updated 12/2/2010 7:15:49 AM ET 2010-12-02T12:15:49

WHITE PLAINS, N.Y., Dec. 2, 2010 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NYSE:FSC) ("Fifth Street" or "we") announces its results for the fourth quarter and fiscal year ended September 30, 2010.

Fourth Quarter 2010 Financial Highlights

  • Net investment income for the quarter ended September 30, 2010 was $11.4 million or $0.21 per share, as compared to $7.8 million or $0.26 per share for the quarter ended September 30, 2009;
     
  • Net asset value per share was $10.43 as of September 30, 2010, as compared to $10.84 as of September 30, 2009; 
     
  • Net unrealized appreciation for the quarter ended September 30, 2010 was $9.9 million (including $14.3 million of reclassifications to realized losses) or $0.18 per share, as compared to $2.0 million or $0.06 per share for the quarter ended September 30, 2009; 
     
  • Net realized losses on investments for the quarter ended September 30, 2010 were $16.0 million or $0.29 per share, as compared to $2.0 million or $0.06 per share for the quarter ended September 30, 2009; and 
     
  • Net increase in net assets resulting from operations for the quarter ended September 30, 2010 was $5.4 million or $0.10 per share, as compared to $7.7 million or $0.25 per share for the quarter ended September 30, 2009.

Annual 2010 Financial Highlights

  • Net investment income for the year ended September 30, 2010 was $43.0 million or $0.95 per share, as compared to $31.4 million or $1.27 per share for the year ended September 30, 2009;
     
  • Net unrealized depreciation for the year ended September 30, 2010 was $1.8 million (including $17.6 million of reclassifications to realized losses) or $0.04 per share, as compared to $10.8 million or $0.44 per share for the year ended September 30, 2009; 
     
  • Net realized losses on investments for the year ended September 30, 2010 were $18.8 million or $0.42 per share, as compared to $14.4 million or $0.58 per share for the year ended September 30, 2009; and 
     
  • Net increase in net assets resulting from operations for the year ended September 30, 2010 was $22.4 million or $0.49 per share, as compared to $6.2 million or $0.25 per share for the year ended September 30, 2009.

First Quarter and Second Quarter 2011 Dividend Declarations

Our Board of Directors has declared monthly dividends for the first and second fiscal quarters of 2011 as follows:

  • $0.10 per share, which was paid on October 27, 2010 to stockholders of record on October 6, 2010;
  • $0.11 per share, which was paid on November 24, 2010 to stockholders of record on November 3, 2010;
  • $0.11 per share, payable on December 29, 2010 to stockholders of record on December 1, 2010;
  • $0.1066 per share, payable on January 31, 2011 to stockholders of record on January 4, 2011;
  • $0.1066 per share, payable on February 28, 2011 to stockholders of record on February 1, 2011; and
  • $0.1066 per share, payable on March 31, 2011 to stockholders of record on March 1, 2011.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our portfolio at September 30, 2010 to be $563.8 million, as compared to $299.6 million at September 30, 2009.

During the quarter ended September 30, 2010, we invested $91.8 million across four new and six existing portfolio companies. This compares to investing $11.9 million across one new and two existing portfolio companies during the quarter ended September 30, 2009.

At September 30, 2010, our portfolio consisted of investments in 38 companies, 35 of which were completed in connection with investments by private equity sponsors and three of which were in private equity funds. At fair value, 99.1% of our portfolio consisted of debt investments (73.8% of the portfolio consisted of first lien loans, 24.5% second lien loans and 0.8% subordinated loans). Our average portfolio company investment size at fair value (excluding equity-only investments) was $16.6 million at September 30, 2010, versus $11.5 million at September 30, 2009. At September 30, 2010 and September 30, 2009, portfolio investments recorded at fair value represented 86.5% and 72.0%, respectively, of our total assets.

"We have been able to capitalize on the M&A wave by way of managing the business through a combination of low cost of capital, careful risk management and steady growth in our portfolio. Having built capacity both in human and financial capital earlier in 2010, Fifth Street is well situated for and looks forward to a busy last quarter of the calendar year," stated our Chief Executive Officer, Leonard M. Tannenbaum.

Our weighted average yield on debt investments at September 30, 2010 was 14.0%, and included a cash component of 11.8%.

At September 30, 2010 and September 30, 2009, $375.6 million and $281.0 million, respectively, of our portfolio of debt investments at fair value were at fixed rates, which represented 67.2% and 95.0%, respectively, of our total portfolio of debt investments at fair value. At September 30, 2010, primarily all of our floating rate loans carried a minimum interest rate floor of at least 9%.

Results of Operations

Total investment income for the quarters ended September 30, 2010 and September 30, 2009 was $20.0 million and $12.5 million, respectively. For the quarter ended September 30, 2010, this amount primarily consisted of $18.0 million of interest income from portfolio investments (which included $3.3 million of PIK interest), and $2.0 million of fee income. For the quarter ended September 30, 2009, total investment income primarily consisted of $11.4 million of interest income from portfolio investments (which included $1.8 million of PIK interest), and $0.9 million of fee income.

The increase in our total investment income for the quarter ended September 30, 2010 as compared to the quarter ended September 30, 2009 was primarily attributable to higher average levels of outstanding debt investments, which were principally due to an increase of eight investments in our portfolio in the year-over-year period, partially offset by scheduled amortization payments received and other debt payoffs during the same period.

Expenses for the quarters ended September 30, 2010 and September 30, 2009 were $8.6 million and $4.7 million, respectively. Expenses increased for the quarter ended September 30, 2010 as compared to the quarter ended September 30, 2009 by $3.9 million, primarily as a result of increases in the base management fee, the incentive fee, interest expense, administrator expense and other general and administrative expenses. For the quarter ended September 30, 2010, no base management fee was incurred on our assets held in the form of cash and cash equivalents, as our investment advisor voluntarily agreed to permanently waive this fee as of the end of each quarter beginning March 31, 2010.

Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs.  During the quarter ended September 30, 2010, we recorded the following investment realization events:

  • In August 2010, we received a cash payment of $7.6 million from Storyteller Theaters Corporation in full satisfaction of all obligations under the loan agreement.  The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
     
  • In September 2010, we restructured our investment in Rail Acquisition Corp.  Although the full amount owed under the loan agreement remained intact, the restructuring resulted in a material modification of the terms of the loan agreement.  As such, we recorded a realized loss on this investment in the amount of $2.6 million; 
     
  • In September 2010, we sold our investment in Martini Park, LLC and received a cash payment in the amount of $0.1 million.  We recorded a realized loss on this investment in the amount of $4.0 million; and 
     
  • In September 2010, we exited our investment in Rose Tarlow, Inc. and received a cash payment in the amount of $3.6 million in full settlement of the debt investment.  We recorded a realized loss on this investment in the amount of $9.3 million.

During the quarter ended September 30, 2009, we exited our investment in American Hardwoods Industries, LLC and recorded a realized loss of $2.0 million.

Net unrealized appreciation or depreciation is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the quarter ended September 30, 2010, we recorded net unrealized appreciation of $10.7 million. This consisted of $14.3 million of reclassifications to realized losses and $0.2 million of net unrealized appreciation on equity investments, offset by $3.8 million of net unrealized depreciation on debt investments. During the quarter ended September 30, 2009, we recorded net unrealized appreciation of 2.0 million. This consisted of $1.9 million of reclassifications to realized losses and $0.1 million of net unrealized appreciation on equity investments.

Liquidity and Capital Resources

As of September 30, 2010, we had $76.8 million in cash and cash equivalents, portfolio investments (at fair value) of $563.8 million, $3.8 million of interest and fees receivable, $73.0 million of SBA debentures payable, no borrowings outstanding under our credit facilities and unfunded commitments of $49.5 million.

As of September 30, 2009, we had $113.2 million in cash and cash equivalents, portfolio investments (at fair value) of $299.6 million, $2.9 million of interest receivable, no borrowings outstanding and unfunded commitments of $9.8 million.

Fiscal Year 2010 Dividends

For the fourth quarter of 2010, our Board of Directors declared a dividend on August 2, 2010 of $0.10 per share. The record date was September 1, 2010 and the dividend was distributed on September 29, 2010.

For the third quarter of 2010, our Board of Directors declared a dividend on May 3, 2010 of $0.32 per share. The record date was May 20, 2010 and the dividend was distributed on June 30, 2010.

For the second quarter of 2010, our Board of Directors declared a dividend on January 12, 2010 of $0.30 per share. The record date was March 3, 2010 and the dividend was distributed on March 30, 2010.

For the first quarter of 2010, our Board of Directors declared a dividend on November 12, 2009 of $0.27 per share. The record date was December 10, 2009 and the dividend was distributed on December 29, 2009.

Dividends are paid from distributable income. Our Board of Directors determines dividends based on estimates of distributable (or 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 of investments.

Our dividend reinvestment plan ("DRIP") provides for reinvestment of our dividends on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors declares a cash dividend, our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. If you are a stockholder and your shares of our common stock are held through a brokerage firm or other financial intermediary and you wish to participate in the DRIP, please contact your broker or other financial intermediary. 

Portfolio Asset Quality

We utilize the following investment rating system for our investment portfolio:

  • Investment Rating 1 is used for investments that are performing above expectations and/or a capital gain is expected.
     
  • Investment Rating 2 is used for investments that are performing substantially within our expectations, and whose risks remain neutral or favorable compared to the potential risk at the time of the original investment. All new loans are initially rated 2.
     
  • Investment Rating 3 is used for investments that are performing below our expectations and that require closer monitoring, but where we expect no loss of investment return (interest and/or dividends) or principal. Companies with a rating of 3 may be out of compliance with financial covenants.
     
  • Investment Rating 4 is used for investments that are performing below our expectations and for which risk has increased materially since the original investment. We expect some loss of investment return, but no loss of principal.
     
  • Investment Rating 5 is used for investments that are performing substantially below our expectations and whose risks have increased substantially since the original investment. Investments with a rating of 5 are those for which some loss of principal is expected.

At September 30, 2010 and September 30, 2009, the distribution of our investments on the 1 to 5 investment rating scale at fair value was as follows:

  September 30, 2010 September 30, 2009
 Investment Rating  Fair Value % of Portfolio Leverage Ratio  Fair Value % of Portfolio Leverage Ratio
 1  $ 89,150,457 15.81% 2.97  $ 22,913,497 7.65% 1.70
 2  424,494,799 75.29% 4.31  248,506,393 82.94% 4.34
 3  18,055,528 3.20% 13.25  6,122,236 2.04% 10.04
 4  23,823,120 4.23% 8.13  16,377,904 5.47% 8.31
 5 8,297,412 1.47% NM1 5,691,107 1.90% NM1
 Total  $ 563,821,316 100.00% 4.53  $ 299,611,137 100.00% 4.42

1Due to operating performance, this ratio is not measurable and, as a result, is excluded from the total portfolio calculation.

As a result of current economic conditions and their impact on certain of our portfolio companies, we have agreed to modify the payment terms of our investments in eleven of our portfolio companies as of September 30, 2010. Such modified terms include increased PIK interest provisions and/or reduced cash interest rates. These modifications, and any future modifications to our loan agreements as a result of current economic conditions or otherwise, 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.

Five investments did not pay all of their scheduled monthly cash interest payments for the year ended September 30, 2010. As of September 30, 2010, we had also stopped accruing PIK interest and OID on these five investments.  As of September 30, 2009, we had stopped accruing PIK interest and OID on five investments, including two investments that had not paid all of their scheduled monthly cash interest payments.

Recent Developments

On October 1, 2010, we closed a $63.5 million senior secured debt facility to support the acquisition of a provider of technology solutions. The investment is backed by a private equity sponsor and $51.0 million was funded at closing. The terms of this investment include a $12.5 million revolver at an interest rate of LIBOR + 7.5% per annum, a $29.0 million Term Loan A at an interest rate of LIBOR + 7.5% per annum and a $22.0 million Term Loan B at an interest rate of 12.5% per annum. This is a first lien facility with a scheduled maturity of five years.

On October 1, 2010, we received a cash payment of $8.6 million from Goldco, Inc., in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par.

On October 13, 2010, Nicos Polymers & Grinding, Inc., an existing portfolio company, filed for Chapter 11 bankruptcy as part of a restructuring of that investment. The bankruptcy was subsequently moved to a court mandated mediation process. On November 15, 2010, we and the major shareholder of Nicos Polymers & Grinding, Inc. agreed to a binding term sheet to settle the restructuring via an out of court foreclosure process. The restructuring will result in Nicos Polymers & Grinding retaining $10.0 million of senior term debt at an interest rate of 8.0% with a scheduled maturity of seven years, along with a $1.0 million to $3.0 million expandable revolving line of credit.

On October 22, 2010, our Board of Directors authorized a stock repurchase program to acquire up to $20 million of our outstanding common stock. Stock repurchases under this program are to be made through the open market at times and in such amounts as our management deems appropriate, provided that the price is below the most recently published net asset value per share. The stock repurchase program expires December 31, 2011 and may be limited or terminated by the Board of Directors at any time without prior notice.

On October 22, 2010, our Board of Directors approved an amendment to our DRIP to allow for a 5% discount on newly issued shares purchased through the DRIP, provided the shares will not be issued at a price below the most recently published net asset value per share.

On October 27, 2010, we paid a dividend in the amount of $0.10 per share to stockholders of record on October 6, 2010.

On November 4, 2010, we held a foreclosure auction of the assets of Vanguard Vinyl, Inc., an existing portfolio company, as part of a loan restructuring. The restructuring broke up Vanguard Vinyl, Inc. into two operating companies. One operating company, located in California, will maintain $0.8 million of senior secured term debt at an interest rate of 8.0%, along with a $0.4 million revolving line of credit; both loans have a scheduled maturity of three years. The other operating company will manage operations in Utah with $2.0 million of senior secured term debt at an interest rate of 8.0%, along with a $1.0 million revolving line of credit; both loans have a scheduled maturity of three years. The Hawaii operations will maintain $3.8 million of senior secured term debt at an interest rate of 8% with a scheduled maturity of six months.

On November 5, 2010, we amended the Wells Fargo facility to, among other things, provide for the issuance from time to time of letters of credit for the benefit of our portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million.

On November 15, 2010, our SBIC subsidiary drew $6.0 million from its SBA commitment to use to fund future investments.

On November 16, 2010, we received a cash payment of $11.0 million from TBA Global, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par.

On November 16, 2010, we drew $10.0 million on the Wells Fargo facility.

On November 19, 2010, we closed a $45.5 million senior secured debt facility to support the acquisition of a provider of technology-based services. The investment is backed by a private equity sponsor and $39.5 million was funded at closing. The terms of this investment include a $6.0 million revolver at an interest rate of LIBOR + 7.0% per annum with a 2% LIBOR floor, a $16.4 million Term Loan A at an interest rate of LIBOR + 8.0% per annum with a 2% LIBOR floor, a $21.0 million Term Loan B at an interest rate of LIBOR + 10.25% per annum with a 2% LIBOR floor and a $2.1 million membership interest. This is a first lien facility with a scheduled maturity of five years.

On November 24, 2010, we paid a dividend in the amount of $0.11 per share to stockholders of record on November 3, 2010.

On November 30, 2010, our Board of Directors declared the following monthly dividends:

  • $0.1066 per share, payable on January 31, 2011 to stockholders of record on January 4, 2011;
  • $0.1066 per share, payable on February 28, 2011 to stockholders of record on February 1, 2011; and
  • $0.1066 per share, payable on March 31, 2011 to stockholders of record on March 1, 2011.

Conference Call

Fifth Street will hold a conference call at 10:00 am (Eastern Time) on Friday, December 3, 2010 to discuss the quarterly and fiscal year end results. All interested parties are welcome to participate. You can access the conference call by dialing (888) 857-6931 approximately 5-10 minutes prior to the call. All callers should reference Fifth Street Finance Corp. An archived replay of the call will be available two hours after the call and will be available through December 7, 2010. To hear the replay, please dial (888) 203-1112 and reference passcode #6492367.

 

Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
 
  September 30, September 30,
  2010 2009
ASSETS
Investments at Fair Value:    
Control investments (cost September 30, 2010: $12,195,029;

cost September 30, 2009: $12,045,029)
$3,700,000 $5,691,107
Affiliate investments (cost September 30, 2010: $50,133,521;

cost September 30, 2009: $71,212,035)
47,222,059 64,748,560
Non-control/Non-affiliate investments (cost September 30, 2010:

$530,168,045; cost September 30, 2009: $243,975,221)
512,899,257 229,171,470
     
Total Investments at Fair Value (cost September 30, 2010:

$592,496,595; cost September 30, 2009: $327,232,285)
563,821,316 299,611,137
Cash and cash equivalents 76,765,254 113,205,287
Interest and fees receivable 3,813,757 2,866,991
Due from portfolio company 103,426 154,324
Deferred financing costs 5,465,964
Collateral posted to bank and other assets 1,956,013 49,609
     
Total Assets $651,925,730 $415,887,348
     
     
LIABILITIES AND NET ASSETS
Liabilities:    
Accounts payable, accrued expenses and other liabilities $1,322,282 $723,856
Base management fee payable 2,875,802 1,552,160
Incentive fee payable 2,859,139 1,944,263
Due to FSC, Inc.  1,083,038 703,900
Interest payable 282,640
Payments received in advance from portfolio companies 1,330,724 190,378
Offering costs payable 216,720
SBA debentures payable 73,000,000
     
Total Liabilities 82,753,625 5,331,277
     
Net Assets:    
Common stock, $0.01 par value, 150,000,000 shares authorized,

54,550,290 and 37,878,987 shares issued and outstanding at

September 30, 2010 and September 30, 2009
545,503 378,790
Additional paid-in-capital 619,759,984 439,989,597
Net unrealized depreciation on investments and interest rate swap (29,448,713) (27,621,147)
Net realized loss on investments (33,090,961) (14,310,713)
Accumulated undistributed net investment income 11,406,292 12,119,544
     
Total Net Assets 569,172,105 410,556,071
     
Total Liabilities and Net Assets $651,925,730 $415,887,348
 
Fifth Street Finance Corp.
Consolidated Statements of Operations
 
  Year Year Year
  Ended Ended Ended
  September 30, September 30, September 30,
  2010 2009 2008
       
Interest income:      
Control investments $182,827 $— $—
Affiliate investments 7,619,018 10,632,844 8,804,543
Non-control/Non-affiliate investments 46,089,945 27,931,097 16,800,945
Interest on cash and cash equivalents 237,557 208,824 750,605
       
Total interest income 54,129,347 38,772,765 26,356,093
       
PIK interest income:      
Control investments
Affiliate investments 1,227,133 1,634,116 1,539,934
Non-control/Non-affiliate investments 8,776,935 5,821,173 3,357,464
       
Total PIK interest income 10,004,068 7,455,289 4,897,398
       
Fee income:      
Control investments
Affiliate investments 1,433,206 1,101,656 702,463
Non-control/Non-affiliate investments 4,537,837 2,440,538 1,105,576
       
Total fee income 5,971,043 3,542,194 1,808,039
       
Dividend and other income:      
Control investments
Affiliate investments 26,740
Non-control/Non-affiliate investments 433,317 22,791 130,971
Other income 35,396
       
Total dividend and other income 433,317 58,187 157,711
       
Total investment income 70,537,775 49,828,435 33,219,241
       
Expenses:      
Base management fee 10,002,326 6,060,690 4,258,334
Incentive fee 10,756,040 7,840,579 4,117,554
Professional fees 1,348,908 1,492,554 1,389,541
Board of Directors fees 278,418 310,250 249,000
Organizational costs 200,747
Interest expense 1,929,389 636,901 917,043
Administrator expense 1,321,546 796,898 978,387
Line of credit guarantee expense 83,333
Transaction fees 206,726
General and administrative expenses 2,604,051 1,500,197 674,360
       
Total expenses 28,240,678 18,638,069 13,075,025
Base management fee waived (727,067) (171,948)
       
Net expenses 27,513,611 18,466,121 13,075,025
       
Net investment income 43,024,164 31,362,314 20,144,216
Unrealized depreciation on interest rate swap  (773,435) —  — 
       
Unrealized appreciation (depreciation) on investments:      
Control investments (2,141,107) (1,792,015)
Affiliate investments 3,294,482 286,190 (10,570,012)
Non-control/Non-affiliate investments (2,207,506) (9,289,492) (6,378,755)
       
Total unrealized depreciation on investments (1,054,131) (10,795,317) (16,948,767)
       
       
Realized gain (loss) on investments:      
Control investments
Affiliate investments (6,937,100) (4,000,000)
Non-control/Non-affiliate investments (11,843,148) (10,373,200) 62,487
       
Total realized gain (loss) on investments (18,780,248) (14,373,200) 62,487
       
Net increase in net assets resulting from operations $22,416,350 $6,193,797 $3,257,936
       
Net Investment Income per common share — basic and diluted $0.95 $1.27 $1.29
Earnings per common share — basic and diluted $0.49 $0.25 $0.21
       
Weighted average common shares — basic and diluted 45,440,584 24,654,325 15,557,469


About Fifth Street Finance Corp.

Fifth Street Finance Corp. is a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. Fifth Street Finance Corp.'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 Fifth Street Finance Corp. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=5525

Forward-Looking Statements

This press release may contain certain forward-looking statements, including statements with regard to the future performance of Fifth Street Finance Corp. Words such as "believes," "expects," "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 Fifth Street Finance Corp.'s filings with the Securities and Exchange Commission. Fifth Street Finance Corp. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

CONTACT: Fifth Street Finance Corp.
         Stacey Thorne, Executive Director, Investor Relations
         (914) 286-6811
         stacey@fifthstreetcap.com

© Copyright 2012, GlobeNewswire, Inc. All Rights Reserved

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