Things are starting to get interesting at Fifth Street Finance Corp. (NASDAQ: FSC). The company's depressed share price may mark a buying opportunity for investors willing to get their hands dirty.
Here's the short and sweet bull case for this high yielder.
1. It's cheap
After a bad start to 2016, Fifth Street Finance now trades for about 56% of its last-reported book value of $9.00 per share.
Unlike many other BDCs with depressed share prices, Fifth Street Finance is relatively light on equity exposure, has modest exposure to troubled oil & gas borrowers, and doesn't invest in highly leveraged CLOs, which have taken a beating in recent months.
The $9.00 of book value per share is, of course, a bit stale. The numbers are from September 30, 2015, and its book value likely shrank in the fourth quarter. That said, the current discount to book gives you a large margin of safety.
2. An activist is gearing up
An activist investor by the name RiverNorth took Fifth Street Finance to task, buying a substantial percentage of ownership in the company, and demanding change. RiverNorth is aiming to revise the fee agreement between Fifth Street Finance and its manager, potentially throw out the current management team, and install some of its own on the board of directors.
In a recently filed preliminary proxy statement, investors learned that RiverNorth isn't backing down. It successfully petitioned to allow shareholders to vote on throwing out Fifth Street Finance's external manager at the company's annual meeting. Doing so would allow for a less-expensive manager to take over, or for the complete liquidation of Fifth Street Finance at a price that is (hopefully) in the ball park of its most recently reported book value.
A recent 13D filing reveals that RiverNorth is playing to win. RiverNorth holds an economic interest equal to 14.4% of the company's shares outstanding. Of that, 13% is in pure form -- common stock owned by RiverNorth and related parties, giving it a lot of voting power at the annual meeting.
3. A quick buck
It's my belief that Fifth Street Finance's assets should be worth much more than the $5 per share at which the company currently trades. In a scenario where the company is liquidated at a 10% discount to the Sept. 30 book value, shares would be worth $8.10 each. Even at a 20% discount, Fifth Street shares should be worth about $7.20 each.
Going from $5 to $7.20 is a 44% return. Supposing that it takes two years to liquidate, or for the market to recognize the value added by a new management team, investors should be very pleased. The downside risk should be relatively modest, given the company already trades at an extremely wide discount to book value.
The upside all rides on the annual meeting, and the result of the shareholder vote. No date has been set, but the meeting is usually held in March. That's a pretty quick timetable for knowing whether this one is a home run or a complete bust.