WHITE PLAINS, N.Y., Nov. 28, 2012 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (Nasdaq:FSC) ("Fifth Street" or "we") announces its financial results for the fourth quarter and fiscal year ended September 30, 2012.
Fourth Quarter 2012 Financial Highlights
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Net investment income for the quarter ended September 30, 2012 was $22.3 million or $0.27 per share, as compared to $20.0 million or $0.28 per share for the quarter ended September 30, 2011;
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Net asset value per share was $9.92 as of September 30, 2012, as compared to $9.85 as of June 30, 2012;
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Net unrealized appreciation for the quarter ended September 30, 2012 was $41.9 million (including $38.9 million of reclassifications to realized losses) or $0.50 per share, as compared to net unrealized depreciation of $41.4 million (including $0.7 million of reclassifications to realized losses) or $0.57 per share for the quarter ended September 30, 2011;
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Net realized losses for the quarter ended September 30, 2012 were $37.2 million (primarily reflecting the $38.9 million of reclassifications from unrealized depreciation) or $0.44 per share, as compared to $2.3 million or $0.03 per share for the quarter ended September 30, 2011; and
- Net increase (decrease) in net assets resulting from operations for the quarter ended September 30, 2012 was $27.1 million or $0.32 per share, as compared to ($23.7 million) or ($0.33) per share for the quarter ended September 30, 2011.
Fiscal Year 2012 Financial Highlights
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Net investment income for the year ended September 30, 2012 was $88.0 million or $1.11 per share, as compared to $67.1 million or $1.05 per share for the year ended September 30, 2011;
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Net unrealized appreciation for the year ended September 30, 2012 was $56.0 million (including $66.6 million of reclassifications to realized losses) or $0.70 per share, as compared to net unrealized depreciation of $6.5 million (including $25.6 million of reclassifications to realized losses) or $0.10 per share for the year ended September 30, 2011;
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Net realized losses on investments for the year ended September 30, 2012 were $64.6 million (primarily reflecting the $66.6 million of reclassifications from unrealized depreciation) or $0.81 per share, as compared to $30.4 million (primarily reflecting the $25.6 million of reclassifications from unrealized depreciation) or $0.47 per share for the year ended September 30, 2011; and
- Net increase in net assets resulting from operations for the year ended September 30, 2012 was $79.4 million or $1.00 per share, as compared to $30.2 million or $0.47 per share for the year ended September 30, 2011.
Fiscal Year 2013 Dividend Declarations
On August 6, 2012, our Board of Directors declared monthly dividends for fiscal year 2013 as follows:
- $0.0958 per share, which was paid on October 31, 2012 to stockholders of record on October 15, 2012;
- $0.0958 per share, payable on November 30, 2012 to stockholders of record on November 15, 2012;
- $0.0958 per share, payable on December 28, 2012 to stockholders of record on December 14, 2012;
- $0.0958 per share, payable on January 31, 2013 to stockholders of record on January 15, 2013; and
- $0.0958 per share, payable on February 28, 2013 to stockholders of record on February 15, 2013.
The Board declared five months of dividends in order to better align the monthly payment dates with our then-current income estimates. Due to these five months of declarations, the Board did not declare monthly dividends at its November 2012 Board meeting. However, we anticipate that the Board will return to a schedule of declaring dividends for the following three months at its scheduled January 2013 Board meeting. The Board plans to continue to target an annual dividend rate of $1.15 per share and we expect that our net investment income will cover the annual dividend going forward.
Portfolio and Investment Activity
Our Board of Directors determined the fair value of our portfolio at September 30, 2012 to be $1.29 billion, as compared to $1.12 billion at September 30, 2011. Total assets at September 30, 2012 were $1.39 billion, as compared to $1.21 billion at September 30, 2011.
During the quarter ended September 30, 2012, we closed $129.1 million of investments in six new and four existing portfolio companies, and funded $123.0 million across new and existing portfolio companies. This compares to closing $172.5 million in eight new and five existing portfolio companies and funding $166.4 million during the quarter ended September 30, 2011. During the quarter ended September 30, 2012, we also received $30.4 million in connection with the exits of six of our portfolio companies, $27.1 million of which were exited at par or above.
At September 30, 2012, our portfolio consisted of investments in 78 companies, 69 of which were completed in connection with investments by private equity sponsors and nine of which were in private equity funds. At fair value, 96.4% of our portfolio consisted of debt investments (70.1% were first lien loans, 10.4% were second lien loans and the remainder were subordinated loans). Our average portfolio company investment size at fair value (excluding equity-only investments) was $20.4 million at September 30, 2012, which was consistent with September 30, 2011.
"We are pleased with our operating performance in fiscal year 2012," stated our President, Bernard D. Berman. "We grew net investment income per share almost 6% year-over-year with a stable net asset value while also cleaning up the credit issues in our 2007 vintage loans. We believe our balance sheet is well-positioned for accretive growth and our origination pipeline continues to strengthen in the December quarter, giving us a strong start to fiscal year 2013."
Our weighted average yield on debt investments at September 30, 2012 was 12.04%, and included a cash component of 11.00%.
At September 30, 2012 and September 30, 2011, $869.9 million and $739.8 million, respectively, of our portfolio of debt investments at fair value were at floating rates, which represented 70.1% and 67.3%, respectively, of our total portfolio of debt investments at fair value.
Results of Operations
Total investment income for the quarters ended September 30, 2012 and September 30, 2011 was $42.5 million and $37.7 million, respectively. For the quarter ended September 30, 2012, this amount primarily consisted of $35.1 million of interest income from portfolio investments (which included $3.6 million of PIK interest). For the quarter ended September 30, 2011, total investment income primarily consisted of $32.6 million of interest income from portfolio investments (which included $3.5 million of PIK interest).
Total investment income for the years ended September 30, 2012 and September 30, 2011 was $165.1 million and $125.2 million, respectively. For the year ended September 30, 2012, this amount primarily consisted of $133.2 million of interest income from portfolio investments (which included $13.8 million of PIK interest). For the year ended September 30, 2011, this amount primarily consisted of $108.3 million of interest income from portfolio investments (which included $13.7 million of PIK interest).
The increase in our total investment income for the quarter and year ended September 30, 2012 as compared to the quarter and year ended September 30, 2011 was primarily attributable to higher average levels of outstanding debt investments, which were principally due to a net increase of eight debt investments in our portfolio and fee income related to debt payoffs, partially offset by amortization repayments received on our debt investments and a decrease in the weighted average yield on our debt investments from 12.35% to 12.04% during the year-over-year period.
Expenses for the quarters ended September 30, 2012 and September 30, 2011 were $20.2 million and $19.2 million, respectively. Expenses for the years ended September 30, 2012 and September 30, 2011 were $78.7 million and $59.5 million, respectively. Expenses increased for both periods primarily due to increases in the base management fee, the incentive fee and interest expense.
Liquidity and Capital Resources
As of September 30, 2012, we had $74.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.29 billion, $7.7 million of interest and fees receivable, $150.0 million of SBA debentures payable, $201.3 million of borrowings outstanding under our credit facilities, $115.0 million of convertible senior notes payable and unfunded commitments of $102.5 million.
As of September 30, 2011, we had $67.6 million in cash and cash equivalents, portfolio investments (at fair value) of $1.12 billion, $6.8 million of interest and fees receivable, $150.0 million of SBA debentures payable, $178.0 million of borrowings outstanding under our credit facilities, $135.0 million of convertible senior notes payable and unfunded commitments of $108.8 million.
Dividends Declared
For the fiscal year ending September 30, 2013, our Board has declared dividends of $0.0958 per share on a monthly basis through February 2013, reflecting an annual dividend rate of $1.15 per share. On August 6, 2012, the Board declared five months of dividends in order to better align the payment dates with our then-current income estimates and ensure that the process remains consistent with our dividend policy.
Our dividend policy is based upon the following key principles:
- Pay dividends consistent with our current and future earnings potential;
- Set dividend rates that are projected to be stable and grow over time, reflecting confidence in our future financial performance; and
- Provide clarity that we intend to cover our dividend payout level with net investment income.
Dividends are paid primarily from distributable (taxable) income. Our Board of Directors determines dividends based on estimates of distributable (taxable) income, which differs 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 stockholders elect 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 are not 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 ranking system for our investment portfolio:
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Investment Ranking 1 is used for investments that are performing above expectations and/or a capital gain is expected.
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Investment Ranking 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 ranked 2.
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Investment Ranking 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 ranking of 3 may be out of compliance with financial covenants.
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Investment Ranking 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 Ranking 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 ranking of 5 are those for which some loss of principal is expected.
At September 30, 2012 and September 30, 2011, the distribution of our investments on the 1 to 5 investment ranking scale at fair value was as follows:
| September 30, 2012 | September 30, 2011 | |||||
| Investment Ranking | Fair Value (thousands) | % of Portfolio | Leverage Ratio | Fair Value (thousands) | % of Portfolio | Leverage Ratio |
| 1 | $ 68,685 | 5.33% | 2.72 | $ 81,335 | 7.26% | 3.16 |
| 2 | 1,212,993 | 94.17% | 3.96 | 1,021,990 | 91.26% | 3.87 |
| 3 | 3,193 | 0.25% | NM (1) | 8,660 | 0.77% | NM (1) |
| 4 | — | 0.00% | — | — | 0.00% | — |
| 5 | 3,237 | 0.25% | NM (1) | 7,852 | 0.71% | NM (1) |
| Total | $ 1,288,108 | 100.00% | 3.89 | $ 1,119,837 | 100.00% | 3.82 |
(1) Due 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 September 30, 2012, we had modified the payment terms of our investments in 14 portfolio companies. Such modified terms may 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.
As of September 30, 2012, we had stopped accruing PIK interest on one investment. As of September 30, 2011, we had stopped accruing cash interest, PIK interest and OID on four investments that had not paid all of their scheduled cash interest payments for the period ended September 30, 2011.
Recent Developments
On October 18, 2012, we issued $75.0 million in aggregate principal amount of our 5.875% senior unsecured notes due 2024 for net proceeds of approximately $72.8 million after deducting underwriting commissions of $2.2 million. Interest on these notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 5.875% per year, beginning January 30, 2013. The notes mature on October 30, 2024 and may be redeemed in whole or in part at any time or from time to time at our option on or after October 30, 2017. On November 1, 2012, we listed the notes on the New York Stock Exchange under the trading symbol "FSCE" with a par value of $25.00 per share. The notes were assigned an investment grade (BBB-) counterparty credit rating from Fitch Ratings and Standard & Poor's.
| Fifth Street Finance Corp. | ||
| Consolidated Statements of Assets and Liabilities | ||
| (in thousands, except per share data) | ||
| September 30, | September 30, | |
| 2012 | 2011 | |
| ASSETS | ||
| Investments at fair value: | ||
| Control investments (cost September 30, 2012: $58,557; cost September 30, 2011: $13,726) | $ 53,240 | $ 14,500 |
| Affiliate investments (cost September 30, 2012: $29,496; cost September 30, 2011: $34,182) | 31,187 | 25,897 |
| Non-control/Non-affiliate investments (cost September 30, 2012: $1,180,436; cost September 30, 2011: $1,108,174) | 1,203,681 | 1,079,440 |
| Total investments at fair value (cost September 30, 2012: $1,268,489; cost September 30, 2011: $1,156,082) | 1,288,108 | 1,119,837 |
| Cash and cash equivalents | 74,393 | 67,644 |
| Interest and fees receivable | 7,652 | 6,752 |
| Due from portfolio company | 3,292 | 552 |
| Receivables from unsettled transactions | 1,750 | — |
| Deferred financing costs | 13,751 | 14,668 |
| Other assets | 56 | 264 |
| Total assets | $ 1,389,002 | $ 1,209,717 |
| LIABILITIES AND NET ASSETS | ||
| Liabilities: | ||
| Accounts payable, accrued expenses and other liabilities | $ 978 | $ 1,175 |
| Base management fee payable | 6,573 | 5,710 |
| Incentive fee payable | 5,579 | 4,997 |
| Due to FSC, Inc. | 1,630 | 1,480 |
| Interest payable | 4,219 | 4,669 |
| Payments received in advance from portfolio companies | 40 | 35 |
| Offering costs payable | 162 | — |
| Credit facilities payable | 201,251 | 178,024 |
| SBA debentures payable | 150,000 | 150,000 |
| Convertible senior notes payable | 115,000 | 135,000 |
| Total liabilities | 485,432 | 481,090 |
| Net assets: | ||
| Common stock, $0.01 par value, 150,000 shares authorized, 91,048 and 72,376 shares issued and outstanding at September 30, 2012 and September 30, 2011 | 910 | 724 |
| Additional paid-in-capital | 1,019,053 | 829,620 |
| Net unrealized appreciation (depreciation) on investments and interest rate swap | 19,998 | (35,976) |
| Net realized loss on investments and interest rate swap | (128,062) | (63,485) |
| Accumulated overdistributed net investment income | (8,329) | (2,256) |
| Total net assets (equivalent to $9.92 and $10.07 per common share at September 30, 2012 and September 30, 2011) | 903,570 | 728,627 |
| Total liabilities and net assets | $ 1,389,002 | $ 1,209,717 |
| Fifth Street Finance Corp. | ||||
| Consolidated Statements of Operations | ||||
| (in thousands, except per share data) | ||||
| Three Months Ended | Three Months Ended | Year Ended | Year Ended | |
| September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | |
| Interest income: | ||||
| Control investments | $ 493 | $ 35 | $ 927 | $ 89 |
| Affiliate investments | 575 | 849 | 2,804 | 4,265 |
| Non-control/Non-affiliate investments | 30,494 | 28,261 | 115,625 | 90,224 |
| Interest on cash and cash equivalents | 5 | 2 | 34 | 19 |
| Total interest income | 31,567 | 29,147 | 119,390 | 94,597 |
| PIK interest income: | ||||
| Control investments | 60 | 108 | 309 | 347 |
| Affiliate investments | 448 | 154 | 916 | 989 |
| Non-control/Non-affiliate investments | 3,054 | 3,236 | 12,570 | 12,339 |
| Total PIK interest income | 3,562 | 3,498 | 13,795 | 13,675 |
| Fee income: | ||||
| Control investments | 1,285 | — | 1,285 | 127 |
| Affiliate investments | 12 | 117 | 642 | 667 |
| Non-control/Non-affiliate investments | 6,035 | 4,888 | 29,779 | 15,888 |
| Total fee income | 7,332 | 5,005 | 31,706 | 16,682 |
| Dividend and other income: | ||||
| Non-control/Non-affiliate investments | 71 | 36 | 225 | 211 |
| Total dividend and other income | 71 | 36 | 225 | 211 |
| Total investment income | 42,532 | 37,686 | 165,116 | 125,165 |
| Expenses: | ||||
| Base management fee | 6,573 | 5,710 | 23,799 | 19,656 |
| Incentive fee | 5,579 | 4,997 | 22,001 | 16,782 |
| Professional fees | 580 | 1,055 | 2,890 | 2,709 |
| Board of Directors fees | 394 | 321 | 551 | 452 |
| Interest expense | 6,310 | 5,497 | 23,245 | 15,137 |
| Administrator expense | 211 | 558 | 2,425 | 1,699 |
| General and administrative expenses | 569 | 1,039 | 3,771 | 3,083 |
| Total expenses | 20,216 | 19,177 | 78,682 | 59,518 |
| Gain on extinguishment of convertible senior notes | — | 1,480 | 1,571 | 1,480 |
| Net investment income | 22,316 | 19,989 | 88,005 | 67,127 |
| Unrealized appreciation on interest rate swap | — | 722 | — | 773 |
| Realized loss on interest rate swap | — | (1,335) | — | (1,335) |
| Unrealized appreciation (depreciation) on investments: | ||||
| Control investments | (4,692) | (3,101) | (6,096) | 9,437 |
| Affiliate investments | 3,294 | (9,134) | 12,944 | (5,374) |
| Non-control/Non-affiliate investments | 43,311 | (29,935) | 49,126 | (11,362) |
| Net unrealized appreciation (depreciation) on investments | 41,913 | (42,170) | 55,974 | (7,299) |
| Realized loss on investments: | ||||
| Control investments | (5,316) | — | (5,316) | (7,806) |
| Affiliate investments | — | — | (10,620) | (14,146) |
| Non-control/Non-affiliate investments | (31,842) | (950) | (48,642) | (7,107) |
| Total realized loss on investments | (37,158) | (950) | (64,578) | (29,059) |
| Net increase (decrease) in net assets resulting from operations | $ 27,071 | $ (23,744) | $ 79,401 | $ 30,207 |
| Net investment income per common share — basic | $ 0.27 | $ 0.28 | $ 1.11 | $ 1.05 |
| Earnings per common share — basic | $ 0.32 | $ (0.33) | $ 1.00 | $ 0.47 |
| Weighted average common shares — basic | 83,979 | 72,376 | 79,570 | 64,057 |
| Net investment income per common share – diluted | $ 0.26 | $ 0.25 | $ 1.07 | $ 1.01 |
| Earnings per common share – diluted | $ 0.31 | $ (0.33) | $ 0.97 | $ 0.47 |
| Weighted average common shares – diluted | 91,770 | 82,018 | 87,719 | 68,716 |
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," "plans," "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.