Fifth Street BDCs continue to decline in NAV

The two BDCs at Fifth Street Asset Management continue to post deteriorating financials as the parent company battles reputational issues.

Fifth Street Finance Corp (FSC) and Fifth Street Senior Floating Rate Corp (FSFR) posted drops in their net asset values for the second quarter, in results announced shortly after their parent firm disclosed it was the target of a federal investigation.

FSC, a BDC that provides financing to small and mid-market companies, announced a year-over-year drop of almost $1 in its NAV per share. For the three months ending 30 June, FSC reported an NAV of $8.15 per share, down from the $9.13 NAV per share at the same time last year. On its second-quarter earnings call chief executive Todd Owens attributed the drop in NAV to credit-related losses.

FSFR, a BDC that invests exclusively in floating-rate loans, also reported a year-over-year drop in its NAV per share this week, an even steeper decline than FSC. In Q2, FSFR announced a $10.99 NAV, down from $12.23 in the same quarter of 2015.

On its earnings call, Owens, also FSFR’s president, attributed the decline in NAV to a few concentrated investments. He highlighted FSFR’s positions in healthcare company Ameritox and website as two investments that were struggling.

FSC’s second-quarter net investment income (NII) was $29.1 million, a decline from the $32.5 million posted in the second quarter of 2015. FSFR, also saw a decline in its NII to $6.2 million from $7.4 million year-over-year.

FSC’s assets dropped to $2.5 billion in assets in Q2, down from $2.6 billion at the same time last year. FSFR also listed a declined in assets, posting $639.8 million against last year’s $749.8 million.

Fifth Street Asset Management (FSAM), which owns the investment advisor that manages the two BDCs, revealed an SEC subpoena in a regulatory filing last week. The investigation questions the valuation of the BDCs’ portfolio companies, as well as FSAM’s business practices. FSAM said it was cooperating with the investigation.

FSAM also recently settled several securities class action lawsuits for FSC and FSAM, as well as shareholder activism activity. The settlement of FSC class actions includes a $14.1 million payment to shareholders that bought stock between 7 July 2014 and 6 February 2015. The FSAM settlement includes a $9.3 million payment to those who bought stock in connection with FSAM’s IPO in 2014.