Robyn Friedman - Executive Director, Head of Investor Relations Todd Owens - Chief Executive Officer Steven Noreika - Chief Financial Officer.

Leslie Vandergriff - Raymond James Doug Mewhirter - SunTrust Robinson Humphrey.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 Fifth Street Finance Corp. Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Ms. Robyn Friedman, Head of Investor Relations. Ma’am, you may begin..

Todd will provide an overview of our results and outlook, and Steve will summarize the financials. Then we will open the line for Q&A. I will now turn the call over to our CEO, Todd Owens..

Thank you, Robyn, and good morning, everyone. For the quarter ended March 31, 2016, FSC generated $0.17 of net investment income per share, which is slightly below our quarterly dividend of $0.18 per share.

Our net investment income was impacted by low origination volumes limited turnover on portfolio and substantially higher professional expenses, partially offset by the reduction in our base management fee.

Despite lower than normal volumes during the quarter, our net investment income would have covered our dividend for the 5th consecutive quarter, if adjusted to exclude incremental professional fees. The quarter was also marked by greater credit stability in our portfolio and a steady amount of loans on nonaccrual.

Additionally, as part of our focus on delivering strong returns for our shareholders, we continue to repurchase our shares and operated within our targeted leverage ratio of 0.6 to 0.8 times debt to equity.

Over the course of 2015, we took a number of actions to maximize shareholder value and renewed our focus on driving strong sustainable performance for our shareholders. That focus has continued in the March quarter as we took additional steps to drive shareholder value.

In January, we permanently reduced FSC’s base management fee on total gross assets from 2% to 1.75%. As a result, shareholders benefited grew an over 10% decrease in management fees paid to our manager this quarter.

As we previously mentioned, we do not pay management fees on cash and we have an 8% hurdle rate on our incentive fees, both of which compare favorably to the fee structures in the industry. For the second quarter in a row, the 8% hurdle rate benefited our shareholders meaningfully.

Additionally, I’m pleased to report that we repurchased approximately $15 million of common stock in the open market this quarter, which was $0.07 per share accretive to our NAV.

Since the end of the March quarter, we have purchased – we have repurchased an additional $10 million of common stock, bringing the total repurchase this calendar year to $25 million. These repurchases combined with the $20 million of repurchase in the fourth fiscal quarter last year, represent north of 5% of our public float at today’s prices.

Following the trend observed in 2015, the middle market experienced its weakest quarter for sponsored loan volumes in six years, sponsored issuance was down 45% from the December quarter and 31% on a year-over-year basis.

Deal volume during the quarter was mainly driven by LBOs and other M&A transactions as there were very few refinancings that occurred.

Several factors contributed to the slowdown in the March quarter, including volatility in the energy and commodity sectors, as well as in the credit markets generally slowing global growth in an uncertain economic outlook.

Many of our private equity sponsors took a wait and see approach in the quarter, given a lack of quality deals and lofty valuations. Consistent with the broader market environment, we experienced muted origination volumes closing $107 million of investments in four new and five existing portfolio companies.

We also experienced substantially lower than normal turnover in our portfolio. While January and February were particularly slow, we were encouraged by an increasing activity as the quarter drew to a close and are optimistic for an uptick in deal flow in the quarters ahead.

As we look at the credit profile of our portfolio, we feel confident about the overall quality of our loans and the performance of our portfolio companies. Our portfolio remains conservatively positioned and well-diversified with approximately 80% of the portfolio consisting with senior secured loans with investments in 127 portfolio companies.

Our energy exposure remains low at only 1.8% of our portfolio at fair value spread across three companies. In addition, we have no CLO exposure debt or equity. As we have previously mentioned, we placed Ameritox on nonaccrual status in the December quarter.

Our portfolio management team worked closely with the company and its sponsor owners to restructure the investment. And subsequent to the end of the March quarter, we entered into an agreement whereby we took majority control of the company.

We feel comfortable with our current valuation level and anticipate moving it off nonaccrual in the June quarter. On a more positive note, the fair market value of our investment in Yeti has increased meaningfully as that company has continued to rapidly grow and execute on its business plan.

Additionally, I would like to take a moment to highlight the recent exit of an investment that illustrates our team’s ability to prudently manage assets and realize gains when a market opportunity presents itself.

Subsequent to the end of the quarter, First Star Aviation, a wholly-owned portfolio company of FSC sold one of the plants and its portfolio. The sale price was higher than the original purchase price and when you factor n the lease payments made over the life of our whole period, we realized a high-teens gross IRR.

This is just one example of the great work our team has done to deliver strong tangible results for our shareholders. As I mentioned at the outset and similar to the December quarter, we incurred higher than normal professional expenses in the March quarter related to the pending litigation at FSC and preparation for our annual meeting.

Excluding the incremental professional expenses, we would have generated $0.18 of net investment income per share, which would have covered our quarterly dividend for the 5th consecutive quarter.

As was the case when we set the quarterly dividend at $0.18 per share a year ago, the management team and the Board of Directors remained confident that our net investment income can regularly meet or exceed our dividend.

Going forward, we anticipate that our professional expenses will decrease, although such expenses could remain at elevated levels due to the pending litigation. Despite the recent challenges we have faced, we are today increasingly optimistic about FSC’s future prospects and are pleased with our repositioning over the past year.

The strategic actions taken during the March quarter combined with the prudent deployment of capital and investments with strong risk adjusted returns and consistently earning our dividend will drive value for our shareholders.

We look forward to providing updates on our progress as we continue to focus on generating steady results and executing our strategic initiatives to enhance shareholder value. I would now like to turn the call over to our Chief Financial Officer, Steve Noreika, to discuss our financials in more detail..

Thank you, Todd. We ended the second quarter of 2016 with total assets of $2.4 billion, down from $2.6 billion at 2015 fiscal year end. Portfolio investments totaled $2.3 billion at fair value, which were spread across 127 companies at March 31, 2016.

At the end of the March quarter, we had $134.5 million of cash and cash equivalents on our balance sheet. Net asset value per share was $8.33 as of March 31, 2016, as compared to the net asset value per share of $8.41 at the end of the December quarter.

NAV was impacted this quarter by a few factors, including a credit and spread-related write-down of $0.14 per share, of which over one-third was due to movements and quotes, and that was offset by $0.07 per share of accretion from our share repurchases during the quarter.

I would like to note that while the high yield market rallied prior to the close in March quarter, the index that we utilize in our mark-to-market process, the LCD middle market index, generally lags the broader market and therefore was down slightly for the quarter.

Subsequent to quarter end, we have seen the LCD index followed the broader market in a positive direction. We ended the December quarter at a 0.77 times debt to equity ratio within our target range.

Subsequent to the end of the March quarter, we successfully repaid our $115 million of unsecured convertible notes using capacity under our ING revolving credit facility. We estimate that this will be $0.02 per share accretive to earnings on an annual basis.

For the three months ended March 31, 2016, we generated total investment income of $59.6 million. The quality of our income continued to be high as net PIK, which is PIK accruals recorded in excess of PIK payments received, represented only 4.5% of total investment income. Net investment income was $25.3 million for the quarter ended March 31.

During the quarter, we closed $106.6 million of investments in four new and five existing portfolio companies, and we received $49.9 million in connection with the full repayments of four of our debt investments, all of which were exited at or above par.

We also received an additional $78.3 million in connection with paydowns, syndications and sales of debt investments. The credit profile of the investment portfolio continues to be solid as over 95% of the portfolio at fair value was ranked in the highest one and two rating categories.

As Todd previously stated, I would also like to point out that one of the loans in category four Ameritox was restructured subsequent to quarter end, and we expect that it will return to accrual status in the June quarter. Ameritox represented approximately 3% of our debt portfolio at fair value at March 31.

We believe that we are conservatively positioned relative to our peers with 92.8% of the portfolio at fair value consisting of debt investments, 79.9% of the portfolio invested in senior secured loans, 80.4% of the debt portfolio consisting of floating rate securities with no CLO investments and limited energy exposure at quarter end.

FSC’s joint venture with an affiliate of Kemper Corporation continues to perform well generating a 10.4% weighted average annualized return on FSC’s investments during the quarter. As of March 31, 2016, the joint venture at $429.2 million of assets, including investments in a range of one-stop and senior secured loans to 38 portfolio companies.

For the March quarter, the weighted average yield on FSC’s debt investments, including the joint venture return was 10.3%, with the cash component of the yields making up 9.8%.

At March 31, the average size of a portfolio debt investment was $20.3 million, the average portfolio company EBITDA was $39.5 million, and our top 10 portfolio company investments represented 29.5% of total assets.

Last week our Board of Directors declared monthly dividends of $0.06 per share for June, July and August, consistent with the last four quarterly dividends.

We expect our Board of Directors to continue declaring monthly dividends on a quarterly basis, subject to various factors, including company performance, capital availability, level and timing of share buybacks, as well as general economic and market conditions. I will now turn it back over to Robyn..

Thank you for joining us on today’s call. Soraya, please open the lines for questions..

[Operator Instructions] Our first question comes from Leslie Vandergriff of Raymond James. Your line is now open..

Good morning..

Good morning, Leslie..

So just first question, just quick color on originations and repayments in the quarter, I know they were low for you guys, it seems to be a trend going on in the market right now.

Can you talk a little bit about what you saw this quarter and if you’re seeing a bit of front load fill in the second quarter after that?.

Yes, I’m happy to take that question. Yes, the March quarter was very slow, interestingly it was slow in terms of portfolio turnover as well as slow on the origination side and the consequence of that was that we stayed pretty close from debt-to-equity perspective.

And as I said in the prepared remarks, we saw a meaningful up tick in activity as we headed into the end of the quarter and that has continued into the – June quarter. And so we are expecting a higher level of activities in both regards, originations and portfolio turnover, refinancings and so forth.

And so we think that – we think we’re going to rebound from very, very low levels of the March quarter to more levels in the June quarter..

Okay, thank you. And on the professional fees, I know you mentioned in your prepared remarks that they were higher on some of the legal actions right now. Is that the entirety of that increase or can you give some color on that breakdown..

The incremental professional fees are related really to two things, principally the litigation, the class-action lawsuit that is still pending, but as well related to preparation for our annual meeting..

Okay, so just the one quarter thing more?.

Yes, as it relates to the shareholder meeting for FSC is behind us..

Okay..

And so we don’t expect any incremental costs there. And so we left at least part of the basis for us, saying that we expect those professional costs to decline although the class action litigation is still pending..

Okay.

And then last question for me this morning, I know you guys were at $225 million on the SBA debentures and while there may not be a large proportion for you guys, looking into getting up to $300 million on that second license, any color there?.

Okay, I’m going to let Steve to take that one Leslie..

Hi, Leslie. Yes, it’s an interesting opportunity currently we do have meaningful cash balance in our SBA entities that due to some repayments that we had that we would like to deploy before we look any further into increasing the license..

Okay. All right, thanks for the color..

Thanks very much..

Thank you..

Thank you. Our next question comes from the line of Doug Mewhirter of SunTrust. Your line is now open..

Hi, good morning.

Just a couple of questions, first for your adjusted net income number, just a clarification, I saw you put that on a basic share basis, is there a reason why you didn’t report on a diluted share basis?.

Doug, we generally view the P&L on a non-diluted basis. Doug, if you want to take it offline, we can certainly recalculate that for you. But there is no particular reason we didn’t, that’s just not the way we analyze our P&L..

Okay, thanks. The – moving on the – to Ameritox, I guess it was already on non-accrual this quarter. If I read it correctly, it sounds like there – was there a mix of debt-in-equity in the new restructuring and would there be any incremental I guess interest that would come back on to the P&L in the next quarter from the Ameritox, the new structure..

Yes, hi Doug. It’s Steve. I can give you a little color on that. Yes, we exchanged our debt investment for debt-in-equity component and there will be a cash interest earnings portion of debt along with that..

Okay. And also with the share repurchase, I know you kind of up maybe towards – you’re still within the debt-to-equity range and there is some more activity, but is there any room for more additional share repurchases beyond what you did subsequently end of the quarter..

Doug thanks for the question. Yes, look I think there is room for additional repurchases as and when we decided to pursue that with our Board. But as we get nearer the top end of our range, it does reduce somewhat our flexibility there or maybe another way to put and just give some factor that we think about.

As we mentioned, we have already completed $10 million of repurchases in this quarter. That is a same June quarter and notwithstanding where we were from a leverage perspective. So obviously the 77% debt-to-equity ratio is not – it doesn’t preclude us from doing buyback, which so we’ve actually already completed meaningfully in this quarter..

Okay, thanks. That’s all my questions..

Okay, thank you Doug..

Thank you. [Operator Instructions] And at this time, I’m showing there are no further participants in the queue. I would like to turn the call to management for any closing remarks..

Yes, thanks to everyone for joining us this morning..

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes your program. You may now disconnect. Everyone have a great day..