Fifth Street Finance Corp. Announces Quarter Ended December 31, 2009 Financial Results

WHITE PLAINS, N.Y., Feb. 9, 2010 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NYSE:FSC) ("Fifth Street" or "we") today announced its results for the first fiscal quarter ended December 31, 2009.

2010 First Quarter Financial Highlights

• Net investment income for the quarter ended December 31, 2009 was $8.3 million or $0.22 per share, as compared to $8.2 million or $0.36 per share for the quarter ended December 31, 2008;
• Distributable income for the quarter ended December 31, 2009 was $13.2 million;
• We 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;
• Net unrealized appreciation (depreciation) on investments was $1.0 million or $0.03 per share for the quarter ended December 31, 2009, as compared to ($18.5 million) or ($0.82) per share for the quarter ended December 31, 2008;
• We recorded a realized gain on investments of $0.1 million during the quarter ended December 31, 2009;
• Net asset value per share was $10.82 as of December 31, 2009, as compared to $10.84 as of September 30, 2009; and
• Net increase (decrease) in net assets resulting from operations for the quarter ended December 31, 2009 was $9.5 million or $0.25 per share, as compared to ($10.3 million) or ($0.46) per share for the quarter ended December 31, 2008.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of the portfolio at December 31, 2009 to be $436.7 million, as compared to $299.6 million at September 30, 2009.

During the quarter ended December 31, 2009, we invested $144.2 million across four new and three existing portfolio companies. This compares to investing $23.7 million across one new and three existing portfolio companies during the quarter ended December 31, 2008.

At December 31, 2009, our portfolio consisted of investments in 32 companies. At fair value, 64.3% were first lien loans, 34.9% were second lien loans and 0.8% were equity investments. Our average portfolio company investment size at fair value (excluding limited partnership interests) was approximately $14.6 million at December 31, 2009, versus $11.5 million at September 30, 2009. 

"We are pleased to achieve an increased level of origination which highlights our ability to provide a complete one-stop commitment to our private equity sponsors. Using our strong, currently unlevered balance sheet we plan to expand our portfolio substantially in 2010," stated Fifth Street Finance Corp.'s President and Chief Executive Officer, Leonard M. Tannenbaum.

Our weighted average yield on debt investments was 14.9% at December 31, 2009. The weighted average yield on debt investments included a cash component of 12.7% at December 31, 2009.

At December 31, 2009 and September 30, 2009, $351.4 million and $281.0 million, respectively, of our portfolio of debt investments at fair value were at fixed rates, which represented approximately 81% and 95%, respectively, of our total portfolio of debt investments at fair value. At December 31, 2009, 100% of our floating rate loans carried a minimum interest rate floor of at least 9%, which protects our return in a declining interest rate environment.

Results of Operations

Total investment income for the three months ended December 31, 2009 and December 31, 2008 was approximately $13.2 million and $12.6 million, respectively. For the three months ended December 31, 2009, this amount primarily consisted of approximately $12.1 million of interest income from portfolio investments (which included approximately $2.0 million of PIK interest), and $0.9 million of fee income. For the three months ended December 31, 2009, fee income included approximately $27,000 of income from accrued exit fees. For the three months ended December 31, 2008, total investment income primarily consisted of approximately $11.4 million of interest income from portfolio investments (which included approximately $1.8 million of PIK interest), and $1.1 million of fee income. No exit fee income was recognized during the three months ended December 31, 2008.

The increase in our total investment income for the three months ended December 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to an increase of seven investments in our portfolio in the year-over-year period, partially offset by debt repayments received during the same period.

Expenses (net of the waived portion of the base management fee) for the three months ended December 31, 2009 and December 31, 2008 were approximately $4.9 million and $4.4 million, respectively. Expenses increased for the three months ended December 31, 2009 as compared to the three months ended December 31, 2008 by approximately $0.5 million, primarily as a result of increases in the base management fee, the incentive fee and other general and administrative expenses.

Net realized gain (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 December 31, 2009, we received a cash payment in the amount of $0.1 million, representing a payment in full of all amounts due in connection with the cancellation of our loan agreement with American Hardwoods Industries, LLC. We recorded a $0.1 million reduction to the previously recorded $10.4 million realized loss on this investment. During the three months ended December 31, 2008, we recorded no realized gains or losses on investments.

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 December 31, 2009, we recorded net unrealized appreciation of $1.0 million. This consisted of $1.2 million of net unrealized appreciation on debt investments, partially offset by $0.2 million of net unrealized depreciation on equity investments. During the three months ended December 31, 2008, we recorded net unrealized depreciation of $18.5 million. This consisted of $16.7 million of net unrealized depreciation on debt investments and $1.8 million of net unrealized depreciation on equity investments.

Liquidity and Capital Resources

As of December 31, 2009, we had $11.8 million in cash and cash equivalents, portfolio investments (at fair value) of $436.7 million, $3.4 million of interest and fees receivable, $38.0 million of borrowings outstanding under our secured credit facility and unfunded commitments of $32.1 million. As of January 31, 2010, we had $28.6 million in cash and cash equivalents, $5.0 million of interest and fees receivable, no borrowings outstanding under our secured credit facility and unfunded commitments of $33.8 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 first quarter of 2010, we 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 taxable income. Our Board of Directors determines quarterly dividends based on estimates of taxable income, which differ from book income due to changes in unrealized appreciation and depreciation of investments and due to temporary and permanent differences in income and expense recognition.

We have adopted a dividend reinvestment plan ("DRIP") that provides for reinvestment of our dividends on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if we declare 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 entire portfolio of debt investments:

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 December 31, 2009, 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.	$28,580,468	6.54%	1.88
2.	379,016,983	86.79%	4.24
3.	5,685,262	1.30%	12.87
4.	15,726,498	3.60%	7.73
5.	7,684,329	1.77%	NM1
Total	$436,693,540	100.00%	4.05

¹Certain investments have been excluded from this analysis, as the operating performances of these investments cause the ratios to be immeasurable, thus distorting the analysis.

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 nine of our portfolio companies as of December 31, 2009. 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 the 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.

As of December 31, 2009, we had stopped accruing PIK interest and OID on five investments, including two investments that had not paid their scheduled monthly cash interest payments. As of December 31, 2008, we had stopped accruing PIK interest and OID on three investments, including one investment that had not paid its scheduled monthly cash interest payments.

Recent Developments

On January 6, 2010, we announced that our external investment adviser has voluntarily agreed to take the following actions:

• To waive the portion of its base management fee for the quarter ended December 31, 2009 attributable to four new portfolio investments, as well as cash and cash equivalents. The amount of the management fee being waived is approximately $727,000; and
• To permanently waive that portion of its base management fee attributable to our assets held in the form of cash and cash equivalents as of the end of each quarter beginning March 31, 2010.

For purposes of the waiver, cash and cash equivalents is as defined in the notes to our Consolidated Financial Statements.

On January 6, 2010, we filed a preliminary proxy statement with the SEC for our 2010 Annual Meeting of Stockholders. Among other things, we plan to seek stockholder approval to increase the number of authorized shares of our common stock and to remove our authority to issue shares of Series A Preferred Stock. We also announced that we do not intend to seek additional approval of our stockholders at our 2010 Annual Meeting of Stockholders to sell or otherwise issue shares of our common stock at a price below the then-current net asset value per share.

On January 6, 2010, AmBath/ReBath Holdings, Inc. drew $0.8 million on its previously undrawn credit line. Prior to the draw, our unfunded commitment was $3.0 million.

On January 12, 2010, our Board of Directors declared a distribution of $0.30 per share, payable on March 30, 2010 to stockholders of record on March 3, 2010. In connection with the distribution declaration, we also announced that as we originate more deals, we expect our quarterly distribution to continue to increase during the fiscal year. The timing and amount of any distribution is at the discretion of our Board of Directors.

On January 14, 2010, we provided a $2.5 million revolving credit line to Vanguard Vinyl, Inc. (formerly known as Best Vinyl Acquisition Corporation), of which $1.25 million was drawn at closing. This investment, along with the proceeds from the sale of a non-core asset and an additional investment by the equity sponsor, were utilized to pay off the company's existing senior debt. In connection with this transaction, we received a first lien security interest on all of the assets of the company. On January 21, 2010, Vanguard Vinyl, Inc. drew an additional $0.25 million on this credit line.

On January 15, 2010, we repaid $0.2 million of the outstanding balance on our secured credit facility with Wachovia. On January 28, 2010, we repaid $25.0 million of the outstanding balance on the facility. On January 29, 2010, we repaid in full the outstanding balance of $12.8 million on the facility.

On January 21, 2010, we announced that we have received a non-binding term sheet from a lender in connection with a potential additional credit line of up to $100 million. The term sheet is subject to completion of due diligence and execution of definitive documents. We cannot assure you that we will enter into any additional new financings.

On January 27, 2010, we completed a public offering of 7,000,000 shares of our common stock at a price of $11.20 per share. The net proceeds totaled approximately $74.9 million after deducting investment banking commissions of approximately $3.5 million.

On January 29, 2010, we closed a $21.8 million senior secured debt facility to support the acquisition of a specialty food company. The investment is backed by a private equity sponsor and $20.3 million was funded at closing. The terms of this investment include a $1.5 million revolver at an interest rate of 10% per annum, a $7.6 million Term Loan A at an interest rate of 10% per annum, and a $12.7 million Term Loan B at an interest rate of 12% per annum in cash and 3% PIK. This is a first lien facility with a scheduled maturity of five years.

On February 1, 2010, TBA Global, LLC repaid $2.5 million of principal outstanding under its Term Loan A.

On February 3, 2010, our wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P., received a license, effective February 1, 2010, from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958.

Conference Call

We will host a conference call on Wednesday, February 10, 2010 at 10:00 am (ET) to discuss our quarter ended December 31, 2009 financial results. Please call (888) 359-3613 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 February 12, 2009. To hear the replay, please dial (888) 203-1112 and reference passcode #3803046. For further information, contact Investor Relations at (914) 286-6811.  
 
 

Fifth Street Finance Corp.
Consolidated Balance Sheets
(unaudited)
	December 31, 2009	September 30, 2009
ASSETS
Investments at Fair Value:
Control investments (cost 12/31/09: $12,045,029; cost 9/30/09: $12,045,029)	$7,684,329	$5,691,107
Affiliate investments (cost 12/31/09: $62,625,551; cost 9/30/09: $71,212,035)	56,819,541	64,748,560
Non-control/Non-affiliate investments (cost 12/31/09: $388,644,812; cost 9/30/09: $243,975,221)	372,189,670	229,171,470
Total Investments at Fair Value	436,693,540	299,611,137
Cash and cash equivalents	11,782,316	113,205,287
Interest and fees receivable	3,442,616	2,866,991
Due from portfolio company	181,593	154,324
Prepaid expenses and other assets	1,034,028	49,609
Deferred offering costs	64,500	--
Total Assets	$453,198,593	$415,887,348
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities	$275,496	$723,856
Base management fee payable	1,539,936	1,552,160
Incentive fee payable	2,087,264	1,944,263
Due to FSC, Inc.	728,015	703,900
Interest payable	49,513	--
Payments received in advance from portfolio companies	249,018	190,378
Offering costs payable	12,000	216,720
Loan payable	38,000,000	--
Total Liabilities	42,941,242	5,331,277
Stockholders' Equity:
Preferred stock, $0.01 par value, 200,000 shares authorized, no shares issued and outstanding	--	--
Common stock, $0.01 par value, 49,800,000 shares authorized,
37,923,407 and 37,878,987 shares issued and outstanding at December 31, 2009 and September 30, 2009	379,234	378,790
Additional paid-in-capital	440,463,407	439,989,597
Net unrealized depreciation on investments	(26,621,853)	(27,621,147)
Net realized loss on investments	(14,204,713)	(14,310,713)
Accumulated undistributed net investment income	10,241,276	12,119,544
Total Stockholders' Equity	410,257,351	410,556,071
Total Liabilities and Stockholders' Equity	$453,198,593	$415,887,348
Fifth Street Finance Corp.
Consolidated Statements of Operations
(unaudited)
	Three months ended	Three months ended
	December 31, 2009	December 31, 2008
Interest income:
Control investments	$224,746	$--
Affiliate investments	2,259,501	2,718,486
Non-control/Non-affiliate investments	7,673,326	6,871,305
Interest on cash and cash equivalents	195,662	79,190
Total interest income	10,353,235	9,668,981
PIK interest income:
Control investments	--	--
Affiliate investments	331,616	353,037
Non-control/Non-affiliate investments	1,630,158	1,463,748
Total PIK interest income	1,961,774	1,816,785
Fee income:
Control investments	--	--
Affiliate investments	253,777	446,913
Non-control/Non-affiliate investments	661,364	616,610
Total fee income	915,141	1,063,523
Dividend and other income:
Non-control/Non-affiliate investments	11,333	--
Other income	--	35,396
Total dividend and other income	11,333	35,396
Total Investment Income	13,241,483	12,584,685
Expenses:
Base management fee	2,267,003	1,370,675
Incentive fee	2,087,264	2,052,595
Professional fees	301,605	385,943
Board of Directors fees	38,000	39,250
Interest expense	91,179	40,158
Administrator expense	251,818	180,430
General and administrative expenses	582,623	305,252
Total expenses	5,619,492	4,374,303
Base management fee waived	(727,067)	--
Net expenses	4,892,425	4,374,303
Net Investment Income	8,349,058	8,210,382
Unrealized appreciation (depreciation) on investments:
Control investments	1,993,222	--
Affiliate investments	399,934	(5,869,425)
Non-control/Non-affiliate investments	(1,393,862)	(12,613,013)
Total unrealized appreciation (depreciation) on investments	999,294	(18,482,438)
Realized gain on investments:
Non-control/Non-affiliate investments	106,000	--
Total realized gain on investments	106,000	--
Net increase (decrease) in net assets resulting from operations	$9,454,352	$(10,272,056)
Net investment income per common share – basic and diluted	$0.22	$0.36
Unrealized appreciation (depreciation) per common share	0.03	(0.82)
Realized gain per common share	--	--
Earnings per common share – basic and diluted	$0.25	$(0.46)
Weighted average common shares outstanding – basic and diluted	37,880,435	22,562,191

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 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, Director, Investor Relations
          (914) 286-6811
          stacey@fifthstreetcap.com