OCSL

Business Context and Reporting Period

Company: Fifth Street Finance Corp. (Note: Input metadata referenced "Oaktree," but the filing text identifies the registrant as Fifth Street Finance Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Fifth Street is a specialty finance company and Business Development Company (BDC) that lends to and invests in small and mid-sized companies, primarily in connection with private equity sponsors. The company invests in debt securities (first and second lien loans) and equity securities.

Key Financial Metrics

Material Changes vs. Prior Period

• Income Growth: Net investment income increased significantly compared to the prior year periods. For the nine months ended June 30, 2009, net investment income rose 83.0% to $23.59 million from $12.89 million in the same period in 2008, driven by a larger portfolio of debt investments.
• Realized Losses: The company recorded $12.4 million in realized losses for the nine months ended June 30, 2009, primarily due to the determination that two portfolio investments (CPAC, Inc. and American Hardwoods Industries Holdings, LLC) were permanently impaired. In contrast, the prior year period showed a realized gain of $62,487.
• Unrealized Depreciation: Net unrealized depreciation for the nine months ended June 30, 2009, was $12.68 million, compared to $12.55 million in the prior year. This was largely driven by declines in EBITDA or market multiples of portfolio companies.
• Liquidity: Cash and cash equivalents decreased from $22.9 million at September 30, 2008, to $1.6 million at June 30, 2009, due to investment funding and dividend payments.

Guidance, Outlook, and Risks

• Capital Raising: On July 21, 2009 (subsequent to the period end), the company completed a follow-on public offering of 9.49 million shares at $9.25 per share, raising approximately $82.6 million in net proceeds. This was done after stockholders authorized the sale of shares below net asset value.
• Debt Facility: The company has a $50 million secured revolving credit facility with the Bank of Montreal, maturing December 29, 2009. As of June 30, 2009, $18.5 million was outstanding. This was repaid in full in July 2009 using proceeds from the equity offering.
• SBIC License: The company is pursuing a Small Business Investment Company (SBIC) license from the SBA to access lower-cost, SBA-guaranteed debentures. As of July 14, 2009, the application was approved for further processing.
• Portfolio Quality: Due to economic recession, the company modified terms for ten portfolio companies, including increased PIK interest and reduced cash rates. Six investments were on non-accrual status as of June 30, 2009.
• Risks: Key risks include the illiquidity of portfolio investments, the potential inability to raise capital on favorable terms, and the impact of the economic recession on portfolio company performance.

Investor Verification Checklist

• Impairment Details: Verify the specific financial deterioration of CPAC, Inc. and American Hardwoods Industries Holdings, LLC that led to the $12.4 million realized loss.
• Non-Accrual Status: Review the status of the six investments on non-accrual and the likelihood of future cash collection.
• Debt Maturity: Confirm the status of the $50 million credit facility renewal or replacement, given its December 2009 maturity.
• SBIC Progress: Monitor the final approval status of the SBIC license and the capitalization requirements to access the $150 million borrowing capacity.
• Dividend Sustainability: Assess the ability to maintain dividend distributions given the reliance on PIK interest (non-cash income) and the need to raise external capital for growth.