Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC") and Fifth Street
Senior Floating Rate Corp. (NASDAQ:FSFR) ("FSFR") released the
November 2015 BDC newsletter today.
Middle Market Origination Report: Positioned for a
Strong Finish to 2015
Middle market loan volume is down roughly 30% in the first three
quarters of 2015 when compared to 2014 (1). We believe that reduced
volumes are the result of a slowdown in LBO activity driven by
higher purchase price multiples and recent market volatility.
However, the year has followed a normal seasonal pattern and
our pipeline has been building into year end, setting the stage for
the December quarter. Notwithstanding the overall reduction in
volumes, lenders with direct origination franchises, such as Fifth
Street, have demonstrated the ability to uncover pockets of
opportunity even in challenging market environments. During
the first half of 2015, FSC and FSFR had gross originations of
$821.3 million, which is in line with the first half of last year
where FSC and FSFR had $820.0 million of gross originations.
SEC Proposes Liquidity Management Rules for Mutual Funds
and ETFs
On September 22nd the SEC proposed legislation that requires
open-end mutual funds and exchange-traded funds to better manage
their liquidity. The legislation would obligate these funds to
classify the liquidity of each portfolio asset and place a 15%
limit on assets deemed to be illiquid. We believe that the
implementation of these rules could present an opportunity for FSC
and FSFR given that the new guidelines could reduce mutual fund and
ETF demand for middle market broadly syndicated loans, as they may
be less likely to purchase those assets. The proposed
legislation is currently in the comment period and will need
additional approval from the SEC Commissioners before it is
implemented. While it is still in the early stages, we believe
that the new liquidity management rules could positively impact the
Fifth Street platform.
Technology Spotlight: Opportunities in Venture
Debt
A recent trend in the technology investment space has been the
proliferation of companies with valuations exceeding $1 billion –
or "unicorns." In order to achieve such lofty valuations,
companies are issuing equity securities that not only behave like
debt through their liquidation preferences, but also guarantee
investors a multiple on investment, thus forcing these companies to
pursue growth at all cost. In contrast, venture debt is far
less dilutive and allows the company to adjust its operating
strategy based on prevailing market conditions as the growth bar is
much lower. As a result, we are cautiously optimistic that
there will be more opportunities for our venture lending team to
prudently invest in healthy, growing companies that will generate
strong risk-adjusted returns. We focus on companies that have
sustainable business models with non-cyclical demand drivers, as
exhibited by investments FSC recently closed in Swipely, a payments
and analytics company, and Quorum, a disaster recovery firm.
Executive Focus: Comments from FSC's CEO and FSFR's
President, Todd Owens
Why do you think the BDC industry is trading below book
value and how can the disparity be improved?
Over the last 18 months, the BDC industry has been negatively
impacted by a number of events: the exclusion of BDCs from
stock indexes, which reduced institutional investor interest; the
plunge in oil prices and its impact on energy-focused businesses;
concern around the credit cycle and the steady decline in yields
paradoxically coupled with increasing concerns that rates would
soon rise. As a result, BDC stock prices have been under
pressure and the industry is trading at levels that we haven't seen
since the credit crisis in 2009. I think investors are weary
of credit generally and concerned specifically about the balance
sheet exposures (particularly energy) in the BDC space. As the
industry reports results that reduce these concerns, I hope that we
will see renewed investor interest in the sector.
What are some trends you are seeing in the BDC
industry?
Volumes are lower this year than last, though still following
the typical seasonal pattern. As a result, we expect that we
will see seasonally higher origination volumes as we head into year
end. Pricing and terms have been reasonably static over the
course of this year, though there is some hope that the volatility
we have seen in the broader markets will translate into marginally
better pricing in the middle market. On the credit side, we
are seeing a reversion to mean, with a more typical level of credit
issues in the industry and in our portfolio, which is a change from
the largely benign credit environment over the last several
years.
What opportunities are there for FSC and
FSFR?
The investment tailwinds for the BDC industry
continue. Regulatory pressure on banks is real and, if
anything, increasing, which impairs the ability of banks to compete
for middle market assets. More recently, the SEC liquidity
proposals are likely to reduce the appetite of mutual funds and
ETFs for these less liquid assets. As a result, I expect BDCs
and other non-bank capital sources to continue taking market
share. Having said that, as we head into an environment with
increasing credit risk and market volatility, we need to be
thoughtful about putting capital to work into high-quality assets
with strong risk-adjusted returns. While we have the
opportunity to grow our market shares, the risks around credit have
increased as well.
FSC Completes Share Repurchases
During August and September, FSC executed on its previously
announced plan to repurchase shares in the open market, completing
an approximately $20 million buyback. Management and the Board
of Directors will continue to evaluate repurchasing shares on the
open market, as we seek ways to continue providing strong
risk-adjusted returns to our shareholders and stabilize our net
asset value per share.
Addressing the Recent Class Action Lawsuits
On October 22nd, we filed a Form 8-K that addresses two class
action lawsuits filed against FSC. FSC believes that the
claims are without merit and intends to vigorously defend itself
against the plaintiffs' allegations.
We look forward to discussing our fiscal year results during
FSC's and FSFR's respective earnings calls. FSC's conference
call is scheduled for December 1, 2015, and FSFR's is scheduled for
December 8, 2015. Information related to the earnings calls
can be found on our Investor Relations website.
Sincerely,
The Fifth Street Team
(1) Thomson Reuters LPC's 4Q15 MM Investor Outlook Survey,
10/2/15. Middle market is defined as companies with EBITDA of
$50MM or less.
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 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.
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 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 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. 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 FSC and/or FSFR. 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, Senior Vice President,
Head of 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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