April 5, 2012 / 2:57 PM / 6 years ago

TEXT-Fitch affirms Fifth Street Finance ratings

April 5 - Fitch Ratings has affirmed Fifth Street Finance Corporation's
 (FSC) long-term Issuer Default Rating (IDR) at 'BBB-'. The Rating 	
Outlook is Stable. A complete list of ratings is detailed at the end of this 	
release. Approximately $483.8 million of secured and unsecured debt is affected 	
by these actions. 	
The rating affirmation reflects FSC's low leverage, strong operating 	
performance, solid asset quality, demonstrated access to the debt and equity 	
markets, improved funding flexibility, ready access to deal flow with various 	
sponsor relationships and experienced management team.	
Rating constraints include the capital markets impact on leverage given the need	
to fair value the portfolio each quarter, dependence on the capital markets to 	
fund portfolio growth, and a limited ability to retain capital due to dividend 	
FSC's leverage, as measured by debt-to-equity was 0.68 times (x) at Dec. 31, 	
2011, or 0.47x excluding Small Business Administration borrowings, which was 	
below management's long-term target of 0.60x. Total leverage was up meaningfully	
from 0.13x at Sept. 30, 2010 due to portfolio growth and the issuance of term 	
unsecured debt. While Fitch expects leverage to increase modestly in 2012 as 	
strong origination volume is funded with drawings on the secured credit 	
facilities, leverage is not expected to rise above management's articulated 	
FSC's liquidity profile is considered sound. At Dec. 31, 2011, balance sheet 	
cash amounted to $70.3 million, borrowing capacity on the secured revolvers was 	
$320.7 million, and portfolio sales and repayments generated $79 million of cash	
in first quarter 2012 (1Q'12). Net investment income coverage of dividends 	
declared fell below 100% in fiscal 2011, but the company cut its quarterly 	
dividend to $0.29 per share in November 2011, which compares to $0.29 per share 	
of net investment income generated in 1Q'12. Fitch views improved earnings 	
coverage of the dividend favorably. 	
Core operating performance was solid in 1Q'12, with 49.3% year-over-year growth 	
in net investment income. Interest income rose 70.2% as 50.8% portfolio growth 	
offset an 89-basis point decline in the weighted average debt yield. Total 	
expenses rose 75.7% due to higher base management and incentive fees on a larger	
portfolio and an increase in interest expense on higher average borrowings 	
outstanding. Fitch believes FY2012 core operating earnings will be up from 	
FY2011 levels, due to portfolio growth outpacing repayments, combined with a 	
relatively stable yield. 	
The Stable Rating Outlook reflects Fitch's expectations for relatively 	
consistent operating performance, as revolver capacity and portfolio proceeds 	
are redeployed into cash-yielding investments with attractive risk-adjusted 	
returns. It also reflects the maintenance of solid asset quality, stable 	
liquidity, and strong dividend coverage from net investment income. While the 	
recognition of additional unrealized portfolio depreciation is possible over the	
near term, given uncertain market conditions Fitch expects FSC to maintain low 	
leverage and adequate cushions on debt covenants and asset coverage in order to 	
absorb potential adverse valuation movements. 	
Negative rating actions could be driven by an increase in leverage above the 	
targeted range, resulting from material unrealized depreciation, and/or an 	
increase in the proportion of equity holdings without a commensurate decline in 	
leverage. Declines in operating performance, a prolonged increase in non-accrual	
levels and weaker dividend coverage would also be viewed unfavorably from a 	
ratings perspective. 	
Positive rating momentum is believed to be limited over the nearterm, given 	
FSC's size, limited funding flexibility, and relatively short-operating history 	
as a public company, but could be influenced over the longer term by consistent 	
operating performance, further portfolio diversification, stronger cash earnings	
coverage of the dividend, and a more meaningful shift to unsecured funding from 	
secured funding. 	
Headquartered in White Plains, NY, FSC is an externally managed business 	
development company, formed in 2007 with an objective to generate both current 	
income and capital appreciation through debt and equity investments. As of Dec. 	
31, 2011 the company had investments in 67 portfolio companies amounting to 	
approximately $1.12 billion at fair value. 	
Fitch has affirmed the following ratings with a Stable Outlook:	
Fifth Street Finance Corporation 	
--Long-term IDR at 'BBB-';	
--Senior secured debt at 'BBB-';	
--Senior unsecured debt at 'BBB-'.

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