Fifth Street signs over BDCs to Oaktree

Edgar Lee of Oaktree will likely be new chief executive overseeing both firms.

Fifth Street Asset Management will sell its business development companies to Oaktree Capital Management, the firms said on Friday.

Los Angeles-based Oaktree will pay $320 million in cash and become the investment advisor to Fifth Street Finance Corp. (FSC) and Fifth Street Senior Floating Rate Corp. (FSFR), according to Fifth Street’s statement. The common stock of both BDCs held by Fifth Street is not included in the transaction.

FSC’s management fee will be reduced from 1.75 percent to 1.5 percent, while the current FSFR management fee of 1 percent will remain unchanged. The incentive fees for both FSC and FSFR will be reduced from 20 percent to 17.5 percent for income and capital gains, under the proposed agreement.  

The deal is expected to be completed in the fourth quarter, subject to shareholder votes at both BDCs, the statement read. Fifth Street’s board intends to make a cash distribution of $2.75 per share of Class A common stock to its shareholders following the close.

Edgar Lee, portfolio manager at Oaktree’s strategic credit arm, will likely serve as chief executive officer of both BDCs, Oaktree said in a separate statement. The current executives at both BDCs are set to resign, as are the BDCs board members, except for Richard Cohen at FSFR and Richard Dutkiewicz at FSC.

Together the BDCs have approximately $2.5 billion of assets under management across first lien, second lien, unitranche and mezzanine investments, the statement read.

FSC will change its name to Oaktree Specialty Lending Corp. and trade under the ticker symbol “OCSL”. FSFR will change its name to Oaktree Strategic Income Corporation, and will trade under the ticker symbol “OCSI.”

Leonard Tannenbaum, chairman and chief executive officer at Fifth Street, said in a statement that Oaktree plans to stabilise and then grow the portfolio of both BDC platforms once the deal goes through.

Oaktree and Fifth Street  were not immediately available to comment further.

The news that these two firms were in discussion to sell Fifth Street assets to Oaktree broke at the end of last month. The first reports did not disclose details on what assets were on the block, and the initial price tag was reportedly $350 million.

Fifth Street’s BDCs had shown a significant decline in net asset value per share over the last year.

FSC saw its net asset value per share decline to $7.23 as of 31 March, down from $8.33 the same date last year, according to US Securities and Exchange Commission filings. FSFR also saw its NAV per share dwindle to $10.83 at the end of first quarter 2017 from $11.18 as of 31 March 2016. The firm had been looking for ways to stabilise these BDCs’ declining NAV per share by other means than buyout, as late as this February.

Patrick Dalton, chief executive officer at FSC, outlined on the first-quarter earnings call several proposed changes to the portfolio and investment strategy. Those shifts included reducing the BDC’s exposure to healthcare, technology and for-profit education as well as scaling back its non-accrual investments and reducing its incentive fee.  

Fifth Street announced last week it agreed to sell its collateralised loan obligation arm to NewStar Financial in a $29 million deal – consisting of a $16 million purchase price and $13 million in assumed liabilities – that will likely close third quarter.

Fifth Street managed two CLOs, each issued in 2015: the $309.5 million Fifth Street Senior Loan Fund I, which closed in February of that year; and the $416.6 million Fifth Street SLF II, which closed that October.