updated 5/4/2011 5:47:47 PM ET 2011-05-04T21:47:47

WHITE PLAINS, N.Y., May 4, 2011 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NYSE:FSC) ("Fifth Street" or "we") announces its financial results for the second fiscal quarter ended March 31, 2011.

Second Quarter 2011 Financial Highlights

  • Net investment income for the quarter ended March 31, 2011 was $16.6 million or $0.27 per share, as compared to $11.2 million or $0.26 per share for the quarter ended March 31, 2010;
  • Net asset value per share was $10.68 as of March 31, 2011, as compared to $10.43 as of September 30, 2010;
  • Net unrealized depreciation for the quarter ended March 31, 2011 was $0.4 million (including $0.6 million of reclassifications to realized losses) or $0.01 per share, as compared to net unrealized appreciation of $1.2 million or $0.03 per share for the quarter ended March 31, 2010;
  • Net realized losses on investments for the quarter ended March 31, 2011 were $0.5 million or $0.01 per share, as compared to $2.9 million or $0.07 per share, for the quarter ended March 31, 2010; and
  • Net increase in net assets resulting from operations for the quarter ended March 31, 2011 was $15.7 million or $0.25 per share, as compared to $9.5 million or $0.22 per share for the quarter ended March 31, 2010.

Third Quarter and Fourth Quarter 2011 Dividend Declarations

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

  • $0.1066 per share, which was paid on April 29, 2011 to stockholders of record on April 1, 2011;
  • $0.1066 per share, payable on May 31, 2011 to stockholders of record on May 2, 2011;
  • $0.1066 per share, payable on June 30, 2011 to stockholders of record on June 1, 2011;
  • $0.1066 per share, payable on July 29, 2011 to stockholders of record on July 1, 2011;
  • $0.1066 per share, payable on August 31, 2011 to stockholders of record on August 1, 2011; and
  • $0.1066 per share, payable on September 30, 2011 to stockholders of record on September 1, 2011.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our portfolio at March 31, 2011 to be $939.7 million, as compared to $563.8 million at September 30, 2010.

During the quarter ended March 31, 2011, we closed $248.6 million of new investments, including funding $218.0 million across ten new and fourteen existing portfolio companies. This compares to funding $33.2 million across one new and five existing portfolio companies during the quarter ended March 31, 2010.

At March 31, 2011, our portfolio consisted of investments in 55 companies, 51 of which were completed in connection with investments by private equity sponsors and four of which were in private equity funds. At fair value, 98.8% of our portfolio consisted of debt investments (87.5% were first lien loans, 8.8% were second lien loans and the remainder were subordinated loans). Our average portfolio company investment size at fair value (excluding equity-only investments) was approximately $19.6 million at March 31, 2011, versus $16.6 million at September 30, 2010.

"We were pleased to see a substantial increase in NAV during our second fiscal quarter, as well as the continued reduction of our basket of distressed investments which now represents under three percent of our total portfolio," stated our Chief Executive Officer, Leonard M. Tannenbaum.

Our weighted average yield on debt investments at March 31, 2011 was 12.8%, and included a cash component of 11.3%.

At March 31, 2011 and September 30, 2010, $553.3 million and $183.0 million, respectively, of our portfolio of debt investments at fair value were at floating rates, which represented 59.6% and 32.8%, respectively, of our total portfolio of debt investments at fair value.


Results of Operations

Total investment income for the quarters ended March 31, 2011 and March 31, 2010 was $29.7 million and $17.9 million, respectively. For the quarter ended March 31, 2011, this amount primarily consisted of $25.8 million of interest income from portfolio investments (which included $3.5 million of PIK interest), and $3.9 million of fee income. For the quarter ended March 31, 2010, total investment income primarily consisted of $16.4 million of interest income from portfolio investments (which included $2.3 million of PIK interest), and $1.4 million of fee income.

The increase in our total investment income for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to an increase of 21 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 March 31, 2011 and March 31, 2010 were $13.1 million and $6.7 million, respectively. Expenses increased for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010 by $6.4 million, primarily as a result of increases in the base management fee, the incentive fee, interest expense and professional fees. For the quarters ended March 31, 2011 and March 31, 2010, no base management fee was incurred on our assets held in the form of cash and cash equivalents. 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 the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs.  During the quarters ended March 31, 2011 and March 31, 2010, we recorded investment realization events, including the following:

  • In March 2011, we received a cash payment of $5.0 million from AmBath/ReBath Holdings, Inc. as part of a restructuring of the loan agreement. The restructuring resulted in a material modification of the terms of the loan agreement. As such, we recorded a realized loss in the amount of $0.3 million; and
  • In March 2010, we recorded a realized loss in the amount of $2.9 million in connection with the sale of a portion of our investment in CPAC, Inc.

Net unrealized appreciation or depreciation is the net change in the fair value of our investment portfolio and our interest rate swap during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the quarter ended March 31, 2011, we recorded net unrealized depreciation of $0.4 million. This consisted of $1.4 million of net unrealized depreciation of equity investments, offset by $0.2 million of net unrealized appreciation on debt investments, $0.6 million of net reclassifications to realized losses and $0.2 million of net unrealized appreciation on our interest rate swap. During the quarter ended March 31, 2010, we recorded net unrealized appreciation of $1.2 million. This consisted of $3.3 million of net reclassifications to realized losses and $1.1 million of net unrealized appreciation on equity investments, partially offset by $3.2 million of net unrealized depreciation on debt investments.

Liquidity and Capital Resources

As of March 31, 2011, we had $38.6 million in cash and cash equivalents, portfolio investments (at fair value) of $939.7 million, $6.6 million of interest and fees receivable, $138.3 million of SBA debentures payable, $134.0 million of borrowings outstanding under our credit facilities and unfunded commitments of $85.6 million.

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 and unfunded commitments of $49.5 million.

Fiscal Year 2011 Dividends

For fiscal year 2011, our Board of Directors has declared monthly dividends 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, which was paid on December 29, 2010 to stockholders of record on December 1, 2010;
  • $0.1066 per share, which was paid on January 31, 2011 to stockholders of record on January 4, 2011;
  • $0.1066 per share, which was paid on February 28, 2011 to stockholders of record on February 1, 2011;
  • $0.1066 per share, which was paid on March 31, 2011 to stockholders of record on March 1, 2011;
  • $0.1066 per share, which was paid on April 29, 2011 to stockholders of record on April 1, 2011;
  • $0.1066 per share, payable on May 31, 2011 to stockholders of record on May 2, 2011;
  • $0.1066 per share, payable on June 30, 2011 to stockholders of record on June 1, 2011;
  • $0.1066 per share, payable on July 29, 2011 to stockholders of record on July 1, 2011;
  • $0.1066 per share, payable on August 31, 2011 to stockholders of record on August 1, 2011; and
  • $0.1066 per share, payable on September 30, 2011 to stockholders of record on September 1, 2011.

Dividends are paid from distributable (taxable) income. 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.

Our amended dividend reinvestment plan ("DRIP") provides for reinvestment of dividends, 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 DRIP will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving cash dividends. We provide a 5% discount on newly-issued shares purchased through the DRIP (provided that shares will not be issued at less than net asset value per share). 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 investments 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 March 31, 2011, the distribution of our investments on the 1 to 5 investment rating scale at fair value was as follows:

   
  Investment at Fair Percentage of Total  
Investment Rating Value Portfolio Leverage Ratio
1.  $ 102,517,984  10.91% 3.07
2.  811,039,654  86.30% 3.42
3.  18,238,348  1.94% 4.52
4.  --  0.00% --
5.  7,953,067   0.85% NM1
Total  $ 939,749,053   100.00% 3.30

1Due 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 March 31, 2011, we had modified the payment terms of our investments in five portfolio companies. Such modified terms 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.

At March 31, 2011, we had stopped accruing cash interest, PIK interest and OID on three investments that had not paid all of their scheduled cash interest payments for the period ended March 31, 2011. At March 31, 2010, we had stopped accruing cash interest, PIK interest and OID on four investments, including two investments that had not paid all of their scheduled monthly cash interest payments.

Recent Developments

On April 1, 2011, we repaid $18.0 million under the ING facility. On April 12, 2011, we repaid $60.0 million and $56.0 million under the Wells Fargo facility and ING facility, respectively. As of May 4, 2011, we had no loans outstanding under our credit facilities.

In April 2011, we received investment grade issuer and corporate debt ratings (BBB-) from the global ratings agency Fitch Ratings.

On April 12, 2011, we closed a private offering of $150 million aggregate principal amount of our 5.375% convertible senior notes due 2016. These convertible senior notes were sold only to qualified institutional buyers (as defined in the Securities Act) pursuant to Rule 144A under the Securities Act. We have granted the initial purchasers for the offering the option, which expires May 7, 2011, to purchase up to an additional $22.5 million aggregate principal amount of the convertible senior notes.  In addition, Leonard M. Tannenbaum, our chief executive officer, purchased $2 million principal amount of the convertible senior notes directly from us in a private placement. 

The convertible senior notes are unsecured and bear interest at a rate of 5.375% per year, payable semiannually. In certain circumstances, the convertible senior notes are convertible into shares of our common stock at an initial conversion rate of 67.7415 shares of common stock per $1,000 principal amount of convertible senior notes, which is equivalent to an initial conversion price of approximately $14.76 per share of our common stock, subject to customary anti-dilution adjustments. In addition, if certain corporate events occur in respect of us, holders of the convertible senior notes may require us to repurchase for cash all or part of their convertible senior notes at a repurchase price equal to 100% of the principal amount of the convertible senior notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. We do not have the right to redeem the convertible senior notes prior to maturity. The convertible senior notes will mature on April 1, 2016, unless repurchased or converted in accordance with their terms prior to such date. 

On April 29, 2011, we paid a dividend in the amount of $0.1066 per share to stockholders of record on April 1, 2011.

On May 2, 2011, our Board of Directors declared the following dividends:

  • $0.1066 per share, payable on July 29, 2011 to stockholders of record on July 1, 2011;
  • $0.1066 per share, payable on August 31, 2011 to stockholders of record on August 1, 2011; and
  • $0.1066 per share, payable on September 30, 2011 to stockholders of record on September 1, 2011.
Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities

 (unaudited)
Fifth Street Finance Corp.
     
     
  March 31, 2011 September 30, 2010
Assets    
     
Investments at fair value:    
Control investments (cost at March 31, 2011: $11,045,168; cost at September 30, 2010: $12,195,029) $9,695,327 $3,700,000
Affiliate investments (cost at March 31, 2011: $48,829,558; cost at September 30, 2010: $50,133,521) 35,747,092 47,222,059
Non-control/Non-affiliate investments (cost at March 31, 2011: $893,318,481; cost at September 30, 2010: $530,168,045) 894,306,634 512,899,257
Total investments at fair value (cost at March 31, 2011: $953,193,207; cost at September 30, 2010: $592,496,595) 939,749,053 563,821,316
     
Cash and cash equivalents 38,556,212 76,765,254
Interest and fees receivable 6,622,820 3,813,757
Due from portfolio company 96,424 103,426
Deferred financing costs 8,849,335 5,465,964
Collateral posted to bank and other assets 1,874,666 1,956,013
     
Total Assets $995,748,510 $651,925,730
     
Liabilities and Net Assets    
     
Liabilities:    
Accounts payable, accrued expenses and other liabilities $452,770 $1,322,282
Base management fee payable 4,785,961 2,875,802
Incentive fee payable 4,139,032 2,859,139
Due to FSC, Inc. 808,525 1,083,038
Interest payable 652,827 282,640
Payments received in advance from portfolio companies 861,298 1,330,724
Loans payable 134,000,000
SBA debentures payable 138,300,000 73,000,000
Total Liabilities 284,000,413 82,753,625
     
Net Assets:    
Common stock, $0.01 par value, 150,000,000 shares authorized, 66,667,933 and 54,550,290 shares issued and outstanding at March 31, 2011 and September 30, 2010 666,679 545,503
Additional paid-in-capital 765,404,953 619,759,984
Net unrealized depreciation on investments and interest rate swap (12,978,443) (29,448,713)
Net realized loss on investments (47,054,064) (33,090,961)
Accumulated undistributed net investment income 5,708,972 11,406,292
Total Net Assets (equivalent to $10.68 and $10.43 per common share at March 31, 2011 and September 30, 2010) 711,748,097 569,172,105
     
Total Liabilities and Net Assets $995,748,510 $651,925,730
 
 
Fifth Street Finance Corp.
 Consolidated Statements of Operations

 (unaudited)
Fifth Street Finance Corp.
         
  Three months Three months Six months Six months
  ended March 31, ended March 31, ended March 31, ended March 31,
  2011 2010 2011 2010
Interest income:        
Control investments $12,463 $(41,919) $13,432 $182,827
Affiliate investments 1,127,620 2,257,404 2,290,136 4,516,905
Non-control/Non-affiliate investments 21,202,939 11,874,938 37,692,123 19,548,264
Interest on cash and cash equivalents 4,393 5,521 13,530 201,183
Total interest income 22,347,415 14,095,944 40,009,221 24,449,179
         
PIK interest income:        
Control investments 101,339 134,672
Affiliate investments 275,633 323,533 557,433 655,149
Non-control/Non-affiliate investments 3,094,431 1,981,640 5,922,986 3,611,798
Total PIK interest income 3,471,403 2,305,173 6,615,091 4,266,947
         
Fee income:        
Control investments 28 126,514
Affiliate investments 133,407 425,261 266,961 679,038
Non-control/Non-affiliate investments 3,740,634 1,018,639 8,007,850 1,680,003
Total fee income 3,874,069 1,443,900 8,401,325 2,359,041
         
Dividend and other income:        
Control investments
Affiliate investments
Non-control/Non-affiliate investments 8,288 11,333 10,722 22,666
Total dividend and other income 8,288 11,333 10,722 22,666
         
Total Investment Income 29,701,175 17,856,350 55,036,359 31,097,833
         
Expenses:        
Base management fee 4,785,961 2,336,878 8,564,740 4,603,881
Incentive fee 4,139,032 2,801,562 7,652,933 4,888,826
Professional fees 507,483 329,014 1,197,972 630,619
Board of Directors fees 36,000 43,000 85,500 81,000
Interest expense 2,724,188 260,941 4,662,898 352,120
Administrator expense 391,175 318,806 745,344 570,624
General and administrative expenses 561,209 559,901 1,515,241 1,142,524
Total expenses 13,145,048 6,650,102 24,424,628 12,269,594
Base management fee waived (727,067)
Net expenses 13,145,048 6,650,102 24,424,628 11,542,527
         
Net Investment Income 16,556,127 11,206,248 30,611,731 19,555,306
 Unrealized appreciation on interest rate swap 234,166     970,556  
Unrealized appreciation (depreciation) on investments:        
Control investments (757,321) 486,853 7,313,275 2,480,075
Affiliate investments (8,590,695) 3,327,908 (10,171,003) 3,727,842
Non-control/Non-affiliate investments 8,741,597 (2,638,050) 18,357,442 (4,031,912)
Net unrealized appreciation (depreciation) on investments (606,419) 1,176,711 15,499,714 2,176,005
         
Realized gain (loss) on investments:        
Control investments (40,586) (7,805,705)
Affiliate investments (2,908,084) (2,908,084)
Non-control/Non-affiliate investments (472,298) (6,157,398) 106,000
Net realized loss on investments (512,884) (2,908,084) (13,963,103) (2,802,084)
         
Net increase in net assets resulting from operations $15,670,990 $9,474,875 $33,118,898 $18,929,227
         
Net investment income per common share — basic and diluted $0.27 $0.26 $0.52 $0.48
Earnings per common share — basic and diluted $0.25 $0.22 $0.57 $0.47
Weighted average common shares outstanding — basic and diluted 62,120,473 43,019,350 58,339,723 40,421,657

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 primarily 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@fifthstreetfinance.com

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