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Press Release - Fifth Street Finance Corp. (FSC-NYSE)

There are more opportunities for us today than ever before! There is a void in middle market private equity sponsor backed lending of at least $7 to $10 billion in size. I think that the void will increase as middle market Mergers and Acquisitions activities continue to accelerate into next year. We will gain substantial market share as we continue to ramp our origination effort... - Leonard M. Tannenbaum (FSC) (Interview published January 1, 2010)

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Fifth Street Finance Corp. Announces Quarter Ended June 30, 2010 Financial Results

WHITE PLAINS, N.Y., Aug. 4, 2010 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NYSE:FSC) ("Fifth Street" or "we") announces its results for the third fiscal quarter ended June 30, 2010.

Third Quarter 2010 Financial Highlights

*    Net investment income for the quarter ended June 30, 2010 was $12.0 million or $0.26 per share, as compared to $7.9 million or $0.35 per share for the quarter ended June 30, 2009;

*    Net unrealized depreciation on investments for the quarter ended June 30, 2010 was $13.9 million or $0.30 per share, as compared to $1.9 million or $0.09 per share for the quarter ended June 30, 2009;

*    Net increase (decrease) in net assets resulting from operations for the quarter ended June 30, 2010 was ($1.9 million) or ($0.04) per share, as compared to $5.9 million or $0.26 per share for the quarter ended June 30, 2009;

*    Net asset value per share was $10.43 as of June 30, 2010, as compared to $10.84 as of September 30, 2009;

*    Distributable income for the quarter ended June 30, 2010 was $12.5 million; and

*    Our Board of Directors declared a third quarter 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.

Fourth Quarter 2010 and First Quarter 2011 Dividend Declaration

Our Board of Directors declared fourth quarter 2010 and first quarter 2011 dividends as follows:

*    $0.10 per share, payable on September 29, 2010 to stockholders of record on September 1, 2010;
*    $0.10 per share, payable on October 27, 2010 to stockholders of record on October 6, 2010;
*    $0.11 per share, payable on November 24, 2010 to stockholders of record on November 3, 2010; and
*    $0.11 per share, payable on December 29, 2010 to stockholders of record on December 1, 2010.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our portfolio at June 30, 2010 to be $494.8 million, as compared to $299.6 million at September 30, 2009.

During the quarter ended June 30, 2010, we invested $56.3 million across two new and seven existing portfolio companies. This compares to investing $2.2 million across two existing portfolio companies during the quarter ended June 30, 2009.

At June 30, 2010, our portfolio consisted of investments in 36 companies. At fair value, 99.0% of our portfolio consisted of debt investments (70.3% were first lien loans, 27.6% were second lien loans and the remainder were subordinated loans). Our average portfolio company investment size at fair value (excluding limited partnership interests) was approximately $15.0 million at June 30, 2010, versus $11.5 million at September 30, 2009.

"While I am disappointed in our inability to put our cash to work quickly, I continue to be optimistic about our origination pipeline as we are seeing the early stages of the increase in M&A activity we expected this year.  I am also very pleased with the work of our underwriting team led by Chad Blakeman and Ivelin Dimitrov," stated Fifth Street's Chief Executive Officer, Leonard M. Tannenbaum.

Our weighted average yield on debt investments at June 30, 2010 was 14.9%, and included a cash component of 12.6%.

At June 30, 2010 and September 30, 2009, $369.7 million and $281.0 million, respectively, of our portfolio of debt investments at fair value were at fixed rates, which represented 75.5% and 95.0%, respectively, of our total portfolio of debt investments at fair value. At June 30, 2010, 100% of our floating rate loans carried a minimum interest rate floor of at least 9%.

Results of Operations

Total investment income for the three months ended June 30, 2010 and June 30, 2009 was $19.4 million and $12.8 million, respectively. For the three months ended June 30, 2010, this amount primarily consisted of $17.4 million of interest income from portfolio investments (which included $2.4 million of PIK interest), and $1.7 million of fee income. For the three months ended June 30, 2010, fee income included $23,000 of income from accrued exit fees. For the three months ended June 30, 2009, total investment income primarily consisted of $12.0 million of interest income from portfolio investments (which included $1.9 million of PIK interest), and $0.9 million of fee income. No exit fee income was recognized during the three months ended June 30, 2009.

The increase in our total investment income for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 was primarily attributable to higher average levels of outstanding debt investments, which were principally due to an increase of ten 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 three months ended June 30, 2010 and June 30, 2009 were $7.4 million and $5.0 million, respectively. Expenses increased for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 by $2.4 million, primarily as a result of increases in the base management fee, the incentive fee, interest expense and other general and administrative expenses. For the three months ended June 30, 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 three months ended June 30, 2010 and June 30, 2009, we did not record any realized gain or losses.

Net unrealized appreciation or depreciation on investments 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 three months ended June 30, 2010, we recorded net unrealized depreciation of $13.9 million. This consisted of $13.3 million of net unrealized depreciation on debt investments and $0.6 million of net unrealized depreciation on equity investments. During the three months ended June 30, 2009, we recorded net unrealized depreciation of $1.9 million. This consisted primarily of net unrealized depreciation on debt investments.

Liquidity and Capital Resources

As of June 30, 2010, we had $106.7 million in cash and cash equivalents, portfolio investments (at fair value) of $494.8 million, $4.7 million of interest and fees receivable, $35.0 million of SBA debentures payable, no borrowings outstanding under our credit facilities and unfunded commitments of $31.4 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.

Dividends

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.

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 June 30, 2010, 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.    $ 50,964,485    10.30%    3.19   
2.    412,256,758    83.32%    4.14   
3.    12,489,413    2.52%    8.80   
4.    10,383,661    2.10%    14.20   
5.    8,720,532      1.76%    NM1   
Total    $ 494,814,849      100.00%    4.27   
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 ten of our portfolio companies as of June 30, 2010. Such modified terms include increased PIK interest provisions and 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.

At June 30, 2010, we had stopped accruing PIK interest and OID on six investments, including three investments that had not paid all of their scheduled monthly cash interest payments. At June 30, 2009, we had stopped accruing PIK interest and OID on six investments, including two investments that had not paid all of their scheduled monthly cash interest payments.

Recent Developments

On July 26, 2010, we executed a loan amendment which increased our unfunded commitment to JTC Education, Inc. by $8.0 million. Prior to the amendment, our unfunded commitment to JTC Education, Inc. was $1.0 million.

On July 30, 2010, we executed a loan amendment which modified the interest rate on our debt investment in Pacific Press Technologies, Inc. from 12.0% cash and 2.75% PIK to 10.0% cash and 2.0% PIK, and extended the loan maturity date from January 10, 2013 to July 10, 2013.

On August 2, 2010, our Board of Directors declared the following dividends:


*    $0.10 per share, payable on September 29, 2010 to stockholders of record on September 1, 2010;
*    $0.10 per share, payable on October 27, 2010 to stockholders of record on October 6, 2010;
*    $0.11 per share, payable on November 24, 2010 to stockholders of record on November 3, 2010; and
*    $0.11 per share, payable on December 29, 2010 to stockholders of record on December 1, 2010.

Conference Call

We will host a conference call on Thursday, August 5 at 1:00 pm (ET) to discuss our quarter ended June 30, 2010 financial results. Please call (877) 303-6503 to enter the conference. An operator will monitor the call and set a queue for the questions. The conference call replay will be available through August 7, 2010. To hear the replay, please dial (800) 642-1687 and reference passcode #88619665.  For further information, contact Investor Relations at (914) 286-6811. 





Fifth Street Finance Corp.   
Consolidated Statements of Assets and Liabilities   
(unaudited)   
           
    June 30, 2010    September 30, 2009   
Assets           
           
Investments at fair value:           
Control investments (cost 6/30/10: $12,045,029; cost 9/30/09: $12,045,029)    $4,000,000    $5,691,107   
Affiliate investments (cost 6/30/10: $54,574,241; cost 9/30/09: $71,212,035)    49,674,035    64,748,560   
Non-control/Non-affiliate investments (cost 6/30/10: $467,561,254; cost 9/30/09: $243,975,221)    441,140,814    229,171,470   
Total investments at fair value (cost 6/30/10: $534,180,524; cost 9/30/09: $327,232,285)    494,814,849    299,611,137   
           
Cash and cash equivalents    106,676,641    113,205,287   
Interest and fees receivable    4,734,422    2,866,991   
Due from portfolio company    96,265    154,324   
Deferred financing costs    4,788,358       
Prepaid expenses and other assets    94,574    49,609   
           
Total Assets    $611,205,109    $415,887,348   
           
Liabilities and Net Assets           
           
Liabilities:           
Accounts payable, accrued expenses and other liabilities    $332,802    $723,856   
Base management fee payable    2,522,642    1,552,160   
Incentive fee payable    3,008,075    1,944,263   
Due to FSC, Inc.    863,638    703,900   
Interest payable    139,696       
Payments received in advance from portfolio companies    38,517    190,378   
Offering costs payable    337,902    216,720   
SBA debentures payable    35,000,000       
Total Liabilities    42,243,272    5,331,277   
           
Net Assets:           
Common stock, $0.01 par value, 150,000,000 shares authorized, 54,524,865 and 37,878,987 shares issued and outstanding at June 30, 2010 and September 30, 2009    545,249    378,790   
Additional paid-in-capital    619,472,834    439,989,597   
Net unrealized depreciation on investments    (39,365,671)    (27,621,147)   
Net realized loss on investments    (17,112,797)    (14,310,713)   
Accumulated undistributed net investment income    5,422,222    12,119,544   
Total Net Assets (equivalent to $10.43 and $10.84 per common share at June 30, 2010 and September 30, 2009)    568,961,837    410,556,071   
           
Total Liabilities and Net Assets    $611,205,109    $415,887,348   






Fifth Street Finance Corp.   
Consolidated Statements of Operations   
(unaudited)   
                   
    Three months    Three months    Nine months    Nine months   
    ended June 30,
2010    ended June 30,
2009    ended June 30,
2010    ended June 30,
2009   
Interest income:                   
Control investments    $    $    $182,827    $   
Affiliate investments    1,749,167    2,763,106    6,266,072    8,131,504   
Non-control/Non-affiliate investments    13,200,823    7,338,407    32,749,087    20,815,516   
Interest on cash and cash equivalents    6,826    710    208,009    90,665   
Total interest income    14,956,816    10,102,223    39,405,995    29,037,685   
                   
PIK interest income:                   
Control investments                   
Affiliate investments    292,702    448,625    947,851    1,245,471   
Non-control/Non-affiliate investments    2,118,339    1,402,118    5,730,137    4,322,759   
Total PIK interest income    2,411,041    1,850,743    6,677,988    5,568,230   
                   
Fee income:                   
Control investments                   
Affiliate investments    536,678    244,590    1,215,716    948,761   
Non-control/Non-affiliate investments    1,117,529    629,874    2,797,532    1,741,950   
Total fee income    1,654,207    874,464    4,013,248    2,690,711   
                   
Dividend and other income:                   
Control investments                   
Affiliate investments                   
Non-control/Non-affiliate investments    384,994    11,458    407,660    11,458   
Other income                35,396   
Total dividend and other income    384,994    11,458    407,660    46,854   
                   
Total Investment Income    19,407,058    12,838,888    50,504,891    37,343,480   
                   
Expenses:                   
Base management fee    2,522,642    1,477,828    7,126,523    4,336,582   
Incentive fee    3,008,075    1,971,894    7,896,901    5,896,316   
Professional fees    174,069    500,194    804,688    1,303,062   
Board of Directors fees    30,500    45,000    111,500    133,250   
Interest expense    492,945    261,656    845,065    430,015   
Administrator expense    357,138    189,027    927,762    610,625   
General and administrative expenses    789,388    505,714    1,931,912    1,048,365   
Total expenses    7,374,757    4,951,313    19,644,351    13,758,215   
Base management fee waived            (727,067)       
Net expenses    7,374,757    4,951,313    18,917,284    13,758,215   
                   
Net Investment Income    12,032,301    7,887,575    31,587,607    23,585,265   




                   
Unrealized appreciation (depreciation) on investments:                   
Control investments    (4,171,182)        (1,691,107)       
Affiliate investments    (2,422,104)    348,604    1,305,738    (2,399,000)   
Non-control/Non-affiliate investments    (7,327,243)    (2,298,343)    (11,359,155)    (10,283,443)   
Net unrealized depreciation on investments    (13,920,529)    (1,949,739)    (11,744,524)    (12,682,443)   
                   
Realized gain (loss) on investments:                   
Control investments                   
Affiliate investments            (2,908,084)    (4,000,000)   
Non-control/Non-affiliate investments            106,000    (8,400,000)   
Net realized loss on investments            (2,802,084)    (12,400,000)   
                   
Net increase (decrease) in net assets resulting from operations    (1,888,228)    5,937,836    17,040,999    (1,497,178)   
                   
Net investment income per common share basic and diluted     0.26    0.35    0.75    1.04   
Net unrealized depreciation per common share    (0.30)    (0.09)    (0.28)    (0.56)   
Net realized loss per common share            (0.07)    (0.55)   
Earnings per common share basic and diluted    (0.04)    0.26    0.40    (0.07)   
Weighted average common shares outstanding basic and diluted    46,294,050    22,803,597    42,379,121    22,705,454   

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 <http://www.globenewswire.com/newsroom/ctr?d=198533&l=40&u=http%3A%2F%2Fwww.globenewswire.com%2Fnewsroom%2Fprs%2F%3Fpkgid%3D5525>

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 our 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

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Fifth Street Finance Corporation
10 Bank Street 12th Floor Suite 1210, White Plains, NY 10606
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