Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") announces
its financial results for the first fiscal quarter ended
December 31, 2015.
First Fiscal Quarter 2016 and Post-Quarter
Highlights
- Net investment income for the quarter ended December 31,
2015 was $26.6 million, or $0.18 per share;
- Net asset value per share was $8.41 at December 31,
2015;
- We closed $338.3 million of investments during the quarter
ended December 31, 2015; and
- We and our investment adviser agreed on a permanent reduction
in our base management fee from 2.00% to 1.75% effective January 1,
2016.
Portfolio and Investment Activity
Our Board of Directors determined the fair value of our
investment portfolio at December 31, 2015 and
September 30, 2015 to be $2.3 billion and $2.4 billion,
respectively. Total assets at December 31, 2015 and
September 30, 2015 were $2.5 billion and $2.6 billion,
respectively.
During the quarter ended December 31, 2015, we closed
$338.3 million of investments in six new and five existing
portfolio companies, and funded $351.9 million across new and
existing portfolio companies. This compares to closing $279.3
million in ten new and six existing portfolio companies, and
funding $288.0 million during the quarter ended September 30,
2015. During the quarter ended December 31, 2015, we
received $226.2 million in connection with the full repayments of
seven of our debt investments, all of which were exited at or above
par, including $119.0 million of principal plus additional fees
from First Choice ER, LLC, our largest non-control
investment. We also received an additional $96.5 million in
connection with syndications and sales of debt investments.
At December 31, 2015, our portfolio consisted of
investments in 131 companies, 113 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, 93.9% of
our portfolio consisted of debt investments and 80.5% of our
portfolio consisted of senior secured loans. Our average
portfolio company debt investment size at fair value was $20.4
million at December 31, 2015, versus $20.7 million at
September 30, 2015, and investments in the energy sector
represented only 1.7% of our portfolio at fair value.
At December 31, 2015, SLF JV I had $360.4 million in
assets, including senior secured loans to 32 portfolio
companies. The joint venture generated income of $4.5 million
to FSC during the first fiscal quarter, which represented a 13.0%
weighted average annualized return on investment.
Our weighted average yield on debt investments at
December 31, 2015, including the return on SLF JV I, was 10.4%
and included a cash component of 9.9%. At December 31,
2015 and September 30, 2015, $1.7 billion of our debt
investments at fair value bore interest at floating rates, which
represented 78.7% and 77.5%, respectively, of our total portfolio
of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended December 31,
2015 and December 31, 2014 was $65.1 million and $65.3
million, respectively. For the quarter ended
December 31, 2015, the amount primarily consisted of $54.5
million of interest income from portfolio investments. For
the quarter ended December 31, 2014, the amount primarily
consisted of $58.0 million of interest income from portfolio
investments. For the quarter ended December 31, 2015,
PIK interest income net of PIK collected in cash represented only
4.2% of total investment income.
Net expenses for the quarters ended December 31, 2015 and
December 31, 2014 were $38.5 million and $38.9 million,
respectively. Net expenses decreased for the quarter ended
December 31, 2015 as compared to the quarter ended
December 31, 2014, due primarily to a $2.9 million decrease in
incentive fees, which was attributable to a 8.2% decrease in
pre-incentive fee net investment income for the year-over-year
period, and a $2.4 million decrease in base management fees, which
was due to a 16.8% decrease in our total assets for the
year-over-year period. The decrease in fees paid to our
investment adviser was partially offset by a $5.8 million increase
in professional fees related to the pending FSC litigation and year
end audit and, to a lesser extent, preparation for our annual
meeting.
Net realized and unrealized losses on our investment portfolio
for the quarters ended December 31, 2015 and December 31,
2014 were $89.5 million and $54.9 million, respectively. For
the quarter ended December 31, 2015, approximately 40% of our
portfolio losses were due to broader market fluctuations, including
spread widening, with the remainder due to credit deterioration in
a small number of investments.
"We believe the permanent reduction in base management fees at
FSC places our fee structure at the industry median and will
increase FSC's return on equity," stated Todd G. Owens, Chief
Executive Officer, adding, "We are pleased that despite the
short-term increase in professional fees, our net investment income
covered our dividend on a per share basis for the fourth
consecutive quarter. We are confident that we are taking the
right steps to deliver consistent results and execute on our
strategic initiatives while also creating value for all FSC
stockholders."
Liquidity and Capital Resources
At December 31, 2015, we had $95.2 million of cash and cash
equivalents (including restricted cash), portfolio investments (at
fair value) of $2.3 billion, $15.6 million of interest, dividends
and fees receivable, $225.0 million of SBA debentures payable,
$385.3 million of borrowings outstanding under our credit
facilities, $115.0 million of unsecured convertible notes payable,
$410.4 million of unsecured notes payable, $19.2 million of secured
borrowings and unfunded commitments of $269.1 million.
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.
Dividend Declaration
In addition to our previously declared dividend of $0.06 per
share, which is payable on February 26, 2016 to stockholders of
record on February 12, 2016, our Board of Directors met on February
8, 2016 and declared the following distributions:
- $0.06 per share, payable on March 31, 2016 to stockholders of
record on March 15, 2016;
- $0.06 per share, payable on April 29, 2016 to stockholders of
record on April 15, 2016; and
- $0.06 per share, payable on May 31, 2016 to stockholders of
record on May 13, 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 intend to repurchase shares of our
common stock during the quarter ending March 31, 2016.
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 December 31, 2015 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 |
|
December 31, 2015 |
|
|
|
September 30, 2015 |
|
Fair Value |
|
% of Portfolio |
|
Leverage Ratio |
|
|
|
Fair Value |
|
% of Portfolio |
|
Leverage Ratio |
|
1 |
|
$ |
68,354 |
|
|
2.94 |
% |
|
0.96 |
|
|
|
|
$ |
215,095 |
|
|
8.95 |
% |
|
1.85 |
|
|
2 |
|
2,117,226 |
|
|
91.03 |
|
|
4.85 |
|
|
|
|
2,040,006 |
|
|
84.91 |
|
|
4.94 |
|
|
3 |
|
35,388 |
|
|
1.52 |
|
|
5.08 |
|
|
|
|
122,128 |
|
|
5.08 |
|
|
5.54 |
|
|
4 |
|
104,791 |
|
|
4.51 |
|
|
NM |
|
|
|
(1 |
) |
|
25,266 |
|
|
1.06 |
|
|
NM |
|
|
(1 |
) |
Total |
|
$ |
2,325,759 |
|
|
100.00 |
% |
|
4.71 |
|
|
|
|
$ |
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 December 31, 2015, we had modified the payment terms of our
investments in 16 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 December 31, 2015, there were five investments on
which we had stopped accruing cash and/or PIK interest or OID
income that represented 4.6% of our debt portfolio at fair value in
the aggregate.
Recent Developments
On January 20, 2016, we announced that our Investment Adviser
has agreed to an amendment to the investment advisory agreement to
permanently reduce the base management fee. As of January 1, 2016,
the base management fee on total gross assets (excluding cash and
cash equivalents) has been reduced from 2.00% to 1.75%. The other
commercial terms of our existing investment advisory arrangement
with our Investment Adviser remain unchanged.
Fifth Street Finance Corp. |
|
Consolidated Statements of Assets and
Liabilities |
(in thousands, except per share
amounts) |
(unaudited) |
|
|
December 31, 2015 |
|
September 30, 2015 |
ASSETS |
|
|
|
Investments at
fair value: |
|
|
|
Control investments (cost December
31, 2015: $344,798; cost September 30, 2015: $333,520) |
$ |
315,527 |
|
|
$ |
318,893 |
|
Affiliate investments (cost
December 31, 2015: $35,355; cost September 30, 2015: $36,637) |
39,782 |
|
|
40,606 |
|
Non-control/Non-affiliate
investments (cost December 31, 2015: $2,107,095; cost September 30,
2015: $2,102,781) |
1,970,450 |
|
|
2,042,996 |
|
Total investments
at fair value (cost December 31, 2015: $2,487,248; cost September
30, 2015: $2,472,938) |
2,325,759 |
|
|
2,402,495 |
|
Cash and cash
equivalents |
82,591 |
|
|
138,377 |
|
Restricted cash |
12,624 |
|
|
5,107 |
|
Interest, dividends and
fees receivable |
15,553 |
|
|
15,687 |
|
Due from portfolio
companies |
2,350 |
|
|
2,641 |
|
Receivables from unsettled
transactions |
— |
|
|
5,168 |
|
Deferred financing
costs |
14,761 |
|
|
16,051 |
|
Other assets |
39 |
|
|
131 |
|
Total
assets |
$ |
2,453,677 |
|
|
$ |
2,585,657 |
|
|
|
|
|
LIABILITIES AND NET ASSETS |
|
|
|
Liabilities: |
|
|
|
Accounts payable, accrued expenses
and other liabilities |
$ |
8,695 |
|
|
$ |
5,006 |
|
Base management fee and Part I
incentive fee payable |
3,525 |
|
|
16,531 |
|
Due to FSC CT |
3,265 |
|
|
2,965 |
|
Interest payable |
11,148 |
|
|
4,300 |
|
Amounts payable to syndication
partners |
— |
|
|
1,316 |
|
Payables from unsettled
transactions |
9,091 |
|
|
3,648 |
|
Credit facilities payable |
385,295 |
|
|
427,295 |
|
SBA debentures payable |
225,000 |
|
|
225,000 |
|
Unsecured convertible notes
payable |
115,000 |
|
|
115,000 |
|
Unsecured notes payable |
410,387 |
|
|
410,320 |
|
Secured borrowings at fair value
(proceeds December 31, 2015: $19,975; proceeds September 30, 2015:
$21,787) |
19,158 |
|
|
21,182 |
|
Total
liabilities |
1,190,564 |
|
|
1,232,563 |
|
Commitments and
contingencies |
|
|
|
Net
assets: |
|
|
|
Common stock, $0.01 par value,
250,000 shares authorized; 150,263 and 150,668 shares issued and
outstanding at December 31, 2015 and September 30, 2015,
respectively |
1,503 |
|
|
1,507 |
|
Additional paid-in-capital |
1,628,989 |
|
|
1,631,523 |
|
Treasury stock, 423 shares at
September 30, 2015 |
— |
|
|
(2,538 |
) |
Net unrealized depreciation on
investments and secured borrowings |
(160,673 |
) |
|
(69,838 |
) |
Net realized loss on investments
and secured borrowings |
(179,578 |
) |
|
(180,945 |
) |
Accumulated overdistributed net
investment income |
(27,128 |
) |
|
(26,615 |
) |
Total net assets
(equivalent to $8.41 and $9.00 per common share at December 31,
2015 and September 30, 2015, respectively) |
1,263,113 |
|
|
1,353,094 |
|
Total liabilities
and net assets |
$ |
2,453,677 |
|
|
$ |
2,585,657 |
|
|
|
|
|
Fifth Street Finance Corp. |
Consolidated Statements of
Operations |
(in thousands, except per share
amounts) |
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
2015 |
|
Three months ended December 31,
2014 |
Interest income: |
|
|
|
|
Control investments |
|
$ |
3,655 |
|
|
$ |
3,695 |
|
Affiliate investments |
|
1,051 |
|
|
1,097 |
|
Non-control/Non-affiliate
investments |
|
46,397 |
|
|
49,211 |
|
Interest on cash and cash
equivalents |
|
63 |
|
|
10 |
|
Total interest
income |
|
51,166 |
|
|
54,013 |
|
PIK interest
income: |
|
|
|
|
Control investments |
|
980 |
|
|
1,374 |
|
Affiliate investments |
|
210 |
|
|
215 |
|
Non-control/Non-affiliate
investments |
|
2,104 |
|
|
2,424 |
|
Total PIK interest
income |
|
3,294 |
|
|
4,013 |
|
Fee income: |
|
|
|
|
Control investments |
|
842 |
|
|
623 |
|
Affiliate investments |
|
8 |
|
|
12 |
|
Non-control/Non-affiliate
investments |
|
7,961 |
|
|
3,982 |
|
Total fee
income |
|
8,811 |
|
|
4,617 |
|
Dividend and other
income: |
|
|
|
|
Control investments |
|
2,427 |
|
|
2,388 |
|
Non-control/Non-affiliate
investments |
|
(576 |
) |
|
307 |
|
Total dividend and other
income |
|
1,851 |
|
|
2,695 |
|
Total investment
income |
|
65,122 |
|
|
65,338 |
|
Expenses: |
|
|
|
|
Base management fee |
|
11,792 |
|
|
14,155 |
|
Part I incentive fee |
|
3,651 |
|
|
6,524 |
|
Professional fees |
|
6,969 |
|
|
1,164 |
|
Board of Directors fees |
|
356 |
|
|
180 |
|
Interest expense |
|
14,047 |
|
|
13,992 |
|
Administrator expense |
|
600 |
|
|
1,247 |
|
General and administrative
expenses |
|
1,221 |
|
|
1,780 |
|
Total expenses |
|
38,636 |
|
|
39,042 |
|
Base management fee waived |
|
(96 |
) |
|
(111 |
) |
Net expenses |
|
38,540 |
|
|
38,931 |
|
Net investment
income |
|
26,582 |
|
|
26,407 |
|
Unrealized appreciation
(depreciation) on investments: |
|
|
|
|
Control investments |
|
(14,644 |
) |
|
(8,760 |
) |
Affiliate investments |
|
458 |
|
|
(135 |
) |
Non-control/Non-affiliate
investments |
|
(76,861 |
) |
|
(29,958 |
) |
Net unrealized depreciation on
investments |
|
(91,047 |
) |
|
(38,853 |
) |
Net unrealized depreciation on
secured borrowings |
|
212 |
|
|
332 |
|
Realized gain (loss) on
investments and secured borrowings: |
|
|
|
|
Control investments |
|
— |
|
|
43 |
|
Non-control/Non-affiliate
investments |
|
1,367 |
|
|
(16,399 |
) |
Net realized gain (loss) on
investments and secured borrowings |
|
1,367 |
|
|
(16,356 |
) |
Net increase (decrease) in net
assets resulting from operations |
|
$ |
(62,886 |
) |
|
$ |
(28,470 |
) |
Net investment income per
common share — basic |
|
$ |
0.18 |
|
|
$ |
0.17 |
|
Loss per common share —
basic |
|
$ |
(0.42 |
) |
|
$ |
(0.19 |
) |
Weighted average common
shares outstanding — basic |
|
150,263 |
|
|
153,340 |
|
Net investment income per
common share — diluted |
|
$ |
0.18 |
|
|
$ |
0.17 |
|
Loss per common share —
diluted |
|
$ |
(0.42 |
) |
|
$ |
(0.19 |
) |
Weighted average common shares
outstanding — diluted |
|
158,053 |
|
|
161,131 |
|
Distributions per common
share |
|
$ |
0.18 |
|
|
$ |
0.28 |
|
Conference Call Information
We will hold a conference call at 10:00 a.m. (Eastern Time) on
Tuesday, February 9, 2016, to discuss our quarterly 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 17763837 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 February 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 17763837. 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. ("FSC") 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. FSC 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. FSC 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
accessed 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 FSC'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.
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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