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FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 1
FIFTH STREET FINANCE CORP
Moderator: William Craig December 10, 2008 4:00 p.m. CT
Operator: Good day everyone and welcome to the Fifth Street Finance Corp. fourth quarter 2008
earnings conference call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. William Craig, Chief Financial Officer.
Please go ahead, sir.
William Craig: Thank you, Jaime. Good afternoon and welcome everyone.
This is the conference call to discuss the results for Fifth Street Finance Corp. for the year-ended
September 30, 2008.
My name is Bill Craig, and I am the CFO and CCO of Fifth Street. I have with me this afternoon
Len Tannenbaum, CEO and President; Stacey Thorne, VP of Investor Relations; and Bernard
Berman, Executive VP and Secretary.
Before I begin, I would like to reiterate this call is being recorded. Replay information is included
in our press release today and is posted on our Web site. Please note that this call is the
property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call of any form is
strictly prohibited. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 2
I would also like to call your attention to the customary Safe Harbor disclosure in our press
release today, regarding forward-looking information. Today's conference call includes forward-
looking statements and projections, and we ask that you refer to our most recent filings with the
SEC for important factors that would cause actual results to differ materially from these
projections.
We do not undertake to update our forward-looking statements, unless required by law. To
obtain copies of our latest SEC filings, please visit our Web site or call Investor Relations at 914-
286-6811. The format for today's call is as follows: Len will provide an overview, I will summarize
the financials, Len will recap, and then we will open the line for Q&A.
With that, I will turn it over to Len.
Len Tannenbaum: Thanks, Bill and welcome everyone to our year-end conference call, and thank you for
participating. It has been a very volatile year, but a successful one for Fifth Street Finance Corp.
We were able to complete our IPO at book value and deploy the proceeds in the best market for
lending in decades. We were able to enhance our terrific relationships with private equity
sponsors and demonstrate our strong value by sticking to our term sheets while the competition
re-traded or disappeared altogether.
We continue to build on our great team by adding key members and growing our bi-coastal
presence. We met and exceeded expectations for growth, dividend and credit quality. Most
importantly we held a very – we held our very disciplined approach, which had delivered strong
returns for Fifth Street for the past 10 years. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 3
The approach is as follows: Only doing deals in conjunction with private equity sponsors; only completing first and second lien originations with the second liens having strong inter-creditors and liens; originating 100% of our securities in-house, we did not buy syndicate paper; setting strong covenants and terms; and most importantly, only originating deals which our scoring system showed us high rewards relative to a lower risk profile.
Discipline, trust and shareholder focus is what you will hear from us over and over again. We have historically operated in LP environment in our previous funds, where we had to deliver strong returns to our investors without the benefits of leverage. We have proven over time that we do not need leverage to generate high returns. In this economic environment, we will be very disciplined with adding any leverage to our currently unlevered portfolio.
From a valuation standpoint, we currently have written down almost $70 million of assets, yet all of loans are performing. Since we get paid monthly by our portfolio companies, we view non- performing loans as any that have not paid within 30 days. These write-downs as of September
30th value the portfolio appropriately at that point in time.
If the economy and/or any specific company's performances deteriorates from that point, we will have future markdowns. If they get better, we will have markups. What you will receive from our team and will learn to trust over time is that we appropriately value our securities. I look forward to calling the bottom in the decline in values, but we have not gotten there yet.
The good news is that our sponsors are being very proactive in this environment and are in general supporting their companies with additional equity. This is one of the reasons we believe that sponsor-backed lending has substantially lower risk than unsponsored lending, and, therefore, we will have lower default rates. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 4
Pricing in our market is truly exceptional. We believe many of the securities originated today will lead to enhance returns in a market recovery. We are also adjusting price upwards in any security that has a technical default or may have a technical default.
Exit fees are also being added or enhanced to many securities, as we endeavor to add potential upsides to our investment returns, when we eventually have an economic recovery. We are not seeking permission in the upcoming proxy to sell stock below book value, as almost all of our peers have done.
While reduced capital availability will constrain our growth in the near-term, we have recently applied for SBIC leverage which will provide long-term, low interest, government-supported funding for our deals.
We believe that if we receive an SBCI charter, it will very accretive to earnings. We also believe that we can help small businesses grow, as a result of this charter. This is right in line with the government's desire to stimulate credit to small businesses, which account for over 80% of the
United States employment and economic growth.
The lower middle market lending environment is picking up again in volume, as sellers begin to adjust their expectations to the new macroeconomic backdrop. There are very few competitors in the space that are actually lending. Competitors are going out of business from overlevering their assets and underpricing their previous deals.
This phenomenon creates opportunities for us. We are excited about our market positioning and appreciate the trust that your shareholders have placed in our team. We look forward to rewarding that trust with strong relative returns, a low relative default rate and increasing dividends. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 5
Now, I'll turn the meeting back over to Bill, our CFO, to discuss the details of our financial
statements.
William Craig: Thanks, Len. Before I begin to get into the numbers, I'd like to recap some history so
we're all on the same page.
I would remind you that the inception of Fifth Street was as a fund on February 15, 2007, so some
of the comparable discussion that might typically take place on a call such as this may be omitted
if it is not meaningful.
On January the 2nd of 2008, the fund converted to a business development corporation, which
then went public in mid-June, and our fiscal year-end is September 30. With respect to the IPO,
we received net proceeds of approximately $129.5 million. We used approximately $15.2 million
to redeem our preferred stock and approximately $27 million to pay down our revolving credit.
The balance is largely to be invested.
With respect to our balance sheet ending September 30, 2008 total assets are $299.1 million,
which includes investments of $273.8 million, net of $5.2 million of unearned fee income and cash
of $22.9 million. Debt is at zero, and stockholder equity is $294.3 million.
Our weighted average yield on investments was 16.2% at September 30, 2008 versus 16.8% at
September 30, 2007. The weighted average yield on debt investments includes a cash
component of 13.3% at September 30, 2008 and 13.9% at September 30, 2007. Our net asset
value per share at September 30, 2008 was 13.02.
For the year-end, total investment income was $33.2 million. Total expenses were $13.1 million.
Net investment income was $20.1 million. Total unrealized depreciation was $16.9 million and
earnings per common share, basic and diluted was 21 cents. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 6
With regard to the dividend, our Board approved first fiscal quarter of 2009 and second fiscal quarter of 2009 dividends on December 9th of 32 cents a share and 33 cents a share respectively. The first quarter dividend is payable on December 29 for stockholders of record on
December 19. The second quarter dividend is payable on January 29 for stockholders of record of December 30.
For the 2009 fiscal year, we plan to pay a third quarter dividend in May and a fourth quarter dividend in August. At September 30, 2008 93% or almost $256 million of our interest-bearing investment portfolio consists of fixed rate loans and 7% or nearly $18 million consists of floating rate loans. All our floating rate loans carry a minimum interest rate floor of at least 9%, which protects our return in a declining rate environment.
With respect to the portfolio, during the three months ended September 30, 2008, we invested
$65.1 million across four new and two existing portfolio companies. At September 30, 2008 our portfolio consisted of investments of 24 companies. All of these investments were in connection with an investment by a private equity sponsor, and these investments consisted of 40% first lien loans and 59% second lien loans, and the balance is equity investments.
As of September 30, 2008 no investments were on a non-accrual status. We did, however, marked three securities down as part of the evaluation process for a total unrealized loss for the quarter of $3.6 million. The markdowns resulted from a decline in economic performance, relative to expectations and declining comparables to the same period. For the year, unrealized losses totaled $16.9 million.
With respect to our ratings at September 30, 2008 the distribution of our debt investments on the
1-to-5 investment rating scale at fair value was as follows. Our overall portfolio credit is strong.
Investment Rating 1 investments, totaled $7.7 million or 2.8% of the portfolio. Investment Rating FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 7
2 investments totaled $249 million or 89.2% of the portfolio. Investment Rating 3 investments totaled $17.7 million or 6.4% of the total portfolio. And investment Rating 4 investments totaled
$4.6 million or 1.6% of the total portfolio.
At September 30, we had one investment with an investment rating of 1, it had an average debt- to-EBITDA multiple of 4.05 times; 19 investments within an investment rating of 2, which had an average debt-to-EBITDA multiple of 4.23 times; 3 investments with an investment rating of 3, which had an average debt-to-EBITDA multiple of 5.86 times; and one investment with an investment rating of 4 with an average debt-to-EBITDA multiple of 9.8 times.
Again, none of these investments are on non-accrual status. We are closing monitoring the status of securities with an investment rating of 3 and 4 and continue to provide managerial assistance, as needed, to help the companies navigate through the current economic downturn.
We continue to see the validation of our dual underwriting methodology, as private equity sponsors are committing additional funds to support their portfolio companies.
Regarding our valuation process, we believe that our securities should be marked up or down on a quarterly basis, including debt and equity, through a level where they would sell with a willing buyer and a willing seller. Our valuation process is straightforward. Our internal team assembles all the necessary data from the portfolio companies and initiates their process, which includes valuing the companies based on market comps, transaction comps and discounted cash flow. At the same time, they deliver the exact same data to our outside third party, who commences their process. Both groups produce a report that is reviewed by the valuation committee of the Board, which makes the ultimate determination.
We like the process because it is rigorous and arm's length. We also like the fact that we typically value over 90% of the securities in a given quarter. As to recent developments, we have invested
$23.3 million in three transactions since September 30. One of these investments was in a new FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 8
company. In addition, Rose Tarlow, an existing portfolio company made a $350,000 draw on its
previously undrawn revolver. On November 28, 2008, Bank of Montreal approved a renewal (of
our) $50 million credit facility, subject only to satisfactory documentation. The terms include a 50
basis point commitment fee and an interest rate of LIBOR plus 3.25% and a term of 364 days.
Starting in the first fiscal quarter of 2009 we will be FAS157 compliant. With that let me give it
back to Len.
Len Tannenbaum: Thanks, Bill. Last quarter's conference call, we touched on several key points in
deliverables, and I'd like to update on the progress. Shareholder focus – to reiterate last quarters
statement, we believe their performance will ultimately drive the price of our stock. We believe a
ramp and consistent yield is an essential part of the equation. We've increased our dividend as
we have now deployed substantially all of the cash from our IPO. Our dividends have gone
during this fiscal year from 30 to 31, and we announced today increases to 32 cents and 33 cents
for the first and second quarters of fiscal 2009.
We continue to expect dividends to increase over the course of the year, creating excess return.
While we generate (often) all environments, the current environment is the best environment I
have seen in our 10 years as lenders. We have generated the vast majority of our investments in
the (space) very favorable environment and we expect our shareholders to benefit from that over
the next few years.
Transparency, we continue to disclose to debt to EBITDA of the rating trenches. There is no
doubt that EBTIDA has deteriorated somewhat in this past quarter. The vast majority of the
portfolio is not in danger of payment default. You should continue to monitor our disclosure and
monthly shareholder updates for return in the lower middle market. We believe our focus on
transparency will deliver a higher multiple of book value over time. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 9
Ultimately, our goal is to generate strong returns. Let me reiterate our target of 15% net yield to
NAV. We are making progress towards that goal, as we have achieved about a 10% net yield on
an annualized basis to NAV. We believe, we will achieve our goal of 15% over the next 12 to 24
months.
Last quarter I said, I would look forward to the call, where we could proudly say that we traded a
premium to NAV and a premium to our peers. I know that to achieve these goals, we need to
continue to prove to you, our shareholders that we can deliver consistently over time. We are
now trading in line or better than many of our peers, but are at a substantial discount to NAV. We
believe by consistent, disciplined performance, we will prove to be one of the beneficiaries of this
credit dislocation. Thank you for your support.
William Craig: Jaime, we will open it up for questions now.
Operator: Thank you, sir. If you would like to ask a question at this time, please press the star key
followed by the digit 1 on your touch tone telephone. If you are using a speaker phone, please
make sure, your mute function has been turned off to insure that our equipment can reach your
signal. And that is star 1 on your touch tone telephone to ask a question. And we'll pause for a
just a moment to give everyone a chance to signal.
We'll take our first question from Greg Mason with Stifel Nicolaus.
Greg Mason: Good afternoon guys. I wonder if you could talk a little bit about the dividend and 11 days
in between the two record dates. Why are both of those record dates in December?
William Craig: Well Greg we – as you know we've certain interesting history – becoming a BDC in
January of last year and then going public in June. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 10
Greg Mason: January this year?
William Craig: I'm sorry. Right. Correct, thanks Len. And we wanted to be in compliance as much as
possible with the taxable distributable income rates. So it has to be record date in 2008.
Len Tannenbaum: And we're – we should have announced this quarter's dividend earlier, and we waited
to the Board meeting, and next year we won't make the same mistake. We'll announce it four
weeks earlier than we just did.
Greg Mason: OK, great. And could you also talk about the good news on the BMO facility? You've said
in the past – you wouldn't mind being levered kind of in the 0.4 or 0.5 to 1.0 range. That would
imply another $100 million of potential credit facilities that you could get beyond the BMO facility.
Any thoughts with any additional credit facilities beyond BMO at this time?
Len Tannenbaum: No.
Greg Mason: OK. Is that due to a market function or are you just comfortable with running very low
leverage at this point?
Len Tannenbaum: No. We have heard – we've talked to many of our shareholders and gone around the
country doing so. And, in doing so, right now in this volatile environment, being un-levered is
definitely a benefit and our shareholders view it as that. I think as you see the economy stabilize
and/or improve, additional leverage is not only prudent, but will enhance shareholder return. So,
right now we feel pretty comfortable with a very low level of leverage. And, that may change as
the economy does. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 11
Greg Mason: Can you talk about, how many of your portfolio companies you received additional funding
from sponsors? You talk pretty positively about getting sponsors to put in more money. How
much of your portfolio are sponsors doing that with?
Len Tannenbaum: In anything that had a technical default, every sponsor with the exception of one, has
supported their companies. In our 10-year history, if you watch the returns of all our other funds,
was a very strong credit enhancement, and I think Bill talked a lot about that on the road show
about why sponsor backed transactions enhance the credit quality of the portfolio. The one that
has not come to the plate and has not delivered on expectation is HIG, and that deal is American
Hardwoods. And, we will not be doing any transactions with HIG any time in the future.
Greg Mason: And, can you talk a little bit, you mentioned Martini Park in your press release, you pull the
unfunded commitment (right) on November 4, and we saw an article on November 24 that the
Dallas location has closed. Are you willing to give any kind of commentary on Martini Park at this
time?
Len Tannenbaum: Sure. I mean, we're happy to give commentary on anything our shareholders want to
know about. Martini Park was initially a $15 million deal. In fact, we got paid points on $15
million. We have restructured Martini Park after a number of discussions given the economic
environment, canceled the additional $11 million of additional draw they could have had, so our
maximum liability is what we put out, which is $4 million.
And restructured it to a cash pay and pick pay component. The close of Dallas, Dallas was a
money losing operation, so we're pretty happy that was closed. The equity sponsors being
extremely active and intelligent about the way he is handling the company, and is looking for
additional capital to open other investments sort of as a franchise idea. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 12
So with that – Chicago, which is the primary operation that we are secured by is actually doing
OK, and especially in light of the given economic environment. That they are definitely cash flow
positive and EBITDA positive.
Greg Mason: OK, great. You talked about this was a fantastic market for new investments. Can you talk
about what you're seeing in terms of pricing on new investments, cash and pick yields, up front
fees and really how many sponsors are out there doing deals and willing to take those kinds of
rates at this time?
Len Tannenbaum: I think the choice – first of all we're only working with our equity sponsor partners at
this time. We are reserving the capital for them. We have built terrific partnerships over the past
10 years and it's our goal to maintain them. You can look at our subsequent events section
actually and you can see some of the recent deals we have done, and I think you're looking at a
17% and 17.5% interest rates. And that's not necessarily the total amount of earnings that we are
getting from those securities. So, I would say the IRR's we're projecting in new deals are over 20.
And, in this environment that's really what our targets are.
Greg Mason: Great. I have more questions but I will hope out of line, and get back in the queue.
Operator: And we'll take our next question from David Chiaverini with BMO Capital Markets.
David Chiaverini: Good afternoon guys. A couple of questions for you – first off, what's the average
EBITDA of your portfolio at this point?
William Craig: I'll have to get back to you on that. The average EBITDA of all the companies…
David Chiaverini: Right. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 13
Len Tannenbaum: You certainly could take out – the average of debt to EBITDA, and you add debt, so
then you could figure out average EBITDA. We just haven't done the calculation.
David Chiaverini: OK.
William Craig: We do it bucket by bucket. We haven't done it in the aggregate.
David Chiaverini: OK. Can you talk a little about how you think lower middle market companies will
perform through this recession versus larger middle market companies?
Len Tannenbaum: I think on a company specific basis, a lot of our companies are niche industries.
Companies like PPT, companies like HealthDrive and others are performing very well. Even the
Burger King franchise, the Gold Coast is performing well. So I think the smaller companies are –
because they can hide from the overall economic cycle somewhat by a differentiated product or a
niche product, are going to do better. Having said that you have a different type of risk in small
companies, right? They are normally one or two product companies, while sometimes the bigger
companies are multi-product companies. So I think it's a different type of risk profile, but I don't
see the smaller companies faring any worse than the economy as a whole if not better in some
circumstances.
David Chiaverini: And, given the current environment are you considering with new investments going
forward – sort of moving up and looking at bigger companies than you have looked at in the past?
Len Tannenbaum: No actually, I think we like our space a lot. We understand our space of the lower
middle market, and we think a disciplined approach as we made it through the '01 cycle the last
time, we did it making money every single year, and we plan on doing it through this cycle. So,
we want to stay with what we know, and we know the lower middle market. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 14
David Chiaverini: OK.
Len Tannenbaum: We are moving up the capital structure, however, and you can notice by watching the
changes in our mix that we have more first lien assets than I ever remember us having, and far
more than we have had in the past ten years with 40% first lien assets. And, I think you can see
that trend continue because even though as we're reaching for higher pricing, really more
importantly in this environment is to reach for safety.
David Chiaverini: OK. And the three investments that were written down in the quarter were they in the
consumer related industries?
Len Tannenbaum: Yes. All three investments were in the consumer related industries to an extent. And,
of the portfolio they're probably the most consumer focused.
William Craig: Other then the restaurants.
Len Tannenbaum: Other then restaurants.
David Chiaverini: Do you have at your fingertips your total exposure to consumer on a fair value basis?
Len Tannenbaum: I think it was 17% last time I looked.
David Chiaverini: OK.
William Craig: That's ballpark figure not at our fingertips David, but it will be coming out in the K.
David Chiaverini: OK. And then, you mentioned in the press release that you increased interest rates
where you saw the risk reward of the investment began to get out of line. I had assumed that FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 15
once you make a loan the rate was locked in until it matures. Are your terms unique? Could you
talk a little bit about that?
Len Tannenbaum: One thing that was done in the previous environment was this covenant-light idea or
loose covenants, because nobody liked covenant violations. We have never really played that
game. We like covenant violations. We like tight covenants that allow us to come back to the
table and re-underwrite and think about how the equity sponsor is acting in each company, how
the companies are acting and how the industries are acting.
And when you set tight covenants and you have an economic decline as we just did, you will get
technical defaults even though the company may not be in any danger of a payment default. You
can then use that opportunity to reprice the security. So we are using that opportunity to reprice
the security and by the way this is not unique to us. I'm hearing from a lot of our peers they are
doing the same thing.
David Chiaverini: I see, I see. Yeah then, that makes a lot of sense. OK Thanks.
Operator: We'll take our next question from Chris Harris with Wachovia.
Chris Harris: Thanks. Just a few questions guys, I was wondering if you could comment a little bit more
about this SBIC leverage that you talked about in your prepared remarks. What is it and how
does it work?
William Craig: Let me answer ((inaudible)). The SBA has the ability for a licensing program, a small
business investment company and we apply for the license. I think you'll see some other BDC's
actually have or are affiliated with SBIC's already and we, and since we like it because it's – in
this environment fairly low cost capital and it would be attractive as capital for investing. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 16
Len Tannenbaum: To be more specific, the cost of a lot of the capital is 10-year treasury plus spread.
And, Bernie do you want to talk a little bit more about the structure?
Bernard Berman: Sure. Hopefully, we will be forming a subsidiary that will be wholly owned by Fifth
Street. If approve, we'll get leverage two to on from the SBA at very attractive rates. As Len said,
a fixed spread over the 10 treasury, which is fixed for 10 years, so it is long-term leverage at very
attractive rates, if we are able to get it and which we are hopeful of.
Chris Harris: OK, that's helpful. I guess then, shifting to the write downs for the quarter, you guys had a
little bit about – you had about $4 million and I guess by my math that was about 2% at the
beginning of the peer portfolio.
William Craig: That's. All right.
Chris Harris: That's appear to be – that seemed to be a lot lighter than what a lot of your other peers
have taken at least in the quarter ending in September? Just wondering, if you could comment a
little about what makes your portfolio different in regards to the write downs?
William Craig: It's hard for me to comment as to what makes us different from the other guys. I don't
track them exhaustively or intensively. I know, we have a really rigorous process and to be not
flip about but we let the chips fall where they may by running our value process and let it come
out.
I guess the other thing really to keep in mind is it's $16 million down in the aggregate for the year,
so it might be that we were trying to be – we've been fairly straightforward about this from the
beginning. So I don't know whether that's a fair cut – a comparable that holds up, but we thought
the number was about right and I do know that there are some people that are heavily discounted FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 17
and honestly I don't know why, why they are and why – I do know what we do though and it's a
pretty – we're pretty comfortable with the number.
Chris Harris: OK, that's all I had. Thanks, guys.
William Craig: All right.
Operator: We'll take our next question from Roger Brown with Brown & Brown.
Roger Brown: I've got a couple. How do you account for paying such a big dividend when you only
earned 21 cents?
William Craig: Well, the earnings is based on book income and the dividend is based on taxable income,
and so there is a fairly significant cash component there. So, we feel that we have it pretty well
covered in terms of – by the end of the year, our tax distributable income will net out to the
dividends that we have scheduled, and which is what makes us (BDC) and allows for this kind of
treatment.
Roger Brown: Well, are you saying you're required to pay that out?
Len Tannenbaum: The unrealized losses do not impact the distributable income.
Roger Brown: Well, are you required to pay out the net income before the losses?
Len Tannenbaum: Yes.
William Craig: Yes. Well, there is – there are some reconciling items there, but simplistically, yes, that's
correct. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 18
Roger Brown: And then, if you have capital gains, you don't have to pay those out either or if you have
markups, you don't pay those out either?
William Craig: Unrealized gains, that's correct, don't go into the distribution.
Roger Brown: I have another question. With the rule 157, we happen to be holders of your earlier
partnership and I notice that you're selling at half of book value. So, should we be marking our
holdings in that partnership at half of net asset value that you declare?
Len Tannenbaum: I think you have to mark your partnership at the stock price, wherever it may be since
it's a liquid stock on the New York Stock Exchange.
Roger Brown: No, no, I'm talking about your previous partnership, not this…
William Craig: (Fund 2).
Roger Brown: (Fund 2)
Len Tannenbaum: I can't – we can't talk – we can't address (Fund 2) on this call, but we could certainly
address…
Roger Brown: Why can't you address (Fund 2) on this call?
Len Tannenbaum: This is a public – to the public BDC.
Roger Brown: OK. Well, then you can call me back. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 19
Len Tannenbaum: We can you back, Roger.
Roger Brown: Thank you.
Operator: We'll take our next question from Brian Gonick with Senvest.
Brian Gonick: Hi, Len. Can you quantify the sponsor support that's been going on last quarter and may
be November to December, October in dollar terms?
Len Tannenbaum: You mean how much of sponsors put in additional equities to support the companies?
Brian Gonick: Yeah.
William Craig: Actually after the first question I was thinking about that and we don't have a total or a
subtotal there. We can certainly approach it, but here is the other side. Often times it's not
strictly writing of a check. It might be the hiring of a consultant to bring – come in and do
inventory management. It could be deferral on fees. There's a lot of ways they are actively
supporting things, but offhand I don't have a direct sense of what the…
Len Tannenbaum: But it's a few million dollars per quarter at least, but it's not – it's not like they're writing
10 and $15 million dollar checks. It's not even necessary. I mean the companies in general,
when we underwrite a company we underwrite it with substantial opening availability, and we
underwrite based upon a strong cash flow and the distressed – we stress test it for our
covenants.
When a company has issues, we often encourage the sponsor and sponsors often just do it
themselves putting in $0.5 million, $1 million, $1.5 million to support the company when it has
liquidity need and/or when we feel that we want a little bit more cushion in the economic cycle. I FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 20
think what we have found over the last 10 years is except for two cases the sponsors always
supported their deals.
Brian Gonick: Right. Based on the investments you've made since the end of the quarter, your probably
like cash balance is pretty close to zero now or have you dipped this in…
William Craig: That is correct.
Len Tannenbaum: That's all right.
Brian Gonick: And you were talking about being more prudent with putting on more debt and also taking
that in context to where the economy is going. So, are you saying that you would pull down on
the line and use leverage ahead of seeing sort of a definitive turn in the economy? I mean, this
could be going – the economy could be terrible for next year into 2010. We don't know. How
early are you going to pull down the line in judging where things are in the economy?
Len Tannenbaum: We are a $300 million asset firm with potential to leverage $300 million of leverage on
to the BDC format. And we are not going to do that or anything close to that. We are going to
pull down very small amounts of leverage. We probably will pull down the $50 million line and we
may expand a line up to $100 million at some point, but we certainly are not going to take our
goal which was 0.5 or 0.6 times levered any time soon or at least until we see an economic turn.
Now, if the economy stays poor and our EBITDA continues to decline, we are just going to
support our existing sponsors. We are just not going to do any other additional deals.
Brian Gonick: OK. Thanks.
Operator: We will take our next question come from Brian Novelling of DRW Investments. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 21
Brian Novelling: Hi, just a follow-up on the SBIC loan. When exactly did you file that application?
William Craig: The exact dates are in the K which is going to be filed imminently.
Len Tannenbaum: It was in November.
Brian Novelling: In November. So, is that a calendar year 2009 event would you guess here on that?
William Craig: Well, it's subject to the government approving our application and that's a little bit of a gray
area. But it certainly will not be calendar year 2008. And we are hopeful it will be calendar year
2009.
Brian Novelling: And what's the potential size of that?
William Craig: The leverage is approximately $130 million.
Brian Novelling: So that is sort of a maximum. I mean, could it be you can get something – that you will
get something and it might be just smaller or…
Len Tannenbaum: Yes, that is possible.
William Craig: Got it. So, and just thinking about you're putting the share repurchase authorization, so it
seems – it looks like roughly almost 1.5 million shares have traded below 50% of your book
value, but you did not take steps to buy any shares. How should we think about your repurchase
and looking at new – I mean, I understand supporting sponsors but putting new money to work
when your shares are trading at below half of book value? I'm just trying to figure that out. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 22
William Craig: Well, that's the essential question right now. I mean, we do have a share buyback plan in
place and we are trying to be again, I think the watch word right now is being judicious in the use
of leverage and the buyback. As it gets down in the six range, we might be buyers. We don't
want to be bidding against ourselves, but we think we need to support the stock and it's also an
attractive return opportunity.
So we're just trying to be, as I said, judicious in whether it's a stock buyback or putting it into an
investment. We aren't necessarily here to buy back the stock. We would like to make good
investments, but sometimes that is the best investment that we see.
Len Tannenbaum: And I don't know where you've got the information that we did not buy back shares,
because we didn't say whether we did or did not buy back shares yet. We may have bought back
shares in the past.
Brian Novelling: Oh, you do – I was just looking at the initial – there's nothing subsequent to the quarter
or anything, I didn't see anything here that indicated…
William Craig: We're trying not to be too effusive about what we're doing in terms of buying the stock. I
mean, we want to be supportive but we don't want to be stupid about it.
Brian Novelling: No. I mean, I understand that and I don't think it makes sense to go out and run out
there, but clearly there's some shareholders that have not fared too well in the six months and I
think it would be just a good signal as you drop below that, I mean because maybe people are
thinking gees October and November must look really bad if they are still not buying stock. I'm
just kind of playing devil's advocate, so I just want to get how you're thinking about that?
William Craig: Well, we sort of concur with that thinking, and we have a plan in place and we will be
supporting the stock. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 23
Brian Novelling: And is there any as far as – can you give any more color on October, November
anymore – I know you kind of talked a little bit about stabilizing, but just in general the
commentary?
Len Tannenbaum: October, November?
William Craig: You're talking about the bought back shares or…
Brian Novelling: No, no, just kind of the portfolio.
Len Tannenbaum: The portfolio. I think you can read – every month we're going to release a statement
to the shareholders. So I think shareholder contact is really important and transparency is really
important. And what I wrote about in November was the deteriorating economic environment.
Look, we all know that in October the world stopped, and it stopped for about a week. And that's
no surprise to anybody and you could watch – you can see what the stock market did in October.
There has been a recovery in November, which shouldn't be any surprise either and therefore as
a quarter, it certainly got worse since September, but not falling off a cliff (worse). I think it's
gotten in a declining – it's continued to decline, and I think I said that in my comments. I wish – I
hope I could signal the turn at some point. We just haven't gotten there yet.
Brian Novelling: Great. Thanks.
Operator: We'll take our next question from Yag Patel with Hugo Neu.
Yag Patel: Hi, guys. I have a three different questions. The first thing is, in terms of your – the way you
reported debt-to-EBITDA numbers, the EBITDA based on LTM metric? FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 24
Len Tannenbaum: I'm sorry, say it again Yag.
Yag Patel: Yeah, your debt to EBITDA.
Len Tannenbaum: Sorry …
Yag Patel: Is the debt-to-EBITDA metric that you guys reported done on an LTM basis?
Len Tannenbaum: Yes.
Yag Patel: OK. And so based on my calculations, it looks like your blended EBITDA – debt-to-EBITDA
ratio looks like about 4.42 versus last quarter's of about 4.0 you know just a simple blended
average based on what you released in your financials. Does that sound right to you?
William Craig: I think you could probably…
Yag Patel: It's sound reasonable.
William Craig: It's reasonable, yeah.
Yag Patel: OK. So, if that's the case then it seems like EBITDA has really fallen a lot quarter-to-quarter,
but your write-downs based on your NAV – your NAV 13.02, I think last quarter was like 13.12 or
something like that. You haven't really taken that material of a write-down relative to the hit your
portfolio. I just wanted to generally comment around that.
Len Tannenbaum: I think that the stressed securities that were already stressed previously, I mean if you
look at the ones that are really, that are stressed, which are C CPAC and American Hardwoods. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 25
They are both written to less than 50% of value. In fact, I think in one case, it's 40% or less. I
mean, so it's the stressed securities that are feeling a lot of that.
Also the debt-to-EBITDA ratio look we want to – we want to be transparent in releasing them, but
you have to realize when once EBITDA goes from 3 to 7 or 3 to 8, it changes the average number
quite a bit. And so, I wouldn't take it as the entire portfolio is rapidly deteriorating, but there
certainly are a couple of securities, look we have our first rated four security in American
Hardwoods, and that company has rapidly deteriorated and there is no question about it. And
that's why, it's written at 4.2 million with an original cost of I don't know $11 million.
Yag Patel: Yeah, I guess, the problem is, if you are doing the things on a LTM basis and as far an
aggregate for the portfolio, I would disagree that any one investment can have that big of an
impact right? It's rolling period that your EBITDA is getting calculated over. So, I'm not sure that I
agree with that.
Len Tannenbaum: OK, all right.
Yag Patel: The other question is on your weighted average yield, it seem that it's 16.2% now, I think last
quarter it was 16.5, but you have a bunch of new investments that were done in the north of your
16.5 range. So I'm just wondering how that was possible?
Len Tannenbaum: Funny, I had the same question when I first read that in the K and when our team
calculated the number. We can certainly walk you through the details off-line. We are not going
to walk through online. It is the function of OID.
Yag Patel: Right. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 26
Len Tannenbaum: And how certain securities are accounted for. And also a number of the first lien
loans, as I've said, we've tilted towards safety, way in, like health drivers, is the lower interest-
bearing loan in the average but it probably one of the safest loans in the portfolio.
Yag Patel: That's fair enough. And I guess two other questions. One is, do you have a sense for and
you mentioned that there has been some technical defaults in your portfolio and so forth, which I
understand is probably net-net, not such a bad thing because you can renegotiate terms. How
many of your 24 I guess portfolio companies have technical defaults?
Len Tannenbaum: I would say probably a third.
Male: ((inaudible)).
Len Tannenbaum: My guess is a third.
Yag Patel: OK. And last question is, the leverage loan index you know not – basically that thing that
there is a S&P I think have a leverage loan index which I'm sure you are aware has gotten
annihilated particularly you know a lot of it happened in the last couple of months but a fair
amount of it happened by the end from June to September. Any comments on how, whether or
not you think about that, with respect to your thoughts on valuating – valuing the portfolio?
Len Tannenbaum: It's funny. People have asked the question, the leverage loan index or the B Index is
20% rate. Why won't you just buy some of those securities? And I will tell you that those
securities are originated far worse than anything that we originate in-house.
We, in general, – we with our tight covenants, with our net free cash flow covenants, with our
being high in the structure, being sponsors supported with open liquidity and sticking to our
scoring system, it's very difficult for us to even consider buying another person's paper or buying FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 27
any syndicate paper. By that same token, when you value our portfolio versus the B index, the
BB index or any other index, I don't think it is an apples-to-apples comparison. Bill you have
anything in addition?
William Craig: No, I think that's fair. It always sounds like (bragging) to say, but 20% open market paper
is probably less valuable than our 20% paper, just because we have the ability to customize our
financing around the specific credit and know the management team very, very well and have a
fairly good control of the business on a – we don't control the business, but control of the debt on
a day-to-day basis.
Len Tannenbaum: What I'll say though, as you look at the spreads widen, we have a fixed rate portfolio.
And our spreads over treasuries or whatever benchmark you're going to use are 15, 16 points
over. So we always – as LIBOR increases, treasuries have decreased, spreads have increased,
but our earnings power has not decreased. And that's different than almost all of our peers. I
don't think anyone has as much of a fixed rate portfolio as we do. And that has allowed us to
really maintain our earnings power even in un-levered environment, while many of our peers with
floating rate securities had decreased had decreased earnings power.
Yag Patel: OK thank you very much guys.
Operator: We'll take our next question from David Broser with Tedco Inc.
David Broser: Hey guys. How many of your companies, I don't know if you covered this beforehand, are
paying – are not paying current pay to you?
Len Tannenbaum: They're all paying current pay. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 28
David Broser: OK. And then, also in the deals that you have done, you guys do deals with companies
that put into escrow interest payments to you for like the first year. Are there prepaid interest
payments at all in any of your deals?
Len Tannenbaum: No. We don't do that, but we do have other – in some securities, we do have other
forms of guarantees and asset coverage.
David Broser: OK. I think well I had bunch of the questions that you all answered on the call. Good
quarter, thank guys.
Len Tannenbaum: Thanks David.
William Craig: Thanks David.
Operator: We'll take our next question from Dr. Eugene Stricker with Fifth Avenue Capital.
Eugene Stricker: Hi Lenny, Eugene Stricker, congratulations on your wonderful financial results.
Len Tannenbaum: Thanks Eugene.
Eugene Stricker: Many of the previous questionnaires cold my thunder. The questions that I was going
to raise with you, but I do have something. Am I right to assume that since most insiders, I
believe purchase stock around $13 a share prior to the public offering – that at the stock's current
low price the expiration of the lock up period, which I understand was today is academic and
should be of little or no concern to investors?
Len Tannenbaum: Actually, the – I think the press reported incorrectly. The expiration of the lock up
period was Monday. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 29
Eugene Stricker: Oh, it was.
Len Tannenbaum: Yeah. So it's already been – other people or the old shareholders have been
unlocked for a couple of days now.
Eugene Stricker: Oh, great. So things look good. OK. Congratulations again and just good – continue
good luck to you and best of luck for the coming months.
Len Tannenbaum: Thanks Eugene.
Eugene Stricker: Thank you.
Operator: We'll take our next question from Ron Silverton with Asgard.
Ron Silverton: Good afternoon gentlemen. A couple of questions, some of them are follow-up. But first –
did you indicate what the current unfunded commitment balance is?
Len Tannenbaum: We haven't as of today.
William Craig: It's detailed in the K.
Ron Silverton: OK. And that K is going to be out later tonight before you open tomorrow?
William Craig: Yeah. It's going to be out shortly.
Ron Silverton: OK. Can you give me a rough sense of what that looks like? Is it $10 million, $20 million,
Zero, $100 million? FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 30
William Craig: I think it's about – the unfunding commitment right now – you mean right now we're about
$24 million. You'll see about $24 million in the K.
Ron Silverton: As of 09/30, it was $24 million?
William Craig: Right. And then, you have to adjust for our recent developments.
Ron Silverton: Right.
Len Tannenbaum: And one of the big recent developments, this is also public information, is the Martini
Park coming down by $11 million.
Ron Silverton: Right, got it. And the investments that were made – clearly two of those are new
investments, so I assume that didn't impact the unfunding commitment at all. So the third was a
draw down on the unfunded commitment, is that right?
William Craig: Right.
Ron Silverton: OK. So that 24 drops down to 13 and you knock out another 5, so kind of around $8
million bucks, is that what I would think about that?
William Craig: The other draw down was about, I think the one you are talking about, was about
$350,000.
Ron Silverton: Oh, OK. How – in terms of meeting those commitments today I guess, that would require
you to pull down the revolver in advance of the SBIC loan coming up or SBIC approval, is that
right? FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 31
William Craig: Yes. But that's kind of a catastrophic. I mean, I know that's the math, but we really based
on our discussions with those folks, I want to say it's unlikely that any of them are going to draw
down. But, I think it's unlikely that they're all going to draw down instantaneously in the next 3 to
6 months. They have – they're – most of them have their own business issues.
Ron Silverton: OK great. And again, the SBIC process, is there – I don't know if there is a typical, but
can you give us some sense? I mean, would we expect that it will be something to hear from in
the spring or with the new administration coming in – does that create a lot of turn over there as
well, and it probably gets pushed out until the fall?
Len Tannenbaum: We are hoping that from the new administration is a positive. I mean, Obama in
general has said that he may enhance the SBIC program and certainly we'll focus on it. We don't
know if that is true or not. We'll find out when he becomes President, but we are being hopeful.
Ron Silverton: Got it. And the funding on that is – that the spread is fixed or the actual rate becomes
fixed off of wherever the spread is when it gets approved?
Len Tannenbaum: That's it would be – that the rate gets fixed on each investment as we are pretty much
near as each investment is done when you draw.
Ron Silverton: Understood. OK, great. And have you done any buyback yet? I know you guys kind of
danced around it with the prior call. Certainly, it wasn't disclosed in the press release.
Len Tannenbaum: You're going – every quarter you will see in the quarterly releases any buybacks we
do for the previous quarter. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 32
Ron Silverton: OK. I just noticed that you certainly talked about a bunch of subsequent events, but that
wasn't included, so I would assume that given the materiality that would have been disclosed if
you had done any?
William Craig: I'm not sure that's a fair assumption.
Len Tannenbaum: I'm not sure that's a fair assumption.
Ron Silverton: All right, understood, great. OK, well I guess, we'll look forward to you – that the K will be
out when?
William Craig: It's imminent.
Ron Silverton: OK. So, tonight.
William Craig: I'm hoping, in the next 24 hours.
Ron Silverton: Perfect. Well great congratulations on solid quarter.
William Craig: Thanks.
Len Tannenbaum: Thank you.
Operator: We'll take our next question from Greg Mason with Stifel Nicolaus.
Greg Mason: If we look at last quarter in buckets three and four, you totaled $20.1 million. This quarter
together they totaled $22.3 million. I would assume roughly $3.6 million of the write down this FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 33
quarter came from those in all likelihood. Can you tell us what investments moved into three and
four this quarter versus last quarter?
Len Tannenbaum: I don't think we talked about individual investments, do we?
William Craig: No, and typically not ones that have moved quarter-over-quarter.
Greg Mason: Is it – can you tell us is it primarily from one investment or two investments? Can you give
us a number on companies that moved in?
William Craig: Moved into category three Greg or moved into four?
Greg Mason: I would assume American Hardwood moved from three to four at 4.6, so.
Len Tannenbaum: That you'll be able to figure out.
William Craig: Right.
Greg Mason: So, it would appear that if we back out category three last quarter, would have probably
been around $15 million and now it is $17.7 million. It would seem that something moved in there
either one or maybe a couple of investments. Is that a fair assumption?
Len Tannenbaum: Yes. There are definitely investments that moved into category three.
William Craig: Yes.
Greg Mason: OK. Just one or a couple? FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 34
Len Tannenbaum: I don't want to play the game each quarter about who is in what category and how
they are going, because also it goes down to figuring out debt to EBITDA for specific investments
and then we don't really want to do that. We don't think that's a – we don't think…
William Craig: Let me comment it this way Greg. To be honest, our problem children haven't changed
radically quarter-over-quarter.
Greg Mason: OK.
Len Tannenbaum: That's right. And any of our – I think you do some of the better, best analysis out
there that our problem children are written down the most.
William Craig: Yes.
Len Tannenbaum: So you can figure it out that way.
Greg Mason: OK. Little – more of a soft ball question, you talk about you hired several people. How
many deal people do you have today and can you remind us versus what you had at the IPO?
Len Tannenbaum: I think we are up seven. Is that right, up six, up seven? And one of the guys we hired
was John Miller who was a former Managing Director of now defunct Bear Stearns. But, he is a
Wharton grad, 1998 – I have known him for awhile and he is now a Director in the company.
Greg Mason: OK great. And then, one last question. I believe you have a new portfolio company the
Geneics.
Len Tannenbaum: Cenegenics. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 35
William Craig: Cenegenics, yes.
Greg Mason: Cenegenics, could you just give us a little color on what that business is and what they do?
Len Tannenbaum: Cenegenics is an age management business, and we are doing that in conjunction
with (Stylus) who we also did Caregiver Services. This is one of the few businesses actually that
we ask for weekly results, they give us daily results. And it is a truly an amazing cash business of
where – and it's a 100% private pay.
And it does – it's teaming up with a number of doctors and providing as I said age management
services. So, you're going to see from us probably in this economic cycle is more healthcare
related deals to the extent that we're really looking at doing more deals and/or add ons with
existing sponsor relationships.
Greg Mason: OK. And when I'm saying – I'm not really fore sure what age management services are?
Just like an example.
Len Tannenbaum: Through a combination of diet and exercise regimen and in certain cases maybe even
human growth hormone or other supplements. They help people feel younger and get healthier
all through doctors of course.
Greg Mason: Right. Thanks guys.
Len Tannenbaum: You're welcome.
Operator: We'll take our next question from John Ellis, Private Investor. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 36
John Ellis: Hello. I wonder if you can clarify your leverage statements to me? You say you are not going
to be on any leverage, but on the other hand you're talking about this SBA facility with the two for
one leverage, and then handling that to a separately owned portfolio and wholly owned facility. Is
that going to be counted in your leverage or are you going to be doing no, no, no leverage?
Len Tannenbaum: I appreciate the need to clarify. We aren't – I didn't say that we are not going to take
leverage. In fact, we will draw on our $50 million line when we find the appropriate deals to do
that with and/or expand the lines slightly. What I think the statement better clarified is, we are not
going to take on a high degree of leverage in this environment. I think it's a matter of degree, not
any leverage – not zero leverage.
John Ellis: Well should the SBA facility then be just viewed as another facility that has attractive terms?
William Craig: That wouldn't be unfair. That will be a good (replica). It's a potential source of capital that
has repayment provisions. So yes, I guess if that's the way…
Len Tannenbaum: We're not have been going to – most likely this is a six to nine month trip, before we
even get the facility and set it up, which means it is probably nine to 12 months before we would
invest in it.
John Ellis: OK. And if I understand it properly, you don't have to count that borrowing in the two for one
BDC limit.
Len Tannenbaum: You're right.
John Ellis: Is that correct?
Len Tannenbaum: Yes. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 37
John Ellis: So that it is off the books to that extent?
Len Tannenbaum: That is normally correct.
John Ellis: And is that the reason why you were thinking about putting it in a separate subsidiary?
William Craig: No, it goes into a separate subsidiary, because that's the way the SBA requires you to set
it up.
John Ellis: I see, so they are all this way?
William Craig: To my knowledge they are all this way.
John Ellis: Yes, OK. And I have a second question and that is I don't have a very good idea of your
management team. Can you just give me a little color on that? Numbers of people, where
they're located, the whole thing? I mean, when I look at a lot of places, it says you have no
employees. That of course means your management team is freestanding and I'd just like to
know a little bit more about it.
Len Tannenbaum: There are 23 in total. There are three or four located in LA, and the rest are here.
There are four investment team members, investment committee members. And our CIO is
(Mark Goodman). And Mark actually is – I brought on very, very beginning of starting our second
fund and Mark was brought on, because we had gone through the 2001 history.
And we were, clearly worried that that would happen again. Mark has ten years of bankruptcy
law experience with (Cramer Law Firm), Mark has 15 years of turnaround experience as a CRO, FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 38
Chief Restructuring Officer and he is our CIO. So we built this, and I'm glad that you asked the
question.
We built this management team not for the good times, but for the troubled times. And in 2005,
2006 and 2007, obviously they turned out to be good economic growth years but when we had
the economic – when we have this economic crisis over the past year, Mark has been absolutely
invaluable in leading a portfolio management team to address and actually be really proactive in
anything that looked like it was going to be a problem.
John Ellis: The 23, does that include the seven new deal makers you have just taken on?
Len Tannenbaum: I'm sorry. That we took on seven new people. We didn't take seven new deal
makers. We only took one new deal maker. We really actually from an origination standpoint, I
think the entire origination team is only four people.
John Ellis: OK. But the 23 includes the seven?
Len Tannenbaum: Yes.
William Craig: Yes.
John Ellis: OK. And are your intentions to grow from here, and if so what do you have in mind?
Len Tannenbaum: I think this team can handle more than double the assets we currently have under
management. We obviously didn't think that the cycle was going to hit as hard as it did. I don't
think a lot of people did. But, I think when the cycle turns, we'll continue to grow. We certainly
are more than adequately staffed for the current portfolio size and current portfolio growth. FIFTH STREET FINANCE CORP Moderator: William Craig 12-10-08/4:00 p.m. CT Confirmation # 3562334 Page 39
John Ellis: And your people have about a 10-year history in this area?
Len Tannenbaum: I started the firm in 1998.
John Ellis: OK, right, very well. OK, thanks. I like what you're doing, I wish you to take on more
leverage.
Len Tannenbaum: Thanks John.
John Ellis: I am carrying your leverage, so this is – in my opinion this is a great time for leverage.
Len Tannenbaum: Thanks John.
John Ellis: OK. Go forward. Thanks.
Operator: And that does conclude our question-and-answer session. At this time, I'd like to turn the call
back over to you Mr. Tannenbaum for any additional or closing remarks.
Len Tannenbaum: Thanks everyone for attending. It looks like we'd much better attendance than the
previous call. And, we look forward to continuing to reporting results, good results in the future.
Operator: That does conclude today's conference call. Thank you for your participation. You may
disconnect at this time.
END