Sends Letter to FSFR Stockholders Highlighting
Serious Concerns over Gross Underperformance, Excessive Incentive
Fees and Dilutive Stock Offering
Nominates Two Highly-Qualified Director
Candidates; Urges Termination of External Advisor FSM
Believes a Sale of Company is Best Way to
Deliver Value to FSFR Stockholders
Ironsides Partners LLC and its affiliates (collectively,
“Ironsides”), one of the largest stockholders of Fifth Street
Senior Floating Rate Corp. (NASDAQ:FSFR) (“FSFR” or the “Company”)
with a combined ownership interest of approximately 6.4% of FSFR’s
outstanding shares, today announced that it has filed a definitive
proxy statement with the Securities and Exchange Commission for the
election of Robert C. Knapp and Richard W. Cohen to FSFR’s Board of
Directors (the “Board”) at the Annual Meeting of Stockholders on
April 7, 2016. Ironsides is also asking FSFR stockholders to vote
to terminate the Company’s investment advisory agreement with Fifth
Street Management LLC (“FSM”), the Company’s external advisor,
which is controlled by the Company’s founder, Leonard
Tannenbaum.
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Total Return Table
In addition, Ironsides is mailing a letter to FSFR stockholders,
along with its definitive proxy statement, addressing the Company’s
gross underperformance, excessive incentive fees paid to its
external advisor, and dilutive stock offering, all of which have
eroded stockholder value. Ironsides recommends adding two
independent and experienced candidates to the Board, terminating
the investment advisory agreement between FSFR and FSM, and either
selling FSFR or seeking a business combination with another company
to restore value at FSFR.
The full text of the letter is as follows:
March 9, 2016
Dear Fellow Stockholders of FSFR:
Ironsides Partners and its affiliates (“Ironsides”) are
soliciting your vote at the 2016 annual meeting of stockholders of
Fifth Street Senior Floating Rate Corp. (“FSFR”). We have nominated
two highly-qualified, stockholder-first candidates to the Board. We
are also asking you to terminate the Company’s investment advisory
agreement with Fifth Street Management LLC (“FSM”), the Company’s
external advisor, which is controlled by the Company’s founder,
Leonard Tannenbaum.
FSFR has grossly underperformed while paying excessive
incentive fees and suffering the consequences of a horribly
dilutive discounted stock offering. Immediate change is required.
FSFR has been a disappointing investment, and as a stockholder –
like you – we find the underperformance unacceptable and are
calling for immediate action. We urge you to vote our GREEN
proxy card to elect our nominees and terminate the investment
advisory agreement with FSM.
FSFR HAS PERFORMED
POORLY AND TRADES AT A WIDE DISCOUNT TO NAV
FSFR was listed in 2013 at an IPO price of $15 per share. The
closing price of FSFR shares on March 8, 2016 was $7.57, equating
to a 50% price loss in a few short years. Consider further:
- FSFR stock trades at a discount of
33% to net asset value (“NAV”);
- FSFR stock has produced a dismal
negative 37% return since its IPO, including reinvestment of
dividends;
- FSFR’s NAV per share has declined
25% from $15.13 at the end of the first quarter following its IPO
to $11.36 as of December 31, 2015;
- FSFR has paid $8.3 million in
incentive fees to its external advisor through December 30, 2015,
despite stockholders’ suffering large capital losses.
By any measure FSFR has woefully underperformed, as demonstrated
in the following table:
(See: Total Return Table)
IMPORTANT HISTORY
& BACKGROUND
FSFR, established by Leonard Tannenbaum, went public in July
2013. Mr. Tannenbaum was originally the chairman and CEO of FSFR,
but has since resigned his positions. He remains chairman and CEO
of Fifth Street Asset Management, Inc. (“FSAM”), the parent of the
Company’s external advisor, FSM.
In July 2014, FSFR solicited stockholder approval for issuing
shares below NAV, as required by law, which was approved. In the
proxy materials, the Company offered three examples of possible
issuance. The largest, most dilutive example provided by the
Company was for 1.7 million shares at a 25% discount to NAV.
Having received stockholder approval, FSFR proceeded to issue
22.8 million shares at a 15% discount to NAV per share, or more
than 13.4x as many shares as discussed in the proxy! The shares
outstanding more than quadrupled and as the chart below shows, the
Company’s share price never recovered.
(See: FSFR Share Price Chart)
Who benefited from such a dilutive offering? FSFR was not in
distress, it was under no compulsion to pay down debt and there was
no compelling market opportunity on the horizon. To make matters
worse for stockholders, despite raising so much fresh cash, FSFR
cut its dividend by 25% the following year. However, FSAM, the
parent of the Company’s external advisor controlled by Mr.
Tannenbaum, conducted an initial public offering in October 2014 –
two months after FSFR’s very dilutive offering. It would have been
advantageous for FSAM to show growth in assets under management
prior to that IPO. Since that IPO, the stock price of FSAM has
declined by nearly 80%, and FSAM and Mr. Tannenbaum are the subject
of numerous legal challenges and class action lawsuits alleging
securities fraud.
It is clear to us that the market has lost
faith in FSAM, and that this loss of credibility, we believe, has
dragged down the value of FSFR.
WHAT IS THE SOLUTION? SELL THE
COMPANY!
Ironsides believes the best way to deliver value to all FSFR
stockholders is to sell the Company or seek a business combination
that could eliminate or materially reduce the discount to NAV.
It is true that most business development companies (“BDCs”) are
trading at discounts to NAV like FSFR. However, there are important
distinctions. Most BDCs make subordinated loans, often taking
equity interests like warrants and charging non-cash interest,
referred to as payment-in-kind or PIK interest. FSFR has a
different strategy. It invests in first lien senior secured
floating rate loans which pay cash interest only. This makes FSFR
easier to manage than the typical BDC. It is the reason why FSM
charges FSFR a 1% management fee while many other BDCs, including
historically its sister vehicle managed by FSM, are charged a 2%
fee. Because FSFR’s portfolio is less risky than most BDCs, and
because its management fee is 1%, its poor performance and wide
discount are all the more perplexing.
Our solution is a sale of FSFR or a business combination that
increases FSFR’s stock price. Consider the following
possibilities:
- Several large BDCs trade at or above
NAV, as shown in the table below. We would gladly accept shares
from any of these BDCs in exchange for FSFR shares.
(See: Price/NAV Ratio Table)
If a BDC of this sort were to acquire FSFR at even a 10%
discount to NAV, or $10.22 per share, the result would be an
immediate 35% gain to stockholders! While we have not yet
approached any such BDC and there is no such assured transaction in
hand, the substantial benefits make it worth pursuing
aggressively.
- Numerous regional banks trade above
book value and might be interested in acquiring FSFR in a
stock-for-stock transaction.
- FSFR’s portfolio might be converted
into a middle market collateralized loan obligation (CLO) vehicle.
Based on our market experience, we believe certain banks are likely
willing to provide financing to assist potential buyers.
Recent activity in the BDC sector suggests that achieving gains
for FSFR stockholders through a business combination transaction is
feasible. When Pennant Park Floating Rate Capital announced its
agreement to acquire MCG Capital in April 2015, the premium paid
was 18.5% over market price. When TPG Specialty Lending announced a
proposal to acquire the shares of TICC Capital in September 2015,
the premium was 20% over market price.
FSM MUST BE
TERMINATED
If our objective is to sell FSFR and thereby achieve an
immediate uplift in value, why are we proposing to terminate FSM,
the external advisor? The answer is that FSM has been paid
lucrative incentive fees even as stockholder value has nosedived.
It can therefore be expected to vigorously oppose any business
combination that would result in the loss of its lucrative
management contract with the Company. The Investment Company Act of
1940 gives stockholders the right to terminate an external manager
on 60 days’ notice without penalty, and we urge our fellow
stockholders to join us in exercising that right to terminate FSM.
In its proxy materials, the Company threatens dire consequences if
FSM is terminated. We urge you not to be misled by the Company’s
rhetoric, and ask that you refer to the Ironsides materials for a
rebuttal of the Company’s scaremongering.
IMMEDIATE CHANGE IS
NEEDED – NOW IS THE TIME FOR STOCKHOLDERS TO TAKE
ACTION!
FSFR stockholders should not passively accept painful investment
losses. Something can be done. Please join us in taking a first
step towards restoring stockholder value. Please vote your GREEN
proxy card to elect the Ironsides nominees and to terminate FSM as
the Company’s investment advisor.
We look forward to your support.
Robert C. Knapp Chief Investment Officer Ironsides Partners LLC
For questions or assistance in voting your shares, please
contact:
OKAPI PARTNERS LLC
1212 Avenue of the Americas, 24th
Floor
New York, N.Y. 10036
(212) 297-0720
Stockholders Call Toll-Free at: (855)
305-0856
E-mail:
fixFSFR@okapipartners.com
About Ironsides
Ironsides Partners LLC is an investment management firm and
SEC-registered investment adviser based in Boston, Massachusetts.
The firm was founded in 2007 by Robert C. Knapp, who serves as
Managing Director.
Ironsides Partners LLC, Ironsides Partners Special Situations
Master Fund II L.P., Ironsides P Fund L.P. (collectively,
“Ironsides”), Robert C. Knapp and Richard W. Cohen may be deemed to
be participants in the solicitation of proxies from Fifth Street
Senior Floating Rate Corp. (“FSFR”) stockholders in connection with
the 2016 annual meeting of FSFR stockholders. Information about
Ironsides is set forth in the definitive proxy statement filed by
Ironsides with the SEC on March 9, 2016.
Collectively, Ironsides beneficially owns 1,877,056 shares of
FSFR Common Stock, or approximately 6.4% of the FSFR shares
outstanding. Ironsides Partners Special Situations Master Fund II
L.P. beneficially owns directly 876,453 shares of FSFR Common
Stock; an account managed by Ironsides Partners LLC owns directly
181,691 shares of FSFR Common Stock; and Ironsides P Fund L.P. owns
818,912 shares of FSFR Common Stock. Mr. Knapp and Mr. Cohen are
nominees for election as directors. Mr. Knapp may be deemed to
beneficially own or share beneficial ownership of the shares
beneficially owned by Ironsides.
Ironsides has filed the definitive proxy statement described in
this announcement with the SEC and will mail the definitive proxy
statement and other relevant documents to FSFR shareholders. The
definitive proxy statement, and any other documents filed by
Ironsides with the SEC, may be obtained free of charge at the SEC's
website at www.sec.gov or by
contacting fixFSFR@okapipartners.com. Investors should read
the definitive proxy statement carefully, before making any voting
decision because it contains important information.
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version on businesswire.com: http://www.businesswire.com/news/home/20160309005730/en/
Media:Sard Verbinnen & Co.Paul Caminiti/Meghan
Gavigan/Amanda Klein212-687-8080orInvestors:Okapi Partners
LLCBruce Goldfarb/Charles
Garske212-297-0720fixFSFR@okapipartners.com
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