Business Context and Reporting Period
This Form 8-K, filed on July 17, 2017, reports events occurring on July 13 and July 14, 2017, for Fifth Street Finance Corp. (the "Company"). The filing details a proposed transaction where Fifth Street Management LLC, the current investment adviser, has entered into an asset purchase agreement with Oaktree Capital Management, L.P. ("Oaktree"). Upon closing, Oaktree will become the new investment adviser for the Company and Fifth Street Senior Floating Rate Corp. ("FSFR").
Key Financial Metrics and Agreements
The filing does not provide standard financial performance metrics such as revenue, profit, cash flow, or margins for a specific reporting period. However, it discloses significant changes to the Company's debt facilities and capital structure in connection with the proposed transaction:
- Transaction Consideration: Oaktree will pay gross cash consideration of $320 million to Fifth Street Management upon closing.
- ING Facility Amendment:
- Minimum shareholders' equity covenant reduced from $978 million to $900 million.
- Consolidated interest coverage ratio reduced from 2.50 to 1.0 to 2.25 to 1.0.
- New minimum net worth covenant of $750 million added.
- Lenders' commitments extended to January 31, 2018; maturity date remains August 6, 2018.
- Sumitomo (SMBC) Facility Amendment:
- Maturity date changed from September 16, 2021, to the earlier of August 6, 2018, or the date the ING facility is repaid/refinanced.
- Waiver granted for change of control and certain events of default related to the transaction until January 1, 2018.
Material Changes Versus Prior Period
The primary material change is the proposed replacement of the investment adviser from Fifth Street Management to Oaktree. This change triggers:
- Termination of the current investment advisory agreement.
- Amendments to credit facilities to accommodate the new adviser and adjust financial covenants.
- Resignation of the entire current Board of Directors and key executive officers (CEO, CFO, Secretary/Chief Compliance Officer) effective upon the closing of the transaction.
Guidance, Outlook, and Risks
Conditions Precedent: The transaction is not yet closed and is conditioned on several approvals, including:
- Stockholder approval of a new investment advisory agreement with Oaktree for both the Company and FSFR.
- Election of five new directors to the boards of the Company and FSFR.
- Approval by stockholders of Fifth Street Asset Management Inc. (FSAM).
- Receipt of required regulatory approvals.
Risks and Contingencies: The filing notes that the SMBC facility waiver for change of control is temporary, ending on the earlier of January 1, 2018, or the termination of the Purchase Agreement. If the transaction does not close, the Company may face events of default under its credit facilities or need to renegotiate terms.
Important Facts for Investor Verification
- Verify the status of stockholder votes required to approve the new investment advisory agreement and the election of new directors.
- Confirm whether the $320 million payment to Fifth Street Management is contingent solely on the closing of the transaction.
- Monitor the impact of the reduced financial covenants (equity, interest coverage, net worth) on the Company's borrowing capacity and liquidity.
- Track the timeline for the resignation of current management and the appointment of Oaktree-affiliated directors.
- Review the specific terms of the SMBC waiver to understand the risk of default if the transaction is terminated after January 1, 2018.