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Fifth Street Finance Corp. Announces Quarter Ended March 31, 2017 Financial Results

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GREENWICH, CT, May 10, 2017 (GLOBE NEWSWIRE) -- 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
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