
originations and $350 million of net originations. FSFR
generated $390 million in gross originations and $280 million of
net originations during the December quarter, both of which
surpassed our expectations.
Capital Markets Platform Gaining Traction
Over the course of the 2014 calendar year, the Fifth Street
platform, including FSC, FSFR and our two senior loan funds, closed
$3.0 billion of investments across 125+ deals and agented and
syndicated $1.8 billion of deals.2
Our capital markets team remained active during the December
quarter. The pipeline of potential capital markets
transactions continues to increase with several investors
evaluating syndication opportunities. These activities could
potentially lead to higher velocity in the portfolio, incremental
fee income and enhanced yields on certain investments, while
enabling us to manage portfolio diversification and liquidity more
effectively.
Strategic Partnerships Beginning to Accrete to
Earnings
We continue to make significant progress in both funding and
expanding our joint ventures at FSC and FSFR. The ability to
attract experienced institutional investors as partners is a vote
of confidence in Fifth Street's origination platform, underwriting
and portfolio management expertise.
As of December 31, 2014, Senior Loan Fund JV I LLC ("SLF JV I"),
the joint venture between FSC and a subsidiary of the Kemper
Corporation had total investments of $250 million in a range of
one-stop and senior secured loans to 23 portfolio
companies. In line with initial projections, the joint venture
has provided a mid-teens weighted average annualized return on
investment. In November, at FSFR, we announced the formation
of FSFR Glick JV LLC, a joint venture with an entity controlled by
members of the Glick Family. We are in the process of
obtaining a leverage line to optimize returns in the joint
venture.
We have ample capacity to grow these and other similar joint
ventures. We continue to have discussions with third parties
about additional partnerships, as we believe that ramping the
existing joint venture at each BDC and potentially forming other
similar joint ventures represent an important driver of earnings at
both FSC and FSFR.
We look forward to discussing our December quarterly results in
more detail during FSC's and FSFR's respective quarterly earnings
calls, which will both be held in February.
Sincerely,
The Fifth Street Team
1 Note: As of 1/2/15; Source: KBW Weekly BDC/RIC
Summary. Represents data from publicly-traded externally
managed BDCs.
2 Source: Thomson Reuters LPC League Tables.
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
rapidly growing credit-focused asset manager with over $6 billion
in assets under management across multiple public and private
vehicles. With a track record of more than 16 years, Fifth
Street's nationally recognized platform has the ability to hold
loans up to $250 million and structure and syndicate transactions
up to $500 million. Fifth Street 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. FSC's
website can be found at
fsc.fifthstreetfinance.com.
About Fifth Street Senior Floating Rate Corp.
Fifth Street Senior Floating Rate Corp. is a specialty finance
company that provides financing solutions in the form of floating
rate senior secured loans to mid-sized companies, primarily in
connection with investments by private equity sponsors. FSFR's
investment objective is to maximize its portfolio's total return by
generating current income from its debt investments while seeking
to preserve its capital. 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 rapidly growing credit-focused asset manager with
over $6 billion in assets under management across multiple public
and private vehicles. With a track record of more than 16
years, Fifth Street's nationally recognized platform has the
ability to hold loans up to $250 million and structure and
syndicate transactions up to $500 million. Fifth Street
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. FSFR's website can be found at
fsfr.fifthstreetfinance.com.
Forward-Looking Statements
This press release may contain certain forward-looking
statements, including statements with regard to the future
performance of the companies. 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 companies' respective filings with the Securities and Exchange
Commission (as applicable). The companies do not undertake any
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise.
CONTACT: Investor Contact:
Robyn Friedman, Vice President, Investor Relations
(203) 681-3720
ir@fifthstreetfinance.com
Media Contact:
Nick Rust
Prosek Partners
(212) 279-3115 ext. 252
pro-fifthstreet@prosek.com
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