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 requirements. 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 target. 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-'.