Fifth Street Finance eyes yield compression, re-aligns dividend, lowers credit facility $75 million

By Lisa Kerner

Charlotte, N.C., Nov. 26 - Fifth Street Finance Corp. chief executive officer Leonard Tannenbaum said the U.S. equity and credit markets continue to be impacted by the Federal Reserve's quantitative easing program.

"While the middle market was initially insulated, it has now experienced yield compression and elevated prepayments for some time," he said during the company's fourth-quarter and fiscal year-end 2013 earnings call on Tuesday.

The net effects of these trends include lower yields in portfolio returns, according to Tannenbaum.

As a result, Fifth Street's board decided to re-align the dividend with net investment income.

For the quarter ending Dec. 31, the board declared monthly dividends totaling $0.24 per share, which is representative of the net investment income per share that was earned during the quarter ended Sept. 30.

This reflects "the higher quality and lower overall risk of the portfolio in an environment where investment yields continue to compress," said Tannenbaum.

A robust pipeline into calendar year-end and continued progress on several initiatives should improve net investment income over time, according to the CEO.

Improving debt terms

"The current frothy market enables us to improve the terms of our debt capital by reducing the cost of revolving bank debt, increasing our access to debt financing and extending the weighted average maturity of our liabilities," said president Bernard Berman on the call.

Since the end of the September quarter, Fifth Street announced an increase in its syndicated credit facility led by ING and a reduction in its Sumitomo credit facility.

"The reduction in our Sumitomo facility to $125 million from $200 million is reflective of the yield compression in the market for first-lien loans," Berman said.

Three new lenders joined the syndicated ING-led credit facility, and one existing lender increased its commitment, lifting Fifth Street's borrowing capacity to $605 million from $480 million.

As of Sept. 30, Fifth Street had $147.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.9 billion, $10.4 million of interest and fees receivable, $181.8 million of SBA debentures payable, $188 million of borrowings outstanding under its credit facilities, $115 million of unsecured convertible notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $149.5 million, according to the earnings news release.

For the prior-year period, the company reported $74.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.3 billion, $7.7 million of interest and fees receivable, $150 million of SBA debentures payable, $201.3 million of borrowings outstanding under its credit facilities, $115 million of unsecured convertible notes payable and unfunded commitments of $102.5 million.

Fifth Street is a specialty finance company based in White Plains, N.Y.

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