Fifth Street Finance (FSC) released its latest newsletter yesterday. It was relatively brief but there were a few interesting points made. Given that FSC is not reporting results for the quarter ended September 30th until December 2nd, this is the latest new info on the company. Ironically, the newsletter does not have any preview of the performance achieved in the last quarter, but is devoted to results achieved since October 2010.
NEW BUSINESS ACTIVITY
Here's an extract from the newsletter about the promised wave of new deals that FSC has been talking about for months, which seems to be coming to pass:
Since releasing our last newsletter in mid-October, we have originated $45.5 million of new deals, $39.5 million of which were funded at close. Total deal originations so far in our first fiscal quarter of 2011 stand at $109.0 million, $90.5 million of which were funded at close. The rest of the quarter is shaping up to be quite robust, with a number of attractive opportunities in our deal pipeline.
Putting this into perspective, FSC originated $56mn in new deals in the quarter ended June, so the volume of deals booked in the seven weeks of the new quarter is already twice that level. Time to celebrate? Maybe, maybe not. The newsletter added cryptically:
We are also experiencing an increased rate of refinancing which further indicates that the leverage market has stabilized.
With no numbers given, we can only speculate, but it appears that much of the new business may be offset with existing loans being paid off. This leaves readers of the newsletter not much better informed than ever before which is the drawback of this episodic and incomplete form of news reporting.
The newsletter mentioned that FSC continues to be in discussions with its lenders about increasing its facilities, but a similar statement was made last month so there does not seem to any urgency. Here's the quote:
In anticipation of a busy conclusion to the calendar year, we are in discussions to expand our credit facilities which will provide us with additional dry powder to take further advantage of our strong pipeline.
Here's what the newsletter said about the dividend:
We now pay a monthly dividend to our shareholders, averaging 10.66 cents per share during the current quarter. Annualized, this would represent a $1.28 per share payout. Due to our strong deal flow, our distributable income continues to support such a dividend level and we and our Board of Directors anticipate being able to maintain this payout level. Realizing book earnings at or exceeding $0.32 per share per quarter is one of the primary goals we have set for the next twelve months.
This seems to suggests (because it's written in public company code) that taxable income (which is very similar to "distributable income"), pumped up by front end fees and termination fees on departing companies, is catching up to the quarter's dividend liability of nearly $0.32 per share. That seems plausible given the result at the end of June was $0.26 for Distributable Income and there has been much activity in the interim. It also suggests that Net Investment Income on a GAAP basis may lag behind for the quarter.
We're encouraged that FSC believes that the earnings should continue to support the dividend level and that they anticipate "being able to maintain this payout level". However, there is nothing in the language which suggests the company anticipates a dividend increase in the foreseeable future, notwithstanding the M&A boom underway and its under-leveraged balance sheet. Like many BDCs, FSC may be more intent on defending its current dividend level than raising the pay-out to an unsustainable level once the fillip from one time fees recedes, and margins shrink as FSC seeks to book lower risk first lien loans.
Disclosure: Author is long FSC