CHICAGO--(BUSINESS WIRE)--Ratings expects to assign a rating of 'BBB-' to Fifth Street Finance Corp.'s (FSC) unsecured institutional debt issuance. Fitch does not expect there to be a material impact on the company's leverage levels as a result of the issuance, as proceeds will be used to repay borrowings on secured credit facilities.
Fitch views positively the firm's ability to access the institutional bond market, which has had limited participation in the industry since the onset of the financial crisis. Access to this market will provide FSC with more funding flexibility going forward, in Fitch's opinion.
KEY RATING DRIVERS
The expected rating is equalized with the ratings assigned to FSC's existing senior unsecured debt as the new notes will rank equally in the capital structure. The equalization of the unsecured ratings with the secured debt rating reflects FSC's focus on senior debt investments, and Fitch's expectation that proceeds from the issuance will be used to repay a portion of secured debt outstanding, thus increasing the amount of unsecured funding in the capital structure.
Assuming the proceeds from a $250 million issuance are used to pay down borrowings on secured credit facilities, unsecured debt as a percentage of total debt on a pro forma basis would be approximately 50% at Dec. 31, 2013. While Fitch expects that percentage to decline as FSC draws on its secured credit facilities to fund a robust origination pipeline through 2014, unsecured debt is expected to remain a meaningful portion of the firm's funding.
A meaningful increase in secured debt as a percentage of total debt, for an extended period of time, could result in notching of FSC's unsecured debt rating below the secured debt rating, to reflect reduced recovery prospects and the structural subordination of unsecured debt holders, given the high level of secured claims.
FSC's long-term Issuer Default Rating has a Stable Rating Outlook reflecting Fitch's expectations for relatively consistent operating performance in 2014, as revolver capacity and portfolio proceeds are redeployed into cash-yielding investments with attractive risk-adjusted returns, and the maintenance of solid asset quality, increased liquidity, and improved dividend coverage from net investment income.
On Nov. 25, 2013, FSC announced it was cutting its monthly dividend to $0.0833/share from $0.0958/share in an effort to align the dividend with net investment income expectations given the low yield environment, which Fitch believes is prudent. FSC's net investment income per share during the quarter ended Dec. 31, 2013, was $0.26 per share, and the company paid $0.24 per share in cumulative monthly dividends. Going forward, FSC has declared monthly dividends through August 2014 of $0.833 per share, or a $0.25 per share quarterly run rate.
Positive rating momentum could be influenced by consistent operating performance, the maintenance of solid asset quality, strong and stable cash earnings coverage of the dividend, and improved funding flexibility. In addition, a longer track record illustrating FSC's ability to successfully manage its more recent aircraft leasing and venture lending verticals, as well as strong performance from asset-backed lender HFG Holdings, LLC, which is currently FSC's largest portfolio investment, would be viewed positively.
Negative rating action 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.
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, 2013, the company had investments in 111 portfolio companies amounting to approximately $2.4 billion at fair value.
Fitch assigns the following rating:
Fifth Street Finance Corporation:
--Unsecured notes 'BBB- (Exp)'.
Fitch currently rates FSC as follows:
--Long-term Issuer Default Rating (IDR) 'BBB-';
--Secured debt 'BBB-;
--Unsecured debt 'BBB-'.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Global Financial Institutions Criteria' (January 2014);
--'Investment Manager and Alternative Funds Criteria' (December 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Investment Manager and Alternative Funds Criteria