Fifth Street Finance Corp. Earnings: What's In Store This Quarter?

Fifth Street Finance (NASDAQ: FSC  ) will report earnings on May 8, and the results are sure to be some of the most important.

This will be the second quarterly earnings report since the company slashed its dividend to $0.0833 per month, or $1.00 per year.

Looking into Fifth Street Finance
Fifth Street Finance laid out a five-point plan to earn its dividend in 2013. So far, the plan seems to be working. Well, working in the sense that it can now cover its new dividend rate.

In January, the company's newsletter indicated that it was working near the low end of its ideal leverage ratio of 0.6-0.7, excluding borrowings from the SBA. In April, the newsletter indicated that leverage had turned higher, rising to the "upper end" of its 0.6-0.7 leverage range during the March quarter. This is, without doubt, good for Fifth Street Finance, and its dividend coverage.

Fifth Street Finance had previously underutilized its SBA borrowings, but a March press release indicates the drag may have come to an end. Its second SBA-licensed fund is now using its full capacity, which suggests originations caught up with its borrowing ability. Investors should remember that in its third-quarter earnings report, Fifth Street Finance had borrowed too much from the SBA, and thus paid interest on funds it couldn't invest. 

Also noteworthy are several key originations. The company's venture lending platform secured at least three deals in the first calendar quarter. One major deal was a $30 million second-lien loan to Five9 (NASDAQ: FIVN  ) , a company that recently went public. Fifth Street Finance scored warrants for its participation in the loan to Five9, providing additional upside beyond the interest due.

An SEC filing for Five9 shows that it issued warrants for 178,000 shares of common stock at $10.12 per share in February 2014, likely in connection with the debt investment by Fifth Street Finance. At a current price of just over $7 per share, its Five9 warrants are currently out of the money, but they represent the upside potential in venture debt financing.

Finally, on Monday, Fifth Street Finance earned an improved outlook rating from Standard & Poor's from "stable" to "positive" on its BBB- credit rating.

The elephant in the room
Among the biggest developments is Fifth Street Finance's new Senior Loan Fund. In April, the company noted that the Senior Loan Fund was in the "documentation stage." By April, the company noted it was establishing its first SLF partnership, and in talks to bring in additional partners.

The SLF could be huge for Fifth Street Finance. Rivals Ares Capital Corporation (NASDAQ: ARCC  ) and Golub Capital (NASDAQ: GBDC  ) already have senior loan fund-like platforms, which allow them to invest in lower-yielding debt with higher leverage to generate double-digit returns.

Typically, a senior loan fund allows a BDC to profit in two ways. First, from a portion of the origination fees, and secondly from interest after all first-lien debt investors are paid. Expect this to be a focus on the next conference call. A senior loan fund can quite easily deliver 15%+ annual returns on equity. Ares Capital's annual report revealed a 14.8% yield on its Senior Secured Loan Program as of December 31, 2013. That yield excludes the contribution of one-time fees and prepayment penalties, which can add significantly to the total return of a senior loan fund.

Looking forward
Yield compression led to a declining dividend in 2013, but Fifth Street Finance appears to be back on track. With new originations coming in ahead of expectations in March, the senior loan fund under development, and a higher credit outlook, it's surprising to find the company trading below its last reported NAV of $9.85 per share.

If Fifth Street Finance's financials reconcile with positive news this quarter, the discount of 5% to net asset value is unwarranted. 

The sky-high dividends Uncle Sam is daring you to buy
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2943571, ~/Articles/ArticleHandler.aspx, 9/20/2014 8:22:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 17,279.74 13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASD 4,579.79 -13.64 -0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/19/2014 3:59 PM
ARCC $16.35 Down -0.10 -0.61%
Ares Capital Corp CAPS Rating: ****
FIVN $6.04 Down -0.11 -1.79%
FIVE9 INC CAPS Rating: No stars
FSC $9.42 Down -0.10 -1.05%
Fifth Street Finan… CAPS Rating: *****
GBDC $16.21 Down -0.14 -0.86%
Golub Capital BDC,… CAPS Rating: ***

Advertisement