OREANDA-NEWS. Fifth Street Finance Corp. today announced its financial results for the third fiscal quarter ended June 30, 2016.

Third Fiscal Quarter 2016 Highlights

  • Net investment income of $29.1 million, or $0.20 per share;
     
  • Net asset value per share of $8.15;
     
  • Closed $276.6 million of new investments; and
     
  • Repurchased 1.9 million shares of common stock in the open market at an aggregate cost of $10.0 million.

“We benefited from an increase in origination volumes in the June quarter, resulting in higher new investment activity and a modest rebound in profitability, compared to the previous quarter.  We continued to execute on our strategic objectives and for the sixth consecutive quarter our net investment income, excluding incremental professional fees, covered our dividend,” stated Todd G. Owens, FSC's Chief Executive Officer, adding, “We also continue to maintain a disciplined approach to capital allocation and repurchased $10 million in FSC shares during the quarter, bringing our total repurchases for the fiscal year to over $25 million.  Importantly, we are focused on bringing leverage levels back within our targeted range and remain committed to delivering strong returns to our stockholders.  Finally, as we announced last week, we are also pleased to have reached a settlement of the outstanding class action and related lawsuits.”

Portfolio and Investment Activity

FSC's Board of Directors determined the fair value of our investment portfolio at June 30, 2016 to be $2.2 billion, as compared to $2.4 billion at September 30, 2015.  Total assets were $2.5 billion at June 30, 2016, as compared to $2.6 billion at September 30, 2015.

During the quarter ended June 30, 2016, we closed $276.6 million of investments in 11 new and five existing portfolio companies and funded $269.1 million across new and existing portfolio companies.  This compares to closing $227.4 million in seven new and five existing portfolio companies and funding $226.9 million during the quarter ended June 30, 2015.  During the quarter ended June 30, 2016, we received $63.2 million in connection with the full repayments of three of our debt investments, all of which were exited at or above par.  We also received an additional $183.8 million in connection with paydowns, syndications and sales of debt investments.

At June 30, 2016, our portfolio consisted of investments in 133 companies, 115 of which were completed in connection with investments by private equity sponsors, one of which was in Senior Loan Fund JV I, LLC ("SLF JV I") and 17 of which were in private equity funds.  At fair value, 91.6% of our portfolio consisted of debt investments and 78.8% of our portfolio consisted of senior secured loans.  Our average portfolio company debt investment size at fair value was $19.1 million at June 30, 2016, versus $20.7 million at September 30, 2015, with only 1.2% of the portfolio's fair value invested in the energy sector and no exposure to CLO equity.

At June 30, 2016, SLF JV I had $399.0 million in assets, including senior secured loans to 37 portfolio companies.  The joint venture generated income of $4.7 million to FSC during the third fiscal quarter, which represented an 11.6% weighted average annualized return on investment.

Our weighted average yield on debt investments at June 30, 2016, including the return on SLF JV I, was 10.6% and included a cash component of 9.9%.  At June 30, 2016 and September 30, 2015, $1.7 billion of our debt investments at fair value bore interest at floating rates, which represented 81.8% and 77.5%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended June 30, 2016 and June 30, 2015 was $64.0 million and $69.9 million, respectively.  For the quarter ended June 30, 2016, the amount primarily consisted of $49.6 million of cash interest income from portfolio investments.  For the quarter ended June 30, 2015, the amount primarily consisted of $54.7 million of cash interest income from portfolio investments.  For the quarter ended June 30, 2016, payment-in-kind ("PIK") interest income net of PIK collected in cash represented 4.8% of total investment income.

Net expenses for the quarters ended June 30, 2016 and June 30, 2015 were $34.9 million and $37.6 million, respectively.  Net expenses decreased for the quarter ended June 30, 2016 as compared to the quarter ended June 30, 2015, due primarily to a $2.1 million decrease in base management fees, which was attributable to the permanent fee reduction that we agreed to with our investment adviser effective January 1, 2016, and a $1.0 million decrease in interest expense.  These expense reductions were partially offset by a $1.1 million increase in professional fees.

Net realized and unrealized losses on our investment portfolio for the quarters ended June 30, 2016 and June 30, 2015 were $34.3 million and $11.7 million, respectively.

Liquidity and Capital Resources

At June 30, 2016, we had $158.1 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.2 billion, $18.8 million of interest, dividends and fees receivable, $12.4 million of receivables from unsettled transactions, $14.6 million of amounts payable to our syndication partners, $225.0 million of U.S. Small Business Administration ("SBA") debentures payable, $568.3 million of borrowings outstanding under our credit facilities, $410.5 million of unsecured notes payable, $18.6 million of secured borrowings and unfunded commitments of $234.4 million.  Our regulatory leverage ratio was 0.84x debt-to-equity, excluding the debentures issued by our small business investment company ("SBIC") subsidiaries.

At September 30, 2015, we had $143.5 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.4 billion, $15.7 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $427.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.3 million of unsecured notes payable, $21.2 million of secured borrowings and unfunded commitments of $305.3 million.  Our regulatory leverage ratio was 0.72x debt-to-equity, excluding the debentures issued by our SBIC subsidiaries.

On April 1, 2016, we repaid in full the $115.0 million of outstanding unsecured convertible notes on their maturity date.  The convertible notes bore interest at a rate of 5.375% per annum and were repaid using cash on hand and borrowings under our ING revolving credit facility.

Dividend Declaration

In addition to our previously declared dividend of $0.06 per share, which is payable on August 31, 2016 to stockholders of record on August 15, 2016, our Board of Directors met on August 3, 2016 and declared the following distributions:

  • $0.06 per share, payable on September 30, 2016 to stockholders of record on September 15, 2016; 
  • $0.06 per share, payable on October 31, 2016 to stockholders of record on October 14, 2016; and
  • $0.06 per share, payable on November 30, 2016 to stockholders of record on November 15, 2016.

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.