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Friday, June 18, 2010

Fifth Street Finance Raises New Equity

Fifth Street Finance Corp (FSC) announced just after the Tuesday close that it has commenced a public offering of 8,000,000 shares of its common stock. According to the company's press release:

Fifth Street plans to grant the underwriters for the offering an option to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments, if any. All shares will be offered by Fifth Street. Wells Fargo Securities, Morgan Stanley, UBS Investment Bank and RBC Capital Markets will act as joint book-running managers for the offering.

Fifth Street intends to use substantially all of the net proceeds from the offering to make investments in small and mid-sized companies in accordance with its investment objectives and strategies described in the prospectus supplement and accompanying prospectus and for general corporate purposes, including working capital requirements. Fifth Street may also use a portion of the net proceeds from the offering to repay its outstanding borrowings under its three-year credit facility with Wells Fargo Bank, N.A.

We're not surprised that Fifth Street Finance is raising more capital. The watchword in the BDC industry is raise money while/when the going is good. FSC has been having a good run of late, booking myriad new deals, (see our post of May 24, 2010) increasing its Revolver limit and reducing the pricing paid to its lenders (see our post of May 27, 2010).

This is a major offering, with the total stock being sold equal to 20% of the existing shares outstanding. FSC should raise $110mn at today's closing price. That's more than enough to pay off any borrowings under the Wells Fargo line (all of which has occurred since month end). The stock price is at a decent premium to the latest NAV : 13%, which is good for existing shareholders. The most obvious downside might be a delay in further dividend increases (most recently the quarterly distribution was up to 32 cents), but that's not for sure. FSC has been willing in the past to get the distribution up ahead of its Distributable Earnings Per Share and Net Investment Income Per Share.

Certainly, the balance sheet of the company seems recession proof. When we recently about the pro-forma impact of a double dip recession (see post of June 1, 2010) and wrote that half of the BDCs we track had virtually no debt, FSC was already on that blue chip list. This additional fillip of equity will only enhance a balance sheet which has only begun to grow. Total equity should be around $600mn after this equity offering closes, and with debt at less than zero, Fifth Street is sitting pretty from that standpoint.

The BDC Reporter, true to our name, seeks to avoid opining on whether or not a stock is a good value or a Buy or Sell. We leave that to the investment banks. However, we can say that the company's $1.28 annual dividend represents a 10.6% yield on today's closing price, and that the stock is trading just 11% below its 52 week high (using Yahoo Finance), which is also its all-time high. The analysts consensus for next fiscal year's earnings are $1.33 a share, which means FSC is trading a multiple of 9.1x.

Disclousre I am long FSC shares.

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