Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") announces
its financial results for the fourth fiscal quarter and year ended
September 30, 2015.
Fourth Fiscal Quarter 2015 Financial
Highlights
- Net investment income for the quarter ended September 30, 2015
was $28.2 million, or $0.18 per share;
- Net asset value per share was $9.00 as of September 30,
2015;
- We closed $279.3 million of investments during the quarter
ended September 30, 2015; and
- We repurchased approximately $20 million of our common shares
in the open market during the quarter ended September 30,
2015.
Fiscal Year 2015 Financial Highlights
- Net investment income for the year ended September 30, 2015 was
$114.9 million, or $0.75 per share, as compared to $142.6 million,
or $1.00 per share, for the year ended September 30, 2014;
- Net realized and unrealized losses for the year ended September
30, 2015 were $99.5 million, or $0.65 per share, as compared to
$30.0 million, or $0.21 per share, for the year ended September 30,
2014; and
- Net increase in net assets resulting from operations for the
year ended September 30, 2015 was $15.4 million, or $0.10 per
share, as compared to $112.5 million, or $0.79 per share, for the
year ended September 30, 2014.
Portfolio and Investment Activity
Our Board of Directors determined the fair value of our
investment portfolio at September 30, 2015 and September 30, 2014
to be $2.4 billion and $2.5 billion, respectively. Total assets at
September 30, 2015 and September 30, 2014 were $2.6 billion and
$2.7 billion, respectively.
During the quarter ended September 30, 2015, we closed $279.3
million of investments in ten new and six existing portfolio
companies, and funded $288.0 million across new and existing
portfolio companies. This compares to closing $394.4 million in
nine new and five existing portfolio companies, and funding $274.9
million during the quarter ended September 30, 2014. During the
quarter ended September 30, 2015, we received $74.7 million in
connection with the full repayments of four of our debt
investments, all of which were exited at or above par. Notably,
during the quarter ended September 30, 2015 we were repaid at par
on our only CLO debt investment, receiving $30.4 million and
resulting in no remaining CLO exposure. We also received an
additional $108.1 million in connection with syndications and sales
of debt investments.
At September 30, 2015, our portfolio consisted of investments in
135 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 19 of which were in private
equity funds. At fair value, 93.7% 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 $20.7 million at September 30, 2015, versus $24.2
million at September 30, 2014.
As of September 30, 2015, SLF JV I had $419.0 million in assets,
including senior secured loans to 34 portfolio companies. The joint
venture generated income of $5.2 million to FSC during the fourth
fiscal quarter, which represented a 15.4% weighted average
annualized return on investment. In July 2015, SLF JV I closed on
$200 million of additional leverage, which should allow SLF JV I to
expand up to its anticipated size of $600 million of assets.
Our weighted average yield on debt investments at September 30,
2015, including the return on SLF JV I, was 10.8% and included a
cash component of 10.3%. At September 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 77.5% and 70.0%, respectively, of our total portfolio
of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended September 30,
2015 and September 30, 2014 was $63.8 million and $76.2 million,
respectively. For the quarter ended September 30, 2015, the amount
primarily consisted of $55.0 million of interest income from
portfolio investments. For the quarter ended September 30, 2014,
the amount primarily consisted of $58.8 million of interest income
from portfolio investments. For the quarter ended September 30,
2015, PIK interest income net of PIK collected in cash represented
only 3.7% of total investment income.
Total investment income for the years ended September 30, 2015
and September 30, 2014 was $265.5 million and $294.0 million,
respectively. For the year ended September 30, 2015, the amount
primarily consisted of $229.3 million of interest income from
portfolio investments. For the year ended September 30, 2014, the
amount primarily consisted of $236.8 million of interest income
from portfolio investments.
Net expenses for the quarters ended September 30, 2015 and
September 30, 2014 were $35.6 million and $38.8 million,
respectively. Net expenses for the years ended September 30, 2015
and September 30, 2014 were $150.5 million and $151.4 million,
respectively. Net expenses decreased for the quarter ended
September 30, 2015 as compared to the quarter ended September 30,
2014, due primarily to a decrease in incentive fees, which was
attributable to a 24.8% decrease in pre-incentive fee net
investment income for the year-over-year period.
Net realized and unrealized losses on our investment portfolio
for the quarters ended September 30, 2015 and September 30, 2014
were $30.5 million and $9.0 million, respectively. Net realized and
unrealized losses on our investment portfolio for the years ended
September 30, 2015 and September 30, 2014 were $99.5 million and
$30.0 million, respectively. For the quarter ended September 30,
2015, over 50% of the net unrealized depreciation on our portfolio
was due to market movements, as increased volatility in loan prices
driven by the market dislocation that occurred during the quarter
negatively affected our investment valuations accordingly.
"FSC is pleased to report solid results during a September
quarter that saw broader market volatility. This represents the
third straight quarter that our net investment income exceeded our
quarterly dividend, generating excess earnings to enhance our
operating flexibility. Additionally, during the quarter we executed
on our announced share repurchase plan, completing a buyback of $20
million of our stock," stated Todd G. Owens, Chief Executive
Officer, adding, "The yield on our credit portfolio has remained
relatively flat quarter-over-quarter and we believe that our
overall portfolio remains stable despite some credit deterioration
in select portfolio investments during the September quarter."
During our September 30, 2015 fiscal year-end audit work, we
identified errors in the recognition of fee revenue over a four
year period, from fiscal years 2012 through 2015. These errors
mainly affected the timing of fee revenue recognition and were
partially offset by the overpayment of Part I fees to our
investment adviser. In aggregate over the four years, we
prematurely recognized $12.9 million in fee revenue and paid $2.6
million in Part I fees, which resulted in a cumulative
overstatement to net investment income of $10.3 million, or 2.3% of
cumulative net investment income over the same period. In addition,
we understated our net assets by $2.6 million as of June 30, 2015.
We have revised our financials to reflect the cumulative
adjustments related to the three fiscal years of 2012, 2013 and
2014 as out-of-period adjustments to the three months ended
December 31, 2014. Such adjustments resulted in a decrease of $3.9
million in net investment income and an increase of $1.0 million in
in net assets. The balance of the revisions are reflected in the
remaining quarters of our fiscal 2015 results. The $2.6 million of
cumulative premature payments of Part I fees will be fully refunded
by the limited partners of Fifth Street Holdings LP, the owner of
our investment adviser, by December 31, 2015, and the prior period
financial impacts have been reflected in FSC's September 30, 2015
Form 10-K.
Liquidity and Capital Resources
As of September 30, 2015, we had $143.5 million in 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 and $21.2 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.
During the three months ended September 30, 2015, we finalized
an amendment to extend the maturity and reduce pricing on our $125
million revolving credit facility with Sumitomo Mitsui Banking
Corporation. The reinvestment period was extended by one year to
September 30, 2017 and the maturity date was extended by one year
to September 16, 2021. Additionally, the stated interest rate on
the facility was changed from LIBOR plus 2.25% per annum to LIBOR
plus 2.00% or LIBOR plus 2.25% per annum, based on actual usage
levels.
Dividend Declaration
On November 30, 2015, our Board of Directors declared the
following distributions:
- $0.06 per share, payable on December 30, 2015 to stockholders
of record on December 15, 2015;
- $0.06 per share, payable on January 28, 2016 to stockholders of
record on January 15, 2016; and
- $0.06 per share, payable on February 26, 2016 to stockholders
of record on February 12, 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
Our Board of Directors previously authorized a common stock
repurchase program to acquire up to $100 million of the outstanding
shares of our common stock. Common stock repurchases under this
program were to be made through the open market at times, and in
such amounts, as our management deemed appropriate. The program
expired on November 20, 2015, and on November 30, 2015 our Board of
Directors approved a new $100 million common stock repurchase
program through November 30, 2016. For the fiscal year ended
September 30, 2015, the Company repurchased 3,077,447 shares at the
weighted average price of $6.48 per share, resulting in $20.0
million of cash paid under the stock repurchase program.
Any common stock repurchases under the newly authorized program
are to be made in the open market, privately negotiated
transactions or otherwise at times, and in such amounts, as
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 newly authorized
repurchase program may be suspended or discontinued at any time.
The company expects to finance the stock repurchases with existing
cash balances or by incurring leverage.
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 September 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:
|
September 30,
2015 |
|
September 30,
2014 |
|
Investment Ranking |
Fair Value |
% of Portfolio |
Leverage Ratio |
|
Fair Value |
% of Portfolio |
Leverage Ratio |
|
1 |
$ 215,095 |
8.95% |
1.85 |
|
$ 65,268 |
2.61% |
1.94 |
|
2 |
2,040,006 |
84.91 |
4.94 |
|
2,424,290 |
97.14 |
4.84 |
|
3 |
122,128 |
5.08 |
5.54 |
|
— |
— |
— |
|
4 |
25,266 |
1.06 |
NM |
(1) |
6,356 |
0.25 |
NM |
(1) |
Total |
$ 2,402,495 |
100.00% |
4.60 |
|
$ 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
September 30, 2015, we had modified the payment terms of our
investments in 16 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 September 30, 2015, there were four investments on
which we had stopped accruing cash and/or PIK interest and OID
income. We added one investment to PIK nonaccrual status
during the quarter ended September 30, 2015. While this
investment was current with their cash interest payments, we
reversed $29,000 of noncash income related to this investment for
the quarter.
|
|
|
Fifth Street Finance
Corp. |
Consolidated Statements
of Assets and Liabilities |
(in thousands, except
per share amounts) |
(audited) |
|
|
|
|
September 30, |
September 30, |
|
2015 |
2014 |
ASSETS |
|
|
Investments at fair
value: |
|
|
Control investments (cost September 30,
2015: $333,520; cost September 30, 2014: $387,625) |
$ 318,893 |
$ 394,872 |
Affiliate investments (cost September 30,
2015: $36,637; cost September 30, 2014: $37,757) |
40,606 |
40,764 |
Non-control/Non-affiliate investments
(cost September 30, 2015: $2,102,781; cost September 30, 2014:
$2,069,301) |
2,042,996 |
2,060,278 |
Total investments at fair value (cost
September 30, 2015: $2,472,938; cost September 30, 2014:
$2,494,683) |
2,402,495 |
2,495,914 |
Cash and cash equivalents |
138,377 |
86,731 |
Restricted cash |
5,107 |
22,315 |
Interest, dividends and fees receivable |
15,687 |
15,224 |
Due from portfolio companies |
2,641 |
22,950 |
Receivables from unsettled transactions |
5,168 |
4,750 |
Deferred financing costs |
16,051 |
20,334 |
Other assets |
131 |
— |
Total assets |
$ 2,585,657 |
$ 2,668,218 |
|
|
|
LIABILITIES AND NET
ASSETS |
|
|
Liabilities: |
|
|
Accounts payable, accrued
expenses and other liabilities |
$ 5,006 |
$ 3,908 |
Base management fee
payable |
12,105 |
12,372 |
Part I incentive fee
payable |
4,426 |
9,309 |
Due to FSC CT |
2,965 |
2,464 |
Interest payable |
4,300 |
5,797 |
Amounts payable to
syndication partners |
1,316 |
3,817 |
Payable from unsettled
transaction |
3,648 |
— |
Credit facilities
payable |
427,295 |
317,395 |
SBA debentures payable |
225,000 |
225,000 |
Unsecured convertible notes
payable |
115,000 |
115,000 |
Unsecured notes
payable |
410,320 |
409,878 |
Secured borrowings at fair
value (proceeds September 30, 2015: $21,787; proceeds September 30,
2014: $84,750) |
21,182 |
84,803 |
Total liabilities |
1,232,563 |
1,189,743 |
Commitments and
contingencies |
|
|
Net assets: |
|
|
Common stock,
$0.01 par value, 250,000 shares authorized; 150,668 and
153,340 shares issued at September 30, 2015 and September 30,
2014, respectively |
1,507 |
1,533 |
Additional paid-in-capital |
1,631,523 |
1,649,086 |
Treasury stock, 423 shares at September
30, 2015 |
(2,538) |
— |
Net unrealized appreciation
(depreciation) on investments and secured borrowings |
(69,838) |
1,178 |
Net realized loss on investments, secured
borrowings and interest rate swap |
(180,945) |
(152,416) |
Accumulated overdistributed net
investment income |
(26,615) |
(20,906) |
Total net assets (equivalent to $9.00
and $9.64 per common share at September 30, 2015 and September 30,
2014, respectively) |
1,353,094 |
1,478,475 |
Total liabilities and net
assets |
$ 2,585,657 |
$ 2,668,218 |
|
|
|
Fifth Street Finance
Corp. |
Consolidated Statements
of Operations |
(in thousands, except
per share amounts) |
(audited) |
|
|
|
|
|
|
Three months |
Three months |
Year |
Year |
|
ended |
ended |
ended |
ended |
|
September 30,
2015 |
September 30,
2014 |
September 30,
2015 |
September 30,
2014 |
Interest income: |
|
|
|
|
Control investments |
$ 3,468 |
$ 5,485 |
$ 15,541 |
$ 14,839 |
Affiliate investments |
1,084 |
1,112 |
4,338 |
4,084 |
Non-control/Non-affiliate
investments |
47,406 |
45,476 |
195,988 |
193,720 |
Interest on cash and cash
equivalents |
19 |
9 |
55 |
17 |
Total interest
income |
51,977 |
52,082 |
215,922 |
212,660 |
PIK interest income: |
|
|
|
|
Control investments |
950 |
2,102 |
5,029 |
9,615 |
Affiliate investments |
217 |
214 |
860 |
966 |
Non-control/Non-affiliate
investments |
1,826 |
4,445 |
7,500 |
13,560 |
Total PIK interest
income |
2,993 |
6,761 |
13,389 |
24,141 |
Fee income: |
|
|
|
|
Control investments |
273 |
3,140 |
1,841 |
7,211 |
Affiliate investments |
16 |
37 |
52 |
230 |
Non-control/Non-affiliate
investments |
4,700 |
10,338 |
20,371 |
45,382 |
Total fee income |
4,989 |
13,515 |
22,264 |
52,823 |
Dividend and other
income: |
|
|
|
|
Control investments |
3,394 |
3,312 |
12,574 |
3,313 |
Non-control/Non-affiliate
investments |
417 |
547 |
1,326 |
1,017 |
Total dividend and other
income |
3,811 |
3,859 |
13,900 |
4,330 |
Total investment income |
63,770 |
76,217 |
265,475 |
293,954 |
Expenses: |
|
|
|
|
Base management fee |
12,250 |
12,596 |
51,615 |
51,735 |
Part I incentive fee |
7,015 |
9,309 |
28,575 |
35,472 |
Professional fees |
1,084 |
1,173 |
4,079 |
3,948 |
Board of Directors fees |
178 |
166 |
722 |
598 |
Interest expense |
13,659 |
13,682 |
56,654 |
51,465 |
Administrator expense |
484 |
705 |
3,090 |
2,810 |
General and administrative expenses |
1,086 |
1,352 |
6,346 |
6,039 |
Total expenses |
35,756 |
38,983 |
151,081 |
152,067 |
Base management fee waived |
(145) |
(224) |
(546) |
(687) |
Net expenses |
35,611 |
38,759 |
150,535 |
151,380 |
Net investment income |
28,159 |
37,458 |
114,940 |
142,574 |
Unrealized appreciation
(depreciation) on investments: |
|
|
|
|
Control investments |
(5,324) |
(5,247) |
(21,874) |
(737) |
Affiliate investments |
(421) |
230 |
962 |
882 |
Non-control/Non-affiliate
investments |
(26,565) |
(5,160) |
(50,762) |
(32,309) |
Net unrealized depreciation on
investments |
(32,310) |
(10,177) |
(71,674) |
(32,164) |
Net unrealized (appreciation)
depreciation on secured borrowings |
474 |
2 |
658 |
(53) |
Realized gain (loss) on investments
and secured borrowings: |
|
|
|
|
Control investments |
(132) |
— |
(4,516) |
(299) |
Affiliate investments |
— |
— |
72 |
— |
Non-control/Non-affiliate
investments |
1,420 |
1,156 |
(24,085) |
2,474 |
Net realized gain (loss) on
investments and secured borrowings |
1,288 |
1,156 |
(28,529) |
2,175 |
Net increase (decrease) in net assets
resulting from operations |
$ (2,389) |
$ 28,439 |
$ 15,395 |
$ 112,532 |
Net investment income per common
share — basic |
$ 0.18 |
$ 0.25 |
$ 0.75 |
$ 1.00 |
Earnings (loss) per common
share — basic |
$ (0.02) |
$ 0.19 |
$ 0.10 |
$ 0.79 |
Weighted average common
shares outstanding — basic |
152,639 |
150,472 |
153,164 |
141,992 |
Net investment income per common
share — diluted |
$ 0.18 |
$ 0.25 |
$ 0.75 |
$ 0.99 |
Earnings (loss) per common share —
diluted |
$ (0.02) |
$ 0.19 |
$ 0.10 |
$ 0.79 |
Weighted average common shares outstanding —
diluted |
160,430 |
158,263 |
160,954 |
149,783 |
Distributions per common
share |
$ 0.18 |
$ 0.25 |
$ 0.79 |
$ 1.00 |
|
|
|
|
|
Conference Call Information
We will hold a conference call at 10:00 a.m. (Eastern Time) on
Tuesday, December 1, 2015, to discuss our fourth quarter and fiscal
year end financial results. All interested parties are welcome to
participate. Domestic callers can access the conference call by
dialing (888) 311-8137. International callers can access the
conference call by dialing +1 (330) 863-3372. All callers will need
to enter the Conference ID Number 55876769 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 December 8, 2015 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
55876769. An archived replay will also be available online on
the "Investor Relations" section of FSC's website under the "News
& Events - Calendar of Events" section. FSC's website can
be accessed at fsc.fifthstreetfinance.com.
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.
Forward-Looking Statements
This press release may contain, and certain oral statements made
by our representatives from time to time may contain,
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.
CONTACT: Investor Contact:
Robyn Friedman, Senior Vice President,
Head of Investor Relations
(203) 681-3720
ir@fifthstreetfinance.com
Media Contact:
Michael Freitag / James Golden / Alyssa Cass
Joele Frank Wilkinson Brimmer Katcher
(212) 355-4449
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