Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") today
announced its financial results for the second fiscal quarter ended
March 31, 2017.
Second Fiscal Quarter 2017 Highlights
- Net investment income of $18.5 million, or $0.13 per
share;
- Net asset value per share of $7.23;
- Closed $112.7 million of new investments; and
- Amended our investment advisory agreement to implement a total
return hurdle and a lookback period which scales up to three years
over time, and to decrease the quarterly hurdle rate used in
calculating the incentive fee from 2% to 1.75%.
“During the March quarter, we continued to execute on our stated
initiatives, reducing the number of loans on non-accrual and
decreasing leverage to within our targeted debt-to-equity range of
0.6x to 0.8x. In addition, we successfully revised our
investment advisory agreement with overwhelming stockholder
approval, an important step towards further aligning the interests
of our investment adviser with our stockholders,” stated Bernard D.
Berman, FSC's Chief Executive Officer. “Looking ahead, we
continue to focus on generating consistent results, stabilizing NAV
and delivering enhanced value for our stockholders.”
Portfolio and Investment Activity
FSC's Board of Directors determined the fair value of our
investment portfolio at March 31, 2017 to be $1.8 billion, as
compared to $2.2 billion at September 30, 2016. Total
assets were $1.9 billion at March 31, 2017, as compared to
$2.3 billion at September 30, 2016.
During the quarter ended March 31, 2017, we closed $112.7
million of investments in six new and one existing portfolio
companies and funded $103.9 million across new and existing
portfolio companies. This compares to closing $106.6 million
of investments in four new and five existing portfolio companies
and funding $73.9 million during the quarter ended March 31,
2016. During the quarter ended March 31, 2017, we
received $208.8 million in connection with the full repayments and
exits of 11 of our investments, and an additional $55.5 million in
connection with other paydowns and sales of investments.
At March 31, 2017, our portfolio consisted of investments
in 113 companies, 94 of which were completed in connection with
investments by private equity sponsors. Our portfolio also
included our investment in Senior Loan Fund JV I, LLC ("SLF JV I")
and 18 investments in private equity funds. At fair value,
89.1% of our portfolio consisted of debt investments and 74.6% of
our portfolio consisted of senior secured loans. Our average
portfolio company debt investment size at fair value was $19.4
million at March 31, 2017, versus $19.7 million at
September 30, 2016.
At March 31, 2017, SLF JV I had $338.5 million in assets,
including senior secured loans to 31 portfolio companies. The
joint venture generated income of $2.6 million for FSC during the
second fiscal quarter.
Our weighted average yield on debt investments at March 31,
2017, including the return on SLF JV I, was 10.4% and included a
cash component of 9.1%. At March 31, 2017 and
September 30, 2016, $1.3 billion and $1.6 billion,
respectively, of our debt investments at fair value bore interest
at floating rates, which represented 78.9% and 80.9%, respectively,
of our total portfolio of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended March 31,
2017 and March 31, 2016 was $45.6 million and $59.6 million,
respectively. For the quarter ended March 31, 2017, the
amount primarily consisted of $38.3 million of cash interest income
from portfolio investments. For the quarter ended
March 31, 2016, the amount primarily consisted of $49.3
million of cash interest income from portfolio investments.
For the quarter ended March 31, 2017, payment-in-kind ("PIK")
interest income net of PIK collected in cash represented 7.2% of
total investment income.
Net expenses for the quarters ended March 31, 2017 and
March 31, 2016 were $27.1 million and $34.2 million,
respectively. Net expenses decreased for the quarter ended
March 31, 2017 as compared to the quarter ended March 31,
2016, due primarily to a $3.4 million decrease in professional fees
(net of insurance recoveries) attributable to the settlement of
litigation matters, a $3.0 million decrease in base management fees
and incentive fees paid to our investment adviser, which was
attributable to a reduction in the size of our portfolio, and a
$1.1 million decrease in interest expense attributable to lower
levels of outstanding debt in the current period.
Net realized and unrealized losses on our investment portfolio
for the quarters ended March 31, 2017 and March 31, 2016
were $9.7 million and $20.4 million, respectively.
Liquidity and Capital Resources
At March 31, 2017, we had $92.8 million of cash and cash
equivalents (including $8.3 million of restricted cash), portfolio
investments (at fair value) of $1.8 billion, $12.3 million of
interest, dividends and fees receivable, $24.2 million of net
receivables from unsettled transactions, $145.8 million of U.S.
Small Business Administration ("SBA") debentures payable (net of
unamortized financing costs), $322.4 million of borrowings
outstanding under our credit facilities, $405.4 million of
unsecured notes payable (net of unamortized financing costs), $14.0
million of secured borrowings and unfunded commitments of $139.0
million. Our regulatory leverage ratio was 0.73x
debt-to-equity, excluding the debentures issued by our small
business investment company ("SBIC") subsidiaries.
At September 30, 2016, we had $130.4 million of cash and
cash equivalents (including $12.4 million of restricted cash),
portfolio investments (at fair value) of $2.2 billion, $15.6
million of interest, dividends and fees receivable, $210.0 million
of SBA debentures payable (net of unamortized financing costs),
$516.3 million of borrowings outstanding under our credit
facilities, $404.6 million of unsecured notes payable (net of
unamortized financing costs), $18.4 million of secured borrowings
and unfunded commitments of $215.7 million. Our regulatory
leverage ratio was 0.83x debt-to-equity, excluding the debentures
issued by our SBIC subsidiaries.
Dividend Declaration
Our Board of Directors met on February 6, 2017 and declared the
following quarterly distributions:
- $0.02 per share, payable on June 30, 2017 to stockholders of
record on June 15, 2017; and
- $0.125 per share, payable on September 29, 2017 to stockholders
of record on September 15, 2017.
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 28, 2016, our Board of Directors approved a
common stock repurchase program authorizing us to repurchase up to
$12.5 million of the outstanding shares of our common stock through
November 28, 2017. During the quarter ended December 31,
2016, we repurchased 2.3 million shares of common stock in the open
market at an aggregate cost of $12.5 million, bringing the total
amount repurchased during calendar year 2016 to $50.0 million.
During the quarter ended March 31, 2017, we did not repurchase any
shares of our common stock under the common stock repurchase
program. As of March 31, 2017, there is no availability under
the common stock repurchase program to repurchase additional common
stock.
Portfolio Asset Quality
We utilize the following investment ranking system to assess and
monitor our debt investment portfolio:
- Investment Ranking 1 is used for debt investments that are
performing above expectations and/or capital gains are
expected.
- Investment Ranking 2 is used for debt 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 debt
investments are initially ranked 2.
- Investment Ranking 3 is used for debt 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, debt investments
with a ranking of 3 are generally those on which we are not
accruing PIK interest.
- Investment Ranking 4 is used for debt investments that are
performing substantially below our expectations and for which risk
has increased substantially since the original or restructured
investment. Debt 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 March 31, 2017 and September 30, 2016, the
distribution of our debt investments on the 1 to 4 investment
ranking scale at fair value was as follows (dollars in
thousands):
Investment Ranking |
|
March 31, 2017 |
|
|
|
September 30, 2016 (2) |
|
Fair Value |
|
% of Portfolio |
|
Leverage Ratio |
|
|
|
Fair Value |
|
% of Portfolio |
|
Leverage Ratio |
|
1 |
|
$ |
10,100 |
|
|
0.63 |
% |
|
4.39 |
|
|
|
|
$ |
38,172 |
|
|
1.94 |
% |
|
3.47 |
|
|
2 |
|
1,426,975 |
|
|
89.50 |
|
|
4.20 |
|
|
|
|
1,792,896 |
|
|
90.79 |
|
|
4.51 |
|
|
3 |
|
119,936 |
|
|
7.52 |
|
|
NM |
|
(1 |
) |
|
41,163 |
|
|
2.08 |
|
|
NM |
(1 |
) |
4 |
|
37,302 |
|
|
2.35 |
|
|
NM |
|
(1 |
) |
|
102,581 |
|
|
5.19 |
|
|
NM |
(1 |
) |
Total |
|
$ |
1,594,313 |
|
|
100.00 |
% |
|
4.20 |
|
|
|
|
$ |
1,974,812 |
|
|
100.00 |
% |
|
4.49 |
|
|
_____________(1) Due to operating performance this ratio
is not measurable and, as a result, is excluded from the total
portfolio calculation.(2) Beginning as of December 31, 2016,
we have revised our investment ranking scale to include only debt
investments. Accordingly, in order to make the table comparative,
we revised the investment ranking table as of September 30, 2016 to
exclude equity investments.
We may from time to time modify the payment terms of our debt
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, 2017, we had modified the payment terms of our
debt investments in 12 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 March 31, 2017, there were eight investments on which
we had stopped accruing cash and/or PIK interest or original issue
discount ("OID") income that represented 11.3% of our debt
portfolio at cost and 5.4% at fair value in the aggregate.
Fifth Street Finance Corp. |
Consolidated Statements of Assets and
Liabilities |
(in thousands, except per share
amounts) |
|
|
|
March 31, 2017 |
|
September 30, 2016 |
ASSETS |
|
|
|
|
Investments at
fair value: |
|
|
|
|
Control
investments (cost March 31, 2017: $454,875; cost September 30,
2016: $456,493) |
|
$ |
401,158 |
|
|
$ |
388,267 |
|
Affiliate
investments (cost March 31, 2017: $34,328; cost September 30, 2016:
$34,955) |
|
38,480 |
|
|
39,769 |
|
Non-control/Non-affiliate investments (cost March 31, 2017:
$1,385,682; cost September 30, 2016: $1,792,410) |
|
1,349,048 |
|
|
1,737,455 |
|
Total
investments at fair value (cost March 31, 2017: $1,874,885; cost
September 30, 2016: $2,283,858) |
|
1,788,686 |
|
|
2,165,491 |
|
Cash and cash
equivalents |
|
84,572 |
|
|
117,923 |
|
Restricted cash |
|
8,250 |
|
|
12,439 |
|
Interest, dividends and
fees receivable |
|
12,293 |
|
|
15,568 |
|
Due from portfolio
companies |
|
6,881 |
|
|
4,077 |
|
Receivables from
unsettled transactions |
|
25,559 |
|
|
5,346 |
|
Deferred financing
costs |
|
1,435 |
|
|
2,234 |
|
Insurance recoveries
receivable |
|
— |
|
|
19,729 |
|
Other assets |
|
1,707 |
|
|
478 |
|
Total
assets |
|
$ |
1,929,383 |
|
|
$ |
2,343,285 |
|
|
|
|
|
|
LIABILITIES AND NET ASSETS |
|
|
|
|
Liabilities: |
|
|
|
|
Accounts
payable, accrued expenses and other liabilities |
|
$ |
2,878 |
|
|
$ |
2,533 |
|
Base
management fee and Part I incentive fee payable |
|
10,900 |
|
|
15,958 |
|
Due to
FSC CT |
|
1,403 |
|
|
2,204 |
|
Interest
payable |
|
3,760 |
|
|
3,912 |
|
Amounts
payable to syndication partners |
|
1,516 |
|
|
754 |
|
Director
fees payable |
|
318 |
|
|
566 |
|
Payables
from unsettled transactions |
|
1,404 |
|
|
6,234 |
|
Legal
settlements payable |
|
— |
|
|
19,500 |
|
Credit
facilities payable |
|
322,413 |
|
|
516,295 |
|
SBA
debentures payable (net of $2,215 and $3,289 of unamortized
financing costs as of March 31, 2017 and September 30, 2016,
respectively) |
|
145,785 |
|
|
210,011 |
|
Unsecured
notes payable (net of $5,346 and $5,956 of unamortized financing
costs as of March 31, 2017 and September 30, 2016,
respectively) |
|
405,372 |
|
|
404,630 |
|
Secured
borrowings at fair value (proceeds March 31, 2017: $14,119;
proceeds September 30, 2016: $18,929) |
|
14,008 |
|
|
18,400 |
|
Total
liabilities |
|
909,757 |
|
|
1,200,997 |
|
Commitments and
contingencies |
|
|
|
|
Net
assets: |
|
|
|
|
Common
stock, $0.01 par value, 250,000 shares authorized; 140,961
shares issued and outstanding at March 31, 2017; 143,259
shares issued and outstanding at September 30, 2016 |
|
1,409 |
|
|
1,433 |
|
Additional paid-in-capital |
|
1,579,278 |
|
|
1,591,467 |
|
Net
unrealized depreciation on investments and secured borrowings |
|
(86,088 |
) |
|
(117,838 |
) |
Net
realized loss on investments and secured borrowings |
|
(445,217 |
) |
|
(306,228 |
) |
Accumulated overdistributed net investment income |
|
(29,756 |
) |
|
(26,546 |
) |
Total net
assets (equivalent to $7.23 and $7.97 per common share at March 31,
2017 and September 30, 2016, respectively) |
|
1,019,626 |
|
|
1,142,288 |
|
Total
liabilities and net assets |
|
$ |
1,929,383 |
|
|
$ |
2,343,285 |
|
Fifth Street Finance Corp. |
Consolidated Statements of
Operations |
(in thousands, except per share
amounts) |
|
|
|
Three months ended March 31, 2017 |
|
Three months ended March 31, 2016 |
|
Six months ended March 31, 2017 |
|
Six months ended March 31, 2016 |
Interest
income: |
|
|
|
|
|
|
|
|
Control
investments |
|
$ |
2,949 |
|
|
$ |
4,000 |
|
|
$ |
7,394 |
|
|
$ |
7,655 |
|
Affiliate
investments |
|
976 |
|
|
1,026 |
|
|
1,984 |
|
|
2,076 |
|
Non-control/Non-affiliate investments |
|
34,216 |
|
|
44,217 |
|
|
72,517 |
|
|
90,615 |
|
Interest
on cash and cash equivalents |
|
164 |
|
|
88 |
|
|
283 |
|
|
151 |
|
Total interest income |
|
38,305 |
|
|
49,331 |
|
|
82,178 |
|
|
100,497 |
|
PIK interest
income: |
|
|
|
|
|
|
|
|
Control
investments |
|
2,362 |
|
|
1,080 |
|
|
3,922 |
|
|
2,060 |
|
Affiliate
investments |
|
196 |
|
|
205 |
|
|
397 |
|
|
415 |
|
Non-control/Non-affiliate investments |
|
997 |
|
|
1,847 |
|
|
2,073 |
|
|
3,952 |
|
Total PIK interest income |
|
3,555 |
|
|
3,132 |
|
|
6,392 |
|
|
6,427 |
|
Fee
income: |
|
|
|
|
|
|
|
|
Control
investments |
|
313 |
|
|
376 |
|
|
622 |
|
|
1,219 |
|
Affiliate
investments |
|
247 |
|
|
263 |
|
|
729 |
|
|
271 |
|
Non-control/Non-affiliate investments |
|
2,293 |
|
|
4,548 |
|
|
5,070 |
|
|
12,509 |
|
Total fee income |
|
2,853 |
|
|
5,187 |
|
|
6,421 |
|
|
13,999 |
|
Dividend and
other income: |
|
|
|
|
|
|
|
|
Control
investments |
|
842 |
|
|
1,692 |
|
|
2,304 |
|
|
4,118 |
|
Non-control/Non-affiliate investments |
|
— |
|
|
221 |
|
|
20 |
|
|
(356 |
) |
Total dividend and other income |
|
842 |
|
|
1,913 |
|
|
2,324 |
|
|
3,762 |
|
Total
investment income |
|
45,555 |
|
|
59,563 |
|
|
97,315 |
|
|
124,685 |
|
Expenses: |
|
|
|
|
|
|
|
|
Base
management fee |
|
8,035 |
|
|
10,006 |
|
|
16,649 |
|
|
21,799 |
|
Part I
incentive fee |
|
3,168 |
|
|
4,173 |
|
|
7,231 |
|
|
7,824 |
|
Professional fees |
|
1,723 |
|
|
4,455 |
|
|
2,787 |
|
|
11,424 |
|
Board of
Directors fees |
|
193 |
|
|
243 |
|
|
390 |
|
|
599 |
|
Interest
expense |
|
12,712 |
|
|
13,838 |
|
|
25,901 |
|
|
27,885 |
|
Administrator expense |
|
619 |
|
|
514 |
|
|
1,150 |
|
|
1,114 |
|
General
and administrative expenses |
|
1,319 |
|
|
1,072 |
|
|
2,787 |
|
|
2,292 |
|
Loss on
legal settlements |
|
— |
|
|
— |
|
|
3 |
|
|
— |
|
Total
expenses |
|
27,769 |
|
|
34,301 |
|
|
56,898 |
|
|
72,937 |
|
Base
management fee waived |
|
(61 |
) |
|
(81 |
) |
|
(122 |
) |
|
(177 |
) |
Insurance
recoveries |
|
(657 |
) |
|
— |
|
|
(1,259 |
) |
|
— |
|
Net expenses |
|
27,051 |
|
|
34,220 |
|
|
55,517 |
|
|
72,760 |
|
Net investment
income |
|
18,504 |
|
|
25,343 |
|
|
41,798 |
|
|
51,925 |
|
Unrealized
appreciation (depreciation) on investments: |
|
|
|
|
|
|
|
|
Control
investments |
|
13,172 |
|
|
(4,203 |
) |
|
14,509 |
|
|
(18,847 |
) |
Affiliate
investments |
|
(687 |
) |
|
(793 |
) |
|
(662 |
) |
|
(335 |
) |
Non-control/Non-affiliate investments |
|
94,039 |
|
|
11,005 |
|
|
18,321 |
|
|
(65,855 |
) |
Net unrealized
appreciation (depreciation) on investments |
|
106,524 |
|
|
6,009 |
|
|
32,168 |
|
|
(85,037 |
) |
Net unrealized
(appreciation) depreciation on secured borrowings |
|
(334 |
) |
|
294 |
|
|
(418 |
) |
|
506 |
|
Realized gain
(loss) on investments and secured borrowings: |
|
|
|
|
|
|
|
|
Control
investments |
|
(22,312 |
) |
|
(8,148 |
) |
|
(45,936 |
) |
|
(8,148 |
) |
Non-control/Non-affiliate investments |
|
(93,581 |
) |
|
(18,518 |
) |
|
(93,053 |
) |
|
(17,151 |
) |
Net realized
loss on investments and secured borrowings |
|
(115,893 |
) |
|
(26,666 |
) |
|
(138,989 |
) |
|
(25,299 |
) |
Net increase
(decrease) in net assets resulting from operations |
|
$ |
8,801 |
|
|
$ |
4,980 |
|
|
$ |
(65,441 |
) |
|
$ |
(57,905 |
) |
Net investment
income per common share — basic |
|
$ |
0.13 |
|
|
$ |
0.17 |
|
|
$ |
0.29 |
|
|
$ |
0.35 |
|
Earnings (loss)
per common share — basic |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
$ |
(0.46 |
) |
|
$ |
(0.39 |
) |
Weighted average common
shares outstanding — basic |
|
140,961 |
|
|
149,207 |
|
|
141,917 |
|
|
149,738 |
|
Net investment
income per common share — diluted |
|
$ |
0.13 |
|
|
$ |
0.16 |
|
|
$ |
0.29 |
|
|
$ |
0.33 |
|
Loss per common
share — diluted |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
$ |
(0.46 |
) |
|
$ |
(0.39 |
) |
Weighted average common
shares outstanding — diluted |
|
140,961 |
|
|
156,997 |
|
|
141,917 |
|
|
157,528 |
|
Distributions
per common share |
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
$ |
0.32 |
|
|
$ |
0.36 |
|
Conference Call Information
We will hold a conference call at 10:00 a.m. (Eastern Time) on
Wednesday, May 10, 2017 to discuss our financial results. All
interested parties are welcome to participate. Domestic
callers can access the conference call by dialing (877) 290-1655.
International callers can access the conference call by dialing +1
(531) 289-2889. All callers will need to enter the Conference ID
Number 6094989 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
call and will be available through May 17, 2017 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 6094989. An archived replay will also be available
online on the "Investor Relations" section of our website under the
"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. 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
approximately $5 billion in assets under management
across multiple public and private vehicles. With a track
record of nearly 20 years, the Fifth Street platform 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 the Company'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, Executive Director, Head of Investor Relations
(203) 681-3720
ir@fifthstreetfinance.com
Media Contact:
James Golden / Aura Reinhard / Andrew Squire
Joele Frank Wilkinson Brimmer Katcher
(212) 355-4449
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