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Oaktree Specialty Lending Corporation
OCSL
#6145
Rank
โ‚น109.06 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
โ‚น1,238
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-0.53%
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N/A
Change (1 year)
  1. Oaktree Specialty Lending Corporation
  2. Quarterly Reports (10-Q)
  3. Submitted on 2015-02-09

Oaktree Specialty Lending Corporation - 10-Q quarterly report FY


Text size:


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2014
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
COMMISSION FILE NUMBER: 1-33901
Fifth Street Finance Corp.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 
DELAWARE
(State or jurisdiction of
incorporation or organization)
 
26-1219283
(I.R.S. Employer
Identification No.)
 
 
 
777 West Putnam Avenue, 3rd Floor
Greenwich, CT
(Address of principal executive office)
 
06830
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(203) 681-3600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   ¨   NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    YES  ¨     NO  þ
The registrant had 153,340,371 shares of common stock outstanding as of February 6, 2015.



FIFTH STREET FINANCE CORP.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2014
TABLE OF CONTENTS
 
 
 
 
 
 
 
PART I — FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Consolidated Financial Statements (unaudited):
 
 
 
Consolidated Statements of Assets and Liabilities as of December 31, 2014 and September 30, 2014
1
 
 
Consolidated Statements of Operations for the three months ended December 31, 2014 and 2013
2
 
 
Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2014 and 2013
3
 
 
Consolidated Statements of Cash Flows for the three months ended December 31, 2014 and 2013
4
 
 
Consolidated Schedules of Investments as of December 31, 2014
5
 
 
Consolidated Schedule of Investments as of September 30, 2014
18
 
 
Notes to Consolidated Financial Statements
30
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
71
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
98
Item 4.
Controls and Procedures
100
 
 
PART II — OTHER INFORMATION
 
Item 1.
Legal Proceedings
101
Item 1A.
Risk Factors
101
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
102
Item 6.
Exhibits
102
Signatures
102


 



PART I — FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements.
Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(unaudited)
 
 
December 31, 2014
 
September 30, 2014
ASSETS
Investments at fair value:
 
 
 
 
Control investments (cost December 31, 2014: $381,275; cost September 30, 2014: $387,625)
 
$
378,053

 
$
394,872

Affiliate investments (cost December 31, 2014: $37,518; cost September 30, 2014: $37,757)
 
40,390

 
40,764

Non-control/Non-affiliate investments (cost December 31, 2014: $2,350,146; cost September 30, 2014: $2,069,301)
 
2,303,152

 
2,060,278

Total investments at fair value (cost December 31, 2014: $2,768,939; cost September 30, 2014: $2,494,683)
 
2,721,595

 
2,495,914

Cash and cash equivalents
 
64,259

 
86,731

Restricted cash
 
46,294

 
22,315

Interest, dividends and fees receivable
 
15,195

 
15,224

Due from portfolio companies
 
27,225

 
22,950

Receivables from unsettled transactions
 
55,853

 
4,750

Deferred financing costs
 
18,985

 
20,334

Other assets
 
94

 
—

Total assets
 
$
2,949,500

 
$
2,668,218

LIABILITIES AND NET ASSETS
Liabilities:
 

 
 
Accounts payable, accrued expenses and other liabilities
 
$
3,866

 
$
3,908

Base management fee payable
 
14,044

 
12,372

Part I incentive fee payable
 
8,715

 
9,309

Due to FSC CT
 
3,552

 
2,464

Interest payable
 
11,655

 
5,797

Amounts payable to syndication partners
 
61

 
3,817

Payables from unsettled transactions
 
112,114

 
—

Credit facilities payable
 
617,495

 
317,395

SBA debentures payable
 
225,000

 
225,000

Unsecured convertible notes payable
 
115,000

 
115,000

Unsecured notes payable
 
410,121

 
409,878

Secured borrowings at fair value (proceeds of $22,525 and $84,750 at December 31, 2014 and September 30, 2014, respectively)
 
22,246

 
84,803

Total liabilities
 
1,543,869

 
1,189,743

Commitments and contingencies (Note 3)
 

 
 
Net assets:
 
 
 
 
Common stock, $0.01 par value, 250,000 shares authorized; 153,340 shares issued and outstanding at December 31, 2014 and September 30, 2014
 
1,533

 
1,533

Additional paid-in-capital
 
1,649,086

 
1,649,086

Net unrealized appreciation (depreciation) on investments and secured borrowings
 
(47,065
)
 
1,178

Net realized loss on investments, secured borrowings and interest rate swap
 
(170,004
)
 
(152,416
)
Accumulated overdistributed net investment income
 
(27,919
)
 
(20,906
)
Total net assets (equivalent to $9.17 and $9.64 per common share at December 31, 2014 and September 30, 2014, respectively) (Note 12)
 
1,405,631

 
1,478,475

Total liabilities and net assets
 
$
2,949,500

 
$
2,668,218

See notes to Consolidated Financial Statements.

1

Fifth Street Finance Corp.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
 
Three months
ended
December 31, 2014
 
Three months
ended
December 31, 2013
Interest income:
 
 
 
 
Control investments
 
$
6,264

 
$
2,419

Affiliate investments
 
1,097

 
766

Non-control/Non-affiliate investments
 
45,170

 
45,296

Interest on cash and cash equivalents
 
10

 
3

Total interest income
 
52,541

 
48,484

PIK interest income:
 
 
 
 
Control investments
 
1,765

 
2,408

Affiliate investments
 
215

 
335

Non-control/Non-affiliate investments
 
2,424

 
2,870

Total PIK interest income
 
4,404

 
5,613

Fee income:
 
 
 
 
Control investments
 
623

 
567

Affiliate investments
 
12

 
170

Non-control/Non-affiliate investments
 
17,267

 
16,401

Total fee income
 
17,902

 
17,138

Dividend and other income:
 
 
 
 
Control investments
 
1,138

 
—

Non-control/Non-affiliate investments
 
307

 
96

Total dividend and other income
 
1,445

 
96

Total investment income
 
76,292

 
71,331

Expenses:
 
 
 
 
Base management fee
 
14,155

 
12,059

Part I incentive fee
 
8,715

 
9,054

Professional fees
 
1,164

 
1,025

Board of Directors fees
 
180

 
155

Interest expense
 
13,992

 
10,213

Administrator expense
 
1,247

 
853

General and administrative expenses
 
1,780

 
1,754

Total expenses
 
41,233

 
35,113

Base management fee waived
 
(111
)
 
—

Net expenses
 
41,122

 
35,113

Net investment income
 
35,170

 
36,218

Unrealized appreciation (depreciation) on investments:
 
 
 
 
Control investments
 
(10,469
)
 
420

Affiliate investments
 
(135
)
 
783

Non-control/Non-affiliate investments
 
(37,971
)
 
(6,921
)
Net unrealized depreciation on investments
 
(48,575
)
 
(5,718
)
Net unrealized appreciation on secured borrowings
 
332

 
—

Realized gain (loss) on investments and secured borrowings:
 
 
 
 
Affiliate investments
 
43

 
—

Non-control/Non-affiliate investments
 
(17,631
)
 
3,206

Net realized gain (loss) on investments and secured borrowings
 
(17,588
)
 
3,206

Net increase (decrease) in net assets resulting from operations
 
$
(30,661
)
 
$
33,706

Net investment income per common share — basic
 
$
0.23

 
$
0.26

Earnings (loss) per common share — basic
 
$
(0.20
)
 
$
0.24

Weighted average common shares outstanding — basic
 
153,340

 
139,126

Net investment income per common share — diluted
 
$
0.23

 
$
0.26

Earnings (loss) per common share — diluted
 
$
(0.20
)
 
$
0.24

Weighted average common shares outstanding — diluted
 
161,130

 
149,916

Distributions per common share
 
$
0.28

 
$
0.24

See notes to Consolidated Financial Statements.

2


Fifth Street Finance Corp.
Consolidated Statements of Changes in Net Assets
(in thousands, except per share amounts)
(unaudited)
 
 
 
Three months
ended
December 31, 2014
 
Three months
ended
December 31, 2013
Operations:
 
 
 
 
Net investment income
 
$
35,170

 
$
36,218

Net unrealized depreciation on investments
 
(48,575
)
 
(5,718
)
Net unrealized appreciation on secured borrowings
 
332

 
—

Net realized gain (loss) on investments and secured borrowings
 
(17,588
)
 
3,206

Net increase (decrease) in net assets resulting from operations
 
(30,661
)
 
33,706

Stockholder transactions:
 
 
 
 
Distributions to stockholders
 
(42,183
)
 
(33,613
)
Net decrease in net assets from stockholder transactions
 
(42,183
)
 
(33,613
)
Capital share transactions:
 
 
 
 
Issuance of common stock under dividend reinvestment plan
 
2,061

 
3,411

Repurchase of common stock under stock repurchase program
 
—

 
(406
)
Repurchase of common stock under dividend reinvestment program
 
(2,061
)
 
(2,002
)
Net increase (decrease) in net assets from capital share transactions
 
—

 
1,003

Total increase (decrease) in net assets
 
(72,844
)
 
1,096

Net assets at beginning of period
 
1,478,475

 
1,368,872

Net assets at end of period
 
$
1,405,631

 
$
1,369,968

Net asset value per common share
 
$
9.17

 
$
9.85

Common shares outstanding at end of period
 
153,340

 
139,138

See notes to Consolidated Financial Statements.


3
Fifth Street Finance Corp.
Consolidated Statements of Cash Flows
(in thousands, except per share amounts)
(unaudited)


 
 
Three months
ended
December 31, 2014
 
Three months
ended
December 31, 2013
Cash flows used in operating activities:
 
 
 
 
Net increase (decrease) in net assets resulting from operations
 
$
(30,661
)
 
$
33,706

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:
 
 
 
 
Net unrealized depreciation on investments
 
48,575

 
5,718

Net unrealized appreciation on secured borrowings
 
(332
)
 
—

Net realized (gains) losses on investments and secured borrowings
 
17,588

 
(3,206
)
PIK interest income
 
(4,404
)
 
(5,613
)
Recognition of fee income
 
(17,902
)
 
(17,138
)
Accretion of original issue discount on investments
 
(258
)
 
(164
)
Accretion of original issue discount on unsecured notes payable
 
244

 
—

Amortization of deferred financing costs
 
1,349

 
1,405

Changes in operating assets and liabilities:
 
 
 
 
Fee income received
 
17,345

 
16,920

Increase in restricted cash
 
(23,979
)
 
—

(Increase) decrease in interest, dividends and fees receivable
 
9

 
(1,342
)
Increase in due from portfolio companies
 
(4,275
)
 
(1,280
)
Increase in receivables from unsettled transactions
 
(51,103
)
 
—

Increase in other assets
 
(94
)
 
(135
)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
 
(42
)
 
1,982

Increase in base management fee payable
 
1,672

 
2,435

Increase (decrease) in Part I incentive fee payable
 
(594
)
 
1,879

Increase in due to FSC CT
 
1,088

 
1,293

Increase in interest payable
 
5,858

 
4,072

Increase (decrease) in payables from unsettled transactions
 
112,114

 
(35,716
)
Decrease in amounts payable to syndication partners
 
(3,756
)
 
—

Purchases of investments and net revolver activity
 
(722,328
)
 
(650,118
)
Principal payments received on investments (scheduled payments)
 
5,790

 
10,346

Principal payments received on investments (payoffs)
 
250,483

 
43,746

PIK interest income received in cash
 
658

 
4,226

Proceeds from the sale of investments
 
178,665

 
111,556

Net cash used in operating activities
 
(218,290
)
 
(475,428
)
Cash flows from financing activities:
 
 
 
 
Distributions paid in cash
 
(40,122
)
 
(30,202
)
Borrowings under SBA debentures payable
 
—

 
29,000

Borrowings under credit facilities
 
355,600

 
475,057

Repayments of borrowings under credit facilities
 
(55,500
)
 
(98,829
)
Repayments of secured borrowings
 
(62,099
)
 
—

Repurchases of common stock under stock repurchase program
 
—

 
(406
)
Repurchases of common stock under dividend reinvestment plan
 
(2,061
)
 
(2,002
)
Deferred financing costs paid
 
—

 
(1,432
)
Offering costs paid
 
—

 
(517
)
Net cash provided by financing activities
 
195,818

 
370,669

Net decrease in cash and cash equivalents
 
(22,472
)
 
(104,759
)
Cash and cash equivalents, beginning of period
 
86,731

 
147,359

Cash and cash equivalents, end of period
 
$
64,259

 
$
42,600

Supplemental information:
 
 
 
 
Cash paid for interest
 
$
6,601

 
$
4,834

Non-cash financing activities:
 
 
 
 
Issuance of shares of common stock under dividend reinvestment plan
 
$
2,061

 
$
3,411

See notes to Consolidated Financial Statements.

4
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value
Control Investments (3)
 
 
 
 
 
 
 
 
 Traffic Solutions Holdings, Inc.
 
Construction and engineering
 
 
 
 
 
 
 Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016
 
 
 
$
15,056

 
$
15,045

 
$
14,997

 LC Facility, 8.5% cash due 12/31/2016 (10)
 
 
 
 
 
(4
)
 
—

 746,114 Series A Preferred Units
 
 
 
 
 
14,909

 
18,013

 746,114 Common Stock Units
 
 
 
 
 
5,316

 
5,094

 
 
 
 
 
 
35,266

 
38,104

 TransTrade Operators, Inc. (9)
 
Air freight and logistics
 
 
 
 
 
 
 First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
 
 
 
15,973

 
15,572

 
8,865

 First Lien Revolver, 8% cash due 5/31/2016
 
 
 
465

 
465

 
257

 596.67 Series A Common Units
 
 
 
 
 
—

 
—

 4,000,000 Series A Preferred Units in TransTrade Holdings LLC
 
 
 
 
 
4,000

 
—

 5,200,000 Series B Preferred Units in TransTrade Holding LLC
 
 
 
 
 
5,200

 
—

 
 
 
 
 
 
25,237

 
9,122

 HFG Holdings, LLC (16)
 
Specialized finance
 
 
 
 
 
 
 First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
 
 
 
96,871

 
96,871

 
95,812

 875,933 Class A Units
 
 
 
 
 
22,347

 
27,511

 
 
 
 
 
 
119,218

 
123,323

 First Star Aviation, LLC
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
 
 
 
15,390

 
15,390

 
15,125

 10,104,401 Common Units
 
 
 
 
 
10,104

 
11,860

 
 
 
 
 
 
25,494

 
26,985

 First Star Speir Aviation 1 Limited (12)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash due 12/15/2015
 
 
 
47,823

 
47,823

 
48,870

 2,058,411.64 Common Units
 
 
 
 
 
2,058

 
4,473

 
 
 
 
 
 
49,881

 
53,343

 First Star Bermuda Aviation Limited (12)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 8/19/2018
 
 
 
24,844

 
24,844

 
25,228

 4,293,042 Common Units
 
 
 
 
 
4,294

 
5,469

 
 
 
 
 
 
29,138

 
30,697

 Eagle Hospital Physicians, LLC
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan A, 8% PIK due 8/1/2016
 
 
 
12,337

 
12,337

 
12,127

 First Lien Term Loan B, 8.1% PIK due 8/1/2016
 
 
 
3,370

 
3,370

 
3,317

 First Lien Revolver, 8% cash due 8/1/2016
 
 
 
2,847

 
2,847

 
2,847

 4,100,000 Class A Common Units
 
 
 
 
 
4,100

 
5,795

 
 
 
 
 
 
22,654

 
24,086

 Senior Loan Fund JV I, LLC (12)(17)
 
Multi-sector holdings
 
 
 
 
 
 
 Subordinated Notes, LIBOR+8% cash due 5/2/2021 (14)
 
 
 
61,723

 
61,723

 
61,831

 87.5% LLC equity interest (6)
 
 
 
 
 
6,858

 
4,756

 
 
 
 
 
 
68,581

 
66,587

 Miche Group, LLC
 
Apparel, accessories
& luxury goods
 
 
 
 
 
 
 First Lien Revolver, LIBOR+8% cash due 12/18/2016 (14)
 
 
 
500

 
500

 
500

 100 units in FSFC Miche, Inc.
 
 
 


 
5,306

 
5,306

 
 
 
 
 
 
5,806

 
5,806

 Total Control Investments (26.9% of net assets)
 
 
 
 
 
$
381,275

 
$
378,053

 Affiliate Investments (4)
 
 
 
 
 
 
 
 
 Caregiver Services, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
 
 
 
$
9,192

 
$
9,192

 
$
9,016

 1,080,399 shares of Series A Preferred Stock
 
 
 
 
 
1,080

 
3,935

 
 
 
 
 
 
10,272

 
12,951

 AmBath/ReBath Holdings, Inc.
 
Home improvement retail
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016 (14)
 
 
 
740

 
740

 
763

 First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
 
 
 
26,506

 
26,506

 
26,213

 4,668,788 Shares of Preferred Stock
 
 
 
 
 
—

 
463

 
 
 
 
 
 
27,246

 
27,439

 Total Affiliate Investments (2.9% of net assets)
 
 
 
 
 
$
37,518

 
$
40,390

See notes to Consolidated Financial Statements.

5
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Non-Control/Non-Affiliate Investments (7)
 
 
 
 
 
 
 
 
 Thermoforming Technology Group LLC
 
Industrial machinery
 
 
 
 
 
 
 33,786 shares of Common Stock (6)
 
 
 
 
 
$
849

 
$
788

 
 
 
 
 
 
849

 
788

 HealthDrive Corporation (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan A, 10% cash due 12/31/15
 
 
 
$
4,358

 
4,357

 
4,323

 First Lien Term Loan B, 12% cash 1% PIK due 12/31/15
 
 
 
11,522

 
11,522

 
11,461

 First Lien Revolver, 12% cash due 12/31/15
 
 
 
2,266

 
2,266

 
2,266

 
 
 
 
 
 
18,145

 
18,050

 Cenegenics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, 9.75% cash due 9/30/2019
 
 
 
31,726

 
31,703

 
31,166

 414,419 Common Units
 
 
 
 
 
598

 
1,011

 
 
 
 
 
 
32,301

 
32,177

 Riverlake Equity Partners II, LP
 
Multi-sector holdings
 
 
 
 
 
 
 1.78% limited partnership interest (12)
 
 
 
 
 
642

 
492

 
 
 
 
 
 
642

 
492

 Riverside Fund IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.34% limited partnership interest (12)
 
 
 
 
 
643

 
629

 
 
 
 
 
 
643

 
629

 JTC Education, Inc. (9)
 
Education services
 
 
 
 
 
 
 Subordinated Term Loan, 13% cash due 11/1/2017
 
 
 
15,823

 
14,441

 
12,727

 17,391 Shares of Series A-1 Preferred Stock
 
 
 
 
 
313

 
—

 17,391 Shares of Common Stock
 
 
 
 
 
187

 
—

 
 
 
 
 
 
14,941

 
12,727

 Psilos Group Partners IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
 2.35% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Mansell Group, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/31/2015 (14)
 
 
 
4,654

 
4,636

 
4,633

 First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 12/31/2015 (14)
 
 
 
9,604

 
9,592

 
9,561

 
 
 
 
 
 
14,228

 
14,194

 Enhanced Recovery Company, LLC
 
Diversified support services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015 (14)
 
 
 
10,500

 
10,456

 
10,445

 First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015 (14)
 
 
 
16,014

 
15,974

 
15,969

 First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (14)
 
 
 
1,500

 
1,486

 
1,500

 
 
 
 
 
 
27,916

 
27,914

 Welocalize, Inc.
 
Internet software & services
 
 
 
 
 
 
 3,393,060 Common Units in RPWL Holdings, LLC
 
 
 
 
 
3,393

 
5,988

 
 
 
 
 
 
3,393

 
5,988

 Bunker Hill Capital II (QP), L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.51% limited partnership interest (12)
 
 
 
 
 
380

 
266

 
 
 
 
 
 
380

 
266

 Physicians Pharmacy Alliance, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016 (14)
 
 
 
10,492

 
10,422

 
10,446

 
 
 
 
 
 
10,422

 
10,446

 Cardon Healthcare Network, LLC
 
Diversified support services
 
 
 
 
 
 
 69,487 Class A Units
 
 
 
 
 
265

 
647

 
 
 
 
 
 
265

 
647

 Phoenix Brands Merger Sub LLC (9)
 
Household products
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016 (14)
 
 
 
2,261

 
2,227

 
2,167

 Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017
 
 
 
32,914

 
31,410

 
19,908

 First Lien Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016 (14)
 
 
 
3,214

 
3,178

 
3,214

 
 
 
 
 
 
36,815

 
25,289


See notes to Consolidated Financial Statements.

6
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 CCCG, LLC (9)
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 12/29/2017 (14)
 
 
 
$
34,748

 
$
34,290

 
$
18,125

 First Lien Revolver, LIBOR+5.5% (1.75% floor) cash due 12/29/2017 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
34,290

 
18,125

 Maverick Healthcare Group, LLC
 
Healthcare equipment
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+5.5% cash (1.75% floor) cash due 12/31/2016 (14)
 
 
 
16,636

 
16,143

 
16,442

 First Lien Term Loan B, LIBOR+9% cash (1.75% floor) cash due 12/31/2016 (14)
 
 
 
38,400

 
38,169

 
38,043

 CapEx Line, LIBOR+5.75% (1.75% floor) cash due 12/31/2016 (14)
 
 
 
1,256

 
1,168

 
1,248

 
 
 
 
 
 
55,480

 
55,733

 Refac Optical Group (9)
 
Specialty stores
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018 (14)
 
 
 
22,006

 
21,908

 
21,610

 First Lien Term Loan B, LIBOR+8.5% cash, 1.75% PIK due 9/30/2018 (14)
 
 
 
33,643

 
33,419

 
32,679

 First Lien Term Loan C, 12% cash due 9/30/2018
 
 
 
3,413

 
3,413

 
3,383

 First Lien Revolver, LIBOR+7.5% cash due 9/30/2018 (14)
 
 
 
1,600

 
1,567

 
1,600

 1,550.9435 Shares of Common Stock in Refac Holdings, Inc.
 
 
 
 
 
1

 
—

 550.9435 Series A-2 Preferred Stock in Refac Holdings, Inc.
 
 
 
 
 
305

 
—

 1,000 Series A Preferred Stock in Refac Holdings, Inc.
 
 
 
 
 
999

 
617

 
 
 
 
 
 
61,612

 
59,889

 Baird Capital Partners V, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.4% limited partnership interest (12)
 
 
 
 
 
847

 
775

 
 
 
 
 
 
847

 
775

 Discovery Practice Management, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+9.75% cash due 11/4/2018 (14)
 
 
 
25,069

 
24,999

 
25,466

 Senior Revolver, LIBOR+6% cash due 11/4/2018 (14)
 
 
 
500

 
486

 
500

 Capex Line, LIBOR+7% cash due 11/4/2018 (14)
 
 
 
1,250

 
1,250

 
1,250

 
 
 
 
 
 
26,735

 
27,216

 Milestone Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.85% limited partnership interest (12)
 
 
 
 
 
1,334

 
1,322

 
 
 
 
 
 
1,334

 
1,322

 National Spine and Pain Centers, LLC
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1.6% PIK due 9/27/2017
 
 
 
29,862

 
29,740

 
29,502

 317,282.97 Class A Units
 
 
 
 
 
317

 
661

 
 
 
 
 
 
30,057

 
30,163

 RCPDirect, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.91% limited partnership interest (12)
 
 
 
 
 
656

 
787

 
 
 
 
 
 
656

 
787

 Digi-Star Acquisition Holdings, Inc.
 
Industrial machinery
 
 
 
 
 
 
 Subordinated Term Loan, 12% cash 1.5% PIK due 11/18/2017
 
 
 
16,762

 
16,703

 
16,299

 264.37 Class A Preferred Units
 
 
 
 
 
115

 
125

 2,954.87 Class A Common Units
 
 
 
 
 
36

 
464

 
 
 
 
 
 
16,854

 
16,888

 Riverside Fund V, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.48% limited partnership interest (12)
 
 
 
 
 
619

 
431

 
 
 
 
 
 
619

 
431

 World 50, Inc.
 
Research & consulting services
 
 
 
 
 
 
 Senior Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (14)
 
 
 
7,766

 
7,709

 
7,888

 Senior Term Loan B, 12.5% cash due 3/30/2017
 
 
 
7,000

 
6,963

 
6,901

 Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)(14)
 
 
 
 
 
(27
)
 
—

 
 
 
 
 
 
14,645

 
14,789

See notes to Consolidated Financial Statements.

7
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 ACON Equity Partners III, LP
 
 
 
 
 
 
 
 
 0.13% limited partnership interest (12)
 
Multi-sector holdings
 
 
 
$
498

 
$
447

 
 
 
 
 
 
498

 
447

 BMC Acquisition, Inc.
 
Other diversified financial services
 
 
 
 
 
 
 500 Series A Preferred Shares
 
 
 
 
 
499

 
615

 50,000 Common Shares (6)
 
 
 
 
 
1

 
53

 
 
 
 
 
 
500

 
668

 Ansira Partners, Inc. (9)
 
Advertising
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)(14)
 
 
 
 
 
(4
)
 
—

 250 Preferred Units & 250 Class A Common Units of Ansira Holdings, LLC
 
 
 
 
250

 
331

 
 
 
 
 
 
246

 
331

 Edmentum, Inc.
 
Education services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019 (14)
 
 
 
$
17,000

 
17,000

 
6,800

 
 
 
 
 
 
17,000

 
6,800

 I Drive Safely, LLC
 
Education services
 
 
 
 
 
 
 75,000 Class A Common Units of IDS Investments, LLC
 
 
 
 
 
1,000

 
766

 
 
 
 
 
 
1,000

 
766

 Yeti Acquisition, LLC (9)
 
Leisure products
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017 (14)
 
 
 
10,692

 
10,675

 
10,866

 First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK, due 6/15/2017 (14)
 
 
 
8,290

 
8,282

 
8,102

 First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)(14)
 
 
 
 
 
(6
)
 
—

 1,500 Common Stock Units of Yeti Holdings, Inc.
 
 
 
 
 
1,500

 
4,507

 
 
 
 
 
 
20,451

 
23,475

 Specialized Education Services, Inc.
 
Education services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (1.5% floor) cash due 6/28/2017 (14)
 
 
 
8,193

 
8,193

 
7,932

 Subordinated Term Loan B, 11% cash 1.5% PIK due 6/28/2018
 
 
 
18,181

 
18,181

 
17,588

 
 
 
 
 
 
26,374

 
25,520

 Vitalyst Holdings, Inc. (formerly known as PC Helps Support, LLC)
 
IT consulting & other services
 
 
 
 
 
 
 Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018
 
 
 
19,165

 
19,165

 
18,671

 675 Series A Preferred Units of PCH Support Holdings, Inc.
 
 
 
 
 
675

 
816

 7,500 Class A Common Stock Units of PCH Support Holdings, Inc.
 
 
 
 
 
75

 
—

 
 
 
 
 
 
19,915

 
19,487

 Beecken Petty O'Keefe Fund IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (12)
 
 
 
 
 
567

 
515

 
 
 
 
 
 
567

 
515

 Deltek, Inc. (9)
 
IT consulting & other services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019 (14)
 
 
 
25,000

 
25,000

 
25,168

 First Lien Revolver, LIBOR+4.75% (1.25% floor) cash due 10/10/2017 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
25,000

 
25,168

 First American Payment Systems, LP
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019 (14)
 
 
 
23,304

 
23,304

 
23,159

 First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017 (14)
 
 
 
1,358

 
1,358

 
1,340

 
 
 
 
 
 
24,662

 
24,499

 Dexter Axle Company
 
Auto parts & equipment
 
 
 
 
 
 
 1,500 Common Shares in Dexter Axle Holding Company
 
 
 
 
 
1,500

 
3,116

 
 
 
 
 
 
1,500

 
3,116

 Comprehensive Pharmacy Services LLC
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 11.25% cash 1.5% PIK due 11/30/2019
 
 
 
14,416

 
14,416

 
14,171

 20,000 Common Shares in MCP CPS Group Holdings, Inc.
 
 
 
 
 
2,000

 
2,549

 
 
 
 
 
 
16,416

 
16,720

See notes to Consolidated Financial Statements.


8
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Garretson Firm Resolution Group, Inc.
 
Diversified support services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1.5% PIK due 6/20/2019
 
 
 
$
5,114

 
$
5,114

 
$
5,038

 First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017 (14)
 
 
 
609

 
609

 
603

 4,950,000 Preferred Units in GRG Holdings, LP
 
 
 
 
 
495

 
501

 50,000 Common Units in GRG Holdings, LP
 
 
 
 
 
5

 
—

 
 
 
 
 
 
6,223

 
6,142

 Teaching Strategies, LLC
 
Education services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (14)
 
 
 
14,861

 
14,853

 
14,861

 Senior Delayed Draw Term Loan, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (14)
 
 
 
99

 
99

 
99

 Senior Revolver, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (10)(14)
 
 
 
 
 
(1
)
 
—

 
 
 
 
 
 
14,951

 
14,960

 Omniplex World Services Corporation
 
Security & alarm services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018
 
 
 
12,826

 
12,826

 
12,426

 500 units Class A Common Units in Omniplex Holdings Corp.
 
 
 
 
 
500

 
586

 
 
 
 
 
 
13,326

 
13,012

 Dominion Diagnostics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018
 
 
 
16,031

 
16,031

 
15,931

 
 
 
 
 
 
16,031

 
15,931

 Affordable Care, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019 (14)
 
 
 
23,250

 
23,250

 
23,018

 
 
 
 
 
 
23,250

 
23,018

 Aderant North America, Inc.
 
Internet & software services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/20/2019 (14)
 
 
 
7,000

 
7,000

 
6,983

 
 
 
 
 
 
7,000

 
6,983

 AdVenture Interactive, Corp.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (14)
 
 
 
107,863

 
107,855

 
107,282

 First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (14)
 
 
 
 
 
—

 
—

 2,000 Preferred Units of AVI Holdings, L.P.
 
 
 
 
 
1,811

 
1,349

 
 
 
 
 
 
109,666

 
108,631

 CoAdvantage Corporation
 
Human resources & employment services
 
 
 
 
 
 
 Mezzanine Term Loan, 11.5% cash 1.25% PIK due 12/31/2018
 
 
 
14,939

 
14,939

 
14,939

 50,000 Class A Units in CIP CoAdvantage Investments LLC
 
 
 
 
 
557

 
924

 
 
 
 
 
 
15,496

 
15,863

 EducationDynamics, LLC (9)
 
Education services
 
 
 
 
 
 
 Mezzanine Term Loan, 12% cash 6% PIK due 1/16/2017
 
 
 
13,045

 
13,045

 
12,674

 
 
 
 
 
 
13,045

 
12,674

 Sterling Capital Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.2% limited partnership interest (12)
 
 
 
 
 
874

 
761

 
 
 
 
 
 
874

 
761

 RP Crown Parent, LLC
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (10)(14)
 
 
 
 
 
(434
)
 
—

 
 
 
 
 
 
(434
)
 
—

 Advanced Pain Management
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018 (14)
 
 
 
24,000

 
24,000

 
23,712

 
 
 
 
 
 
24,000

 
23,712

 Rocket Software, Inc.
 
Internet & software services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2019 (14)
 
 
 
10,475

 
10,444

 
10,481

 
 
 
 
 
 
10,444

 
10,481




See notes to Consolidated Financial Statements.


9
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 TravelClick, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 5/6/2019
 
 
 
$
4,976

 
$
4,976

 
$
4,920

 Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/8/2021 (14)
 
 
 
10,000

 
10,000

 
9,650

 
 
 
 
 
 
14,976

 
14,570

 Pingora MSR Opportunity Fund I-A, LP
 
Thrift & mortgage finance
 
 
 
 
 
 
 1.9% limited partnership interest (12)
 
 
 
 
 
5,778

 
5,687

 
 
 
 
 
 
5,778

 
5,687

 Credit Infonet, Inc. (9)
 
Data processing & outsourced services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 10/26/2018
 
 
 
13,334

 
13,334

 
12,934

 
 
 
 
 
 
13,334

 
12,934

 2Checkout.com, Inc.
 
Diversified support services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5% cash due 6/26/2016 (14)
 
 
 
2,150

 
2,148

 
2,082

 
 
 
 
 
 
2,148

 
2,082

 Meritas Schools Holdings, LLC
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 6/25/2019 (14)
 
 
 
2,478

 
2,478

 
2,469

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 1/23/2021 (14)
 
 
 
19,500

 
19,500

 
19,208

 
 
 
 
 
 
21,978

 
21,677

 Chicago Growth Partners III, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Royal Adhesives and Sealants, LLC
 
Specialty chemicals
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 1/31/2019 (11) (14)
 
 
 
13,500

 
13,500

 
13,612

 
 
 
 
 
 
13,500

 
13,612

 Bracket Holding Corp.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020 (14)
 
 
 
32,000

 
32,000

 
31,360

 50,000 Common Units in AB Group Holdings, LP
 
 
 
 
 
500

 
501

 
 
 
 
 
 
32,500

 
31,861

 Salus CLO 2012-1, Ltd.
 
Asset management & custody banks
 
 
 
 
 
 
 Class F Deferrable Notes - A, LIBOR+11.5% cash due 3/5/2021 (12)(14)
 
 
 
7,500

 
7,500

 
7,439

 Class F Deferrable Notes - B, LIBOR+10.85% cash due 3/5/2021 (12)(14)
 
 
 
22,000

 
22,000

 
21,819

 
 
 
 
 
 
29,500

 
29,258

 HealthEdge Software, Inc.
 
Application software
 
 
 
 
 
 
 Second Lien Term Loan, 12% cash due 9/30/2018
 
 
 
17,500

 
17,332

 
17,481

 482,453 Series A-3 Preferred Stock Warrants (exercise price $1.450918)
 
 
 
 
 
213

 
720

 
 
 
 
 
 
17,545

 
18,201

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
13,813

 
13,787

 
13,730

 First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
2,904

 
2,899

 
2,904

 CapEx Line, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
4,240

 
4,234

 
4,240

 1,000,000 Class A Units in InMotion Entertainment Holdings, LLC (6)
 
 
 
 
 
1,000

 
954

 
 
 
 
 
 
21,920

 
21,828

 BMC Software Finance, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% (1% floor) cash due 9/10/2018
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Thing5, LLC
 
Data processing & outsourced services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 10/11/2018 (13)(14)
 
 
 
44,775

 
44,742

 
44,177

 First Lien Revolver, LIBOR+7% (1% floor) cash due 10/11/2018 (10)(14)
 
 
 
 
 
(4
)
 
—

 2,000,000 in T5 Investment Vehicle, LLC
 
 
 
 
 
2,000

 
1,887

 
 
 
 
 
 
46,738

 
46,064

 Epic Health Services, Inc.
 
 
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/18/2019 (14)
 
Healthcare services
 
25,000

 
25,000

 
24,589

 
 
 
 
 
 
25,000

 
24,589

See notes to Consolidated Financial Statements.

10
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Kason Corporation
 
Industrial machinery
 
 
 
 
 
 
 Mezzanine Term Loan, 11.5% cash 1.75% PIK due 10/28/2019
 
 
 
$
5,721

 
$
5,721

 
$
5,441

 450 Class A Preferred Units in Kason Investment, LLC
 
 
 
 
 
450

 
493

 5,000 Class A Common Units in Kason Investment, LLC
 
 
 
 
 
50

 
27

 
 
 
 
 
 
6,221

 
5,961

 First Choice ER, LLC
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 10/31/2018 (14)
 
 
 
55,000

 
54,978

 
54,804

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 10/31/2018 (14)
 
 
 
5,500

 
5,497

 
5,500

 First Lien Delayed Draw, LIBOR+7.5% (1% floor) cash due 4/30/2015 (14)
 
 
 
25,000

 
24,951

 
24,687

 
 
 
 
 
 
85,426

 
84,991

 SPC Partners V, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.571% limited partnership interest (12)
 
 
 
 
 
572

 
507

 
 
 
 
 
 
572

 
507

 Systems Maintenance Services Holdings, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/18/2020 (14)
 
 
 
24,000

 
24,000

 
23,940

 
 
 
 
 
 
24,000

 
23,940

 P2 Upstream Acquisition Co.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% (1% floor) cash due 10/31/2018
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Vandelay Industries Merger Sub, Inc.
 
Industrial machinery
 
 
 
 
 
 
 Second Lien Term Loan, 10.75% cash 1% PIK due 11/12/2019
 
 
 
39,265

 
39,265

 
38,880

 2,500,000 Class A Common Units in Vandelay Industries, L.P. (6)
 
 
 
 
 
958

 
1,764

 
 
 
 
 
 
40,223

 
40,644

 Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 11/4/2021 (14)
 
 
 
8,000

 
8,000

 
7,800

 
 
 
 
 
 
8,000

 
7,800

 The Active Network, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/15/2021 (14)
 
 
 
16,543

 
16,412

 
16,006

 
 
 
 
 
 
16,412

 
16,006

 OmniSYS Acquisition Corporation
 
Diversified support services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 11/21/2018 (14)
 
 
 
10,602

 
10,564

 
10,262

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 11/21/2018 (10)(14)
 
 
 
 
 
(4
)
 
—

 100,000 Common Units in OSYS Holdings, LLC
 
 
 
 
 
1,000

 
979

 
 
 
 
 
 
11,560

 
11,241

 All Web Leads, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1% floor) cash due 11/26/2018 (14)
 
 
 
24,891

 
24,854

 
24,378

 First Lien Revolver, LIBOR+8% (1% floor) cash due 11/26/2018 (10)(14)
 
 
 
 
 
(5
)
 
—

 
 
 
 
 
 
24,849

 
24,378

 Moelis Capital Partners Opportunity Fund I-B, LP
 
Multi-sector holdings
 
 
 
 
 
 
 1.0% limited partnership interest (12)
 
 
 
 
 
1,008

 
970

 
 
 
 
 
 
1,008

 
970

 Aden & Anais Merger Sub, Inc.
 
Apparel, accessories & luxury goods
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 6/23/2019
 
 
 
12,252

 
12,252

 
12,167

 30,000 Common Units in Aden & Anais Holdings, Inc.
 
 
 
 
 
3,000

 
4,087

 
 
 
 
 
 
15,252

 
16,254

 Lift Brands Holdings Inc.
 
Leisure facilities
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/23/2019 (14)
 
 
 
43,442

 
43,370

 
43,420

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 12/23/2019 (14)
 
 
 
2,000

 
1,982

 
2,000

 2,000,000 Class A Common Units in Snap Investments, LLC
 
 
 
 
 
2,000

 
2,116

 
 
 
 
 
 
47,352

 
47,536

 Tailwind Capital Partners II, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.3% limited partnership interest (12)
 
 
 
 
 
301

 
301

 
 
 
 
 
 
301

 
301

See notes to Consolidated Financial Statements.

11
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Long's Drugs Incorporated
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1% PIK due 1/31/2020
 
 
 
$
9,543

 
$
9,543

 
$
9,491

 50 Series A Preferred Shares in Long's Drugs Incorporated
 
 
 
 
 
500

 
597

 
 
 
 
 
 
10,043

 
10,088

 Five9, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 2/20/2019 (14)
 
 
 
20,000

 
19,737

 
19,895

 118,577 Common Stock Warrants (exercise price $10.12)
 
 
 
 
 
321

 
18

 
 
 
 
 
 
20,058

 
19,913

 Crealta Pharmaceuticals LLC
 
Pharmaceuticals
 
 
 
 
 
 
 Second Lien Term Loan, 12.75% cash due 8/21/2020
 
 
 
20,000

 
20,000

 
19,497

 
 
 
 
 
 
20,000

 
19,497

 Conviva Inc.
 
Application software
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.75% (1% floor) cash due 2/28/2018 (14)
 
 
 
5,000

 
4,919

 
4,927

 417,851 Series D Preferred Stock Warrants (exercise price $1.1966)
 
 
 
 
 
105

 
227

 
 
 
 
 
 
5,024

 
5,154

 OnCourse Learning Corporation
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/28/2019 (14)
 
 
 
95,000

 
94,992

 
95,164

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 2/28/2019 (10)(14)
 
 
 
 
 
(1
)
 
—

 200,000 Class A Units in CIP OCL Investments, LLC
 
 
 
 
 
2,544

 
2,839

 
 
 
 
 
 
97,535

 
98,003

 ShareThis, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+10.5% (1% floor) cash due 3/5/2018 (14)
 
 
 
15,000

 
14,709

 
14,912

 345,452 Series C Preferred Stock Warrants (exercise price $3.0395)
 
 
 
 
 
367

 
261

 
 
 
 
 
 
15,076

 
15,173

 Aegis Toxicology Sciences Corporation
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/24/2021 (14)
 
 
 
18,000

 
18,000

 
17,820

 
 
 
 
 
 
18,000

 
17,820

 Aptean, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/26/2021 (14)
 
 
 
3,000

 
3,000

 
2,880

 
 
 
 
 
 
3,000

 
2,880

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 3/31/2019 (14)
 
 
 
22,608

 
22,601

 
21,655

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 3/31/2019 (10)(14)
 
 
 
 
 
(1
)
 
—

 
 
 
 
 
 
22,600

 
21,655

 Total Military Management, Inc.
 
Air freight and logistics
 
 
 
 
 
 
 Delayed Draw Term Loan, LIBOR+5.75% (1.25% floor) cash due 3/31/2019 (14)
 
 
 
2,571

 
2,571

 
2,575

 
 
 
 
 
 
2,571

 
2,575

 ExamSoft Worldwide, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1% floor) cash due 5/1/2019 (14)
 
 
 
15,000

 
14,843

 
14,690

 First Lien Revolver, LIBOR+8% (1% floor) cash due 5/1/2019 (14)
 
 
 
 
 
—

 
—

 180,707 Class C Units in ExamSoft Investor LLC
 
 
 
 
 
181

 
149

 
 
 
 
 
 
15,024

 
14,839

 Language Line, LLC
 
Integrated telecommunication services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.75% floor) cash due 12/20/2016 (14)
 
 
 
6,600

 
6,593

 
6,551

 
 
 
 
 
 
6,593

 
6,551

 DigiCert, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 6/2/2020 (14)
 
 
 
42,000

 
42,000

 
41,288

 
 
 
 
 
 
42,000

 
41,288

 Puerto Rico Cable Acquisition Company Inc.
 
Cable & satellite
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 5/30/2019 (12)(14)
 
 
 
27,000

 
27,000

 
26,663

 
 
 
 
 
 
27,000

 
26,663

See notes to Consolidated Financial Statements.

12
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 RCPDirect II, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (12)
 
 
 
 
 
$
100

 
$
100

 
 
 
 
 
 
100

 
100

 PR Wireless, Inc. (12)
 
Integrated telecommunication services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9% (1% floor) cash due 6/27/2020 (14)
 
 
 
$
12,942

 
12,695

 
11,648

 118.4211 Common Stock Warrants (exercise price $0.01)
 
 
 
 
 
—

 
558

 
 
 
 
 
 
12,695

 
12,206

 Integral Development Corporation
 
Other diversified financial services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9.5% (1% floor) cash due 7/10/2019 (14)
 
 
 
15,000

 
14,893

 
14,897

 1,078,284 Common Stock Warrants (exercise price $0.9274)
 
 
 
 
 
113

 
113

 
 
 
 
 
 
15,006

 
15,010

 Loftware, Inc.
 
Internet software & services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1% PIK due 7/18/2020
 
 
 
6,028

 
6,028

 
6,035

 300,000 Class A Common Units in RPLF Holdings, LLC
 
 
 
 
 
300

 
133

 
 
 
 
 
 
6,328

 
6,168

 Tectum Holdings, Inc.
 
Auto parts & equipment
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 1/28/2021 (14)
 
 
 
15,000

 
15,000

 
15,022

 
 
 
 
 
 
15,000

 
15,022

 TV Borrower US, LLC (12)
 
Integrated telecommunication services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 7/8/2021 (14)
 
 
 
30,000

 
30,000

 
29,049

 
 
 
 
 
 
30,000

 
29,049

 Webster Capital III, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
0.754% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 L Squared Capital Partners LLC
 
Multi-sector holdings
 
 
 
 
 
 
 2% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 ERS Acquisition Corp.
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 9/10/2018 (14)
 
 
 
40,000

 
40,000

 
40,030

 
 
 
 
 
 
40,000

 
40,030

 BeyondTrust Software, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Term Loan LIBOR+7% (1% floor) cash due 9/25/2019 (14)
 
 
 
65,207

 
65,158

 
64,779

 First Lien Revolver, LIBOR+7% (1% floor) cash due 9/25/2019 (10)(14)
 
 
 
 
 
(4
)
 
—

 4,500,000 Class A membership interests in BeyondTrust Holdings LLC
 
 
 
 
 
4,500

 
4,249

 
 
 
 
 
 
69,654

 
69,028

 Answers Corporation
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 10/1/2021 (14)
 
 
 
5,000

 
4,976

 
4,788

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 10/3/2022 (14)
 
 
 
37,000

 
36,104

 
35,335

 
 
 
 
 
 
41,080

 
40,123

 Idera, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (0.5% floor) cash due 11/5/2020 (14)
 
 
 
36,200

 
36,181

 
36,200

 First Lien Revolver, LIBOR+5.5% (0.5% floor) cash due 11/5/2019 (10)(14)
 
 
 
 
 
(1
)
 
—

 
 
 
 
 
 
36,180

 
36,200

 GOBP Holdings Inc.
 
Food retail
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 10/21/2021 (14)
 
 
 
5,000

 
5,000

 
5,013

 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/21/2022 (14)
 
 
 
11,000

 
11,000

 
10,918

 
 
 
 
 
 
16,000

 
15,931

 Kellermeyer Bergensons Services, LLC
 
Diversified support services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.00% (1% floor) cash due 10/29/2021 (14)
 
 
 
500

 
500

 
498

 Second Lien Term Loan, LIBOR+8.50% (1% floor) cash due 4/29/2022 (14)
 
 
 
13,300

 
13,300

 
13,234

 
 
 
 
 
 
13,800

 
13,732


See notes to Consolidated Financial Statements.

13
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 Dodge Data & Analytics LLC
 
Data processing & outsourced services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.75% (1% floor) cash due 10/31/2019 (14)
 
 
 
$
20,000

 
$
20,000

 
$
20,000

 
 
 
 
 
 
20,000

 
20,000

 NAVEX Global, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 11/19/2021 (14)
 
 
 
6,000

 
6,000

 
5,940

 Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 11/18/2022 (14)
 
 
 
34,000

 
34,000

 
33,490

 
 
 
 
 
 
40,000

 
39,430

 Penn Foster, Inc.
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/24/2019 (14)
 
 
 
30,000

 
29,975

 
30,000

 First Lien Revolver, LIBOR+8.5% (1% floor) cash due 11/24/2019 (14)
 
 
 
68

 
64

 
68

 
 
 
 
 
 
30,039

 
30,068

 Tecomet Inc.
 
Healthcare equipment
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 12/5/2022 (14)
 
 
 
17,000

 
16,001

 
16,065

 
 
 
 
 
 
16,001

 
16,065

 Metamorph US 3, LLC
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 12/1/2020 (14)
 
 
 
25,000

 
24,976

 
25,000

 First Lien Revolver, LIBOR+5.5% (1% floor) cash due 12/1/2020 (10)(14)
 
 
 
 
 
(5
)
 
—

 
 
 
 
 
 
24,971

 
25,000

 Schulman Associates Institutional Board Review, Inc.
 
Research & consulting services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1% floor) cash due 6/3/2021 (14)
 
 
 
17,000

 
17,000

 
17,000

 
 
 
 
 
 
17,000

 
17,000

 TransFirst Holdings Inc.
 
Consumer finance
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1% floor) cash due 11/11/2022 (14)
 
 
 
4,900

 
4,900

 
4,852

 
 
 
 
 
 
4,900

 
4,852

 Creganna Finance (US) LLC (12)
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1% floor) cash due 6/1/2022 (14)
 
 
 
9,000

 
9,000

 
9,045

 
 
 
 
 
 
9,000

 
9,045

 Janrain, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 6/5/2018 (14)
 
 
 
5,000

 
4,956

 
4,955

 218,008 Series C Preferred Stock Warrants (exercise price $1.3761)
 
 
 
 
 
45

 
45

 
 
 
 
 
 
5,001

 
5,000

 TigerText, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.75% (1% floor) cash due 12/8/2017 (14)
 
 
 
5,000

 
4,941

 
4,940

 299,110 Series B Preferred Stock Warrants (exercise price $1.3373)
 
 
 
 
 
60

 
60

 
 
 
 
 
 
5,001

 
5,000

 Compuware Holdings, LLC
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan B1, LIBOR+5.25% (1% floor) cash due 12/11/2019 (14)
 
 
 
3,500

 
3,500

 
3,448

 First Lien Term Loan B2, LIBOR+5.25% (1% floor) cash due 12/10/2021 (14)
 
 
 
10,000

 
9,802

 
9,515

 Bridge Loan, LIBOR+5.25% (1% floor) cash due 12/11/2015 (14)
 
 
 
1,500

 
1,500

 
1,496

 
 
 
 
 
 
14,802

 
14,459

 Survey Sampling International, LLC
 
Research & consulting services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5% (1% floor) cash due 12/31/2020 (14)
 
 
 
2,500

 
2,500

 
2,478

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 12/16/2021 (14)
 
 
 
18,700

 
18,700

 
18,373

 
 
 
 
 
 
21,200

 
20,851

 Accuvant Finance, LLC
 
IT consulting & other services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 12/15/2021 (14)
 
 
 
10,500

 
10,500

 
10,395

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 12/15/2022 (14)
 
 
 
9,000

 
9,000

 
9,045

 
 
 
 
 
 
19,500

 
19,440

 Abaco Energy Technologies LLC
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan B, LIBOR+7% (1% floor) cash due 11/21/2020 (14)
 
 
 
9,000

 
8,645

 
8,505

 
 
 
 
 
 
8,645

 
8,505

See notes to Consolidated Financial Statements.

14
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 Ameritox Ltd.
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 6/23/2019 (14)
 
 
 
$
115,700

 
$
115,639

 
$
115,700

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 6/23/2019 (14)
 
 
 
4,267

 
4,260

 
4,267

 
 
 
 
 
 
119,899

 
119,967

 PSC Industrial Holdings Corp.
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 12/3/2021 (14)
 
 
 
15,000

 
15,000

 
14,775

 
 
 
 
 
 
15,000

 
14,775

 TIBCO Software, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% cash due 11/25/2020 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 EOS Fitness Opco Holdings, LLC
 
Leisure facilities
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.75% (0.75% floor) cash due 12/30/2019 (14)
 
 
 
4,000

 
4,000

 
4,000

 First Lien Revolver, LIBOR+8.75% (0.75% floor) cash due 12/30/2019 (14)
 
 
 
 
 
—

 
—

 487.5 Class A Preferred Units
 
 
 
 
 
488

 
488

 12,500 Class B Common Units
 
 
 
 
 
13

 
13

 
 
 
 
 
 
4,501

 
4,501

 TrialCard Incorporated
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 12/31/2019 (14)
 
 
 
36,200

 
36,164

 
36,199

 First Lien Revolver, LIBOR+5.25% (1% floor) cash due 12/31/2019 (10)(14)
 
 
 
 
 
(8
)
 
—

 
 
 
 
 
 
36,156

 
36,199

 Total Non-Control/Non-Affiliate Investments (163.9% of net assets)
 
 
 
 
 
$
2,350,146

 
$
2,303,152

Total Portfolio Investments (193.6% of net assets)
 
 
 
 
 
$
2,768,939

 
$
2,721,595

See notes to Consolidated Financial Statements.


15
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

(1)
All debt investments are income producing unless otherwise noted. Equity is non-income producing unless otherwise noted.
(2)
See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.
(3)
Control Investments are defined by the Investment Company Act of 1940 (“1940 Act") as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
(4)
Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.
(5)
Equity ownership may be held in shares or units of companies related to the portfolio companies.
(6)
Income producing through payment of dividends or distributions.
(7)
Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
(8)
Principal includes accumulated PIK interest and is net of repayments.
(9)Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to tier pricing arrangements or financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:
Portfolio Company
 
Effective date
 
Cash interest
 
PIK interest
 
Reason
JTC Education, Inc.
 
November 25, 2014
 
-13.25% on Term Loan
 
+13.25% on Term Loan
 
Per loan amendment
Refac Optical Group
 
August 22, 2014
 
+1.0% on Revolver
 
+1.0% on Term Loan A
+1.0% on Term Loan B
+1.0% on Term Loan C
 
Per loan amendment
EducationDynamics, LLC
 
August 14, 2014
 
-12.0% on Term Loan
 
+12.0% on Term Loan
 
Per loan amendment
Cenegenics, LLC
 
August 14, 2014
 
 
 
+2.0% on Term Loan
 
Per loan amendment
Credit Infonet, Inc.
 
July 1, 2014
 
-1.25% on Term Loan
 
+1.25% on Term Loan
 
Per loan amendment
Dominion Diagnostics, LLC
 
April 8, 2014
 
 
 
- 1.0% on Term Loan
 
Per loan amendment
Phoenix Brands Merger Sub LLC
 
April 1, 2014
 
+ 0.75% on Senior Term Loan and Revolver - 10% on Subordinated Term Loan
 
+ 12.75% on Subordinated Term Loan
 
Per loan amendment
Discovery Practice Management, Inc.
 
November 4, 2013
 
+ 2.25% on Term Loan A - 1.0% on Revolver
 
 
 
Per loan amendment
TransTrade Operators, Inc.
 
August 1, 2014
 
- 11.0% on Term Loan
 
+ 7.0% on Term Loan
 
Per loan amendment
HealthDrive Corporation
 
October 1, 2013
 
- 1.0% on Term Loan A
- 3.0% on Term Loan B
 
+ 3.0% on Term Loan A
+ 4.0% on Term Loan B
 
Per loan amendment
Ansira Partners, Inc.
 
June 30, 2013
 
- 0.5% on Revolver
 
 
 
Tier pricing per loan agreement
Physicians Pharmacy Alliance, Inc.
 
April 1, 2013
 
+ 1.0% on Term Loan
 
+ 1.0% on Term Loan
 
Per loan agreement
Deltek, Inc.
 
February 1, 2013
 
- 1.0% on Revolver
 
 
 
Per loan amendment
CCCG, LLC
 
November 15, 2012
 
+ 0.5% on Term Loan
 
+ 1.0% on Term Loan
 
Per loan amendment
Yeti Acquisition, LLC
 
October 1, 2012
 
- 1.0% on Term Loan A,
   Term Loan B and Revolver
 
 
 
Tier pricing per loan 
agreement
(10)
Investment has undrawn commitments and a negative cost basis as a result of unamortized fees. Unamortized fees are classified as unearned income which reduces cost basis.
(11)
Represents an unfunded commitment to fund limited partnership interest. See Note 3 to the Consolidated Financial Statements.
(12)
Investment is not a "qualifying asset" as defined under Section 55(a) of the 1940 Act, in whole or in part.
(13)
The sale of a portion of this loan does not qualify for sale accounting under ASC Topic 860 - Transfers and Servicing, and therefore, the entire debt investment remains in the Schedule of Investments. (See Note 15 in the accompanying notes to the Consolidated Financial Statements.)
(14)
The principal balance outstanding for all floating rate loans is indexed to LIBOR and an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.
(15)
Each of the Company's investments are pledged as collateral under one or more of its credit facilities. A single investment may be divided into parts that are individually pledged as collateral to separate credit facilities.
(16)
The Company, through its investments in HFG Holdings, LLC, acquired a majority equity interest in Healthcare Finance Group, LLC, which provides financing to healthcare companies. The fair value of the Company's debt and equity investments in HFG Holdings approximates the fair value of HFG Holdings' equity investment in Healthcare Finance Group, LLC.

16
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
December 31, 2014
(unaudited)

(17)
As defined in the 1940 Act, the Company is deemed to be both an "Affiliated Person" of and to "Control" this portfolio company as the Company owns more than 25% of the portfolio company's outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). See Schedule 12-14 in the accompanying notes to the consolidated financial statements for transactions during the three months ended December 31, 2014 in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to control.

See notes to Consolidated Financial Statements.

17
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value
Control Investments (3)
 
 
 
 
 
 
 
 
 Traffic Solutions Holdings, Inc.
 
Construction and engineering
 
 
 
 
 
 
 Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016
 
 
 
$
14,942

 
$
14,925

 
$
14,905

 LC Facility, 8.5% cash due 12/31/2016 (10)
 
 
 
 
 
(6
)
 
—

 746,114 Series A Preferred Units
 
 
 
 
 
14,460

 
17,564

 746,114 Common Stock Units
 
 
 
 
 
5,316

 
6,113

 
 
 
 
 
 
34,695

 
38,582

 TransTrade Operators, Inc. (9)
 
Air freight and logistics
 
 
 
 
 
 
 First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
 
 
 
15,572

 
15,572

 
11,109

 First Lien Revolver, 8% cash due 5/31/2016
 
 
 
 
 
—

 
—

 596.67 Series A Common Units
 
 
 
 
 
—

 
—

 1,403,922 Series A Preferred Units in TransTrade Holdings LLC
 
 
 
 
2,000

 
—

 5,200,000 Series B Preferred Units in TransTrade Holding LLC
 
 
 
 
5,200

 
—

 
 
 
 
 
 
22,772

 
11,109

 HFG Holdings, LLC (16)
 
Specialized finance
 
 
 
 
 
 
 First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
 
 
 
96,378

 
96,378

 
96,935

 875,933 Class A Units
 
 
 
 
 
22,347

 
31,786

 
 
 
 
 
 
118,725

 
128,721

 First Star Aviation, LLC
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
 
 
 
16,840

 
16,840

 
16,556

 10,104,401 Common Units (6)
 
 
 
 
 
10,105

 
10,328

 
 
 
 
 
 
26,945

 
26,884

 First Star Speir Aviation 1 Limited (12)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash due 12/15/2015
 
 
 
60,773

 
60,773

 
61,155

 2,058,411.64 Common Units (6)
 
 
 
 
 
2,058

 
3,572

 
 
 
 
 
 
62,831

 
64,727

 First Star Bermuda Aviation Limited (12)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 8/19/2018
 
 
 
35,045

 
35,045

 
35,606

 4,293,736 Common Units
 
 
 
 
 
4,294

 
5,839

 
 
 
 
 
 
39,339

 
41,445

 Eagle Hospital Physicians, LLC
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan A, 8% PIK due 8/1/2016
 
 
 
12,088

 
12,088

 
11,924

 First Lien Term Loan B, 8.1% PIK due 8/1/2016
 
 
 
3,301

 
3,301

 
3,262

 First Lien Revolver, 8% cash due 8/1/2016
 
 
 
2,847

 
2,847

 
2,847

 4,100,000 Class A Common Units
 
 
 
 
 
4,100

 
5,738

 
 
 
 
 
 
22,336

 
23,771

 Senior Loan Fund JV I, LLC (12)(17)
 
Multi-sector holdings
 
 
 
 
 
 
 Subordinated Notes, LIBOR+8% cash due 5/2/2021 (14)
 
 
 
53,984

 
53,984

 
53,984

 87.5% LLC equity interest
 
 
 
 
 
5,998

 
5,649

 
 
 
 
 
 
59,982

 
59,633

 Total Control Investments (26.7% of net assets)
 
 
 
 
 
$
387,625

 
$
394,872

 Affiliate Investments (4)
 
 
 
 
 
 
 
 
 Caregiver Services, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
 
 
 
$
9,145

 
$
9,145

 
$
9,062

 1,080,399 shares of Series A Preferred Stock
 
 
 
 
 
1,080

 
3,805

 
 
 
 
 
 
10,225

 
12,867

 AmBath/ReBath Holdings, Inc.
 
Home improvement retail
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016 (14)
 
 
 
1,206

 
1,203

 
1,222

 First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
 
 
 
26,337

 
26,329

 
26,032

 4,668,788 Shares of Preferred Stock
 
 
 
 
 
—

 
643

 
 
 
 
 
 
27,532

 
27,897

 Total Affiliate Investments (2.8% of net assets)
 
 
 
 
 
$
37,757

 
$
40,764

 Non-Control/Non-Affiliate Investments (7)
 
 
 
 
 
 
 
 
 Fitness Edge, LLC
 
Leisure facilities
 
 
 
 
 
 
 1,000 Common Units (6)
 
 
 
 
 
$
43

 
$
190

 
 
 
 
 
 
43

 
190

See notes to Consolidated Financial Statements.

18
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Thermoforming Technology Group LLC
 
Industrial machinery
 
 
 
 
 
 
 33,786 shares of Common Stock
 
 
 
 
 
$
849

 
$
819

 
 
 
 
 
 
849

 
819

 HealthDrive Corporation (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan A, 10% cash due 12/31/15
 
 
 
$
4,325

 
4,323

 
4,287

 First Lien Term Loan B, 12% cash 1% PIK due 12/31/15
 
 
 
11,376

 
11,376

 
11,373

 First Lien Revolver, 12% cash due 12/31/15
 
 
 
2,266

 
2,266

 
2,266

 
 
 
 
 
 
17,965

 
17,926

 Cenegenics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, 9.75% cash due 9/30/2019
 
 
 
32,014

 
31,982

 
32,015

 414,419 Common Units (6)
 
 
 
 
 
598

 
1,019

 
 
 
 
 
 
32,580

 
33,034

 Riverlake Equity Partners II, LP
 
Multi-sector holdings
 
 
 
 
 
 
 1.78% limited partnership interest (12)
 
 
 
 
 
642

 
492

 
 
 
 
 
 
642

 
492

 Riverside Fund IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.34% limited partnership interest (6)(12)
 
 
 
 
 
643

 
629

 
 
 
 
 
 
643

 
629

 JTC Education, Inc. (9)
 
Education services
 
 
 
 
 
 
 Subordinated Term Loan, 13% cash due 11/1/2017
 
 
 
14,500

 
14,436

 
14,449

 17,391 Shares of Series A-1 Preferred Stock
 
 
 
 
 
313

 
89

 17,391 Shares of Common Stock
 
 
 
 
 
187

 
—

 
 
 
 
 
 
14,936

 
14,538

 Psilos Group Partners IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
 2.35% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Mansell Group, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/31/2015
 
 
 
5,046

 
5,023

 
5,028

 First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 12/31/2015
 
 
 
9,568

 
9,546

 
9,537

 
 
 
 
 
 
14,569

 
14,565

 Enhanced Recovery Company, LLC
 
Diversified support services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015 (14)
 
 
 
10,750

 
10,688

 
10,705

 First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015 (14)
 
 
 
16,013

 
15,957

 
15,983

 First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (14)
 
 
 
500

 
479

 
500

 
 
 
 
 
 
27,124

 
27,188

 Welocalize, Inc.
 
Internet software & services
 
 
 
 
 
 
 3,393,060 Common Units in RPWL Holdings, LLC
 
 
 
 
 
3,393

 
5,835

 
 
 
 
 
 
3,393

 
5,835

 Miche Bag, LLC (9)
 
Apparel, accessories
& luxury goods
 
 
 
 
 
 
 First Lien Term Loan B, LIBOR+10% (3% floor) cash 3% PIK due 12/7/2015 (14)
 
 
 
17,936

 
16,778

 
5,856

 First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015 (14)
 
 
 
1,000

 
974

 
500

 10,371 shares of series A preferred equity interest
 
 
 
 
 
1,037

 
—

 1,358.854 shares of series C preferred equity interest
 
 
 
 
 
136

 
—

 146,289 shares of series D common equity interest
 
 
 
 
 
1,463

 
—

 
 
 
 
 
 
20,388

 
6,356

 Bunker Hill Capital II (QP), L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.51% limited partnership interest (12)
 
 
 
 
 
368

 
254

 
 
 
 
 
 
368

 
254




See notes to Consolidated Financial Statements.


19
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Drugtest, Inc. (9)
 
Human resources & employment services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 6/27/2018 (14)
 
 
 
$
13,297

 
$
13,211

 
$
13,406

 First Lien Term Loan B, LIBOR+10% (1% floor) cash 1.5% PIK due 6/27/2018 (14)
 
 
 
13,395

 
13,356

 
13,344

 First Lien Revolver, LIBOR+6% (1% floor) cash due 6/27/2018 (10)(14)
 
 
 
 
 
(19
)
 
—

 Acquisition Line, LIBOR+5.75% cash due 6/27/2015 (14)
 
 
 
9,100

 
9,100

 
9,100

 
 
 
 
 
 
35,648

 
35,850

 Physicians Pharmacy Alliance, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016
 
 
 
10,823

 
10,722

 
10,794

 
 
 
 
 
 
10,722

 
10,794

 Cardon Healthcare Network, LLC
 
Diversified support services
 
 
 
 
 
 
 69,487 Class A Units
 
 
 
 
 
265

 
602

 
 
 
 
 
 
265

 
602

 Phoenix Brands Merger Sub LLC (9)
 
Household products
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016 (14)
 
 
 
3,675

 
3,632

 
3,524

 Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017
 
 
 
31,590

 
31,389

 
30,154

 First Lien Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016 (14)
 
 
 
3,000

 
2,955

 
3,000

 
 
 
 
 
 
37,976

 
36,678

 CCCG, LLC (9)
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 12/29/2017 (14)
 
 
 
34,572

 
34,259

 
30,309

 First Lien Revolver, LIBOR+5.5% (1.75% floor) cash due 12/29/2017 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
34,259

 
30,309

 Maverick Healthcare Group, LLC
 
Healthcare equipment
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+5.5% cash (1.75% floor) cash due 12/31/2016 (14)
 
 
16,722

 
16,165

 
16,576

 First Lien Term Loan B, LIBOR+9% cash (1.75% floor) cash due 12/31/2016 (14)
 
 
 
38,500

 
38,243

 
38,256

 CapEx Line, LIBOR+5.75% (1.75% floor) cash due 12/31/2016 (14)
 
 
 
1,260

 
1,160

 
1,255

 
 
 
 
 
 
55,568

 
56,087

 Refac Optical Group (9)
 
Specialty stores
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018 (14)
 
 
 
21,950

 
21,832

 
21,643

 First Lien Term Loan B, LIBOR+8.5% cash, 1.75% PIK due 9/30/2018 (14)
 
 
 
33,408

 
33,161

 
32,707

 First Lien Term Loan C, 12% cash due 9/30/2018
 
 
 
3,405

 
3,405

 
3,401

 First Lien Revolver, LIBOR+7.5% cash due 9/30/2018 (14)
 
 
 
1,600

 
1,557

 
1,600

 1,550.9435 Shares of Common Stock in Refac Holdings, Inc.
 
 
 
 
1

 
—

 550.9435 Series A-2 Preferred Stock in Refac Holdings, Inc.
 
 
 
 
305

 
—

 1,000 Series A Preferred Stock in Refac Holdings, Inc.
 
 
 
 
 
999

 
134

 
 
 
 
 
 
61,260

 
59,485

 Charter Brokerage, LLC
 
Oil & gas equipment services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+6.5% (1.5% floor) cash due 10/10/2016 (14)
 
 
 
27,215

 
27,166

 
27,198

 Mezzanine Term Loan, 11.75% cash 2% PIK due 10/10/2017
 
 
 
12,217

 
12,182

 
12,190

 Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 10/10/2016 (10)(14)
 
 
 
 
 
(26
)
 
—

 
 
 
 
 
 
39,322

 
39,388

 Baird Capital Partners V, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.4% limited partnership interest (6)(12)
 
 
 
 
 
826

 
753

 
 
 
 
 
 
826

 
753

 Discovery Practice Management, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+9.75% cash due 11/4/2018 (14)
 
 
 
19,787

 
19,707

 
20,323

 Senior Revolver, LIBOR+6% cash due 11/4/2018 (14)
 
 
 
1,500

 
1,484

 
1,500

 Capex Line, LIBOR+7% cash due 11/4/2018 (14)
 
 
 
750

 
750

 
750

 
 
 
 
 
 
21,941

 
22,573

See notes to Consolidated Financial Statements.

20
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Milestone Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.85% limited partnership interest (6)(12)
 
 
 
 
 
$
1,131

 
$
1,118

 
 
 
 
 
 
1,131

 
1,118

 National Spine and Pain Centers, LLC
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1.6% PIK due 9/27/2017
 
 
 
$
29,740

 
29,607

 
29,726

 317,282.97 Class A Units (6)
 
 
 
 
 
317

 
609

 
 
 
 
 
 
29,924

 
30,335

 RCPDirect, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.91% limited partnership interest (6)(12)
 
 
 
 
 
656

 
787

 
 
 
 
 
 
656

 
787

 The MedTech Group, Inc. (9)
 
Healthcare equipment
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/7/2016 (14)
 
 
 
7,460

 
7,415

 
7,427

 
 
 
 
 
 
7,415

 
7,427

 Digi-Star Acquisition Holdings, Inc.
 
Industrial machinery
 
 
 
 
 
 
 Subordinated Term Loan, 12% cash 1.5% PIK due 11/18/2017
 
 
 
16,698

 
16,632

 
16,673

 264.37 Class A Preferred Units
 
 
 
 
 
115

 
122

 2,954.87 Class A Common Units (6)
 
 
 
 
 
36

 
478

 
 
 
 
 
 
16,783

 
17,273

 CRGT, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 Mezzanine Term Loan, 12.5% cash 3% PIK due 3/9/2018
 
 
 
27,566

 
27,421

 
27,741

 
 
 
 
 
 
27,421

 
27,741

 Riverside Fund V, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.48% limited partnership interest (6)(12)
 
 
 
 
 
578

 
390

 
 
 
 
 
 
578

 
390

 World 50, Inc.
 
Research & consulting services
 
 
 
 
 
 
 Senior Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (14)
 
 
 
7,947

 
7,880

 
7,956

 Senior Term Loan B, 12.5% cash due 3/30/2017
 
 
 
7,000

 
6,958

 
7,006

 Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)(14)
 
 
 
 
 
(30
)
 
—

 
 
 
 
 
 
14,808

 
14,962

 ACON Equity Partners III, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.13% limited partnership interest (6)(12)
 
 
 
 
 
498

 
447

 
 
 
 
 
 
498

 
447

 BMC Acquisition, Inc.
 
Other diversified financial services
 
 
 
 
 
 
 500 Series A Preferred Shares
 
 
 
 
 
499

 
604

 50,000 Common Shares
 
 
 
 
 
1

 
1

 
 
 
 
 
 
500

 
605

 Ansira Partners, Inc. (9)
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (14)
 
 
 
5,329

 
5,286

 
5,321

 First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)(14)
 
 
 
 
 
(5
)
 
—

 250 Preferred Units & 250 Class A Common Units of Ansira Holdings, LLC
 
 
 
 
250

 
331

 
 
 
 
 
 
5,531

 
5,652

 Edmentum, Inc.
 
Education services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019 (14)
 
 
 
17,000

 
17,000

 
16,815

 
 
 
 
 
 
17,000

 
16,815




See notes to Consolidated Financial Statements.


21
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 I Drive Safely, LLC
 
Education services
 
 
 
 
 
 
 75,000 Class A Common Units of IDS Investments, LLC
 
 
 
 
 
$
1,000

 
$
902

 
 
 
 
 
 
1,000

 
902

 Yeti Acquisition, LLC (9)
 
Leisure products
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017 (14)
 
 
 
$
11,007

 
10,978

 
11,010

 First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK, due 6/15/2017 (14)
 
 
 
8,290

 
8,278

 
8,287

 First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)(14)
 
 
 
 
 
(10
)
 
—

 1,500 Common Stock Units of Yeti Holdings, Inc.
 
 
 
 
 
1,500

 
4,286

 
 
 
 
 
 
20,746

 
23,583

 Specialized Education Services, Inc.
 
Education services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (1.5% floor) cash due 6/28/2017 (14)
 
 
 
8,554

 
8,554

 
8,411

 Subordinated Term Loan B, 11% cash 1.5% PIK due 6/28/2018
 
 
 
18,112

 
18,112

 
17,903

 
 
 
 
 
 
26,666

 
26,314

 Vitalyst Holdings, Inc. (formerly known as PC Helps Support, LLC)
 
IT consulting & other services
 
 
 
 
 
 
 Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018
 
 
 
19,092

 
19,092

 
18,999

 675 Series A Preferred Units of PCH Support Holdings, Inc.
 
 
 
 
 
675

 
807

 7,500 Class A Common Stock Units of PCH Support Holdings, Inc.
 
 
 
 
75

 
—

 
 
 
 
 
 
19,842

 
19,806

 Olson + Co., Inc. (9)
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/30/2017 (14)
 
 
 
8,556

 
8,556

 
8,553

 First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 9/30/2017 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
8,556

 
8,553

 Beecken Petty O'Keefe Fund IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (12)
 
 
 
 
 
567

 
525

 
 
 
 
 
 
567

 
525

 Deltek, Inc. (9)
 
IT consulting & other services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019 (14)
 
 
 
25,000

 
25,000

 
25,127

 First Lien Revolver, LIBOR+4.75% (1.25% floor) cash due 10/10/2017 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
25,000

 
25,127

 First American Payment Systems, LP
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019 (14)
 
 
 
23,304

 
23,304

 
23,190

 First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
23,304

 
23,190

 Dexter Axle Company
 
Auto parts & equipment
 
 
 
 
 
 
 1,500 Common Shares in Dexter Axle Holding Company
 
 
 
 
 
1,500

 
2,507

 
 
 
 
 
 
1,500

 
2,507

 Comprehensive Pharmacy Services LLC
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 11.25% cash 1.5% PIK due 11/30/2019
 
 
 
14,362

 
14,362

 
14,342

 20,000 Common Shares in MCP CPS Group Holdings, Inc.
 
 
 
 
 
2,000

 
2,570

 
 
 
 
 
 
16,362

 
16,912

 Garretson Firm Resolution Group, Inc.
 
Diversified support services
 
 
 
 
 
 
 First Lien Senior Term Loan, LIBOR+5% (1.25% floor) cash due 12/20/2018 (14)
 
 
 
6,984

 
6,984

 
6,975

 Mezzanine Term Loan, 11% cash 1.5% PIK due 6/20/2019
 
 
 
5,095

 
5,095

 
5,100

 First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017 (14)
 
 
 
391

 
391

 
391

 4,950,000 Preferred Units in GRG Holdings, LP
 
 
 
 
 
495

 
432

 50,000 Common Units in GRG Holdings, LP
 
 
 
 
 
5

 
—

 
 
 
 
 
 
12,970

 
12,898




See notes to Consolidated Financial Statements.


22
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Teaching Strategies, LLC
 
Education services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+6% (1.25% floor) cash due 12/21/2017 (14)
 
 
 
$
46,360

 
$
46,355

 
$
46,360

 First Lien Term Loan B, LIBOR+8.35% (1.25% floor) cash 3.15% PIK due 12/21/2017 (14)
 
 
27,975

 
27,973

 
27,976

 First Lien Revolver, LIBOR+6% (1.25% floor) cash due 12/21/2017 (10)(14)
 
 
 
 
 
(1
)
 
—

 
 
 
 
 
 
74,327

 
74,336

 Omniplex World Services Corporation
 
Security & alarm services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018
 
 
 
12,785

 
12,785

 
12,681

 500 units Class A Common Units in Omniplex Holdings Corp.
 
 
 
 
500

 
575

 
 
 
 
 
 
13,285

 
13,256

 Dominion Diagnostics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018
 
 
 
15,990

 
15,990

 
16,053

 
 
 
 
 
 
15,990

 
16,053

 Affordable Care, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019 (14)
 
 
 
21,500

 
21,500

 
21,656

 
 
 
 
 
 
21,500

 
21,656

 Aderant North America, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/20/2019 (14)
 
 
 
7,000

 
7,000

 
7,036

 
 
 
 
 
 
7,000

 
7,036

 AdVenture Interactive, Corp.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (13)(14)
 
 
 
108,989

 
108,968

 
109,249

 First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (10)(14)
 
 
 
 
 
(1
)
 
—

 2,000 Preferred Units of AVI Holdings, L.P.
 
 
 
 
 
1,811

 
1,325

 
 
 
 
 
 
110,778

 
110,574

 CoAdvantage Corporation
 
Human resources & employment services
 
 
 
 
 
 
 Mezzanine Term Loan, 11.5% cash 1.25% PIK due 12/31/2018
 
 
 
14,893

 
14,893

 
14,934

 50,000 Class A Units in CIP CoAdvantage Investments LLC
 
 
 
 
 
557

 
701

 
 
 
 
 
 
15,450

 
15,635

 EducationDynamics, LLC (9)
 
Education services
 
 
 
 
 
 
 Mezzanine Term Loan, 12% cash 6% PIK due 1/16/2017
 
 
 
12,462

 
12,462

 
12,035

 
 
 
 
 
 
12,462

 
12,035

 Sterling Capital Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.2% limited partnership interest (6)(12)
 
 
 
 
 
874

 
761

 
 
 
 
 
 
874

 
761

 Devicor Medical Products, Inc.
 
Healthcare equipment
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5% (2% floor) cash due 7/8/2015 (14)
 
 
 
12,785

 
12,785

 
12,782

 
 
 
 
 
 
12,785

 
12,782

 RP Crown Parent, LLC
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (10)(14)
 
 
 
 
 
(472
)
 
—

 
 
 
 
 
 
(472
)
 
—

 Advanced Pain Management
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018 (14)
 
 
 
24,000

 
24,000

 
23,914

 
 
 
 
 
 
24,000

 
23,914

 Rocket Software, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2019 (14)
 
 
 
10,475

 
10,443

 
10,452

 
 
 
 
 
 
10,443

 
10,452

 TravelClick, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 5/6/2019
 
 
 
4,988

 
4,988

 
4,994

 Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/8/2021 (14)
 
 
 
10,000

 
10,000

 
9,971

 
 
 
 
 
 
14,988

 
14,965

 Pingora MSR Opportunity Fund I-A, LP
 
Thrift & mortgage finance
 
 
 
 
 
 
 1.9% limited partnership interest (12)
 
 
 
 
 
4,056

 
3,966

 
 
 
 
 
 
4,056

 
3,966

See notes to Consolidated Financial Statements.

23
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Credit Infonet, Inc. (9)
 
Data processing & outsourced services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 10/26/2018
 
 
 
$
13,292

 
$
13,292

 
$
13,387

 
 
 
 
 
 
13,292

 
13,387

 2Checkout.com, Inc.
 
Diversified support services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5% cash due 6/26/2016 (14)
 
 
 
2,150

 
2,148

 
2,150

 
 
 
 
 
 
2,148

 
2,150

 Meritas Schools Holdings, LLC
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 6/25/2019 (14)
 
 
 
8,345

 
8,345

 
8,336

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 1/23/2021 (14)
 
 
 
19,500

 
19,500

 
19,493

 
 
 
 
 
 
27,845

 
27,829

 Chicago Growth Partners III, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Royal Adhesives and Sealants, LLC
 
Specialty chemicals
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 1/31/2019 (11) (14)
 
 
 
13,500

 
13,500

 
13,580

 
 
 
 
 
 
13,500

 
13,580

 Bracket Holding Corp.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020 (14)
 
 
 
32,000

 
32,000

 
31,767

 50,000 Common Units in AB Group Holdings, LP
 
 
 
 
 
500

 
294

 
 
 
 
 
 
32,500

 
32,061

 Salus CLO 2012-1, Ltd.
 
Asset management & custody banks
 
 
 
 
 
 
 Class F Deferrable Notes - A, LIBOR+11.5% cash due 3/5/2021 (12)(14)
 
 
 
7,500

 
7,500

 
7,500

 Class F Deferrable Notes - B, LIBOR+10.85% cash due 3/5/2021 (12)(14)
 
 
 
22,000

 
22,000

 
22,000

 
 
 
 
 
 
29,500

 
29,500

 HealthEdge Software, Inc.
 
Application software
 
 
 
 
 
 
 Second Lien Term Loan, 12% cash due 9/30/2018
 
 
 
17,500

 
17,320

 
17,463

 482,453 Series A-3 Preferred Stock Warrants (exercise price $1.450918)
 
 
 
 
213

 
722

 
 
 
 
 
 
17,533

 
18,185

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
13,813

 
13,813

 
13,872

 First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
4,179

 
4,179

 
4,179

 CapEx Line, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
 
 
—

 
—

 1,000,000 Class A Units in InMotion Entertainment Holdings, LLC
 
 
 
 
 
1,000

 
1,169

 
 
 
 
 
 
18,992

 
19,220

 BMC Software Finance, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% (1% floor) cash due 9/10/2018
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 CT Technologies Intermediate Holdings, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/4/2020 (14)
 
 
 
12,000

 
12,000

 
11,920

 
 
 
 
 
 
12,000

 
11,920

 Thing5, LLC
 
Data processing & outsourced services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 10/11/2018 (13)(14)
 
 
 
45,000

 
45,000

 
44,780

 First Lien Revolver, LIBOR+7% (1% floor) cash due 10/11/2018 (14)
 
 
 
 
 
—

 
—

 2,000,000 in T5 Investment Vehicle, LLC (6)
 
 
 
 
 
2,000

 
1,667

 
 
 
 
 
 
47,000

 
46,447

 Epic Health Services, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/18/2019 (14)
 
 
 
25,000

 
25,000

 
24,877

 
 
 
 
 
 
25,000

 
24,877

 Kason Corporation
 
Industrial machinery
 
 
 
 
 
 
 Mezzanine Term Loan, 11.5% cash 1.75% PIK due 10/28/2019
 
 
 
5,695

 
5,695

 
5,630

 450 Class A Preferred Units in Kason Investment, LLC
 
 
 
 
 
450

 
396

 5,000 Class A Common Units in Kason Investment, LLC
 
 
 
 
 
50

 
—

 
 
 
 
 
 
6,195

 
6,026

See notes to Consolidated Financial Statements.

24
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 First Choice ER, LLC
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 10/31/2018 (14)
 
 
 
$
55,000

 
$
55,000

 
$
55,457

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 10/31/2018 (14)
 
 
 
 
 
—

 
—

 First Lien Delayed Draw, LIBOR+7.5% (1% floor) cash due 4/30/2015 (14)
 
 
 
25,000

 
25,000

 
25,067

 
 
 
 
 
 
80,000

 
80,524

 SPC Partners V, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.571% limited partnership interest (6)(12)
 
 
 
 
 
585

 
521

 
 
 
 
 
 
585

 
521

 Systems Maintenance Services Holdings, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/18/2020 (14)
 
 
 
24,000

 
24,000

 
24,353

 
 
 
 
 
 
24,000

 
24,353

 P2 Upstream Acquisition Co.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, L+4% (1% floor) cash due 10/31/2018
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Vandelay Industries Merger Sub, Inc.
 
Industrial machinery
 
 
 
 
 
 
 Second Lien Term Loan, 10.75% cash 1% PIK due 11/12/2019
 
 
 
27,001

 
27,001

 
27,251

 2,500,000 Class A Common Units in Vandelay Industries, L.P.
 
 
 
 
 
2,500

 
3,461

 
 
 
 
 
 
29,501

 
30,712

 Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5% (1% floor) cash due 11/4/2020 (14)
 
 
 
 
 
—

 
—

 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 11/4/2021 (14)
 
 
 
8,000

 
8,000

 
8,083

 
 
 
 
 
 
8,000

 
8,083

 SugarSync, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+10% (0.5% floor) cash due 11/18/2016 (14)
 
 
 
6,500

 
6,500

 
6,500

 
 
 
 
 
 
6,500

 
6,500

 The Active Network, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/15/2021 (14)
 
 
 
13,600

 
13,600

 
13,609

 
 
 
 
 
 
13,600

 
13,609

 OmniSYS Acquisition Corporation
 
Diversified support services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 11/21/2018 (14)
 
 
 
10,670

 
10,666

 
10,611

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 11/21/2018 (14)
 
 
 
 
 
—

 
—

 100,000 Common Units in OSYS Holdings, LLC
 
 
 
 
 
1,000

 
961

 
 
 
 
 
 
11,666

 
11,572

 All Web Leads, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1% floor) cash due 11/26/2018 (14)
 
 
 
25,050

 
25,047

 
24,864

 First Lien Revolver, LIBOR+8% (1% floor) cash due 11/26/2018 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
25,047

 
24,864

 Moelis Capital Partners Opportunity Fund I-B, LP
 
Multi-sector holdings
 
 
 
 
 
 
 1.0% limited partnership interest (6)(12)
 
 
 
 
 
715

 
677

 
 
 
 
 
 
715

 
677

 Aden & Anais Merger Sub, Inc.
 
Apparel, accessories & luxury goods
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 6/23/2019
 
 
 
12,189

 
12,189

 
12,330

 30,000 Common Units in Aden & Anais Holdings, Inc.
 
 
 
 
 
3,000

 
3,973

 
 
 
 
 
 
15,189

 
16,303

 Lift Brands Holdings Inc.
 
Leisure facilities
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/23/2019 (14)
 
 
 
43,721

 
43,708

 
43,474

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 12/23/2019 (14)
 
 
 
3,500

 
3,497

 
3,500

 2,000,000 Class A Common Units in Snap Investments, LLC
 
 
 
 
 
2,000

 
2,142

 
 
 
 
 
 
49,205

 
49,116

See notes to Consolidated Financial Statements.

25
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 Tailwind Capital Partners II, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.3% limited partnership interest (6)(12)
 
 
 
 
 
$
274

 
$
274

 
 
 
 
 
 
274

 
274

 Long's Drugs Incorporated
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1% PIK due 1/31/2020
 
 
 
$
9,519

 
9,518

 
9,530

 50 Series A Preferred Shares in Long's Drugs Incorporated
 
 
 
 
 
500

 
548

 
 
 
 
 
 
10,018

 
10,078

 American Cadastre, LLC
 
Systems software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5% (1% floor) cash due 8/14/2015 (14)
 
 
 
5,595

 
5,592

 
5,345

 
 
 
 
 
 
5,592

 
5,345

 Five9, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 2/20/2019 (14)
 
 
 
20,000

 
19,721

 
20,294

 118,577 Common Stock Warrants (exercise price $10.12)
 
 
 
 
 
321

 
69

 
 
 
 
 
 
20,042

 
20,363

 Crealta Pharmaceuticals LLC
 
Pharmaceuticals
 
 
 
 
 
 
 Second Lien Term Loan, 12.75% cash due 8/21/2020
 
 
 
20,000

 
20,000

 
19,640

 
 
 
 
 
 
20,000

 
19,640

 Conviva Inc.
 
Application software
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.75% (1% floor) cash due 2/28/2018 (14)
 
 
 
5,000

 
4,913

 
4,998

 417,851 Series D Preferred Stock Warrants (exercise price $1.1966)
 
 
 
 
 
104

 
79

 
 
 
 
 
 
5,017

 
5,077

 OnCourse Learning Corporation
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/28/2019 (14)
 
 
 
55,000

 
54,969

 
55,154

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 2/28/2019 (14)
 
 
 
2,000

 
1,998

 
2,000

 200,000 Class A Units in CIP OCL Investments, LLC
 
 
 
 
 
2,000

 
1,755

 
 
 
 
 
 
58,967

 
58,909

 ShareThis, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+10.5% (1% floor) cash due 3/5/2018 (14)
 
 
 
15,000

 
14,686

 
15,115

 345,452 Series C Preferred Stock Warrants (exercise price $3.0395)
 
 
 
 
 
367

 
282

 
 
 
 
 
 
15,053

 
15,397

 Aegis Toxicology Sciences Corporation
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/24/2021 (14)
 
 
 
18,000

 
18,000

 
18,044

 
 
 
 
 
 
18,000

 
18,044

 Aptean, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/26/2021 (14)
 
 
 
3,000

 
3,000

 
3,020

 
 
 
 
 
 
3,000

 
3,020

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 3/31/2019 (14)
 
 
 
22,752

 
22,734

 
22,873

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 3/31/2019 (10)(14)
 
 
 
 
 
(3
)
 
—

 
 
 
 
 
 
22,731

 
22,873

 Total Military Management, Inc.
 
Air freight and logistics
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 3/31/2019 (14)
 
 
 
9,750

 
9,750

 
9,759

 Delayed Draw Term Loan, LIBOR+5.75% (1.25% floor) cash due 3/31/2019 (14)
 
 
 
 
 
—

 
—

 First Lien Revolver, LIBOR+5.75% (1.25% floor) cash due 3/31/2019 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
9,750

 
9,759

 ExamSoft Worldwide, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1% floor) cash due 5/1/2019 (14)
 
 
 
15,000

 
14,834

 
14,992

 First Lien Revolver, LIBOR+8% (1% floor) cash due 5/1/2019 (14)
 
 
 
 
 
—

 
—

 180,707 Class C Units in ExamSoft Investor LLC
 
 
 
 
 
181

 
17

 
 
 
 
 
 
15,015

 
15,009


See notes to Consolidated Financial Statements.

26
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 Language Line, LLC
 
Integrated telecommunication services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.75% floor) cash due 12/20/2016 (14)
 
 
 
$
6,600

 
$
6,592

 
$
6,605

 
 
 
 
 
 
6,592

 
6,605

 DigiCert, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 6/2/2020 (14)
 
 
 
42,000

 
42,000

 
42,010

 
 
 
 
 
 
42,000

 
42,010

 Puerto Rico Cable Acquisition Company Inc.
 
Cable & satellite
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 5/30/2019 (12)(14)
 
 
 
27,000

 
27,000

 
27,019

 
 
 
 
 
 
27,000

 
27,019

 RCPDirect II, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (12)
 
 
 
 
 
10

 
10

 
 
 
 
 
 
10

 
10

 PR Wireless, Inc. (12)
 
Integrated telecommunication services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9% (1% floor) cash due 6/27/2020 (14)
 
 
 
9,975

 
9,975

 
9,325

 118.4211 Common Stock Warrants (exercise price $0.01)
 
 
 
 
 
—

 
557

 
 
 
 
 
 
9,975

 
9,882

 Integral Development Corporation
 
Other diversified financial services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9.5% (1% floor) cash due 7/10/2019 (14)
 
 
 
15,000

 
15,000

 
15,000

 1,078,284 Common Stock Warrants (exercise price $0.9274)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
15,000

 
15,000

 Loftware, Inc.
 
Internet software & services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1% PIK due 7/18/2020
 
 
 
6,013

 
6,013

 
6,013

 300,000 Class A Common Units in RPLF Holdings, LLC
 
 
 
 
 
300

 
300

 
 
 
 
 
 
6,313

 
6,313

 Tectum Holdings, Inc.
 
Auto parts & equipment
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 1/28/2021 (14)
 
 
 
15,000

 
15,000

 
15,000

 
 
 
 
 
 
15,000

 
15,000

 TV Borrower US, LLC (12)
 
Integrated telecommunication services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 7/8/2021 (14)
 
 
 
30,000

 
30,000

 
30,000

 
 
 
 
 
 
30,000

 
30,000

 Webster Capital III, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
0.754% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 L Squared Capital Partners LLC
 
Multi-sector holdings
 
 
 
 
 
 
 2% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 ERS Acquisition Corp.
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 9/10/2018 (14)
 
 
 
40,000

 
40,000

 
40,000

 
 
 
 
 
 
40,000

 
40,000

 BeyondTrust Software, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Term Loan LIBOR+7% (1% floor) cash due 9/25/2019 (14)
 
 
 
112,500

 
112,434

 
112,500

 First Lien Revolver, LIBOR+7% (1% floor) cash due 9/25/2019 (10)(14)
 
 
 
 
 
(6
)
 
—

 4,500,000 Class A membership interests in BeyondTrust Holdings LLC
 
 
 
 
 
4,500

 
4,500

 
 
 
 
 
 
116,928

 
117,000

 Total Non-Control/Non-Affiliate Investments (139.4% of net assets)
 
 
 
 
 
$
2,069,301

 
$
2,060,278

 Total Portfolio Investments (168.8% of net assets)
 
 
 
 
 
$
2,494,683

 
$
2,495,914



See notes to Consolidated Financial Statements.


27
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


(1)
All debt investments are income producing unless otherwise noted. Equity is non-income producing unless otherwise noted.
(2)
See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.
(3)
Control Investments are defined by the 1940 Act as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
(4)
Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.
(5)
Equity ownership may be held in shares or units of companies related to the portfolio companies.
(6)
Income producing through payment of dividends or distributions.
(7)
Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
(8)
Principal includes accumulated PIK interest and is net of repayments.
(9)Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to tier pricing arrangements or financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:
Portfolio Company
 
Effective date
 
Cash interest
 
PIK interest
 
Reason
Refac Optical Group
 
August 22, 2014
 
+1.0% on Revolver
 
+1.0% on Term Loan A
+1.0% on Term Loan B
+1.0% on Term Loan C
 
Per loan amendment
EducationDynamics, LLC
 
August 14, 2014
 
-12.0% on Term Loan
 
+12.0% on Term Loan
 
Per loan amendment
Cenegenics, LLC
 
August 14, 2014
 
 
 
+2.0% on Term Loan
 
Per loan amendment
Credit Infonet, Inc.
 
July 1, 2014
 
-1.25% on Term Loan
 
+1.25% on Term Loan
 
Per loan amendment
HealthDrive Corporation
 
July 1, 2014
 
-1.0% on Term Loan A
-3.0% on Term Loan B
 
+3.0% on Term Loan A
+4.0% on Term Loan B
 
Per loan amendment
Dominion Diagnostics, LLC
 
April 8, 2014
 
 
 
- 1.0% on Term Loan
 
Per loan amendment
Phoenix Brands Merger Sub LLC
 
April 1, 2014
 
+ 0.75% on Senior Term Loan and Revolver - 10% on Subordinated Term Loan
 
+ 12.75% on Subordinated Term Loan
 
Per loan amendment
Olson + Co., Inc.
 
December 13, 2013
 
+ 0.25% on Term Loan and Revolver
 
 
 
Per loan amendment
Discovery Practice Management, Inc.
 
November 4, 2013
 
+ 2.25% on Term Loan A - 1.0% on Revolver
 
 
 
Per loan amendment
TransTrade Operators, Inc.
 
August 1, 2014
 
- 11.0% on Term Loan
 
+ 7.0% on Term Loan
 
Per loan amendment
Miche Bag, LLC
 
July 26, 2013
 
- 3.0% on Term Loan B
 
- 1.0% on Term Loan B
 
Per loan amendment
Ansira Partners, Inc.
 
June 30, 2013
 
- 0.5% on Term Loan and Revolver
 
 
 
Tier pricing per loan agreement
Drugtest, Inc.
 
June 27, 2013
 
- 1.5% on Term Loan A
- 0.75% on Term Loan B
- 0.25% on Revolver
 
- 0.5% on Term Loan B
 
Per loan amendment
The MedTech Group, Inc.
 
June 21, 2013
 
- 0.5% on Term Loan
 
 
 
Per loan amendment
Physicians Pharmacy Alliance, Inc.
 
April 1, 2013
 
+ 1.0% on Term Loan
 
+ 1.0% on Term Loan
 
Per loan agreement
Deltek, Inc.
 
February 1, 2013
 
- 1.0% on Revolver
 
 
 
Per loan amendment
JTC Education, Inc.
 
January 1, 2013
 
+ 0.25% on Term Loan
 
 
 
Per loan amendment
CCCG, LLC
 
November 15, 2012
 
+ 0.5% on Term Loan
 
+ 1.0% on Term Loan
 
Per loan amendment
Yeti Acquisition, LLC
 
October 1, 2012
 
– 1.0% on Term Loan A,
   Term Loan B and Revolver
 
 
 
Tier pricing per loan 
agreement
(10)
Investment has undrawn commitments and a negative cost basis as a result of unamortized fees. Unamortized fees are classified as unearned income which reduces cost basis.
(11)
Represents an unfunded commitment to fund limited partnership interest. See Note 3 to the Consolidated Financial Statements.
(12)
Investment is not a "qualifying asset" as defined under Section 55(a) of the 1940 Act, in whole or in part.
(13)
The sale of a portion of this loan does not qualify for sale accounting under ASC Topic 860 - Transfers and Servicing, and therefore, the entire debt investment remains in the Schedule of Investments. (See Note 15 in the accompanying notes to the Consolidated Financial Statements.)
(14)
The principal balance outstanding for all floating rate loans is indexed to LIBOR and an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.

28
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2014


(15)
Each of the Company's investments are pledged as collateral under one or more of its credit facilities. A single investment may be divided into parts that are individually pledged as collateral to separate credit facilities.
(16)
The Company, through its investments in HFG Holdings, LLC, acquired a majority equity interest in Healthcare Finance Group, LLC, which provides financing to healthcare companies. The fair value of the Company's debt and equity investments in HFG Holdings approximates the fair value of HFG Holdings' equity investment in Healthcare Finance Group, LLC.
(17)
As defined in the 1940 Act, the Company is deemed to be both an "Affiliated Person" of and to "Control" this portfolio company as the Company owns more than 25% of the portfolio company's outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). See Schedule 12-14 in the accompanying notes to the consolidated financial statements for transactions during the three months ended December 31, 2014 in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control.

See notes to Consolidated Financial Statements.

29
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Note 1. Organization
Fifth Street Mezzanine Partners III, L.P. (the "Partnership"), a Delaware limited partnership, was organized on February 15, 2007 to primarily invest in debt securities of small and middle market companies. FSMPIII GP, LLC was the Partnership's general partner (the "General Partner"). The Partnership's investments were managed by Fifth Street Management LLC (the "Investment Adviser"). The General Partner and Investment Adviser were under common ownership.
Effective January 2, 2008, the Partnership merged with and into Fifth Street Finance Corp. (the "Company"), an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940 (the "1940 Act"). Fifth Street Finance Corp. is managed by the Investment Adviser.
The Company also has certain wholly-owned subsidiaries, including subsidiaries that are not consolidated for U.S. federal income tax purposes, which hold certain portfolio investments of the Company. These subsidiaries are consolidated with the Company for accounting purposes, and the portfolio investments held by the subsidiaries are included in the Company's Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.
On November 28, 2011, the Company transferred the listing of its common stock from the New York Stock Exchange to the NASDAQ Global Select Market, where it continues to trade under the symbol "FSC." The following table reflects common stock offerings that have occurred from inception through December 31, 2014:
 
Date
 
Transaction
 
Shares
 
Offering
 price
 
 
 
Gross 
proceeds
June 17, 2008
 
Initial public offering
 
10,000,000

 
$
14.12

 
  
 
141.2 million
July 21, 2009
 
Follow-on public offering (including underwriters' exercise of over-allotment option)
 
9,487,500

 
9.25

 
  
 
87.8 million
September 25, 2009
 
Follow-on public offering (including underwriters' exercise of over-allotment option)
 
5,520,000

 
10.50

 
  
 
58.0 million
January 27, 2010
 
Follow-on public offering
 
7,000,000

 
11.20

 
  
 
78.4 million
February 25, 2010
 
Underwriters' partial exercise of over-allotment option
 
300,500

 
11.20

 
  
 
3.4 million
June 21, 2010
 
Follow-on public offering (including underwriters' exercise of over-allotment option)
 
9,200,000

 
11.50

 
  
 
105.8 million
December 2010
 
At-the-Market offering
 
429,110

 
11.87

 
(1
)
 
5.1 million
February 4, 2011
 
Follow-on public offering (including underwriters' exercise of over-allotment option)
 
11,500,000

 
12.65

 
  
 
145.5 million
June 24, 2011
 
Follow-on public offering (including underwriters' partial exercise of over-allotment option)
 
5,558,469

 
11.72

 
  
 
65.1 million
January 26, 2012
 
Follow-on public offering
 
10,000,000

 
10.07

 
  
 
100.7 million
September 14, 2012
 
Follow-on public offering (including underwriters' partial exercise of over-allotment option)
 
8,451,486

 
10.79

 
  
 
91.2 million
December 7, 2012
 
Follow-on public offering
 
14,000,000

 
10.68

 
 
 
149.5 million
December 14, 2012
 
Underwriters' partial exercise of over-allotment option
 
725,000

 
10.68

 
 
 
7.7 million
April 15, 2013
 
Follow-on public offering
 
13,500,000

 
10.85

 
 
 
146.5 million
April 26, 2013
 
Underwriters' partial exercise of over-allotment option
 
935,253

 
10.85

 
 
 
10.1 million
September 26, 2013
 
Follow-on public offering (including underwriters' partial exercise of over-allotment option)
 
17,643,000

 
10.31

 
 
 
181.9 million
July 11, 2014
 
Follow-on public offering
 
13,250,000

 
9.95

 
 
 
131.8 million
September 2014
 
At-the-Market offering
 
841,456

 
9.86

 
(1
)
 
8.3 million
 ______________
(1)
Average offering price.
On February 3, 2010, the Company's consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. ("FSMP IV"), received a license, effective February 1, 2010, from the United States Small Business Administration, or SBA, to operate as a small business investment company, or SBIC, under Section 301(c) of the Small Business Investment Act of 1958. On May 15, 2012, the Company's consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. ("FSMP V"), received a license, effective May 10, 2012, from the SBA to operate as an SBIC. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.
 
The SBIC licenses allow the Company's SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the satisfaction of certain customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a 10-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid

30
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.
SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million when they have at least $112.5 million in regulatory capital.
As of December 31, 2014, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $137.0 million, as compared to $134.0 million as of September 30, 2014. These debentures bear interest at a weighted average interest rate of 3.567% (excluding the SBA annual charge), as follows:
Rate Fix Date
 
Debenture
Amount
 
Fixed
Interest
Rate
 
SBA
Annual
Charge
September 2010
 
$
73,000

 
3.215
%
 
0.285
%
March 2011
 
65,300

 
4.084

 
0.285

September 2011
 
11,700

 
2.877

 
0.285

As of December 31, 2014, FSMP V had $37.5 million in regulatory capital and $75.0 million in SBA-guaranteed debentures outstanding, which had a fair value of $64.7 million. These debentures bear interest at a weighted average interest rate of 2.835% (excluding the SBA annual charge), as follows:
Rate Fix Date
 
Debenture
Amount
 
Fixed
Interest
Rate
 
SBA
Annual Charge
March 2013
 
$
31,750

 
2.351
%
 
0.804
%
March 2014
 
43,250

 
3.191

 
0.804

As of December 31, 2014, the $225.0 million of SBA-guaranteed debentures held by the Company's SBIC subsidiaries carry a weighted average interest rate of 3.323%.
For the three months ended December 31, 2014 and December 31, 2013, the Company recorded interest expense of $2.4 million and $1.9 million, respectively, related to the SBA-guaranteed debentures of both SBIC subsidiaries.
The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a "change of control" or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, the Company's SBIC subsidiaries may also be limited in their ability to make distributions to the Company if they do not have sufficient capital, in accordance with SBA regulations.
The Company's SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that the SBIC subsidiaries will receive SBA-guaranteed debenture funding and is further dependent upon the SBIC subsidiaries continuing to be in compliance with SBA regulations and policies.
The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries' assets over the Company's stockholders in the event the Company liquidates the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries upon an event of default.
The Company has received exemptive relief from the Securities and Exchange Commission ("SEC") to permit it to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the Company's 200% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200% asset coverage test by permitting it to borrow up to $225 million more than it would otherwise be able to under the 1940 Act absent the receipt of this exemptive relief.
Note 2. Significant Accounting Policies
Basis of Presentation:
The Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. In the opinion of management, all adjustments of a normal recurring nature considered necessary for the fair presentation of the

31
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Consolidated Financial Statements have been made. The financial results of the Company's portfolio investments are not consolidated in the Company's Consolidated Financial Statements. As provided under ASU 2013-08 which amended Accounting Standards Codification ("ASC") 946 – Financial Services – Investment Companies ("ASC 946"), the Company is an investment company as it is regulated under the 1940 Act.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements and accompanying notes. These estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions and conditions. The most significant estimates inherent in the preparation of the Company's Consolidated Financial Statements are the valuation of investments and revenue recognition.
The Consolidated Financial Statements include portfolio investments at fair value of $2.7 billion and $2.5 billion at December 31, 2014 and September 30, 2014, respectively. The portfolio investments represent 193.6% and 168.8% of net assets at December 31, 2014 and September 30, 2014, respectively, and their fair values have been determined in good faith by the Company's Board of Directors. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, "Control Investments" are defined as investments in companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation; "Affiliate Investments" are defined as investments in companies in which the Company owns between 5% and 25% of the voting securities; and "Non-Control/Non-Affiliate Investments" are defined as investments that are neither Control Investments nor Affiliate Investments.
Consolidation:
As provided under Regulation S-X and ASC 946, the Company will generally not consolidate its investment in a company other than a wholly-owned investment company or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of certain of the Company's wholly-owned subsidiaries in its consolidated financial statements.

Fair Value Measurements:
The Financial Accounting Standards Board ("FASB") ASC 820 Fair Value Measurements and Disclosures ("ASC 820") defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity.
Assets and liabilities recorded at fair value in the Company's Consolidated Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
 
•
Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
•
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
•
Level 3 — Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Under ASC 820, the Company performs detailed valuations of its debt and equity investments for which quotations are not readily available on an individual basis, using bond yield, market and income approaches as appropriate. In general, the Company utilizes the

32
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


bond yield method in determining the fair value of its debt investments, as long as it is appropriate. If, in the Company's judgment, the bond yield approach is not appropriate, it may use the market or income approach in determining the fair value of the Company's investment in the portfolio company. In certain instances, the Company may use alternative methodologies, including an asset liquidation, expected recovery model or other alternative approaches.

Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, the Company obtains and analyzes readily available market quotations provided by independent pricing services for all of the Company's senior secured debt investments for which quotations are available. In determining the fair value of a particular investment, pricing services use observable market information, including both binding and non-binding indicative quotations. These investments are generally classified as Level 3 because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities or may require adjustment for investment-specific factors or restrictions.

The Company evaluates the prices obtained from independent pricing services based on available market information and company specific data that could affect the credit quality and/or fair value of the investment. Investments for which market quotations are readily available may be valued at such market quotations. In order to validate market quotations, the Company looks at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. The Company does not adjust any of the prices received from these sources unless the Company has a reason to believe any such market quotations are not reflective of the fair value of an investment.

Market quotations may be deemed not to represent fair value where the Company believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security causes current market quotations not to reflect the fair value of the security, among other reasons. Examples of these events could include cases when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a "fire sale" by a distressed seller. In these instances, the Company values such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available (as discussed below).

If the quotation provided by the pricing service is based on only one or two market sources, the Company performs additional procedures to corroborate such information, generally including but not limited to, the bond yield approach discussed below and a quantitative and qualitative assessment of the credit quality and market trends affecting the portfolio company.
Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Company reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.
Under the market approach, the Company estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Company analyzes various factors, including the portfolio company's historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization), cash flows, net income or revenues. The Company generally requires portfolio companies to provide annual audited and quarterly or monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year. The Company determines the fair value of its limited partnership interests based on the most recently available net asset value of the partnership.
Under the income approach, the Company generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.
The Company estimates the fair value of privately held warrants using a Black Scholes pricing model. At each reporting date, privately held warrants are valued based on an analysis of various factors and subjective assumptions including, but not limited to, the current stock price (by analyzing the portfolio company's operating performance and financial condition and general market conditions), the expected period until exercise, expected volatility of the underlying stock price, expected dividends and the risk free rate. Changes in the subjective input assumptions can materially affect the fair value estimates.
The Company's Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of the investment portfolio:
•
The quarterly valuation process begins with each portfolio company or investment being initially valued either by the Company's capital markets group for quoted investments or the Company's finance department for unquoted investments;

33
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


•Preliminary valuations are then reviewed and discussed with principals of the Investment Adviser;
•
Separately, independent valuation firms engaged by the Board of Directors prepare preliminary valuations of our investments, on a selected basis, for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment, and submit the reports to the Company;
•
The finance department compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;
•
The finance department prepares a valuation report for the Audit Committee of the Board of Directors;
•
The Audit Committee of the Board of Directors is apprised of the preliminary valuations of the independent valuation firms;
•
The Audit Committee of the Board of Directors reviews the preliminary valuations with the portfolio managers of the Investment Adviser, and the finance department responds and supplements the preliminary valuations to reflect any comments provided by the Audit Committee;
•
The Audit Committee of the Board of Directors makes a recommendation to the Board of Directors regarding the fair value of the investments in the Company's portfolio; and
•
The Board of Directors discusses valuations and determines the fair value of each investment in the Company's portfolio in good faith.
The fair value of each of the Company's investments at December 31, 2014 and September 30, 2014 was determined in good faith by the Board of Directors. The Board of Directors has authorized the engagement of independent valuation firms to provide valuation assistance. The Company will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of a portion of the Company's portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter, with a substantial portion being valued over the course of each fiscal year. However, the Board of Directors is ultimately and solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company's valuation policy and a consistently applied valuation process.
In certain cases, an independent valuation firm may perform a portfolio company valuation which is reviewed and, where appropriate, relied upon by the Company's Board of Directors in determining the fair value of such investment.
Investment Income:
Interest income, adjusted for accretion of original issue discount or "OID," is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. In connection with its investment, the Company sometimes receives nominal cost equity that is valued as part of the negotiation process with the particular portfolio company. When the Company receives nominal cost equity, the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. Any resulting discount from recording the loan, or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan.
For the Company's secured borrowings, the interest earned on the entire loan balance is recorded within interest income and the interest earned by the buyer from the partial loan sales is recorded within interest expense in the Consolidated Statements of Operations.
The Company generally recognizes dividend income on the ex-dividend date.
The Company has investments in debt securities which contain payment-in-kind ("PIK") interest provisions. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income. The Company stops accruing PIK interest on investments when it is determined that PIK interest is no longer collectible.
Fee income consists of the monthly servicing fees, advisory fees, structuring fees and prepayment fees that the Company receives in connection with its debt investments. These fees are recognized as earned.
The Company has also structured exit fees across certain of its portfolio investments to be received upon the future exit of those investments. Exit fees are fees which are payable upon the exit of a debt security. These fees are to be paid to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan.

34
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Gain on Extinguishment of Convertible Notes:
The Company may repurchase its convertible notes ("Convertible Notes") in accordance with the 1940 Act and the rules promulgated thereunder and may surrender these Convertible Notes to Deutsche Bank Trust Company Americas (the "Trustee"), as trustee, for cancellation. If the repurchase occurs at a purchase price below par value, a gain on the extinguishment of these Convertible Notes is recorded. The amount of the gain recorded is the difference between the reacquisition price and the net carrying amount of the Convertible Notes, net of the proportionate amount of unamortized debt issuance costs.
Cash and Cash Equivalents:
Cash and cash equivalents consist of demand deposits and highly liquid investments with maturities of three months or less, when acquired. The Company places its cash and cash equivalents with financial institutions and, at times, cash held in bank accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Restricted Cash:
Included in restricted cash is $40.5 million that was held at U.S. Bank, National Association in connection with the Company's Sumitomo facility (as defined in Note 6 — Lines of Credit). The Company is restricted in terms of access to this cash until such time as the Company submits its required monthly reporting schedules and Sumitomo Mitsui Banking Corporation verifies the Company's compliance per the terms of the credit agreement with the Company. Additionally, the Company has $5.8 million that is held at Wells Fargo Bank, National Association ("Wells Fargo") that represents collateral for standby letters of credit issued to portfolio companies under the Wells Fargo facility (as defined in Note 6 — Lines of Credit).
Due from Portfolio Companies:
Due from portfolio companies consists of amounts payable to the Company from its portfolio companies, excluding those amounts attributable to interest, dividends or fees receivable. These amounts are recognized as they become payable to the Company (e.g., principal payments on the schedule amortization payment date).
Deferred Financing Costs:
Deferred financing costs consist of fees and expenses paid in connection with the closing or amending of credit facilities and debt offerings, and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the terms of the respective credit facilities and debt securities. This amortization expense is included in interest expense in the Company's Consolidated Statements of Operations. Upon early termination of a credit facility, the remaining balance of unamortized fees related to such facility is accelerated into interest expense.

Offering Costs:
Offering costs consist of fees and expenses incurred in connection with the public offer and sale of the Company's common stock, including legal, accounting and printing fees. There were no offering costs charged to capital during the three months ended December 31, 2014 and December 31, 2013.
Income Taxes:
As a regulated investment company, or RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Company intends to distribute between 90% and 100% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any U.S. federal or state income tax at the RIC level. As a RIC, the Company is also subject to a 4% U.S. federal excise tax based on distribution requirements of its taxable income on a calendar year basis. The Company anticipates timely distribution of its taxable income within the tax rules. The Company did not incur a U.S. federal excise tax for calendar years 2012 and 2013 and does not expect to incur a U.S. federal excise tax for calendar year 2014. The Company may incur a U.S. federal excise tax in future years.
The purpose of the Company's taxable subsidiaries is to permit the Company to hold equity investments in portfolio companies which are "pass through" entities for U.S. federal income tax purposes in order to comply with the "source income" requirements contained in the RIC tax requirements. The taxable subsidiaries are not consolidated with the Company for U.S. federal income tax purposes and may generate income tax expense as a result of their ownership of certain portfolio investments. This income tax expense, if any, would be reflected in the Company's Consolidated Statements of Operations. The Company uses the asset and liability method to account for its taxable subsidiaries' income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax

35
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences.
ASC 740 Accounting for Uncertainty in Income Taxes ("ASC 740") provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the Company's Consolidated Financial Statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management's determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company recognizes the tax benefits of uncertain tax positions only where the position is "more-likely-than-not" to be sustained assuming examination by tax authorities. Management has analyzed the Company's tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years 2011, 2012 or 2013. The Company identifies its major tax jurisdictions as U.S. Federal and Connecticut, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.    
Secured Borrowings:
The Company follows the guidance in ASC 860 Transfers and Servicing when accounting for loan participations and other partial loan sales. Such guidance provides accounting and reporting standards for transfers and servicing of financial assets and requires a participation or other partial loan sale to meet the definition of a "participating interest," as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company's Consolidated Statement of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value. See Note 15 for additional information.
Payable to Syndication Partners:
The Company acts as administrative agent for certain loans it originates and then syndicates. As administrative agent, the Company receives interest, principal and/or other payments from borrowers that gets redistributed to syndication partners. Such amounts are recorded as payable to syndication partners on the Consolidated Statements of Assets and Liabilities.
Fair Value Option:
The Company adopted ASC 825-10-25-1 Financial Instruments – Fair Value Option ("ASC 825") as of February 19, 2014, and elected the fair value option for its secured borrowings which had a cost basis of $22.5 million in the aggregate, as of December 31, 2014. The Company believes that by electing the fair value option for these financial instruments, it provides consistent measurement of the assets and liabilities which relate to the partial loan sales mentioned above.
Recent Accounting Pronouncements:
In June 2013, the FASB issued ASU 2013-08, "Financial Services – Investment Companies (ASC 946): Amendments to the Scope, Measurement, and Disclosure Requirements," ("ASU 2013-08") which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act will be automatically deemed an investment company under the new GAAP definition. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. As the Company is regulated by the 1940 Act, there was no impact on the consolidated financial results as it is automatically treated as a GAAP investment company under the ASU 2013-08.
In May 2014, the FASB issued guidance to establish a comprehensive and converged standard on revenue recognition to enable financial statement users to better understand and consistently analyze an entity's revenue across industries, transactions and geographies. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. The new guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Qualitative and quantitative information is required to be disclosed about: (1) contracts with customers, (2) significant judgments and changes in judgments, and (3) assets recognized from costs to obtain or fulfill a contract. The new guidance will apply

36
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


to all entities. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. Early application is not permitted. The Company is in the process of evaluating the impact that this guidance will have on its financial statements.
Note 3. Portfolio Investments
At December 31, 2014, 193.6% of net assets, or $2.7 billion, was invested in 137 portfolio investments, including the Company's investment in subordinated notes and LLC equity interests in Senior Loan Fund JV I, LLC ("SLF JV I") with a fair value of $61.8 million and $4.8 million, respectively, and 4.6% of net assets, or $64.3 million, was invested in cash and cash equivalents. In comparison, at September 30, 2014, 168.8% of net assets, or $2.5 billion, was invested in 124 portfolio investments, including the Company's investment in subordinated notes and LLC equity interests in SLF JV I with a fair value of $54.0 million and $5.6 million, respectively, and 5.9% of net assets, or $86.7 million, was invested in cash and cash equivalents. As of December 31, 2014, 82.2% of the Company's portfolio at fair value consisted of senior secured debt investments that were secured by priority liens on the assets of the portfolio companies. Moreover, the Company held equity investments in certain of its portfolio companies consisting of common stock, preferred stock, limited partnership interests or limited liability company interests. These instruments generally do not produce a current return but are held for potential investment appreciation and capital gain.
During the three months ended December 31, 2014 and December 31, 2013, the Company recorded net realized gains (losses) on investments and secured borrowings of $(17.6) million and $3.2 million, respectively. During the three months ended December 31, 2014 and December 31, 2013, the Company recorded net unrealized depreciation on investments and secured borrowings of $48.6 million and $5.7 million, respectively.
 
The composition of the Company's investments as of December 31, 2014 and September 30, 2014 at cost and fair value was as follows:
 
 
 
December 31, 2014
 
September 30, 2014
 
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Investments in debt securities
 
$
2,567,869

 
$
2,503,406

 
$
2,309,405

 
$
2,291,459

Investments in equity securities
 
132,489

 
151,602

 
125,296

 
144,822

Debt investment in senior loan fund vehicle
 
61,723

 
61,831

 
53,984

 
53,984

Equity investment in senior loan fund vehicle
 
6,858

 
4,756

 
5,998

 
5,649

Total
 
$
2,768,939

 
$
2,721,595

 
$
2,494,683

 
$
2,495,914

The composition of the Company's debt investments as of December 31, 2014 and September 30, 2014 at fixed rates and floating rates was as follows:
 
 
 
December 31, 2014
 
September 30, 2014
 
 
Fair Value
 
% of Debt
Portfolio
 
Fair Value
 
% of Debt
Portfolio
Fixed rate debt securities
 
$
634,475

 
24.73
%
 
$
703,967

 
30.01
%
Floating rate debt securities, including subordinated notes of SLF JV I
 
1,930,762

 
75.27

 
1,641,476

 
69.99

Total
 
$
2,565,237

 
100.00
%
 
$
2,345,443

 
100.00
%
The following table presents the financial instruments carried at fair value as of December 31, 2014, by caption on the Company's Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820:

37
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments in debt securities (senior secured)
 
$
—

 
$
—

 
$
2,238,204

 
$
2,238,204

Investments in debt securities (subordinated, including subordinated notes of SLF JV I)
 
—

 
—

 
297,775

 
297,775

Investments in debt securities (Collateralized loan obligation, or CLO)
 
—

 
—

 
29,258

 
29,258

Investments in equity securities (preferred)
 
—

 
—

 
28,012

 
28,012

Investments in equity securities (common, including LLC equity interests of SLF JV I)
 
—

 
—

 
128,346

 
128,346

Total investments at fair value
 
$
—

 
$
—

 
$
2,721,595

 
$
2,721,595

Secured borrowings relating to senior secured debt investments
 
—

 
—

 
22,246

 
22,246

Total liabilities at fair value
 
$
—

 
$
—

 
$
22,246

 
$
22,246

The following table presents the financial instruments carried at fair value as of September 30, 2014, by caption on the Company's Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820:
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments in debt securities (senior secured)
 
$
—

 
$
—

 
$
1,972,088

 
$
1,972,088

Investments in debt securities (subordinated, including subordinated notes of SLF JV I)
 
—

 
—

 
343,855

 
343,855

Investments in debt securities (CLO)
 
—

 
—

 
29,500

 
29,500

Investments in equity securities (preferred)
 
—

 
—

 
26,469

 
26,469

Investments in equity securities (common, including LLC equity interests of SLF JV I)
 
—

 
—

 
124,002

 
124,002

Total investments at fair value
 
$
—

 
$
—

 
$
2,495,914

 
$
2,495,914

Secured borrowings relating to senior secured debt investments
 
—

 
—

 
84,803

 
84,803

Total liabilities at fair value
 
$
—

 
$
—

 
$
84,803

 
$
84,803


When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors are the most significant to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated by external sources). Accordingly, the appreciation (depreciation) in the tables below includes changes in fair value due in part to observable factors that are part of the valuation methodology.
The following table provides a roll-forward in the changes in fair value from September 30, 2014 to December 31, 2014, for all investments for which the Company determines fair value using unobservable (Level 3) factors:
 

38
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


 
 
Investments
 
Liabilities
 
 
Senior Secured Debt
 
Subordinated
Debt (including subordinated notes of SLF JV I)
 
CLO Debt
 
Preferred
Equity
 
Common
Equity (including LLC equity interests of SLF JV I)
 
Total
 
Secured Borrowings
Fair value as of September 30, 2014
 
$
1,972,088

 
$
343,855

 
$
29,500

 
$
26,469

 
$
124,002

 
$
2,495,914

 
$
84,803

New investments & net revolver activity
 
705,533

 
7,739

 
—

 
2,488

 
6,568

 
722,328

 
—

Redemptions/repayments
 
(393,187
)
 
(39,964
)
 
—

 
—

 
(2,046
)
 
(435,197
)
 
(62,630
)
Net accrual of PIK interest income
 
1,835

 
1,463

 
—

 
448

 
—

 
3,746

 
—

Accretion of original issue discount
 
145

 
—

 
—

 
—

 
113

 
258

 
—

Net change in unearned income
 
352

 
224

 
—

 
—

 
—

 
576

 
—

Net unrealized appreciation (depreciation) on investments
 
(30,625
)
 
(15,542
)
 
(242
)
 
(220
)
 
(1,946
)
 
(48,575
)
 
—

Net unrealized depreciation on secured borrowings
 
—

 
—

 
—

 
—

 
—

 
—

 
332

Realized gain (loss) on investments
 
(17,937
)
 
—

 
—

 
(1,173
)
 
1,655

 
(17,455
)
 
—

Realized gain on secured borrowings
 
—

 
—

 
—

 
—

 
—

 
—

 
(259
)
Transfer into (out of) Level 3
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Fair value as of December 31, 2014
 
$
2,238,204

 
$
297,775

 
$
29,258

 
$
28,012

 
$
128,346

 
$
2,721,595

 
$
22,246

Net unrealized appreciation (depreciation) relating to Level 3 assets & liabilities still held at December 31, 2014 and reported within net unrealized appreciation (depreciation) in the Consolidated Statement of Operations for the three months ended December 31, 2014
 
$
(48,562
)
 
$
(15,542
)
 
$
(242
)
 
$
(1,393
)
 
$
(291
)
 
$
(66,030
)
 
$
73


The following table provides a roll-forward in the changes in fair value from September 30, 2013 to December 31, 2013, for all investments for which the Company determines fair value using unobservable (Level 3) factors:
 
 
 
Senior Secured Debt
 
Subordinated
Debt
 
CLO Debt
 
Preferred
Equity
 
Common
Equity
 
Total
Fair value as of September 30, 2013
 
$
1,467,665

 
$
296,298

 
$
29,500

 
$
25,648

 
$
73,935

 
$
1,893,046

New investments & net revolver activity
 
609,340

 
21,746

 
—

 
1,533

 
17,524

 
650,143

Redemptions/repayments
 
(148,528
)
 
(13,756
)
 
—

 
(150
)
 
(2,695
)
 
(165,129
)
Net accrual of PIK interest income
 
1,459

 
(493
)
 
—

 
406

 
—

 
1,372

Accretion of original issue discount
 
164

 
—

 
—

 
—

 
—

 
164

Net change in unearned income
 
1

 
156

 
—

 
—

 
—

 
157

Net unrealized appreciation (depreciation)
 
(2,213
)
 
(74
)
 
—

 
(1,485
)
 
(1,946
)
 
(5,718
)
Unrealized adjustments due to deal exits
 
321

 
156

 
—

 
—

 
2,200

 
2,677

Transfer into (out of) Level 3
 
—

 
—

 
—

 
—

 
—

 
—

Fair value as of December 31, 2013
 
$
1,928,209

 
$
304,033

 
$
29,500

 
$
25,952

 
$
89,018

 
$
2,376,712

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at December 31, 2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended December 31, 2013
 
$
(1,892
)
 
$
82

 
$
—

 
$
(1,485
)
 
$
254

 
$
(3,041
)

The Company generally utilizes a bond yield model to estimate the fair value of its debt investments when there is not a readily available market value (Level 3), which model is based on the present value of expected cash flows from the debt investments. The significant observable inputs into the model are market interest rates for debt with similar characteristics, which are adjusted for the portfolio company's credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position. These factors are incorporated into the calculation of the capital structure

39
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


premium, tranche specific risk premium/(discount), size premium and industry premium/(discount), which are significant unobservable inputs into the model.

Significant Unobservable Inputs for Level 3 Investments
The following tables provide quantitative information related to the significant unobservable inputs for Level 3 investments and secured borrowings, which are carried at fair value, as of December 31, 2014 and September 30, 2014, respectively:
Asset
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Senior secured debt
 
$
1,704,590

 
Bond yield approach
 
Capital structure premium
 
(a)
0.0%
-
2.0%
 
0.7%
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(5.5)%
-
7.5%
 
0.9%
 
 
 
 
 
 
Size premium
 
(a)
0.5%
-
2.0%
 
1.3%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.5)%
-
6.4%
 
0.2%
 
 
27,247

 
Market and income approach
 
Weighted average cost of capital
 
 
27.0%
-
28.0%
 
27.7%
 
 
 
 
 
 
Company specific risk premium
 
(a)
10.0%
-
10.0%
 
10.0%
 
 
 
 
 
 
Revenue growth rate
 
 
(28.2)%
-
39.6%
 
(5.5)%
 
 
506,367

 
Market quotations
 
Broker quoted price
 
(d)
N/A
-
N/A
 
N/A
Subordinated debt
 
216,037

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk premium
 
(a)
0.7%
-
10.0%
 
3.5%
 
 
 
 
 
 
Size premium
 
(a)
1.0%
-
2.0%
 
1.3%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(0.9)%
-
0.5%
 
0.1%
 
 
19,908

 
Market and income approach
 
Weighted average cost of capital
 
 
19.0%
-
19.0%
 
19.0%
 
 
 
 
 
 
Company specific risk premium
 
(a)
5.0%
-
5.0%
 
5.0%
 
 
 
 
 
 
Revenue growth rate
 
 
2.5%
-
2.5%
 
2.5%
 
 
 
 
 
 
EBITDA multiple
 
(b)
11.2x
-
11.2x
 
11.2x
SLF JV I Subordinated Debt
 
61,830

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk premium
 
(a)
(2.1)%
-
(2.1)%
 
(2.1)%
 
 
 
 
 
 
Size premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.3)%
-
(1.3)%
 
(1.3)%
CLO Debt
 
29,258

 
Market quotations
 
Broker quoted price
 
(d)
N/A
-
N/A
 
N/A
SLF JV I Equity
 
4,756

 
Net asset value
 
Net asset value
 
 
N/A
-
N/A
 
N/A
Preferred & common equity
 
151,602

 
Market and income approach
 
Weighted average cost of capital
 
 
12.0%
-
36.0%
 
17.0%
 
 
 
 
 
 
Company specific risk premium
 
(a)
1.0%
-
15.0%
 
2.9%
 
 
 
 
 
 
Revenue growth rate
 
 
(16.6)%
-
105.7%
 
6.1%
 
 
 
 
 
 
EBITDA multiple
 
(b)
1.7x
-
23.1x
 
9.1x
 
 
 
 
 
 
Revenue multiple
 
(b)
3.5x
-
5.2x
 
4.3x
 
 
 
 
 
 
Book value multiple
 
(b)
0.9x
-
1.0x
 
0.9x
Total
 
$
2,721,595

 
 
 
 
 
 
 
 
 
 
 
Liability
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Secured borrowings
 
$
22,246

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(1.0)%
-
(1.0)%
 
(1.0)%
 
 
 
 
 
 
Size premium
 
(a)
1.5%
-
1.5%
 
1.5%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
0.5%
-
0.5%
 
0.5%
Total
 
$
22,246

 
 
 
 
 
 
 
 
 
 
 
 
(a)
Used when market participant would take into account this premium or discount when pricing the investment or secured borrowings.

40
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


(b)
Used when market participant would use such multiples when pricing the investment.
(c)
Weighted averages are calculated based on fair value of investments or secured borrowings.
(d)
The Company generally uses prices provided by an independent pricing service which are non-binding indicative prices on or near the valuation date as the primary basis for the fair value determinations for quoted senior secured debt investments and CLO debt investments. Since these prices are non-binding, they may not be indicative of fair value. Each quoted price is evaluated by the Audit Committee in conjunction with additional information compiled by the Company, including financial performance, recent business developments and various other factors.
Asset
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Senior secured debt
 
$
1,954,623

 
Bond yield approach
 
Capital structure premium
 
(a)
0.0%
-
2.0%
 
0.9%
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(4.3)%
-
10.0%
 
1.4%
 
 
 
 
 
 
Size premium
 
(a)
0.5%
-
2.0%
 
1.2%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.3)%
-
1.3%
 
0.3%
 
 
17,465

 
Market and income approach
 
Weighted average cost of capital
 
 
27.0%
-
27.0%
 
27.0%
 
 
 
 
 
 
Company specific risk premium
 
(a)
10.0%
-
10.0%
 
10.0%
 
 
 
 
 
 
Revenue growth rate
 
 
(29.5)%
 
(29.5)%
 
(29.5)%
Subordinated debt
 
343,506

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk premium
 
(a)
1.0%
-
11.5%
 
4.5%
 
 
 
 
 
 
Size premium
 
(a)
0.5%
-
2.0%
 
1.2%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(0.6)%
-
1.2%
 
0.4%
CLO debt
 
29,500

 
Bond yield approach
 
Market yield
 
 
13.3%
-
13.8%
 
13.5%
SLF JV I
 
5,998

 
Net asset value
 
N/A
 
 
N/A
-
N/A
 
N/A
Preferred & common equity
 
144,822

 
Market and income approach
 
Weighted average cost of capital
 
 
14.0%
-
34.0%
 
17.8%
 
 
 
 
 
 
Company specific risk premium
 
(a)
1.0%
-
15.0%
 
2.8%
 
 
 
 
 
 
Revenue growth rate
 
 
(29.5)%
-
78.3%
 
10.0%
 
 
 
 
 
 
EBITDA multiple
 
(b)
1.4x
-
14.0x
 
9.3x
 
 
 
 
 
 
Revenue multiple
 
(b)
3.5x
-
5.2x
 
4.3x
 
 
 
 
 
 
Book value multiple
 
(b)
0.9x
-
1.1x
 
0.9x
Total
 
$
2,495,914

 
 
 
 
 
 
 
 
 
 
 
Liability
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Secured borrowings
 
$
84,803

 
Bond yield approach
 
Capital structure premium
 
(a)
0.0%
-
0.0%
 
0.0%
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(4.3)%
-
(3.8)%
 
(4.1)%
 
 
 
 
 
 
Size premium
 
(a)
1.0%
-
2.0%
 
1.3%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
0.4%
-
1.0%
 
0.9%
Total
 
$
84,803

 
 
 
 
 
 
 
 
 
 
 

(a)
Used when market participant would take into account this premium or discount when pricing the investment or secured borrowings.
(b)
Used when market participant would use such multiples when pricing the investment.
(c)
Weighted averages are calculated based on fair value of investments or secured borrowings.
Under the bond yield approach, the significant unobservable inputs used in the fair value measurement of the Company's investments in debt securities are capital structure premium, tranche specific risk premium/(discount), size premium and industry premium/(discount). Significant increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement, respectively.

41
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Under the market and income approaches, the significant unobservable inputs used in the fair value measurement of the Company's investments in debt or equity securities are the weighted average cost of capital, company specific risk premium, revenue growth rate, EBITDA multiple, revenue multiple and book value multiple. Significant increases or decreases in a portfolio company's weighted average cost of capital or company specific risk premium in isolation may result in a significantly lower or higher fair value measurement, respectively. Significant increases or decreases in the revenue growth rate or valuation multiples in isolation may result in a significantly higher or lower fair value measurement, respectively.
 
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following table presents the carrying value and fair value of the Company's financial liabilities disclosed, but not carried, at fair value as of December 31, 2014, and the level of each financial liability within the fair value hierarchy:
 
 
 
Carrying
Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Credit facilities payable
 
$
617,495

 
$
617,495

 
$
—

 
$
—

 
$
617,495

SBA debentures payable
 
225,000

 
201,654

 
—

 
—

 
201,654

Unsecured convertible notes payable
 
115,000

 
118,881

 
—

 
—

 
118,881

Unsecured notes payable
 
410,121

 
418,719

 
—

 
160,494

 
258,225

Total
 
$
1,367,616

 
$
1,356,749

 
$
—

 
$
160,494

 
$
1,196,255

The following table presents the carrying value and fair value of the Company's financial liabilities disclosed, but not carried, at fair value as of September 30, 2014 and the level of each financial liability within the fair value hierarchy:
 
 
 
Carrying
Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Credit facilities payable
 
$
317,395

 
$
317,395

 
$
—

 
$
—

 
$
317,395

SBA debentures payable
 
225,000

 
197,126

 
—

 
—

 
197,126

Unsecured convertible notes payable
 
115,000

 
119,025

 
—

 
—

 
119,025

Unsecured notes payable
 
409,878

 
416,539

 
—

 
157,864

 
258,675

Total
 
$
1,067,273

 
$
1,050,085

 
$
—

 
$
157,864

 
$
892,221


The carrying values of credit facilities payable approximates their fair values and are included in Level 3 of the hierarchy.
The Company utilizes the bond yield approach to estimate the fair values of its SBA debentures payable, which are included in Level 3 of the hierarchy. Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flows streams for the debentures. The Company reviews various sources of data involving investments with similar characteristics and assesses the information in the valuation process.
The Company uses the non-binding indicative quoted price as of the valuation date to estimate the fair value of its 4.875% unsecured notes due 2019 and Convertible Notes, which are included in Level 3 of the hierarchy.
The Company uses the unadjusted quoted price as of the valuation date to calculate the fair value of its 5.875% unsecured notes due 2024 and its 6.125% unsecured notes due 2028, which trade under the symbol "FSCE" on the New York Stock Exchange and the symbol "FSCFL" on the NASDAQ Stock Exchange, respectively. As such, these securities are included in Level 2 of the hierarchy.

42
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements consisted of $350.8 million and $325.0 million of unfunded commitments to provide debt and equity financing to its portfolio companies or to fund limited partnership interests as of December 31, 2014 and September 30, 2014, respectively. Such commitments are subject to the portfolio companies' satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Statements of Assets and Liabilities and are not reflected in the Company's Consolidated Statements of Assets and Liabilities. A summary of the composition of the unfunded commitments (consisting of revolvers, term loans, SLF JV I subordinated notes and LLC interests and limited partnership interests) as of December 31, 2014 and September 30, 2014 is shown in the table below:
 
December 31, 2014
 
September 30, 2014
 Senior Loan Fund JV 1, LLC
$
106,419

 
$
115,018

 Yeti Acquisition, LLC
30,000

 
15,000

 Lift Brands Holdings, Inc.
18,000

 
20,000

 BMC Software Finance, Inc.
15,000

 
15,000

 P2 Upstream Acquisition Co.
10,000

 
10,000

 TigerText, Inc.
10,000

 
—

 RP Crown Parent, LLC
9,868

 
10,000

 Deltek, Inc.
9,713

 
3,213

 Ameritox, Ltd.
8,533

 
—

 Trialcard Incorporated
7,800

 
—

 BeyondTrust Software, Inc.
6,495

 
9,375

 Refac Optical Group
6,400

 
6,400

 Thing5, LLC
6,000

 
6,000

 TIBCO Software, Inc.
5,800

 
—

 Integrated Petroleum Technologies, Inc.
5,397

 
5,397

 Integral Development Corporation
5,000

 
5,000

 OnCourse Learning Corporation
5,000

 
3,000

 EOS Fitness Opco Holdings, LLC
5,000

 
—

 InMotion Entertainment Group, LLC
4,951

 
7,916

 Penn Foster, Inc.
4,932

 
—

 Metamorph US 3, LLC
4,900

 
—

 Adventure Interactive, Corp.
4,846

 
4,846

 Pingora MSR Opportunity Fund I, LP (limited partnership interest)
4,222

 
5,944

 World 50, Inc.
4,000

 
4,000

 First Choice ER, LLC (1)
3,681

 
9,181

 First American Payment Systems, LP
3,642

 
5,000

 All Web Leads, Inc.
3,500

 
3,500

 Discovery Practice Management, Inc.
3,468

 
2,682

 OmniSYS Acquisition Corporation
2,500

 
2,500

 Teaching Strategies, LLC
2,400

 
5,000

 Idera, Inc.
2,400

 
—

 TransTrade Operators, Inc.
2,194

 
2,255

 Chicago Growth Partners L.P. (limited partnership interest)
2,000

 
2,000

 Webster Capital III, L.P. (limited partnership interest)
2,000

 
2,000

 ExamSoft Worldwide, Inc.
2,000

 
—

 Miche Group, LLC
2,000

 
—

 Eagle Hospital Physicians, Inc.
1,820

 
1,820

 Tailwind (limited partnership interest)
1,699

 
1,726

 Beecken Petty O'Keefe Fund IV, L.P. (limited partnership interest)
1,433

 
1,433

 SPC Partners V, L.P. (limited partnership interest)
1,428

 
1,415

 Riverside Fund V, LP (limited partnership interest)
1,381

 
1,422

 Ansira Partners, Inc.
1,190

 
1,190

 Sterling Capital Partners IV, L.P. (limited partnership interest)
1,126

 
1,126

 Phoenix Brands Merger Sub LLC
1,071

 
1,286

 Psilos Group Partners IV, LP (limited partnership interest)
1,000

 
1,000

 L Squared Capital Partners (limited partnership interest)
1,000

 
1,000

 Moelis Capital Partners Opportunity Fund I-B, L.P. (limited partnership interest)
992

 
1,285

 RCP Direct II, LP (limited partnership interest)
900

 
990

 Total Military Management, Inc.
857

 
857

 HealthDrive Corporation
734

 
734

 Milestone Partners IV, LP (limited partnership interest)
666

 
869


43
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


 Garretson Firm Resolution Group, Inc.
641

 
859

 Bunker Hill Capital II (QP), LP (limited partnership interest)
620

 
632

 ACON Equity Partners III, LP (limited partnership interest)
502

 
502

 Enhanced Recovery Company, LLC
500

 
1,500

 Riverlake Equity Partners II, LP (limited partnership interest)
358

 
358

 Riverside Fund IV, LP (limited partnership interest)
357

 
357

 RCP Direct, LP (limited partnership interest)
344

 
344

 Baird Capital Partners V, LP (limited partnership interest)
153

 
174

 Drugtest, Inc.
—

 
10,900

 Charter Brokerage, LLC
—

 
4,000

 CPASS Acquisition Company
—

 
2,500

 Olson + Co., Inc.
—

 
1,673

 CCCG, LLC
—

 
1,520

 2Checkout.com, Inc.
—

 
850

 American Cadastre, LLC
—

 
405

Total
$
350,833

 
$
324,954

 (1) In addition to its revolving commitment, the Company has extended a $105.2 million delayed draw term loan facility to First Choice ER, LLC. Specific amounts are made available to the borrower as certain financial requirements are satisfied. As of December 31, 2014, the total amount available to the borrower under this delayed draw facility was $26.4 million, and the facility was drawn at $25.0 million as of such date.
Portfolio Composition

Summaries of the composition of the Company's investment portfolio at cost and fair value as a percentage of total investments are shown in the following tables:
 
 
 
December 31, 2014
 
September 30, 2014
Cost:
 
 
 
 
 
 
 
 
Senior secured debt
 
$
2,285,482

 
82.54
%
 
$
1,988,739

 
79.72
%
Subordinated debt
 
252,887

 
9.13

 
291,166

 
11.67

CLO debt
 
29,500

 
1.07

 
29,500

 
1.18

Subordinated notes of SLF JV I
 
61,723

 
2.23

 
53,984

 
2.16

LLC equity interests of SLF JV I
 
6,858

 
0.25

 
5,998

 
0.24

Purchased equity
 
114,585

 
4.14

 
107,465

 
4.31

Equity grants
 
3,085

 
0.11

 
5,409

 
0.22

Limited partnership interests
 
14,819

 
0.53

 
12,422

 
0.50

Total
 
$
2,768,939

 
100.00
%
 
$
2,494,683

 
100.00
%
Fair Value:
 
 
 
 
 
 
 
 
Senior secured debt
 
$
2,238,204

 
82.24
%
 
$
1,972,088

 
79.01
%
Subordinated debt
 
235,944

 
8.67

 
289,871

 
11.61

CLO debt
 
29,258

 
1.08

 
29,500

 
1.18

Subordinated notes of SLF JV I
 
61,831

 
2.27

 
53,984

 
2.16

LLC equity interests of SLF JV I
 
4,756

 
0.17

 
5,649

 
0.23

Purchased equity
 
130,052

 
4.78

 
125,834

 
5.04

Equity grants
 
7,559

 
0.28

 
7,384

 
0.30

Limited partnership interests
 
13,991

 
0.51

 
11,604

 
0.47

Total
 
$
2,721,595

 
100.00
%
 
$
2,495,914

 
100.00
%

    

44
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The Company primarily invests in portfolio companies located in North America. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company's business. The following tables show the portfolio composition by geographic region at cost and fair value as a percentage of total investments:
 
 
December 31, 2014
 
September 30, 2014
Cost:
 
 
 
 
 
 
 
 
Northeast U.S.
 
$
868,604

 
31.37
%
 
$
729,792

 
29.25
%
Southwest U.S.
 
522,443

 
18.87

 
537,232

 
21.54

Midwest U.S.
 
511,850

 
18.49

 
428,577

 
17.18

Southeast U.S.
 
361,126

 
13.04

 
361,198

 
14.48

West U.S.
 
347,201

 
12.54

 
268,738

 
10.77

International
 
157,715

 
5.69

 
169,146

 
6.78

Total
 
$
2,768,939

 
100.00
%
 
$
2,494,683

 
100.00
%
 
 
 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
 
 
Northeast U.S.
 
$
858,670

 
31.55
%
 
$
738,774

 
29.61
%
Southwest U.S.
 
491,267

 
18.05

 
526,115

 
21.08

Midwest U.S.
 
497,747

 
18.29

 
428,771

 
17.18

Southeast U.S.
 
365,937

 
13.44

 
369,007

 
14.78

West U.S.
 
346,971

 
12.75

 
260,173

 
10.42

International
 
161,003

 
5.92

 
173,074

 
6.93

Total
 
$
2,721,595

 
100.00
%
 
$
2,495,914

 
100.00
%
 

45
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The composition of the Company's portfolio by industry at cost and fair value as of December 31, 2014 and September 30, 2014 were as follows:
 
 
December 31, 2014
 
 
September 30, 2014
Cost:
 
 
 
 
 
 
 
 
 
 Healthcare services
 
$
539,846

 
19.50
%
 
 
$
374,684

 
15.03
%
 Internet software & services
 
320,749

 
11.58

 
 
157,348

 
6.31

 Education services
 
236,864

 
8.55

 
 
233,203

 
9.35

 Advertising
 
148,989

 
5.38

 
 
164,483

 
6.59

 Diversified support services
 
141,574

 
5.11

 
 
117,476

 
4.71

 Specialized finance
 
119,218

 
4.31

 
 
118,726

 
4.76

 Airlines
 
104,515

 
3.77

 
 
129,116

 
5.18

 Application software
 
91,789

 
3.31

 
 
139,008

 
5.57

 IT consulting & other services
 
88,415

 
3.19

 
 
96,262

 
3.86

 Data processing & outsourced services
 
80,072

 
2.89

 
 
60,292

 
2.42

 Multi-sector holdings
 
77,622

 
2.80

 
 
68,348

 
2.74

 Healthcare equipment
 
71,481

 
2.58

 
 
75,767

 
3.04

 Oil & gas equipment services
 
65,534

 
2.37

 
 
96,312

 
3.86

 Industrial machinery
 
64,146

 
2.32

 
 
53,329

 
2.14

 Specialty stores
 
61,614

 
2.23

 
 
61,257

 
2.46

 Research & consulting services
 
52,846

 
1.91

 
 
14,808

 
0.59

 Leisure facilities
 
51,851

 
1.87

 
 
49,248

 
1.97

 Integrated telecommunication services
 
49,288

 
1.78

 
 
46,567

 
1.87

 Pharmaceuticals
 
46,458

 
1.68

 
 
46,380

 
1.86

 Household products
 
36,815

 
1.33

 
 
37,975

 
1.52

 Construction & engineering
 
35,266

 
1.27

 
 
34,695

 
1.39

 Asset management & custody banks
 
29,500

 
1.07

 
 
29,500

 
1.18

 Air freight & logistics
 
27,808

 
1.00

 
 
32,522

 
1.30

 Home improvement retail
 
27,245

 
0.98

 
 
27,531

 
1.10

 Cable & satellite
 
27,000

 
0.98

 
 
27,000

 
1.08

 Consumer electronics
 
21,920

 
0.79

 
 
18,992

 
0.76

 Apparel, accessories & luxury goods
 
21,057

 
0.76

 
 
35,577

 
1.43

 Leisure products
 
20,451

 
0.74

 
 
20,747

 
0.83

 Auto parts & equipment
 
16,500

 
0.60

 
 
16,500

 
0.66

 Food retail
 
16,000

 
0.58

 
 
—

 
—

 Other diversified financial services
 
15,506

 
0.56

 
 
15,500

 
0.62

 Human resources & employment services
 
15,496

 
0.56

 
 
51,097

 
2.05

 Specialty chemicals
 
13,500

 
0.49

 
 
13,500

 
0.54

 Security & alarm services
 
13,326

 
0.48

 
 
13,285

 
0.53

 Healthcare technology
 
8,000

 
0.29

 
 
8,000

 
0.32

 Thrift & mortgage finance
 
5,778

 
0.21

 
 
4,056

 
0.16

 Consumer finance
 
4,900

 
0.18

 
 
—

 
0.00

 Systems software
 
—

 
—

 
 
5,592

 
0.22

Total
 
$
2,768,939

 
100.00
%
 
 
$
2,494,683

 
100.00
%

 

46
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


 
 
December 31, 2014
 
September 30, 2014
Fair Value:
 
 
 
 
 
 
 
 
 Healthcare services
 
$
542,222

 
19.92
%
 
$
380,347

 
15.24
%
 Internet software & services
 
319,498

 
11.74

 
160,509

 
6.43

 Education services
 
223,196

 
8.20

 
231,678

 
9.28

 Advertising
 
147,533

 
5.42

 
164,207

 
6.58

 Diversified support services
 
141,062

 
5.18

 
117,600

 
4.71

 Specialized finance
 
123,323

 
4.53

 
128,721

 
5.16

 Airlines
 
111,025

 
4.08

 
133,056

 
5.33

 Application software
 
92,385

 
3.39

 
140,262

 
5.62

 IT consulting & other services
 
88,035

 
3.23

 
97,027

 
3.89

 Data processing & outsourced services
 
78,999

 
2.90

 
59,833

 
2.40

 Multi-sector holdings
 
74,891

 
2.76

 
67,273

 
2.69

 Healthcare equipment
 
71,797

 
2.64

 
76,296

 
3.06

 Industrial machinery
 
64,281

 
2.36

 
54,830

 
2.20

 Specialty stores
 
59,889

 
2.20

 
59,485

 
2.38

 Research & consulting services
 
52,641

 
1.93

 
14,962

 
0.60

 Leisure facilities
 
52,036

 
1.91

 
49,306

 
1.98

 Oil & gas equipment services
 
48,285

 
1.77

 
92,571

 
3.71

 Integrated telecommunication services
 
47,806

 
1.76

 
46,488

 
1.86

 Pharmaceuticals
 
46,304

 
1.70

 
46,630

 
1.87

 Construction & engineering
 
38,104

 
1.40

 
38,582

 
1.55

 Asset management & custody banks
 
29,258

 
1.08

 
29,500

 
1.18

 Home improvement retail
 
27,439

 
1.01

 
27,897

 
1.12

 Cable & satellite
 
26,663

 
0.98

 
27,019

 
1.08

 Household products
 
25,290

 
0.93

 
36,678

 
1.47

 Leisure products
 
23,475

 
0.86

 
23,583

 
0.94

 Apparel, accessories & luxury goods
 
22,060

 
0.81

 
22,659

 
0.91

 Consumer electronics
 
21,829

 
0.80

 
19,220

 
0.77

 Auto parts & equipment
 
18,138

 
0.67

 
17,507

 
0.70

 Food retail
 
15,930

 
0.59

 
—

 
—

 Human resources & employment services
 
15,863

 
0.58

 
51,486

 
2.06

 Other diversified financial services
 
15,678

 
0.58

 
15,605

 
0.63

 Specialty chemicals
 
13,612

 
0.50

 
13,580

 
0.54

 Security & alarm services
 
13,012

 
0.48

 
13,255

 
0.53

 Air freight & logistics
 
11,697

 
0.43

 
20,868

 
0.84

 Healthcare technology
 
7,800

 
0.29

 
8,083

 
0.32

 Thrift & mortgage finance
 
5,687

 
0.21

 
3,966

 
0.16

 Consumer finance
 
4,852

 
0.18

 
—

 
—

 Systems software
 
—

 
—

 
5,345

 
0.21

Total
 
$
2,721,595

 
100.00
%
 
$
2,495,914

 
100.00
%
The Company's investments are generally in small and mid-sized companies in a variety of industries. At December 31, 2014 and September 30, 2014, the Company had no single investment that represented greater than 5% of the total investment portfolio at fair value. Income, consisting of interest, dividends, fees, other investment income and realization of gains or losses, can fluctuate upon repayment or sale of an investment and in any given year can be highly concentrated among several investments. For the three months ended December 31, 2014 and December 31, 2013 no individual investment produced income that exceeded 10% of investment income.



47
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Senior Loan Fund JV I:
In May, 2014, the Company entered into an LLC agreement with Trinity Universal Insurance Company, a subsidiary of Kemper Corporation ("Kemper") to form SLF JV I. On July 1, 2014, SLF JV I began investing in senior secured loans of middle market companies and other corporate debt securities. The Company co-invests in these securities with Kemper through its investment in SLF JV I. SLF JV I is managed by a four person Board of Directors, two of whom are selected by the Company and two of whom are selected by Kemper. SLF JV I is capitalized pro rata with subordinated notes and LLC equity interests as transactions are completed. All portfolio decisions and investment decisions in respect of SLF JV I must be approved by the SLF JV I investment committee, which consists of one representative of the Company and one representative of Kemper (with approval from a representative of each required). The members provide capital to SLF JV I in the form of subordinated notes and LLC equity interests. As of December 31, 2014 and September 30, 2014, the Company and Kemper owned, in the aggregate, 87.5% and 12.5%, respectively, of each of the outstanding subordinated notes and LLC equity interests.
The Company has determined that SLF JV I is an investment company under ASC 946, however, in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company does not consolidate its noncontrolling interest in SLF JV I.
As of December 31, 2014 and September 30, 2014, SLF JV I had total assets of $265.0 million and $186.0 million, respectively. The Company's investment in SLF JV I consisted of LLC equity interests of $4.8 million and subordinated notes of $61.8 million, at fair value as of December 31, 2014. As of September 30, 2014, the Company's investment consisted of LLC equity interests of $5.6 million and subordinated notes of $54.0 million, at fair value. The subordinated notes are junior in right of payment to the repayment of temporary contributions made by the Company to fund investments of SLF JV I. SLF JV I's portfolio consisted of middle-market and other corporate debt securities of 21 and 18 "eligible portfolio companies" (as defined in the Section 2(a)(46) of the 1940 Act) as of December 31, 2014 and September 30, 2014, respectively. As of December 31, 2014, the largest investment in a single company in SLF JV I's portfolio in aggregate principal amount was $20.0 million, and the five largest investments in portfolio companies in SLF JV I totaled $75.0 million in aggregate principal amount. As of September 30, 2014, the largest investment in a single company in SLF JV I's portfolio in aggregate principal amount was $20.0 million, and the five largest investments in portfolio companies in SLF JV I totaled $60.0 million in aggregate principal amount. The portfolio companies in SLF JV I are in industries similar to those in which the Company may invest directly.
As of December 31, 2014, SLF JV I had total capital commitments of $200.0 million, $175.0 million of which was from the Company and the remaining $25.0 million from Kemper. Approximately $78.4 million and $68.6 million, respectively, was funded as of December 31, 2014 and September 30, 2014 relating to these commitments, of which $68.6 million and $60.0 million, respectively, was from the Company. As of December 31, 2014 and September 30, 2014, the Company had commitments to fund subordinated notes to SLF JV I of $157.5 million, of which $95.8 million and $103.5 million was unfunded, respectively. The subordinated notes mature on May 2, 2021. As of December 31, 2014 and September 30, 2014, the Company had commitments to fund LLC equity interests in SLF JV I of $17.5 million, of which $10.6 million and $11.5 million was unfunded, respectively. Additionally, SLF JV I had a senior revolving credit facility with Deutsche Bank AG, New York Branch ("Deutsche Bank facility") with a stated maturity date of July 1, 2019, which permitted up to $200.0 million of borrowings as of December 31, 2014 and September 30, 2014. Under the Deutsche Bank facility, $130.0 million and $109.3 million was outstanding as of December 31, 2014 and September 30, 2014, respectively.
Below is a summary of SLF JV I's portfolio, followed by a listing of the individual loans in SLF JV I's portfolio as of December 31, 2014 and September 30, 2014:

 
 
December 31, 2014
 
September 30, 2014
Senior secured loans (1)
 
$224,841
 
$158,451
Weighted average current interest rate on senior secured loans (2)
 
7.79%
 
8.09%
Number of borrowers in SLF JV I
 
21
 
18
Largest loan to a single borrower (1)
 
$20,000
 
$20,000
Total of five largest loans to borrowers (1)
 
$75,000
 
$60,000
(1) At principal amount.
(2) Computed as the (a) annual interest on accruing senior secured loans divided by (b) total senior secured loans at principal amount.


48
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


SLF JV I Loan Portfolio as of December 31, 2014
Portfolio Company
 
Business Description
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
 All Web Leads, Inc.
 
Advertising
 
Senior Loan
 
11/2018
 
LIBOR+8% (1% floor)
 
$
9,873

 
$
9,873

 
$
9,670

 AMAG Pharmaceuticals, Inc.

 
Diversified financial services
 
Senior Loan
 
11/2020
 
LIBOR+6.25% (1% floor)
 
15,000

 
15,000

 
15,000

 Ansira Partners, Inc.
 
Advertising
 
Senior Loan
 
5/2017
 
LIBOR+5.0% (1.5% floor)
 
3,382

 
3,367

 
3,351

 Ansira Partners, Inc.
 
Advertising
 
Senior Loan
 
5/2017
 
LIBOR+5.0% (1.5% floor)
 
5,329

 
5,322

 
5,281

 EOS Fitness
 
Leisure facilities
 
Senior Loan
 
12/2019
 
LIBOR+8.75% (0.75% floor)
 
20,000

 
20,000

 
20,000

 First Choice ER, LLC
 
Healthcare services
 
Senior Loan
 
10/2018
 
LIBOR+7.5% (1% floor)
 
20,000

 
20,018

 
19,928

 Garretson Firm Resolution Group, Inc.
 
Diversified support services
 
Senior Loan
 
12/2018
 
LIBOR+5% (1.25% floor)
 
6,551

 
6,543

 
6,485

 GTCR Valor Companies, Inc.
 
Advertising
 
Senior Loan
 
5/2021
 
LIBOR+5% (1% floor)
 
9,975

 
9,741

 
9,738

 H.D. Vest, Inc.
 
Specialty Finance
 
Senior Loan
 
6/2019
 
LIBOR+8% (1.25% floor)
 
8,750

 
8,816

 
8,691

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
Senior Loan
 
10/2018
 
LIBOR+7.75% (1.25% floor)
 
10,000

 
10,035

 
9,940

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
Senior Loan
 
3/2019
 
LIBOR+7.5% (1% floor)
 
9,874

 
9,874

 
9,458

 Lift Brands, Inc.
 
Leisure facilities
 
Senior Loan
 
12/2019
 
LIBOR+7.5% (1% floor)
 
9,874

 
9,874

 
9,869

 MedTech Group, Inc.
 
Healthcare equipment
 
Senior Loan
 
9/2016
 
LIBOR+5.25% (1.25% floor)
 
4,663

 
4,666

 
4,610

 MedTech Group, Inc.
 
Healthcare equipment
 
Senior Loan
 
9/2016
 
LIBOR+5.25% (1.25% floor)
 
7,460

 
7,430

 
7,376

 Meritas Schools Holdings LLC
 
Education services
 
Senior Loan
 
6/2019
 
LIBOR+5.75% (1.25% floor)
 
5,845

 
5,839

 
5,824

 OmniSYS Acquisition Corporation
 
Diversified support services
 
Senior Loan
 
11/2018
 
LIBOR+7.5% (1% floor)
 
9,873

 
9,873

 
9,556

 OnCourse Learning Corporation
 
Education services
 
Senior Loan
 
2/2019
 
LIBOR+7.5% (1% floor)
 
10,000

 
10,000

 
10,017

 TIBCO Software, Inc.

 
Internet software & services
 
Senior Loan
 
12/2020
 
LIBOR+5.5% (1% floor)
 
6,000

 
5,715

 
5,835

 TIBCO Software, Inc.

 
Internet software & services
 
 Bridge loan
 
12/2020
 
LIBOR+4.5% (1% floor)
 
4,900

 
4,876

 
4,876

 Total Military Management, Inc.
 
Air freight and logistics
 
Senior Loan
 
3/2019
 
LIBOR+5.75% (1.25% floor)
 
3,175

 
3,175

 
3,179

 Total Military Management, Inc.
 
Air freight and logistics
 
Senior Loan
 
3/2019
 
LIBOR+5.75% (1.25% floor)
 
9,750

 
9,758

 
9,763

 TravelClick, Inc.
 
Internet software & services
 
Senior Loan
 
11/2021
 
LIBOR+7.5% (1% floor)
 
10,000

 
10,000

 
9,650

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
6/2017
 
LIBOR+7% (1.25% floor)
 
5,941

 
5,983

 
6,037

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
6/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
3,701

 
3,719

 
3,617

 TV Borrower US, LLC
 
Integrated telecommunications services
 
Senior Loan
 
1/2021
 
LIBOR+5% (1% floor)
 
9,975

 
9,975

 
9,796

 Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
Senior Loan
 
11/2020
 
LIBOR+5% (1% floor)
 
4,950

 
4,950

 
4,925

 
 
 
 
 
 
 
 
 
 
$
224,841

 
$
224,422

 
$
222,472

(1) Represents the current interest rate as of December 31, 2014. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is not included in the Company's Board of Directors' valuation process described elsewhere herein.


49
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


SLF JV I Loan Portfolio as of September 30, 2014
Portfolio Company
 
Business Description
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
 All Web Leads, Inc.
 
Advertising
 
Senior Loan
 
11/2018
 
LIBOR+8% (1% floor)
 
$
9,937

 
$
9,937

 
$
9,867

 Ansira Partners, Inc.
 
Advertising
 
Senior Loan
 
05/2017
 
LIBOR+5.0% (1.5% floor)
 
3,553

 
3,536

 
3,549

 Drugtest, Inc.
 
Human resources & employment services
 
Senior Loan
 
06/2018
 
LIBOR+ 5.75% (1% floor)
 
9,859

 
9,924

 
9,940

 First Choice ER, LLC
 
Healthcare services
 
Senior Loan
 
10/2018
 
LIBOR+7.5% (1% floor)
 
20,000

 
20,019

 
20,166

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
Senior Loan
 
10/2018
 
LIBOR+7.75% (1.25% floor)
 
10,000

 
10,038

 
10,043

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
Senior Loan
 
03/2019
 
LIBOR+7.5% (1% floor)
 
9,937

 
9,937

 
9,987

 Lift Brands, Inc.
 
Leisure facilities
 
Senior Loan
 
12/2019
 
LIBOR+7.5% (1% floor)
 
9,937

 
9,937

 
9,881

 MedTech Group, Inc.
 
Healthcare equipment
 
Senior Loan
 
09/2016
 
LIBOR+5.25% (1.25% floor)
 
4,663

 
4,667

 
4,644

 Olson + Co., Inc.
 
Advertising
 
Senior Loan
 
09/2017
 
LIBOR+5.75% (1.5% floor)
 
4,257

 
4,257

 
4,257

 OmniSYS Acquisition Corporation
 
Diversified support services
 
Senior Loan
 
11/2018
 
LIBOR+7.5% (1% floor)
 
9,937

 
9,937

 
9,887

 OnCourse Learning Corporation
 
Education services
 
Senior Loan
 
02/2019
 
LIBOR+7.5% (1% floor)
 
10,000

 
10,000

 
10,030

 Teaching Strategies, LLC
 
Education services
 
Senior Loan
 
12/2017
 
LIBOR+6% (1.25% floor)
 
9,490

 
9,592

 
9,490

 Total Military Management, Inc.
 
Air freight and logistics
 
Senior Loan
 
03/2019
 
LIBOR+5.75% (1.25% floor)
 
3,343

 
3,343

 
3,346

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
06/2017
 
LIBOR+7% (1.25% floor)
 
6,115

 
6,161

 
6,115

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
06/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
3,710

 
3,731

 
3,710

 TV Borrower US, LLC
 
Integrated telecommunications services
 
Senior Loan
 
01/2021
 
LIBOR+5.0% (1% floor)
 
10,000

 
10,000

 
10,000

 Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
Senior Loan
 
11/2020
 
LIBOR+5% (1% floor)
 
4,963

 
4,963

 
4,980

 H.D. Vest, Inc.
 
Specialty Finance
 
Senior Loan
 
06/2019
 
LIBOR+8% (1.25% floor)
 
8,750

 
8,820

 
8,820

 TravelClick, Inc.
 
Internet software & services
 
Senior Loan
 
11/2021
 
LIBOR+7.75% (1% floor)
 
10,000

 
10,000

 
9,971

 
 
 
 
 
 
 
 
 
 
$
158,451

 
$
158,799

 
$
158,683

(1) Represents the current interest rate as of September 30, 2014. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is not included in the Company's Board of Directors' valuation process described elsewhere herein.
The amortized cost and fair value of the subordinated notes held by the Company was $61.7 million and $61.8 million, respectively as of December 31, 2014 and $54.0 million as of September 30, 2014. The subordinated notes bear interest at a rate of LIBOR plus 8.0% and the Company earned interest income of $1.2 million on its investments in these notes for the three months ended December 31, 2014. The cost and fair value of the LLC equity interests held by the Company was $6.9 million and $4.8 million, respectively, as of December 31, 2014, and $6.0 million and $5.6 million, respectively, as of September 30, 2014. The Company earned dividend income of $1.1 million for the three months ended December 31, 2014 with respect to its LLC equity interests. The LLC equity interest are dividend producing to the extent there is residual income to be distributed on a quarterly basis.
Below is certain summarized financial information for SLF JV I as of December 31, 2014 and September 30, 2014 and for the three months ended December 31, 2014:

50
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


 
 
December 31, 2014
 
September 30, 2014
Selected Balance Sheet Information:
 
 
 
 
Investments in loans at fair value (cost December 31, 2014: $224,422, and September 30, 2014:$158,799)
 
$
222,472

 
$
158,683

Receivables from secured financing arrangement at fair value (cost: $10,028 and $20,070, respectively)
 
9,857

 
19,970

Cash and cash equivalents
 
6,268

 
—

Restricted cash
 
13,499

 
2,276

Other assets
 
12,887

 
5,039

Total assets
 
$
264,983

 
$
185,968

 
 
 
 
 
Senior credit facility payable
 
$
130,040

 
$
109,334

Payable for unsettled transaction
 
54,925

 
4,750

Subordinated notes payable at fair value (proceeds: $70,541 and $61,696, respectively)
 
70,663

 
61,696

Other liabilities
 
3,919

 
3,634

Total liabilities
 
$
259,547

 
$
179,414

Members' equity
 
5,436

 
6,554

Total liabilities and net assets
 
$
264,983

 
$
185,968


 
 
Three months ended December 31, 2014
Selected Statement of Operations Information:
 
 
Total revenues
 
$
4,109

Total expenses
 
2,439

Net unrealized depreciation
 
(2,267
)
Net realized loss
 
(205
)
Net loss
 
$
(802
)
SLF JV I has elected to fair value the subordinated notes issued to the Company and Kemper under ASC 825. The subordinated notes are valued by calculating the net present value of the future expected cash flow streams using an appropriate risk-adjusted discount rate model.
During the three months ended December 31, 2014, the Company sold $89.8 million of senior secured debt investments ($54.9 million of which was unsettled at December 31, 2014) and paid $10.0 million of receivables from secured financing arrangements from SLF JV I at fair value in exchange for $99.8 million cash consideration. The Company recognized a $0.05 million realized loss on these transactions.
Note 4. Fee Income
The Company receives a variety of fees in the ordinary course of business including servicing, advisory, structuring and prepayments fees, which are classified as fee income and recognized as they are earned. The ending unearned fee income balances as of December 31, 2014 and September 30, 2014 were $2.4 million and $3.0 million, respectively.
As of December 31, 2014, the Company had structured $2.5 million in aggregate exit fees across three portfolio investments upon the future exit of those investments. Exit fees are fees which are payable upon the exit of a debt investment. These fees are to be paid to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan.
 Note 5. Share Data
On March 19, 2013, the Company amended its Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares.

51
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


On August 22, 2014, the Company entered into an at-the-market offering ("ATM Program") with KeyBanc Capital Markets Inc. through which the Company may sell, from time to time at our sole discretion, up to $100,000,000 of its common stock. Since the inception of the ATM Program, the Company sold 841,456 shares of our common stock at an average price of $9.86 per share, and raised $8.3 million of net proceeds, under the ATM Program. Commissions to the broker-dealer on shares sold and offering costs were approximately $0.1 million. There were no issuances under the ATM Program for the three months ended December 31, 2014.
The following table sets forth the computation of basic and diluted earnings per share, pursuant to ASC 260-10 Earnings per Share, for the three months ended December 31, 2014 and December 31, 2013:
 
 
Three months
ended
December 31, 2014
 
Three months
ended
December 31, 2013
Earnings (loss) per common share — basic:
 
 
 
 
Net increase (decrease) in net assets resulting from operations
 
$
(30,661
)
 
$
33,706

Weighted average common shares outstanding — basic
 
153,340

 
139,126

Earnings (loss) per common share — basic:
 
(0.20
)
 
0.24

Earnings (loss) per common share — diluted: (1)
 
 
 
 
Net increase (decrease) in net assets resulting from operations, before adjustments
 
$
(30,661
)
 
$
33,706

Adjustments for interest on convertible notes, base management fees and incentive fees
 
1,361

 
1,364

Net increase (decrease) in net assets resulting from operations, as adjusted
 
$
(29,300
)
 
$
35,070

Weighted average common shares outstanding — basic
 
153,340

 
139,126

Adjustments for dilutive effect of convertible notes
 
7,790

 
7,790

Weighted average common shares outstanding — diluted
 
161,130

 
146,916

Earnings (loss) per common share — diluted:
 
$
(0.20
)
 
$
0.24


(1) For the three months ended December 31, 2014, conversion is not assumed for purposes of computing diluted Earnings per Share since the effect would be anti-dilutive. Anti-dilution was $0.02 per share for the three months ended December 31, 2014. For the three months ended December 31, 2013, there was no anti-dilution.


52
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The following table reflects the distributions per share that the Board of Directors of the Company has paid, including shares issued under the dividend reinvestment plan ("DRIP"), on its common stock from October 1, 2013 to December 31, 2014:
Date Declared
 
Record Date
 
Payment Date
 
Amount
per Share
 
Cash
Distribution
 
DRIP Shares
Issued
 
 
 
DRIP Shares
Value
August 5, 2013
 
October 15, 2013
 
October 31, 2013
 
0.0958

 
11.9 million
 
142,320,000

 
 
 
1.4 million
August 5, 2013
 
November 15, 2013
 
November 29, 2013
 
0.0958

 
12.0 million
 
145,063

 
(1)
 
1.4 million
November 21, 2013
 
December 13, 2013
 
December 30, 2013
 
0.05

 
6.3 million
 
69,291

 
(1)
 
0.6 million
November 21, 2013
 
January 15, 2014
 
January 31, 2014
 
0.0833

 
10.5 million
 
114,033

 
(1)
 
1.1 million
November 21, 2013
 
February 14, 2014
 
February 28, 2014
 
0.0833

 
10.5 million
 
110,486

 
(1)
 
1.1 million
November 21, 2013
 
March 14, 2014
 
March 31, 2014
 
0.0833

 
11.0 million
 
64,748

 
(1)
 
0.6 million
November 21, 2013
 
April 15, 2014
 
April 30, 2014
 
0.0833

 
10.5 million
 
120,604

 
(1)
 
1.1 million
November 21, 2013
 
May 15, 2014
 
May 30, 2014
 
0.0833

 
11.1 million
 
58,003

 
(1)
 
0.5 million
February 6, 2014
 
June 16, 2014
 
June 30, 2014
 
0.0833

 
11.1 million
 
51,692

 

 
0.5 million
February 6, 2014
 
July 15, 2014
 
July 31, 2014
 
0.0833

 
12.2 million
 
54,739

 
(1)
 
0.5 million
February 6, 2014
 
August 15, 2014
 
August 29, 2014
 
0.0833

 
12.1 million
 
59,466

 

 
0.6 million
July 2, 2014
 
September 15, 2014
 
September 30, 2014
 
0.0917

 
13.4 million
 
73,141

 
(1)
 
0.7 million
July 2, 2014
 
October 15, 2014
 
October 31, 2014
 
0.0917

 
13.3 million
 
82,390

 
(1)
 
0.7 million
July 2, 2014
 
November 14, 2014
 
November 28, 2014
 
0.0917

 
13.4 million
 
80,775

 
(1)
 
0.7 million
November 20, 2014
 
December 15, 2014
 
December 30, 2014
 
0.0917

 
13.4 million
 
79,849

 
(1)
 
0.6 million
 __________
(1) Shares were purchased on the open market and distributed.
On November 21, 2013, the Company's Board of Directors terminated the Company's previous $50 million stock repurchase program and approved a new $100 million stock repurchase program. Under this program, any stock repurchases were to be made through the open market at times and in such amounts as management deemed appropriate, provided they were below the most recently published net asset value per share.
In December 2013, the Company repurchased 45,104 shares at the weighted average price of $8.978 per share, resulting in $0.4 million of cash paid.
On November 20, 2014, the Company's Board of Directors terminated the Company's previous $100 million stock repurchase program and approved a new $100 million stock repurchase plan through November 20, 2015. Any stock repurchases under the new $100 million stock repurchase program will be made through the open market at times, and in such amounts, as management deems appropriate. This program may be limited or terminated at any time without prior notice.
Note 6. Lines of Credit
 Wells Fargo Facility
On November 16, 2009, Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary ("Funding"), and the Company entered into a Loan and Servicing Agreement ("Wells Agreement"), with respect to a revolving credit facility, as subsequently amended, (the "Wells Fargo facility") with Wells Fargo, as successor to Wachovia Bank, National Association, Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time.
Effective February 21, 2014, the Company and Funding terminated the Wells Fargo facility. In connection therewith, the Amended and Restated Loan and Servicing Agreement and other related documents governing the Wells Fargo facility were also terminated. As such, the Company has no borrowing capacity under the Wells Fargo facility as of December 31, 2014. Upon termination of the Wells Fargo facility, the Company accelerated the $0.7 million remaining unamortized fee balance into interest expense.
While in effect, the Wells Fargo facility permitted up to $150 million of borrowings (subject to collateral requirements) with an accordion feature allowing for future expansion of the facility up to a total of $250 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-month) plus 2.50% per annum, with no LIBOR floor. The maturity date of the Wells Fargo facility was April 25, 2016.

53
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The Wells Fargo facility was secured by all of the assets of Funding, and all of the Company's equity interest in Funding. The Company used the Wells Fargo facility to fund a portion of its loan origination activities and for general corporate purposes. Each loan origination under the facility was subject to the satisfaction of certain conditions. The Company's borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.749% for the three months ended December 31, 2013. For the three months ended December 31, 2013, the Company recorded interest expense of $0.7 million related to the Wells Fargo facility.
 
ING Facility
On May 27, 2010, the Company entered into a secured syndicated revolving credit facility (as subsequently amended, the "ING facility") pursuant to a Senior Secured Revolving Credit Agreement ("ING Credit Agreement") with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility allows the Company to request letters of credit from ING Capital LLC, as the issuing bank.
As of December 31, 2014, the ING facility permitted up to $705 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $800 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-, 2-, 3- or 6-month, at the Company's option) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on August 6, 2017 and the maturity date of the facility is August 6, 2018.
The ING facility is secured by substantially all of the Company's assets, as well as the assets of the Company's wholly-owned subsidiary, FSFC Holdings, Inc. ("Holdings"), and its indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC ("Fund of Funds"), subject to certain exclusions for, among other things, equity interests in the Company's SBIC subsidiaries, and equity interests in Funding and Funding II (which is defined and discussed below) as further set forth in a Guarantee, Pledge and Security Agreement ("ING Security Agreement") entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., ING Capital LLC, as collateral agent, and the Company. Fifth Street Fund of Funds LLC and FSFC Holdings, Inc. were formed to hold certain of the Company's portfolio companies for tax purposes and have no other operations. None of the Company's SBIC subsidiaries, Funding or Funding II is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that the Company may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.
 
Pursuant to the ING Security Agreement, Holdings and Fund of Funds guaranteed the obligations under the ING Security Agreement, including the Company's obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, the Company pledged its entire equity interest in Holdings and Holdings pledged its entire equity interest in Fund of Funds to the collateral agent pursuant to the terms of the ING Security Agreement.
The ING Credit Agreement and related agreements governing the ING facility required Holdings, Fund of Funds and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of the Company's businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by the Company to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company's liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the ING facility.
Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. The Company cannot be assured that it will be able to borrow funds under the ING facility at any particular time or at all.
As of December 31, 2014, the Company had $582.0 million of borrowings outstanding under the ING facility, which had a fair value of $582.0 million. The Company's borrowings under the ING facility bore interest at a weighted average interest rate of 2.656% for the three months ended December 31, 2014. For the three months ended December 31, 2014 and December 31, 2013, the Company recorded interest expense of $2.9 million and $2.8 million, respectively, related to the ING facility.
 
Sumitomo Facility
On September 16, 2011, Fifth Street Funding II, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary ("Funding II"), entered into a Loan and Servicing Agreement ("Sumitomo Agreement") with respect to a seven-year credit facility ("Sumitomo facility") with Sumitomo Mitsui Banking Corporation ("SMBC"), an affiliate of Sumitomo Mitsui Financial Group, Inc., as administrative agent, and each of the lenders from time to time party thereto, in the amount of $200 million.

54
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


As of December 31, 2014, the Sumitomo facility permitted up to $125 million of borrowings (subject to collateral requirements), and borrowings under the facility bore interest at a rate of LIBOR (1-month) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on September 16, 2016 and the maturity date of the facility is September 16, 2020, with an option for a one-year extension.
In connection with the Sumitomo facility, the Company concurrently entered into a Purchase and Sale Agreement with Funding II, pursuant to which it has sold and will continue to sell to Funding II certain loan assets the Company has originated or acquired, or will originate or acquire.
  
The Sumitomo Agreement and related agreements governing the Sumitomo facility required both Funding II and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of its businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities, including a prepayment penalty in certain cases. The Sumitomo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding II, and the failure by Funding II or the Company to materially perform under the Sumitomo Agreement and related agreements governing the Sumitomo facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company's liquidity, financial condition and results of operations. Funding II was formed for the sole purpose of entering into the Sumitomo facility and has no other operations.
The Sumitomo facility is secured by all of the assets of Funding II. Each loan origination under the facility is subject to the satisfaction of certain conditions. There is no assurance that Funding II will be able to borrow funds under the Sumitomo facility at any particular time or at all. As of December 31, 2014, the Company had $35.5 million of borrowings outstanding under the Sumitomo facility which had a fair value of $35.5 million. The Company's borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.447% for the three months ended December 31, 2014. For the three months ended December 31, 2014 and December 31, 2013, the Company recorded interest expense of $0.5 million and $0.5 million, respectively, related to the Sumitomo facility.
As of December 31, 2014, except for assets that were funded through the Company's SBIC subsidiaries, substantially all of the Company's assets were pledged as collateral under the ING facility or the Sumitomo facility. With respect to the assets funded through the Company's SBIC subsidiaries, the SBA, as a creditor, will have a superior claim to the SBIC subsidiaries' assets over the Company's stockholders.
Total interest expense for the three months ended December 31, 2014 and December 31, 2013 was $14.0 million and $10.2 million, respectively.
Note 7. Interest and Dividend Income
Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. In accordance with the Company's policy, accrued interest is evaluated periodically for collectability. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. Distributions of income from portfolio companies are recorded as dividend income on the ex-dividend date.
The Company holds debt in its portfolio that contains PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company generally ceases accruing PIK interest if there is insufficient value to support the accrual or if the Company does not expect the portfolio company to be able to pay all principal and interest due. The Company's decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; the Company's assessment of the portfolio company's business development success, including product development, profitability and the portfolio company's overall adherence to its business plan; information obtained by the Company in connection with periodic formal update interviews with the portfolio company's management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, the Company determines whether to cease accruing PIK interest on a loan or debt security. The Company's determination to cease accruing PIK interest on a loan or debt security is generally made well before the Company's full write-down of such loan or debt security.
 
Accumulated PIK interest activity for the three months ended December 31, 2014 and December 31, 2013 was as follows:

55
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


 
 
Three months
ended
December 31, 2014
 
Three months
ended
December 31, 2013
PIK balance at beginning of period
 
$
39,686

 
$
23,934

Gross PIK interest accrued
 
7,643

 
5,613

PIK income reserves (1)
 
(3,239
)
 
—

PIK interest received in cash
 
(658
)
 
(4,226
)
Loan exits and other PIK adjustments
 
—

 
(421
)
PIK balance at end of period
 
$
43,432

 
$
24,900

 ___________________
(1)
PIK income is generally reserved for when a loan is placed on PIK non-accrual status.
As of December 31, 2014, there were four investments on which the Company had stopped accruing cash interest, PIK interest or OID income. As of September 30, 2014, there was one investment on which the Company had stopped accruing cash interest, PIK interest or OID income. As of December 31, 2013, there were no investments on which the Company had stopped accruing cash and/or PIK interest and OID income.
The percentages of the Company's debt investments at cost and fair value by accrual status as of December 31, 2014, September 30, 2014 and December 31, 2013 were as follows:
 
 
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
 
 
Cost
 
% of Debt
Portfolio
 
Fair
Value
 
% of Debt
Portfolio
 
Cost
 
% of Debt
Portfolio
 
Fair
Value
 
% of Debt
Portfolio
 
Cost
 
% of Debt
Portfolio
 
Fair
Value
 
% of Debt
Portfolio
Accrual
 
$
2,523,714

 
95.97
%
 
$
2,505,354

 
97.67
%
 
$
2,345,637

 
99.25
%
 
$
2,339,087

 
99.73
%
 
$
2,249,767

 
100.00
%
 
$
2,261,742

 
100.00
%
PIK non-accrual
 
105,878

 
4.03

 
59,883

 
2.33

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Cash non-accrual(1)
 
—

 
—

 
—

 
—

 
17,752

 
0.75

 
6,356

 
0.27

 
—

 
—

 
—

 
—

Total
 
$
2,629,592

 
100.00
%
 
$
2,565,237

 
100.00
%
 
$
2,363,389

 
100.00
%
 
$
2,345,443

 
100.00
%
 
$
2,249,767

 
100.00
%
 
$
2,261,742

 
100.00
%
 ___________________
(1)
Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.
The non-accrual status of the Company's portfolio investments as of December 31, 2014, September 30, 2014 and December 31, 2013 was as follows:
 
 
  
December 31, 2014
  
September 30, 2014
  
December 31, 2013
Miche Bag, LLC
  
—
  
Cash non-accrual (1)
  
—
Phoenix Brands Merger Sub LLC
 
PIK non-accrual
 
—
 
—
TransTrade Operators, Inc.
 
PIK non-accrual
 
—
 
—
CCCG, LLC
 
PIK non-accrual
 
—
 
—
JTC Education, Inc.

PIK non-accrual

—

—
  __________________
(1)
Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.

Income non-accrual amounts for the three months ended December 31, 2014 and December 31, 2013 were as follows:
 


Three months ended
December 31, 2014 (1)

Three months ended
December 31, 2013
Cash interest income

$
—


$
—

PIK interest income

3,239


—

OID income

583


—

Total

$
3,822


$
—

 ___________________
(1)
Income non-accrual amounts for the year may include amounts for investments that were no longer held at the end of the period.


56
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Note 8. Taxable/Distributable Income and Dividend Distributions
Taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments and secured borrowings, as gains and losses are not included in taxable income until they are realized; (2) origination and exit fees received in connection with investments in portfolio companies; (3) organizational and deferred offering costs; (4) recognition of interest income on certain loans; and (5) income or loss recognition on exited investments.
At September 30, 2014, the Company had net loss carryforwards of $123.4 million to offset net capital gains, to the extent provided by U.S. federal income tax law. Of the capital loss carryforwards, $1.5 million will expire on September 30, 2017, $10.3 million will expire on September 30, 2019, and $111.6 million will not expire, of which $2.2 million are available to offset future short-term capital gains and $109.4 million are available to offset future long-term capital gains.
Listed below is a reconciliation of "net decrease in net assets resulting from operations" to taxable income for the three months ended December 31, 2014.
 
Net decrease in net assets resulting from operations
$
(30,661
)
Net unrealized depreciation on investments and secured borrowings
48,243

Book/tax difference due to loan fees
(556
)
Book/tax difference due to exit fees
(429
)
Book/tax difference due to organizational and deferred offering costs
(22
)
Book/tax difference due to interest income on certain loans
3,421

Book/tax difference due to capital losses not recognized
18,121

Other book-tax differences
(1,445
)
Taxable/Distributable Income(1)
$
36,672

 
(1)
The Company's taxable income for the three months ended December 31, 2014 is an estimate and will not be finally determined until the Company files its tax return for the fiscal year ended September 30, 2015. Therefore, the final taxable income may be different than the estimate.
As of September 30, 2014, the components of accumulated undistributed income on a tax basis were as follows:
Undistributed ordinary income, net (RIC status)
$
—

Realized capital losses
(123,407
)
Unrealized gains, net
75

The Company uses the asset and liability method to account for its taxable subsidiaries' income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences. The Company has recorded a deferred tax asset for the difference in the book and tax basis of certain equity investments and tax net operating losses held by its taxable subsidiaries of $8.5 million. However, this amount has been fully offset by a valuation allowance of $8.5 million, since it is more likely than not that these deferred tax assets will not be realized.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the "Act") was enacted, which changed various technical rules governing the tax treatment of RICs. The changes are generally effective for taxable years beginning after the date of enactment. Under the Act, the Company is permitted to carry forward any net capital losses, if any, incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment net loss carryforwards may be more likely to expire unused.
Distributions to stockholders are recorded on the record date. The Company is required to distribute annually to its stockholders at least 90% of its net taxable income and net realized short-term capital gains in excess of net realized long-term capital losses for each taxable year in order to be eligible for the tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a dividend all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of

57
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Directors and is based on management's estimate of the Company's annual taxable income. The Company maintains an "opt out" dividend reinvestment plan for its stockholders.
For U.S. federal income tax purposes, the Company estimates that its distributions for the calendar year 2014 will be composed primarily of ordinary income, and will be reflected as such on the Form 1099-DIV for the calendar year 2014.
As a RIC, the Company is also subject to a U.S. federal excise tax based on distributive requirements of its taxable income on a calendar year basis. The Company did not incur a U.S. federal excise tax for calendar years 2012 and 2013 and does not expect to incur a U.S. federal excise tax for calendar year 2014.
Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments and Secured Borrowings
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with the Company's determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
Net unrealized appreciation or depreciation reflects the net change in the valuation of the portfolio pursuant to the Company's valuation guidelines and the reclassification of any prior period unrealized appreciation or depreciation.
During the three months ended December 31, 2014, the Company recorded investment realization events, including the following:
•
In October 2014, the Company restructured its investment in Miche Bag, LLC. As part of the restructuring, the Company exchanged cash and its debt and equity securities for debt and equity securities in the restructured entity, Miche Group, LLC and recorded a realized loss in the amount of $17.9 million on this transaction;
•
In October 2014, the Company received a cash payment of $74.4 million from Teaching Strategies, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In October 2014, the Company received a cash payment of $6.5 million from SugarSync, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;
•
In November 2014, the Company received a cash payment of $8.6 million from Olson + Co., Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In November 2014, the Company received a cash payment of $5.6 million from American Cadastre, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In December 2014, the Company received a cash payment of $35.8 million from Drugtest, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In December 2014, the Company received a cash payment of $39.5 million from Charter Brokerage, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;
•
In December 2014, the Company received a cash payment of $27.7 million from CRGT, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;
•
In December 2014, the Company received a cash payment of $12.5 million from Devicor Medical Products, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In December 2014, the Company received a cash payment of $12.0 million from CT Technologies Intermediate Holdings, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction; and

58
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


•
During the three months ended December 31, 2014, the Company received payments of $178.7 million in connection with syndications of debt investments to other investors, sales of debt investments in the open market, and repayment of secured borrowings and recorded a net realized gain of $0.3 million on these transactions.
During the three months ended December 31, 2013, the Company recorded investment realization events, including the following:
•
In October and December 2013, the Company received payments of $3.2 million from Stackpole Powertrain International Holding, L.P. related to the sale of its equity investment. A realized gain of $2.2 million was recorded on this transaction;
•
In October 2013, the Company received a payment of $8.9 million from Harden Healthcare, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;
•
In October 2013, the Company received a payment of $4.0 million from Capital Equipment Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction. The Company also received an additional $0.9 million in connection with the sale of its common equity investment, realizing a gain of $0.6 million;
•
In November 2013, the Company received a payment of $10.0 million from IG Investments Holdings, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;
•
In November 2013, the Company received a payment of $15.7 million from CTM Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;
•
In December 2013, the Company received a payment of $0.4 million in connection with the exit of its debt investment in Saddleback Fence and Vinyl Products, Inc. A realized loss of $0.3 million was recorded on this transaction;
•
In December 2013, the Company received a payment of $7.2 million from Western Emulsions, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;
•
During the three months ended December 31, 2013, the Company received payments of $108.9 million in connection with sales of debt investments and recorded a net realized gain of $0.5 million.
During the three months ended December 31, 2014 and December 31, 2013, the Company recorded net unrealized depreciation on investments of $48.6 million and $5.7 million, respectively. For the three months ended December 31, 2014, the Company's net unrealized depreciation consisted of $57.0 million of net unrealized depreciation on debt investments and $4.7 million of net unrealized depreciation on equity investments, offset by $13.1 million of net reclassifications to realized loss on debt and equity investments (resulting in unrealized appreciation). For the three months ended December 31, 2013, the Company's net unrealized depreciation consisted of $2.7 million of net reclassifications to realized gains (resulting in unrealized depreciation), $1.8 million of net unrealized depreciation on debt investments and $1.2 million of net unrealized depreciation on equity investments.
Note 10. Concentration of Credit Risks
The Company places its cash in financial institutions and at times such balances may be in excess of the FDIC insured limit. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions and monitoring their financial stability.
Note 11. Related Party Transactions
The Company has entered into an investment advisory agreement with the Investment Adviser. Under the investment advisory agreement, the Company pays the Investment Adviser a fee for its services consisting of two components — a base management fee and an incentive fee.
Base management Fee

59
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The base management fee is calculated at an annual rate of 2% of the Company's gross assets, which includes any borrowings for investment purposes but excludes any cash and cash equivalents held at the end of each quarter. The base management fee is payable quarterly in arrears and the fee for any partial month or quarter is appropriately prorated.
For the three months ended December 31, 2014, the Investment Adviser voluntarily waived a portion of the base management fee which resulted in waivers of $0.1 million.
For the three months ended December 31, 2014 and December 31, 2013, base management fees (net of waivers) were $14.0 million and $12.1 million, respectively. At December 31, 2014, the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $14.0 million reflecting the unpaid portion of the base management fee payable to the Investment Adviser.
Incentive Fee
The incentive fee portion of the investment advisory agreement has two parts. The first part ("Part I Incentive Fee") is calculated and payable quarterly in arrears based on the Company's "Pre-Incentive Fee Net Investment Income" for the immediately preceding fiscal quarter. For this purpose, "Pre-Incentive Fee Net Investment Income" means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the fiscal quarter, minus the Company's operating expenses for the quarter (including the base management fee, expenses payable under the Company's administration agreement, and any interest expense and dividends paid on any issued and outstanding indebtedness or preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company's net assets at the end of the immediately preceding fiscal quarter, will be compared to a "hurdle rate" of 2% per quarter (8% annualized), subject to a "catch-up" provision measured as of the end of each fiscal quarter. The Company's net investment income used to calculate this part of the incentive fee is also included in the amount of its gross assets used to calculate the 2% base management fee. The operation of the incentive fee with respect to the Company's Pre-Incentive Fee Net Investment Income for each quarter is as follows:
•
No incentive fee is payable to the Investment Adviser in any fiscal quarter in which the Company's Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 2% (the "preferred return" or "hurdle");
•
100% of the Company's Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser. The Company refers to this portion of its Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) as the "catch-up." The "catch-up" provision is intended to provide the Investment Adviser with an incentive fee of 20% on all of the Company's Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when the Company's Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter; and
•
20% of the amount of the Company's Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser once the hurdle is reached and the catch-up is achieved (20% of all Pre-Incentive Fee Net Investment Income thereafter is allocated to the Investment Adviser).
The second part of the incentive fee ("Part II Incentive Fee") is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date) and equals 20% of the Company's realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
GAAP requires the Company to accrue for the theoretical capital gains incentive fee that would be payable after giving effect to the net realized and unrealized capital appreciation. It should be noted that a fee so calculated and accrued would not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. Amounts ultimately paid under the investment advisory agreement will be consistent with the formula reflected in the investment advisory agreement. The Company does not currently accrue for capital gains incentive fees due to the accumulated realized losses in the portfolio.
For the three months ended December 31, 2014 and December 31, 2013, incentive fees were $8.7 million and $9.1 million respectively. At December 31, 2014, the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $8.7 million reflecting the unpaid portion of the incentive fee payable to the Investment Adviser.

60
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Indemnification
The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, the Company's Investment Adviser and its officers, managers, agents, any employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of the Investment Adviser's services under the investment advisory agreement or otherwise as the Company's Investment Adviser.
Administration Agreement
On January 1, 2014, the Company entered into an administration agreement with a new administrator, FSC CT, Inc., which has since converted into FSC CT LLC ("FSC CT"), a wholly-owned subsidiary of the Company's investment adviser, under substantially similar terms as its prior administration agreement with FSC, Inc. Under the administration agreement with FSC CT, administrative services are provided to the Company, including its principal executive offices and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreement, FSC CT also performs or oversees the performance of the Company's required administrative services, which includes being responsible for the financial records which the Company is required to maintain and preparing reports to the Company's stockholders and reports filed with the SEC. In addition, FSC CT assists the Company in determining and publishing the Company's net asset value, overseeing the preparation and filing of the Company's tax returns and the printing and dissemination of reports to the Company's stockholders, and generally overseeing the payment of the Company's expenses and the performance of administrative and professional services rendered to the Company by others. For providing these services, facilities and personnel, the Company provides reimbursement for the allocable portion of overhead and other expenses incurred in connection with payments of rent at market rates and the Company's allocable portion of the costs of compensation and related expenses of the Company's chief financial officer and chief compliance officer and their staffs. Such reimbursement is at cost with no profit to, or markup by, FSC CT. FSC CT may also provide, on the Company's behalf, managerial assistance to the Company's portfolio companies. The administration agreement may be terminated by either party without penalty upon 60 days' written notice to the other party.
For the three months ended December 31, 2014, the Company accrued administrative expenses of $2.5 million, including $1.3 million of general and administrative expenses, which are due to FSC CT. At December 31, 2014, $3.6 million was included in Due to FSC CT in the Consolidated Statement of Assets and Liabilities.

61
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Note 12. Financial Highlights
 
 
Three months ended
December 31,
2014
 
Three months ended
December 31,
2013
Net asset value at beginning of period
 
$9.64
 
$9.85
Net investment income (4)
 
0.23
 
0.26
Net unrealized depreciation on investments and secured borrowings (4)
 
(0.31)
 
(0.04)
Net realized gain (loss) on investments, secured borrowings and interest rate swap (4)
 
(0.11)
 
0.02
Distributions to stockholders (4)
 
(0.28)
 
(0.24)
Net asset value at end of period
 
$9.17
 
$9.85
Per share market value at beginning of period
 
$9.18
 
$10.29
Per share market value at end of period
 
$8.01
 
$9.25
Total return (1)
 
(9.88)%
 
(7.81)%
Common shares outstanding at beginning of period
 
153,340
 
139,041
Common shares outstanding at end of period
 
153,340
 
139,138
Net assets at beginning of period
 
$1,478,476
 
$1,368,872
Net assets at end of period
 
$1,405,631
 
$1,369,968
Average net assets (2)
 
$1,448,626
 
$1,373,035
Ratio of net investment income to average net assets (5)
 
9.63%
 
10.47%
Ratio of net expenses to average net assets (excluding base management fee waiver) (5)
 
11.29%
 
10.15%
Ratio of net expenses to average net assets (5)
 
11.26%
 
10.15%
Ratio of portfolio turnover to average investments at fair value
 
4.90%
 
2.38%
Weighted average outstanding debt (3)
 
$1,182,007
 
$829,393
Average debt per share (4)
 
$7.71
 
$5.96
 __________
(1)
Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company's DRIP.
(2)
Calculated based upon the weighted average net assets for the period.
(3)
Calculated based upon the weighted average of loans payable for the period.
(4)
Calculated based upon weighted average shares outstanding for the period.
(5)
Interim periods are annualized.
Note 13. Convertible Notes
On April 12, 2011, the Company issued $152.0 million unsecured convertible notes, including $2 million issued to Leonard M. Tannenbaum, the Company's former Chief Executive Officer. The Convertible Notes were issued pursuant to an Indenture, dated April 12, 2011 (the "Indenture"), between the Company and the Trustee.
The Convertible Notes mature on April 1, 2016 (the "Maturity Date"), unless previously converted or repurchased in accordance with their terms. The Convertible Notes bear interest at a rate of 5.375% per annum payable semiannually in arrears on April 1 and October 1 of each year. The Convertible Notes are the Company's unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries or financing vehicles.
Prior to the close of business on the business day immediately preceding January 1, 2016, holders may convert their Convertible Notes only under certain circumstances set forth in the Indenture, such as during specified periods when the Company's shares of common stock trade at more than 110% of the then applicable conversion price or the Convertible Notes trade at less than 98% of their conversion value. On or after January 1, 2016 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time. Upon conversion, the Company will deliver shares of its common stock. The conversion rate was initially, and currently is, 67.7415 shares of common stock per $1,000 principal amount of Convertible Notes

62
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


(equivalent to a conversion price of approximately $14.76 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments, including for any cash dividends or distributions paid on shares of the Company's common stock in excess of a monthly distribution of $0.1066 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. Based on the current conversion rate, the maximum number of shares of common stock that would be issued upon conversion of the $115 million convertible debt outstanding at December 31, 2014 is 7,790,273. If the Company delivers shares of common stock upon a conversion at the time that net asset value per share exceeds the conversion price in effect at such time, the Company's stockholders may incur dilution. In addition, the Company's stockholders will experience dilution in their ownership percentage of common stock upon the issuance of common stock in connection with the conversion of the Company's convertible notes and any dividends paid on common stock will also be paid on shares issued in connection with such conversion after such issuance. The shares of common stock issued upon a conversion are not subject to registration rights.
The Company may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect of the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.
The Indenture contains certain covenants, including covenants requiring the Company to provide financial information to the holders of the Convertible Notes, and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture.
For the three months ended December 31, 2014 and December 31, 2013, the Company recorded interest expense of $1.7 million and $1.7 million, respectively, related to the Convertible Notes.
The Company may repurchase the Convertible Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Convertible Notes repurchased by the Company may, at the Company's option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Convertible Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the Indenture. The Company did not repurchase Convertible Notes during the three months ended December 31, 2014 and December 31, 2013.
Because this net gain was included in the amount that must be distributed to the Company's stockholders in order for it to maintain its RIC status and is classified as a component of net investment income in the Consolidated Statements of Operations, such net gain was included in "Pre-Incentive Fee Net Investment Income" for purposes of the payment of the income incentive fee to the investment adviser under the investment advisory agreement. Paying an incentive fee on this type of net gain is permissible under the Company's investment advisory agreement, but because such a fee was not specifically detailed in the investment advisory agreement, the Company obtained the approval of the Company's Board of Directors to pay such fees. This type of net gain, and corresponding income incentive fee, may occur again in the future. Any repurchase of the 2019 Notes, 2024 Notes or 2028 Notes at a discount will be treated in a similar manner.
As of December 31, 2014, there were $115.0 million Convertible Notes outstanding, which had a fair value of $118.9 million.
Note 14. Unsecured Notes
2019 Notes
On February 26, 2014, the Company issued $250.0 million in aggregate principal amount of its 4.875% unsecured notes due 2019 (the "2019 Notes") for net proceeds of $244.4 million after deducting original issue discount of $1.4 million, underwriting commissions and discounts of $3.7 million and offering costs of $0.5 million.  The original issue discount on these notes is amortized on a straight-line basis over the term of the notes.
The 2019 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated February 26, 2014 (collectively, the "2019 Notes Indenture"), between the Company and the Trustee. The 2019 Notes are the Company's general unsecured obligations that rank senior in right of payment to all of the Company's existing and future indebtedness that is expressly subordinated in right of payment to the 2019 Notes. The 2019 Notes rank equally in right of payment with all of the Company's existing and future liabilities that are not so subordinated. The 2019 Notes effectively rank junior to any of the Company's secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness. The 2019 Notes rank structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries, financing vehicles or similar facilities. 

63
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Interest on the 2019 Notes is paid semi-annually on March 1 and September 1, at a rate of 4.875% per annum. The 2019 Notes mature on March 1, 2019 and may be redeemed in whole or in part at any time or from time to time at the Company's option prior to maturity.
The 2019 Notes Indenture contains certain covenants, including covenants requiring the Company's compliance with (regardless of whether the Company is subject to) the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the 2019 Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2019 Notes Indenture. The Company may repurchase the 2019 Notes in accordance with the 1940 Act and the rules promulgated thereunder. In addition, holders of the 2019 Notes can require the Company to repurchase the 2019 Notes at 100% of their principal amount upon the occurrence of certain change of control events as described in the 2019 Notes Indenture. The 2019 Notes are issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. During the three months ended December 31, 2014, the Company did not repurchase any of the 2019 Notes in the open market.
For the three months ended December 31, 2014, the Company recorded interest expense of $3.5 million related to the 2019 Notes.
As of December 31, 2014, there were $250.0 million 2019 Notes outstanding, which had a fair value of $258.2 million.
2024 Notes
On October 18, 2012, the Company issued $75.0 million in aggregate principal amount of its 5.875% unsecured notes due 2024 (the "2024 Notes") for net proceeds of $72.5 million after deducting underwriting commissions of $2.2 million and offering costs of $0.3 million.
The 2024 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated October 18, 2012 (collectively, the "2024 Notes Indenture"), between the Company and the Trustee. The 2024 Notes are the Company's unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries or financing vehicles.
Interest on the 2024 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 5.875% per annum. The 2024 Notes mature on October 30, 2024 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or after October 30, 2017. The 2024 Notes are listed on the New York Stock Exchange under the trading symbol "FSCE" with a par value of $25.00 per share.
The 2024 Notes Indenture contains certain covenants, including covenants requiring the Company's compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the 2024 Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2024 Notes Indenture. The Company may repurchase the 2024 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2024 Notes repurchased by the Company may, at the Company's option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any 2024 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2024 Notes Indenture. During the years ended September 30, 2014 and 2013, the Company did not repurchase any of the 2024 Notes in the open market.
For the three months ended December 31, 2014 and December 31, 2013, the Company recorded interest expense of $1.2 million and $1.2 million, respectively, related to the 2024 Notes.
As of December 31, 2014, there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.5 million.
2028 Notes

64
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


In April and May 2013, the Company issued $86.3 million in aggregate principal amount of its 6.125% unsecured notes due 2028 (the "2028 Notes") for net proceeds of $83.4 million after deducting underwriting commissions of $2.6 million and offering costs of $0.3 million. The proceeds included the underwriters' full exercise of their overallotment option.
The 2028 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the second supplemental indenture, dated April 4, 2013 (collectively, the "2028 Notes Indenture"), between the Company and the Trustee. The 2028 Notes are the Company's unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the 2028 Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that it later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries or financing vehicles. Interest on the 2028 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per annum. The 2028 Notes mature on April 30, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or after April 30, 2018. The 2028 Notes are listed on the NASDAQ Global Select Market under the trading symbol "FSCFL" with a par value of $25.00 per share.
The 2028 Notes Indenture contains certain covenants, including covenants requiring the Company's compliance with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the 2028 Notes and the Trustee if it ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2028 Notes Indenture. The Company may repurchase the 2028 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2028 Notes repurchased by the Company may, at its option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any 2028 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2028 Notes Indenture. During the years ended December 31, 2014 and 2013, the Company did not repurchase any of the 2028 Notes in the open market.
For the three months ended December 31, 2014 and December 31, 2013, the Company recorded interest expense of $1.4 million and $1.3 million respectively, related to the 2028 Notes.
As of December 31, 2014, there were $86.3 million 2028 Notes outstanding, which had a fair value of $86.0 million.

Note 15. Secured Borrowings
The Company follows the guidance in ASC 860 when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a "participating interest," as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company's Consolidated Statement of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.
As of December 31, 2014, secured borrowings at fair value totaled $22.2 million and the fair value of the investments that are associated with these secured borrowings was $44.2 million. These secured borrowings were the result of the Company's completion of partial loan sales of a senior secured debt investment totaling $22.8 million during the fiscal year ended September 30, 2014 that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and these partial loan sales were treated as secured borrowings. During the three months ended December 31, 2014, there were $62.1 million of repayments on secured borrowings.
As of September 30, 2014, secured borrowings at fair value totaled $84.8 million and the fair value of the investments that are associated with these secured borrowings was $154.0 million. These secured borrowings were the result of the Company's completion of partial loan sales of two senior secured debt investments totaling $87.8 million during the year ended September 30, 2014 that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and these partial loan sales were treated as secured borrowings. During the year ended September 30, 2014, there were $3.0 million of repayments on secured borrowings.
As of December 31, 2014, there were $22.5 million of secured borrowings outstanding, which had a fair value of $22.2 million. As of September 30, 2014, there were $84.8 million of secured borrowings outstanding, which had a fair value of $84.8 million.
For the three months ended December 31, 2014, the Company recorded interest expense of $0.5 million related its secured borrowings.


65
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Note 16. Subsequent Events
The Company's management evaluated subsequent events through the date of issuance of these Consolidated Financial Statements and noted that the following event requires disclosure and recognition in the Company's Financial statements as of and for the three months ended December 31, 2014:
During January 2015, one of the Company's portfolio investments disclosed its substantial financial deterioration that occurred prior to the date of these Consolidated Financial Statements.  As a result, the Company reflected such information in its valuation of this portfolio investment as of December 31, 2014.  As more information becomes available, the Company may experience a further mark-down of the fair value of this investment in the future.  The investment may be placed on non-accrual status after the fiscal quarter ended December 31, 2014, as all interest due through that date has been paid to the Company. The investment represents 0.25% of the total portfolio at fair value as of December 31, 2014.


66

Schedule 12-14
Fifth Street Finance Corp.
Schedule of Investments in and Advances to Affiliates
(in thousands, except share and per share amounts, percentages and as otherwise indicated)
Three months ended December 31, 2014
Portfolio Company/Type of Investment (1)
 
Amount of
Interest,
Fees or
Dividends
Credited in
Income (2)
 
Fair Value
at October 1,
2014
 
Gross
Additions (3)
 
Gross
Reductions(4)
 
Fair Value
at December 31,
2014
Control Investments
 
 
 
 
 
 
 
 
 
 
Traffic Solutions Holdings, Inc.
 
 
 
 
 
 
 
 
 
 
Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016
 
$
676

 
$
14,905

 
$
217

 
$
(125
)
 
$
14,997

LC Facility, 8.5% cash due 12/31/2016
 
36

 
—

 
2

 
(2
)
 
—

746,114 Series A Preferred Units
 
449

 
17,564

 
449

 
—

 
18,013

746,114 Common Stock Units
 
—

 
6,113

 
—

 
(1,019
)
 
5,094

TransTrade Operators, Inc.
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
 
6

 
11,109

 
407

 
(2,651
)
 
8,865

First Lien Revolver, 8% cash due 5/31/2016
 
22

 
—

 
475

 
(218
)
 
257

596.67 Series A Common Units in TransTrade Holdings LLC
 
—

 
—

 
—

 
—

 
—

4,000,000 Series A Preferred Units in TransTrade Holdings LLC
 
—

 
—

 
2,000

 
(2,000
)
 
—

5,200,000 Preferred Units in TransTrade Holding LLC
 
—

 
—

 
—

 
—

 
—

HFG Holdings, LLC
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
 
2,588

 
96,935

 
618

 
(1,741
)
 
95,812

875,933 Class A Units
 
—

 
31,786

 
—

 
(4,275
)
 
27,511

 First Star Aviation, LLC
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
 
578

 
16,556

 
213

 
(1,644
)
 
15,125

 10,104,401 Common Units
 
—

 
10,329

 
1,531

 
—

 
11,860

First Star Speir Aviation 1 Limited
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan, 9% cash due 12/15/2015
 
1,552

 
61,155

 
821

 
(13,106
)
 
48,870

2,058,411.64 Common Units
 
—

 
3,572

 
901

 
—

 
4,473

First Star Bermuda Aviation Limited
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan, 9% cash 3% PIK due 8/19/2018
 
1,155

 
35,606

 
363

 
(10,741
)
 
25,228

4,293,736 Common Units
 
—

 
5,839

 
—

 
(370
)
 
5,469

 Eagle Hospital Physicians, LLC
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan A, 8% PIK due 8/1/2016
 
249

 
11,924

 
249

 
(46
)
 
12,127

 First Lien Term Loan B, 8.1% PIK due 8/1/2016
 
69

 
3,262

 
68

 
(13
)
 
3,317

 First Lien Revolver, 8% cash due 8/1/2016
 
59

 
2,847

 
2

 
(2
)
 
2,847

 4,100,000 Class A Common Units
 
—

 
5,738

 
57

 
—

 
5,795

Senior Loan Fund JV I, LLC
 
 
 
 
 
 
 
 
 
 
Subordinated Note, LIBOR+8% cash due 5/2/2021
 
2,301

 
53,984

 
7,847

 
—

 
61,831

87.5% equity interest (5)
 
—

 
5,650

 
860

 
(1,754
)
 
4,756

 Miche Group, LLC
 
 
 
 
 
 
 
 
 
—

 First Lien Revolver, L+8% cash due 12/18/2016
 
50

 
—

 
500

 
—

 
500

 100 units in FSFC Miche, Inc.
 
—

 
—

 
5,306

 
—

 
5,306

Total Control Investments
 
$
9,790

 
$
394,874

 
$
22,886

 
$
(39,707
)
 
$
378,053

Affiliate Investments
 
 
 
 
 
 
 
 
 
 
Caregiver Services, Inc.
 
 
 
 
 
 
 
 
 
 
Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
 
281

 
9,062

 
47

 
(93
)
 
9,016

1,080,399 shares of Series A Preferred Stock
 
—

 
3,805

 
130

 
—

 
3,935

AmBath/ReBath Holdings, Inc.
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016
 
23

 
1,222

 
7

 
(466
)
 
763

First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
 
1,020

 
26,032

 
181

 
—

 
26,213

4,668,788 shares of Preferred Stock
 
—

 
643

 
—

 
(180
)
 
463

Total Affiliate Investments
 
$
1,324

 
$
40,764

 
$
365

 
$
(739
)
 
$
40,390

Total Control & Affiliate Investments
 
$
11,114

 
$
435,638

 
$
23,251

 
$
(40,446
)
 
$
418,443


67

This schedule should be read in connection with the Company's Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.
______________________
(1)
The principal amount and ownership detail as shown in the Company's Consolidated Schedules of Investments.
(2)
Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Non-Control/Non-Affiliate categories, respectively.
(3)
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on Investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category.
(4)
Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category.
(5)
Together with Trinity Universal Insurance, the Company co-invests through SLF JV I. SLF JV I is capitalized as transactions are completed and all portfolio and investment decisions in respect to SLF JV I must be approved by the SLF JV I investment committee consisting of representatives of the Company and Kemper (with approval from a representative of each required).

68

Schedule 12-14
Fifth Street Finance Corp.
Schedule of Investments in and Advances to Affiliates
(in thousands, except share and per share amounts, percentages and as otherwise indicated)
Three months ended December 31, 2013

Portfolio Company/Type of Investment(1)
 
Amount of
Interest,
Fees or
Dividends
Credited in
Income(2)
 
Fair Value
at October 1,
2013
 
Gross
Additions(3)
 
Gross
Reductions(4)
 
Fair Value
at December 31,
2013
Control Investments
 
 
 
 
 
 
 
 
 
 
Traffic Solutions Holdings, Inc.
 
 
 
 
 
 
 
 
 
 
Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016
 
$
693

 
$
14,499

 
$
267

 
$
(131
)
 
$
14,635

LC Facility, 8.5% cash due 12/31/2016
 
86

 
—

 
2

 
(2
)
 
—

746,114 Series A Preferred Units
 
406

 
15,891

 
406

 
—

 
16,297

746,114 Common Stock Units
 
—

 
10,529

 
60

 
—

 
10,589

TransTrade Operators, Inc.
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
 
511

 
13,524

 
513

 
(16
)
 
14,021

First Lien Revolver, 8% cash due 5/31/2016
 
1

 
—

 
—

 
—

 
—

596.67 Series A Common Units in TransTrade Holding LLC
 
—

 
—

 
—

 
—

 
—

3,033,333.33 Preferred Units in TransTrade Holding LLC
 
—

 
539

 
1,083

 
(937
)
 
685

HFG Holdings, LLC
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
 
2,380

 
93,297

 
952

 
(62
)
 
94,187

860,000 Class A Units
 
—

 
22,346

 
436

 
—

 
22,782

 First Star Aviation, LLC
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
 
1,012

 
19,211

 
15,100

 
(411
)
 
33,900

10,104,401 Common Units
 
—

 
5,264

 
5,793

 
—

 
11,057

 Eagle Hospital Physicians, LLC
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan A, 8% PIK due 8/1/2016
 
230

 
11,149

 
229

 
(34
)
 
11,344

 First Lien Term Loan B, 8.1% PIK due 8/1/2016
 
63

 
3,050

 
63

 
(10
)
 
3,103

 First Lien Revolver, 8% cash due 8/1/2016
 
12

 
—

 
936

 
(4
)
 
932

 4,100,000 Class A Common Units
 
—

 
6,203

 
—

 
(40
)
 
6,163

Total Control Investments
 
$
5,394

 
$
215,502

 
$
25,840

 
$
(1,647
)
 
$
239,695

Affiliate Investments
 
 
 
 
 
 
 
 
 
 
Caregiver Services, Inc.
 
 
 
 
 
 
 
 
 
 
Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
 
203

 
—

 
9,173

 
(158
)
 
9,015

1,080,399 shares of Series A Preferred Stock
 
—

 
3,256

 
313

 
—

 
3,569

AmBath/ReBath Holdings, Inc.
 
 
 
 
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016
 
77

 
3,272

 
25

 
(350
)
 
2,947

First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
 
991

 
25,317

 
348

 
—

 
25,665

4,668,788 shares of Preferred Stock
 
—

 
87

 
429

 
—

 
516

Total Affiliate Investments
 
$
1,271

 
$
31,932

 
$
10,288

 
$
(508
)
 
$
41,712

Total Control & Affiliate Investments
 
$
6,665

 
$
247,434

 
$
36,128

 
$
(2,155
)
 
$
281,407


69

This schedule should be read in connection with the Company's Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.
______________________
(1)
The principal amount and ownership detail as shown in the Company's Consolidated Schedules of Investments.
(2)
Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Non-Control/Non-Affiliate categories, respectively.
(3)
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on Investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category.
(4)
Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category.


70


Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
 
•
our future operating results and dividend projections;
•
our business prospects and the prospects of our portfolio companies;
•
the impact of the investments that we expect to make;
•
the ability of our portfolio companies to achieve their objectives;
•
our expected financings and investments;
•
the adequacy of our cash resources and working capital; and
•
the timing of cash flows, if any, from the operations of our portfolio companies.
In addition, words such as "anticipate," "believe," "expect," "seek," "plan," "should," "estimate," "project" and "intend" indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in our annual report on Form 10-K for the year ended September 30, 2014 and elsewhere in this quarterly report on Form 10-Q for the quarter ended December 31, 2014. Other factors that could cause actual results to differ materially include:
 
•
changes in the economy and the financial markets;
•
risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters;
•
future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies, SBICs or RICs; and
•
other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Except as otherwise specified, references to the "Company," "we," "us," and "our," refer to Fifth Street Finance Corp.
All amounts are in thousands, except share and per share amounts, percentages and as otherwise indicated.
Overview
We are a specialty finance company that lends to and invests in small and mid-sized companies, primarily in connection with investments by private equity sponsors. Our investment objective is to maximize our portfolio's total return by generating current income from our debt investments and capital appreciation from our equity investments.
We were formed as a Delaware limited partnership (Fifth Street Mezzanine Partners III, L.P.) on February 15, 2007. Effective as of January 2, 2008, Fifth Street Mezzanine Partners III, L.P. merged with and into Fifth Street Finance Corp. At the time of the merger, all outstanding partnership interests in Fifth Street Mezzanine Partners III, L.P. were exchanged for 12,480,972 shares of common stock in Fifth Street Finance Corp.
 
On June 17, 2008, we completed an initial public offering of 10,000,000 shares of our common stock at the offering price of $14.12 per share. Our stock was listed on the New York Stock Exchange until November 28, 2011 when we transferred the listing to the NASDAQ Global Select Market, where it continues to trade under the symbol "FSC."

Critical Accounting Policies

Basis of Presentation

71


The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires management to make certain estimates and assumptions affecting amounts reported in the Consolidated Financial Statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Investment Valuation
We are required to report our investments that are not publicly traded or for which current market values are not readily available at fair value. The fair value is deemed to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In accordance with authoritative accounting guidance, we perform detailed valuations of our debt and equity investments on an individual basis, using bond yield, market and income approaches as appropriate. In general, we utilize a bond yield method for the majority of our investments, as long as it is appropriate. If, in our judgment, the bond yield approach is not appropriate, we may use the market approach, income approach, or, in certain cases, an alternative methodology potentially including market quotations, asset liquidation model, expected recovery model or other alternative approaches.

Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, our capital markets group obtains and analyzes readily available market quotations provided by independent pricing services for all of our senior secured debt investments for which quotations are available. In determining the fair value of a particular investment, pricing services use observable market information, including both binding and non-binding indicative quotations. These investments are generally classified as Level 3 because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities or may require adjustment for investment-specific factors or restrictions.

We evaluate the prices obtained from independent pricing services based on available market information and company specific data that could affect the credit quality and/or fair value of the investment. We do not adjust any of the prices received from these sources unless we have a reason to believe any such market quotations are not reflective of the fair value of an investment.

Market quotations may be deemed not to represent fair value where we believe that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security causes current market quotations not to reflect the fair value of the security, among other reasons. Examples of these events could include cases when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a “fire sale" by a distressed seller. In these instances, we value such investments by using the valuation procedure that we use with respect to assets for which market quotations are not readily available (as discussed below).

If the quotation provided by the pricing service is based on only one or two market sources, we perform additional procedures to corroborate such information, generally including but not limited to, the bond yield approach discussed below and a quantitative and qualitative assessment of the credit quality and market trends affecting the portfolio company.
Under the bond yield approach, we use bond yield models to determine the present value of the future cash flow streams of our debt investments. We review various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assess the information in the valuation process.
Under the market approach, we estimate the enterprise value of the portfolio companies in which we invest. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values from which we derive a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, we analyze various factors, including the portfolio company's historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (earnings before interest, taxes, depreciation and amortization), cash flows, net income or revenues. We generally require portfolio companies to provide annual audited and quarterly or monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.
Under the income approach, we generally prepare and analyze discounted cash flow models based on our projections of the future free cash flows of the business.
We estimate the fair value of privately held warrants using a Black Scholes pricing model. At each reporting date, privately held warrants are valued based on an analysis of various factors and subjective assumptions including, but not limited to, the current stock

72


price (by analyzing the portfolio company's operating performance and financial condition and general market conditions), the expected period until exercise, expected volatility of the underlying stock price, expected dividends, and the risk free rate. Changes in the subjective input assumptions can materially affect the fair value estimates.
 
Our Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:
•
The quarterly valuation process begins with each portfolio company or investment being initially valued by our finance department;
•
Preliminary valuations are then reviewed and discussed with principals of the investment adviser;
•
Separately, independent valuation firms are engaged by our Board of Directors to prepare preliminary valuations on a selected basis and submit the reports to us;
•
Our finance department compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;
•
Our finance department prepares a valuation report for the Audit Committee of our Board of Directors;
•
The Audit Committee of our Board of Directors is apprised of the preliminary valuations of the independent valuation firms;
•
The Audit Committee of our Board of Directors reviews the preliminary valuations with the portfolio managers of the investment adviser, and our finance department responds and supplements the preliminary valuations to reflect any comments provided by the Audit Committee;
•
The Audit Committee of our Board of Directors makes a recommendation to the Board of Directors regarding the fair value of the investments in our portfolio; and
•
Our Board of Directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith.
The fair value of all of our investments at December 31, 2014, and September 30, 2014, was determined by our Board of Directors. Our Board of Directors has authorized the engagement of independent valuation firms to provide us with valuation assistance. We will continue to engage independent valuation firms to provide us with assistance regarding our determination of the fair value of selected portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter; however, our Board of Directors is ultimately and solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process.
In certain cases, an independent valuation firm may perform a portfolio company valuation which is reviewed and, where appropriate, relied upon by our Board of Directors in determining the fair value of such investment.
The percentages of our portfolio, at fair value, valued by independent valuation firms each period during the current and two preceding fiscal years were as follows:
For the quarter ended December 31, 2012
 
79.5
%
For the quarter ended March 31, 2013
 
73.8
%
For the quarter ended June 30, 2013
 
76.4
%
For the quarter ended September 30, 2013
 
86.5
%
For the quarter ended December 31, 2013
 
78.9
%
For the quarter ended March 31, 2014
 
80.7
%
For the quarter ended June 30, 2014
 
68.5
%
For the quarter ended September 30, 2014
 
84.0
%
For the quarter ended December 31, 2014
 
78.5
%
As of December 31, 2014 and September 30, 2014, approximately 92.3% and 93.5%, respectively, of our total assets represented investments in portfolio companies valued at fair value.
Revenue Recognition
Interest and Dividend Income
Interest income, adjusted for accretion of original issue discount, or OID, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Distributions of income from portfolio companies are generally recorded as dividend income on the ex-dividend date.

73


Fee Income
We receive a variety of fees in the ordinary course of business including servicing, advisory, structuring and prepayment fees, which are classified as fee income and recognized as they are earned.
We have also structured exit fees across certain of our portfolio investments to be received upon the future exit of those investments. Exit fees are payable upon the exit of a debt security. These fees are to be paid to us upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan. As of December 31, 2014, we had structured $2.5 million in aggregate exit fees across three portfolio investments upon the future exit of those investments.
Payment-in-Kind (PIK) Interest
Our loans typically contain contractual PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; our assessment of the portfolio company's business development success, including product development, profitability and the portfolio company's overall adherence to its business plan; information obtained by us in connection with periodic formal update interviews with the portfolio company's management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, we determine whether to cease accruing PIK interest on a loan or debt security when it is determined that PIK interest is no longer collectible. Our determination to cease accruing PIK interest on a loan or debt security is generally made well before our full write-down of such loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest.
For a discussion of risks we are subject to as a result of our use of PIK interest in connection with our investments, see "Risk Factors — Risks Relating to Our Business and Structure — We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income," "— We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive" and "— Our incentive fee may induce our investment adviser to make speculative investments" in our annual report on Form 10-K for the year ended September 30, 2014. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on our debt investments increases the recorded cost basis of these investments in our Consolidated Financial Statements and, as a result, increases the cost basis of these investments for purposes of computing the capital gains incentive fee payable by us to our Investment Adviser.
To maintain our status as a RIC, PIK income must be paid out to our stockholders as distributions, even though we have not yet collected the cash and may never collect the cash relating to the PIK interest. Accumulated PIK interest was $43.4 million, or 1.6% of the fair value of our portfolio of investments as of December 31, 2014 and $39.7 million or 1.6% as of September 30, 2014. The net increases in loan balances as a result of contractual PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.

74


Portfolio Composition
Our investments principally consist of loans, purchased equity investments and equity grants in privately-held companies. Our loans are typically secured by a first, second or subordinated lien on the assets of the portfolio company and generally have terms of up to six years (but an expected average life of between three and four years). We are currently focusing our origination efforts on a prudent mix of senior secured and subordinated loans which we believe will provide superior risk-adjusted returns while maintaining adequate credit protection. The mix may change over time based on market conditions and management's view of where the best risk- adjusted returns are available.
A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables:
 
 
 
December 31, 2014
 
September 30, 2014
Cost:
 
 
 
 
Senior secured debt
 
82.54
%
 
79.72
%
Subordinated debt
 
9.13

 
11.67

CLO debt
 
1.07

 
1.18

Subordinated notes of SLF JV I
 
2.23

 
2.16

LLC equity interests of SLF JV I
 
0.25

 
0.24

Purchased equity
 
4.14

 
4.31

Equity grants
 
0.11

 
0.22

Limited partnership interests
 
0.53

 
0.50

Total
 
100.00
%
 
100.00
%
 
 
 
December 31, 2014
 
September 30, 2014
Fair value:
 
 
 
 
Senior secured debt
 
82.24
%
 
79.01
%
Subordinated debt
 
8.67

 
11.61

CLO debt
 
1.08

 
1.18

Subordinated notes of SLF JV I
 
2.27

 
2.16

LLC equity interests of SLF JV I
 
0.17

 
0.23

Purchased equity
 
4.78

 
5.04

Equity grants
 
0.28

 
0.30

Limited partnership interests
 
0.51

 
0.47

Total
 
100.00
%
 
100.00
%

75


The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:

 
 
December 31, 2014
 
September 30, 2014
Cost:
 
 
 
 
 Healthcare services
 
19.50
%
 
15.03
%
 Internet software & services
 
11.58

 
6.31

 Education services
 
8.55

 
9.35

 Advertising
 
5.38

 
6.59

 Diversified support services
 
5.11

 
4.71

 Specialized finance
 
4.31

 
4.76

 Airlines
 
3.77

 
5.18

 Application software
 
3.31

 
5.57

 IT consulting & other services
 
3.19

 
3.86

 Data processing & outsourced services
 
2.89

 
2.42

 Multi-sector holdings
 
2.80

 
2.74

 Healthcare equipment
 
2.58

 
3.04

 Oil & gas equipment services
 
2.37

 
3.86

 Industrial machinery
 
2.32

 
2.14

 Specialty stores
 
2.23

 
2.46

 Research & consulting services
 
1.91

 
0.59

 Leisure facilities
 
1.87

 
1.97

 Integrated telecommunication services
 
1.78

 
1.87

 Pharmaceuticals
 
1.68

 
1.86

 Household products
 
1.33

 
1.52

 Construction & engineering
 
1.27

 
1.39

 Asset management & custody banks
 
1.07

 
1.18

 Air freight & logistics
 
1.00

 
1.30

 Home improvement retail
 
0.98

 
1.10

 Cable & satellite
 
0.98

 
1.08

 Consumer electronics
 
0.79

 
0.76

 Apparel, accessories & luxury goods
 
0.76

 
1.43

 Leisure products
 
0.74

 
0.83

 Auto parts & equipment
 
0.60

 
0.66

 Food retail
 
0.58

 
—

 Other diversified financial services
 
0.56

 
0.62

 Human resources & employment services
 
0.56

 
2.05

 Specialty chemicals
 
0.49

 
0.54

 Security & alarm services
 
0.48

 
0.53

 Healthcare technology
 
0.29

 
0.32

 Thrift & mortgage finance
 
0.21

 
0.16

 Consumer finance
 
0.18

 
0.00

 Systems software
 
—

 
0.22

Total
 
100.00
%
 
100.00
%

76


 
 
December 31, 2014
 
September 30, 2014
Fair value:
 
 
 
 
 Healthcare services
 
19.92
%
 
15.24
%
 Internet software & services
 
11.74

 
6.43

 Education services
 
8.20

 
9.28

 Advertising
 
5.42

 
6.58

 Diversified support services
 
5.18

 
4.71

 Specialized finance
 
4.53

 
5.16

 Airlines
 
4.08

 
5.33

 Application software
 
3.39

 
5.62

 IT consulting & other services
 
3.23

 
3.89

 Data processing & outsourced services
 
2.90

 
2.40

 Multi-sector holdings
 
2.76

 
2.69

 Healthcare equipment
 
2.64

 
3.06

 Industrial machinery
 
2.36

 
2.20

 Specialty stores
 
2.20

 
2.38

 Research & consulting services
 
1.93

 
0.60

 Leisure facilities
 
1.91

 
1.98

 Oil & gas equipment services
 
1.77

 
3.71

 Integrated telecommunication services
 
1.76

 
1.86

 Pharmaceuticals
 
1.70

 
1.87

 Construction & engineering
 
1.40

 
1.55

 Asset management & custody banks
 
1.08

 
1.18

 Home improvement retail
 
1.01

 
1.12

 Cable & satellite
 
0.98

 
1.08

 Household products
 
0.93

 
1.47

 Leisure products
 
0.86

 
0.94

 Apparel, accessories & luxury goods
 
0.81

 
0.91

 Consumer electronics
 
0.80

 
0.77

 Auto parts & equipment
 
0.67

 
0.70

 Food retail
 
0.59

 
—

 Human resources & employment services
 
0.58

 
2.06

 Other diversified financial services
 
0.58

 
0.63

 Specialty chemicals
 
0.50

 
0.54

 Security & alarm services
 
0.48

 
0.53

 Air freight & logistics
 
0.43

 
0.84

 Healthcare technology
 
0.29

 
0.32

 Thrift & mortgage finance
 
0.21

 
0.16

 Consumer finance
 
0.18

 
—

 Systems software
 
—

 
0.21

Total
 
100.00
%
 
100.00
%
Portfolio Asset Quality
We employ a ranking system to assess and monitor the credit risk of our investment portfolio. We rank all investments on a scale from 1 to 4. The system is intended to reflect the performance of the borrower's business, the collateral coverage of the loan, and other factors considered relevant to making a credit judgment. We have determined that there should be an individual ranking assigned to each tranche of securities in the same portfolio company where appropriate. This may arise when the perceived risk of loss on the investment varies significantly between tranches due to their respective seniority in the capital structure.
•
Investment Ranking 1 is used for investments that are performing above expectations and/or capital gains are expected.

77


•
Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain materially consistent with the potential risks at the time of the original or restructured investment. All new investments are initially ranked 2.
•
Investment Ranking 3 is used for investments that are performing below our expectations and for which risk has materially increased since the original or restructured investment. The portfolio company may be out of compliance with debt covenants and may require closer monitoring. To the extent that the underlying agreement has a PIK interest provision, investments with a ranking of 3 are generally those on which we are not accruing PIK interest.
•
Investment Ranking 4 is used for investments that are performing substantially below our expectations and for which risk has increased substantially since the original or restructured investment. Investments with a ranking of 4 are those for which some loss of principal is expected and are generally those on which we are not accruing cash interest.
The following table shows the distribution of our investments on the 1 to 4 investment ranking scale at fair value as of December 31, 2014 and September 30, 2014:
Investment Ranking
 
December 31, 2014
 
 
 
September 30, 2014
 
 
Fair Value
 
% of Portfolio
 
Leverage Ratio
 
 
 
Fair Value
 
% of Portfolio
 
Leverage Ratio
 
 
1
 
$
29,463

 
1.08
%
 
0.81

 
  
 
$
65,268

 
2.61
%
 
1.94

 
  
2
 
2,625,449

 
96.47

 
4.71

 
  
 
2,424,290

 
97.14

 
4.84

 
  
3
 
66,683

 
2.45

 
9.39

 
 
 
—

 
—

 
—

 
 
4
 
—

 
—

 
—

 

 
6,356

 
0.25

 
NM

 
(1)
Total
 
$
2,721,595

 
100.00
%
 
4.77

 
  
 
$
2,495,914

 
100.00
%
 
4.75

 
  
__________________
(1)
Due to operating performance this ratio is not measurable and, as a result, is excluded from the total portfolio calculation.
We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of December 31, 2014, we had modified the payment terms of our investments in 15 portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.
Loans and Debt Securities on Non-Accrual Status
As of December 31, 2014, there were four investments on which we had stopped accruing cash and/or PIK interest and OID income. As of September 30, 2014, there was one investment on which we had stopped accruing cash interest, PIK interest or OID income. As of December 31, 2013, there were no investments on which we had stopped accruing cash and/or PIK interest and OID income.
The percentages of our debt investments at cost and fair value by accrual status for the years ended December 31, 2014, September 30, 2014 and December 31, 2013 were as follows:
 
 
 
December 31, 2014
 
September 30, 2014
 
December 31, 2013
 
 
Cost
 
% of Debt
Portfolio
 
Fair
Value
 
% of Debt
Portfolio
 
Cost
 
% of Debt
Portfolio
 
Fair
Value
 
% of Debt
Portfolio
 
Cost
 
% of Debt
Portfolio
 
Fair
Value
 
% of Debt
Portfolio
Accrual
 
$
2,523,714

 
95.97
%
 
$
2,505,354

 
97.67
%
 
$
2,345,637

 
99.25
%
 
$
2,339,087

 
99.73
%
 
$
2,249,767

 
100.00
%
 
$
2,261,742

 
100.00
%
PIK non-accrual
 
105,878

 
4.03

 
59,883

 
2.33

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Cash non-accrual(1)
 
—

 
—

 
—

 
—

 
17,752

 
0.75

 
6,356

 
0.27

 
—

 
—

 
—

 
—

Total
 
$
2,629,592

 
100.00
%
 
$
2,565,237

 
100.00
%
 
$
2,363,389

 
100.00
%
 
$
2,345,443

 
100.00
%
 
$
2,249,767

 
100.00
%
 
$
2,261,742

 
100.00
%
__________________
(1)
Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.

78


The non-accrual status of our portfolio investments as of December 31, 2014, September 30, 2014 and December 31, 2013 was as follows:
 
 
  
December 31, 2014
  
September 30, 2014
  
December 31, 2013
Miche Bag, LLC
  
—
  
Cash non-accrual (1)
  
—
Phoenix Brands Merger Sub LLC
 
PIK non-accrual
 
—
 
—
TransTrade Operators, Inc.
 
PIK non-accrual
 
—
 
—
CCCG, LLC
 
PIK non-accrual
 
—
 
—
JTC Education, Inc.
 
PIK non-accrual
 
—
 
—
 __________________
(1)
We no longer hold this investment as of December 31, 2014. See “— Discussion and Analysis of Results and Operations — Comparison of the three months ended December 31, 2014 and December 31, 2013.

Income non-accrual amounts for the three months ended December 31, 2014 and December 31, 2013 were as follows:
 

 
Three months ended
December 31, 2014 (1)
 
Three months ended
December 31, 2013
Cash interest income
 
$
—

 
$
—

PIK interest income
 
3,239

 
—

OID income
 
583

 
—

Total
 
$
3,822

 
$
—

 ___________________
(1)
Income non-accrual amounts for the year may include amounts for investments that were no longer held at the end of the period.

Senior Loan Fund JV I, LLC
In May, 2014, we entered into an LLC agreement with Trinity Universal Insurance Company, a subsidiary of Kemper to form SLF JV I. On July 1, 2014, SLF JV I began investing in senior secured loans of middle market companies and other corporate debt securities. We co-invest in these securities with Kemper through our investment in SLF JV I. SLF JV I is managed by a four person Board of Directors, two of whom are selected by us and two of whom are selected by Kemper. SLF JV I is capitalized pro rata with subordinated notes and LLC equity interests as transactions are completed. All portfolio decisions and investment decisions in respect of SLF JV I must be approved by the SLF JV I investment committee, which consists of one representative from us and one representative of Kemper (with approval from a representative of each required). We and Kemper provide capital to SLF JV I in the form of subordinated notes and LLC equity interests. As of December 31, 2014 and September 30, 2014, we and Kemper owned, in the aggregate, 87.5% and 12.5%, respectively, of each of the outstanding subordinated notes and LLC equity interests.
We have determined that SLF JV I is an investment company under ASC 946, however, in accordance with such guidance, we will generally not consolidate our investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we do not consolidate our noncontrolling interest in SLF JV I.
As of December 31, 2014 and September 30, 2014, SLF JV I had total assets of $265.0 million and $186.0 million, respectively. Our investment in SLF JV I consisted of LLC equity interests of $4.8 million and subordinated notes of $61.8 million, at fair value as of December 31, 2014. As of September 30, 2014, our investment consisted of LLC equity interests of $5.6 million and subordinated notes of $54.0 million, at fair value. The subordinated notes are junior in right of payment to the repayment of temporary contributions made by us to fund investments of SLF JV I. SLF JV I's portfolio consisted of middle-market and other corporate debt securities of 21 and 18 "eligible portfolio companies" (as defined in the Section 2(a)(46) of the 1940 Act) as of December 31, 2014 and September 30, 2014, respectively. As of December 31, 2014, the largest investment in a single company in SLF JV I's portfolio in aggregate principal amount was $20.0 million, and the five largest investments in portfolio companies in SLF JV I totaled $75.0 million in aggregate principal amount. As of September 30, 2014, the largest investment in a single company in SLF JV I's portfolio in aggregate principal amount was $20.0 million, and the five largest investments in portfolio companies in SLF JV I totaled $60.0 million in aggregate principal amount. The portfolio companies in SLF JV I are in industries similar to those in which we may invest directly.
As of December 31, 2014 and September 30, 2014, SLF JV I had total capital commitments of $200.0 million, $175.0 million of which was from us and the remaining $25.0 million from Kemper. Approximately $78.4 million and $68.6 million, respectively, was funded as of December 31, 2014 and September 30, 2014 relating to these commitments, of which $68.6 million and $60.0 million,

79


respectively, was from us. Additionally, SLF JV I had a senior revolving credit facility with Deutsche Bank AG, New York Branch ("Deutsche Bank facility") with a stated maturity date of July 1, 2019, which permitted up to $200.0 million of borrowings as of December 31, 2014 and September 30, 2014. As of December 31, 2014 and September 30, 2014, we had commitments to fund subordinated notes to SLF JV I of $157.5 million, of which $95.8 million and $103.5 million was unfunded, respectively. The subordinated notes mature on May 2, 2019. As of December 31, 2014 and September 30, 2014, we had commitments to fund LLC equity interests in SLF JV I of $17.5 million, of which $10.6 million and $11.5 million was unfunded, respectively. Under the Deutsche Bank facility, $130.0 million and $109.3 million was outstanding as of December 31, 2014 and September 30, 2014, respectively.
Below is a summary of SLF JV I's portfolio, followed by a listing of the individual loans in SLF JV I's portfolio as of December 31, 2014 and September 30, 2014:

 
 
December 31, 2014
 
September 30, 2014
Senior secured loans (1)
 
$224,841
 
$158,451
Weighted average current interest rate on senior secured loans (2)
 
7.79%
 
8.09%
Number of borrowers in SLF JV I
 
21
 
18
Largest loan to a single borrower (1)
 
$20,000
 
$20,000
Total of five largest loans to borrowers (1)
 
$75,000
 
$60,000
__________________
(1) At principal amount.
(2) Computed as the (a) annual interest on accruing senior secured loans divided by (b) total senior secured loans at principal amount.


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SLF JV I Loan Portfolio as of December 31, 2014
Portfolio Company
 
Business Description
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
 All Web Leads, Inc.
 
Advertising
 
Senior Loan
 
11/2018
 
LIBOR+8% (1% floor)
 
$
9,873

 
$
9,873

 
$
9,670

 AMAG Pharmaceuticals, Inc.
 
Diversified financial services
 
Senior Loan
 
11/2020
 
LIBOR+6.25% (1% floor)
 
15,000

 
15,000

 
15,000

 Ansira Partners, Inc.
 
Advertising
 
Senior Loan
 
5/2017
 
LIBOR+5.0% (1.5% floor)
 
3,382

 
3,367

 
3,351

 Ansira Partners, Inc.
 
Advertising
 
Senior Loan
 
5/2017
 
LIBOR+5.0% (1.5% floor)
 
5,329

 
5,322

 
5,281

 EOS Fitness
 
Leisure facilities
 
Senior Loan
 
12/2019
 
LIBOR+8.75% (0.75% floor)
 
20,000

 
20,000

 
20,000

 First Choice ER, LLC
 
Healthcare services
 
Senior Loan
 
10/2018
 
LIBOR+7.5% (1% floor)
 
20,000

 
20,018

 
19,928

 Garretson Firm Resolution Group, Inc.
 
Diversified support services
 
Senior Loan
 
12/2018
 
LIBOR+5% (1.25% floor)
 
6,551

 
6,543

 
6,485

 GTCR Valor Companies, Inc.
 
Advertising
 
Senior Loan
 
5/2021
 
LIBOR+5% (1% floor)
 
9,975

 
9,741

 
9,738

 H.D. Vest, Inc.
 
Specialty Finance
 
Senior Loan
 
6/2019
 
LIBOR+8% (1.25% floor)
 
8,750

 
8,816

 
8,691

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
Senior Loan
 
10/2018
 
LIBOR+7.75% (1.25% floor)
 
10,000

 
10,035

 
9,940

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
Senior Loan
 
3/2019
 
LIBOR+7.5% (1% floor)
 
9,874

 
9,874

 
9,458

 Lift Brands, Inc.
 
Leisure facilities
 
Senior Loan
 
12/2019
 
LIBOR+7.5% (1% floor)
 
9,874

 
9,874

 
9,869

 MedTech Group, Inc.
 
Healthcare equipment
 
Senior Loan
 
9/2016
 
LIBOR+5.25% (1.25% floor)
 
4,663

 
4,666

 
4,610

 MedTech Group, Inc.
 
Healthcare equipment
 
Senior Loan
 
9/2016
 
LIBOR+5.25% (1.25% floor)
 
7,460

 
7,430

 
7,376

 Meritas Schools Holdings LLC
 
Education services
 
Senior Loan
 
6/2019
 
LIBOR+5.75% (1.25% floor)
 
5,845

 
5,839

 
5,824

 OmniSYS Acquisition Corporation
 
Diversified support services
 
Senior Loan
 
11/2018
 
LIBOR+7.5% (1% floor)
 
9,873

 
9,873

 
9,556

 OnCourse Learning Corporation
 
Education services
 
Senior Loan
 
2/2019
 
LIBOR+7.5% (1% floor)
 
10,000

 
10,000

 
10,017

 TIBCO Software, Inc.
 
Internet software & services
 
Senior Loan
 
12/2020
 
LIBOR+5.5% (1% floor)
 
6,000

 
5,715

 
5,835

 TIBCO Software, Inc.
 
Internet software & services
 
 Bridge loan
 
12/2020
 
LIBOR+4.5% (1% floor)
 
4,900

 
4,876

 
4,876

 Total Military Management, Inc.
 
Air freight and logistics
 
Senior Loan
 
3/2019
 
LIBOR+5.75% (1.25% floor)
 
3,175

 
3,175

 
3,179

 Total Military Management, Inc.
 
Air freight and logistics
 
Senior Loan
 
3/2019
 
LIBOR+5.75% (1.25% floor)
 
9,750

 
9,758

 
9,763

 TravelClick, Inc.
 
Internet software & services
 
Senior Loan
 
11/2021
 
LIBOR+7.5% (1% floor)
 
10,000

 
10,000

 
9,650

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
6/2017
 
LIBOR+7% (1.25% floor)
 
5,941

 
5,983

 
6,037

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
6/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
3,701

 
3,719

 
3,617

 TV Borrower US, LLC
 
Integrated telecommunications services
 
Senior Loan
 
1/2021
 
LIBOR+5% (1% floor)
 
9,975

 
9,975

 
9,796

 Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
Senior Loan
 
11/2020
 
LIBOR+5% (1% floor)
 
4,950

 
4,950

 
4,925

 
 
 
 
 
 
 
 
 
 
$
224,841

 
$
224,422

 
$
222,472

__________________
(1) Represents the current interest rate as of December 31, 2014. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the fair value determined utilizing a similar process as us in accordance with ASC 820. However, the determination of such fair value is not included in the valuation process of the Board of Directors described elsewhere herein.


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SLF JV I Loan Portfolio as of September 30, 2014
Portfolio Company
 
Business Description
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
 All Web Leads, Inc.
 
Advertising
 
Senior Loan
 
11/2018
 
LIBOR+8% (1% floor)
 
$
9,937

 
$
9,937

 
$
9,867

 Ansira Partners, Inc.
 
Advertising
 
Senior Loan
 
05/2017
 
LIBOR+5.0% (1.5% floor)
 
3,553

 
3,536

 
3,549

 Drugtest, Inc.
 
Human resources & employment services
 
Senior Loan
 
06/2018
 
LIBOR+ 5.75% (1% floor)
 
9,859

 
9,924

 
9,940

 First Choice ER, LLC
 
Healthcare services
 
Senior Loan
 
10/2018
 
LIBOR+7.5% (1% floor)
 
20,000

 
20,019

 
20,166

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
Senior Loan
 
10/2018
 
LIBOR+7.75% (1.25% floor)
 
10,000

 
10,038

 
10,043

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
Senior Loan
 
03/2019
 
LIBOR+7.5% (1% floor)
 
9,937

 
9,937

 
9,987

 Lift Brands, Inc.
 
Leisure facilities
 
Senior Loan
 
12/2019
 
LIBOR+7.5% (1% floor)
 
9,937

 
9,937

 
9,881

 MedTech Group, Inc.
 
Healthcare equipment
 
Senior Loan
 
09/2016
 
LIBOR+5.25% (1.25% floor)
 
4,663

 
4,667

 
4,644

 Olson + Co., Inc.
 
Advertising
 
Senior Loan
 
09/2017
 
LIBOR+5.75% (1.5% floor)
 
4,257

 
4,257

 
4,257

 OmniSYS Acquisition Corporation
 
Diversified support services
 
Senior Loan
 
11/2018
 
LIBOR+7.5% (1% floor)
 
9,937

 
9,937

 
9,887

 OnCourse Learning Corporation
 
Education services
 
Senior Loan
 
02/2019
 
LIBOR+7.5% (1% floor)
 
10,000

 
10,000

 
10,030

 Teaching Strategies, LLC
 
Education services
 
Senior Loan
 
12/2017
 
LIBOR+6% (1.25% floor)
 
9,490

 
9,592

 
9,490

 Total Military Management, Inc.
 
Air freight and logistics
 
Senior Loan
 
03/2019
 
LIBOR+5.75% (1.25% floor)
 
3,343

 
3,343

 
3,346

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
06/2017
 
LIBOR+7% (1.25% floor)
 
6,115

 
6,161

 
6,115

 Yeti Acquisition, LLC
 
Leisure products
 
Senior Loan
 
06/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
3,710

 
3,731

 
3,710

 TV Borrower US, LLC
 
Integrated telecommunications services
 
Senior Loan
 
01/2021
 
LIBOR+5.0% (1% floor)
 
10,000

 
10,000

 
10,000

 Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
Senior Loan
 
11/2020
 
LIBOR+5% (1% floor)
 
4,963

 
4,963

 
4,980

 H.D. Vest, Inc.
 
Specialty Finance
 
Senior Loan
 
06/2019
 
LIBOR+8% (1.25% floor)
 
8,750

 
8,820

 
8,820

 TravelClick, Inc.
 
Internet software & services
 
Senior Loan
 
11/2021
 
LIBOR+7.75% (1% floor)
 
10,000

 
10,000

 
9,971

 
 
 
 
 
 
 
 
 
 
$
158,451

 
$
158,799

 
$
158,683

(1) Represents the current interest rate as of September 30, 2014. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the fair value determined utilizing a similar process as us in accordance with ASC 820. However, the determination of such fair value is not included in our Board of Directors' valuation process described elsewhere herein.
The amortized cost and fair value of the subordinated notes held by us was $61.7 million and $61.8 million, respectively as of December 31, 2014 and $54.0 million at both cost and fair value as of September 30, 2014. The subordinated notes bear interest at a rate of LIBOR plus 8.0% and we earned interest income of $1.2 million on its investments in these notes for the three months ended December 31, 2014. The cost and fair value of the LLC equity interests held by us was $6.9 million and $4.8 million, respectively, as of December 31, 2014, and $6.0 million and $5.6 million, respectively, as of September 30, 2014. We earned dividend income of $1.1 million for the three months ended December 31, 2014 with respect to its LLC equity interests. The LLC equity interest are dividend producing to the extent there is residual income to be distributed on a quarterly basis.
Below is certain summarized financial information for SLF JV I as of December 31, 2014 and September 30, 2014 and for the three months ended December 31, 2014:


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December 31, 2014
 
September 30, 2014
Selected Balance Sheet Information:
 
 
 
 
Investments in loans at fair value (cost December 31, 2014: $224,422, and September 30, 2014:$158,799)
 
$
222,472

 
$
158,683

Receivables from secured financing arrangement at fair value (cost: $10,028 and $20,070, respectively)
 
9,857

 
19,970

Cash and cash equivalents
 
6,268

 
—

Restricted cash
 
13,499

 
2,276

Other assets
 
12,887

 
5,039

Total assets
 
$
264,983

 
$
185,968

 
 
 
 
 
Senior credit facility payable
 
$
130,040

 
$
109,334

Payable for unsettled transaction
 
54,925

 
4,750

Subordinated notes payable at fair value (proceeds: $70,541 and $61,696, respectively)
 
70,663

 
61,696

Other liabilities
 
3,919

 
3,634

Total liabilities
 
$
259,547

 
$
179,414

Members' equity
 
5,436

 
6,554

Total liabilities and net assets
 
$
264,983

 
$
185,968


 
 
Three months ended December 31, 2014
Selected Statement of Operations Information:
 
 
Total revenues
 
$
4,109

Total expenses
 
2,439

Net unrealized depreciation
 
(2,267
)
Net realized loss
 
(205
)
Net loss
 
$
(802
)
SLF JV I has elected to fair value the subordinated notes issued to us and Kemper under ASC 825 — Financial Instruments, or ASC 825. The subordinated notes are valued by calculating the net present value of the future expected cash flow streams using an appropriate risk-adjusted discount rate model.
During the three months ended December 31, 2014, we sold $89.8 million of senior secured debt investments ($54.9 million of which was unsettled at December 31, 2014) and paid $10.0 million of receivables from secured financing arrangements from SLF JV I at fair value in exchange for $99.8 million cash consideration. We recognized $0.05 million realized loss on these transactions.
Discussion and Analysis of Results and Operations
Results of Operations
The principal measure of our financial performance is the net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and total expenses. Net realized gain (loss) on investments and secured borrowings is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment portfolio and secured borrowings.
Comparison of three months ended December 31, 2014 and December 31, 2013
Total Investment Income
Total investment income includes interest income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, administrative fees, unused fees, amendment fees, advisory fees, structuring fees, exit fees, prepayment fees and waiver fees. Other investment income consists primarily of dividend income received from certain of our equity investments.

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Total investment income for the three months ended December 31, 2014 and December 31, 2013 was $76.3 million and $71.3 million, respectively. For the three months ended December 31, 2014, this amount primarily consisted of $56.9 million of interest income from portfolio investments (which included $4.4 million of PIK interest) and $17.9 million of fee income. For the three months ended December 31, 2013, this amount primarily consisted of $54.1 million of interest income from portfolio investments (which included $5.6 million of PIK interest) and $17.1 million of fee income.
The increase in our total investment income for the three months ended December 31, 2014 as compared to the three months ended December 31, 2013 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to a net increase of 25 debt investments in our portfolio and fees related to investment activity, partially offset by amortization repayments received on our debt investments.
Expenses
Net expenses for the three months ended December 31, 2014 and December 31, 2013 were $41.1 million and $35.1 million, respectively. Net expenses increased for the three months ended December 31, 2014 as compared to the three months ended December 31, 2013 by $6.0 million. This was due primarily to changes in:
 
•
Base management fees (net of waivers), which was primarily attributable to a 14.5% increase in the fair value of the investment portfolio due to an increase in net investment fundings in the year-over-year period; and
•
Interest expense, which was attributable to a 42.5% increase in weighted average debt outstanding for the year-over-year period.
Net Investment Income
As a result of the $5.0 million increase in total investment income and the $6.0 million increase in net expenses, net investment income for the three months ended December 31, 2014 reflected a $1.0 million, or 2.9%, decrease compared to the quarter ended December 31, 2013.
Realized Gain (Loss) on Investments and Secured Borrowings
Realized gain (loss) is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
During the three months ended December 31, 2014, we recorded investment realization events, including the following:
•
In October 2014, we restructured our investment in Miche Bag, LLC. As part of the restructuring, we exchanged cash and our debt and equity securities for debt and equity securities in the restructured entity, Miche Group, LLC and recorded a realized loss in the amount of $17.9 million on this transaction;
•
In October 2014, we received a cash payment of $74.4 million from Teaching Strategies, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In October 2014, we received a cash payment of $6.5 million from SugarSync, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;
•
In November 2014, we received a cash payment of $8.6 million from Olson + Co., Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In November 2014, we received a cash payment of $5.6 million from American Cadastre, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In December 2014, we received a cash payment of $35.8 million from Drugtest, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In December 2014, we received a cash payment of $39.5 million from Charter Brokerage, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

84


•
In December 2014, we received a cash payment of $27.7 million from CRGT, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;
•
In December 2014, we received a cash payment of $12.5 million from Devicor Medical Products, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In December 2014, we received a cash payment of $12.0 million from CT Technologies Intermediate Holdings, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction; and
•
During the three months ended December 31, 2014, we received payments of $178.7 million in connection with syndications of debt investments to other investors, sales of debt investments and repayment of secured borrowings and recorded a net realized gain of $0.3 million on these transactions.
During the three months ended December 31, 2013, we recorded investment realization events, including the following:
•
In October and December 2013, we received payments of $3.2 million from Stackpole Powertrain International Holding, L.P. related to the sale of our equity investment. A realized gain of $2.2 million was recorded on this transaction;
•
In October 2013, we received a payment of $8.9 million from Harden Healthcare, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;
•
In October 2013, we received a payment of $4.0 million from Capital Equipment Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction. We also received an additional $0.9 million in connection with the sale of our common equity investment, realizing a gain of $0.6 million;
•
In November 2013, we received a payment of $10.0 million from IG Investments Holdings, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;
•
In November 2013, we received a payment of $15.7 million from CTM Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;
•
In December 2013, we received a payment of $0.4 million in connection with the exit of our debt investment in Saddleback Fence and Vinyl Products, Inc. A realized loss of $0.3 million was recorded on this transaction;
•
In December 2013, we received a payment of $7.2 million from Western Emulsions, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction; and
•
During the three months ended December 31, 2013, we received payments of $108.9 million in connection with sales of debt investments and recorded a net realized gain of $0.5 million.
Net Unrealized Appreciation (Depreciation) on Investments and Secured Borrowings
Net unrealized appreciation or depreciation is the net change in the fair value of our investments during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
During the three months ended December 31, 2014, we recorded net unrealized depreciation on investments of $48.6 million. This consisted of $57.0 million of net unrealized depreciation on debt investments and $4.7 million of net unrealized depreciation on equity investments, offset by $13.1 million of net reclassifications to realized losses on debt and equity investments (resulting in unrealized appreciation). During the three months ended December 31, 2013, we recorded net unrealized depreciation of $5.7 million. This consisted of $2.7 million of net reclassifications to realized gains (resulting in unrealized depreciation), $1.8 million of net unrealized depreciation on debt investments and $1.2 million of net unrealized depreciation on equity investments.
Financial Condition, Liquidity and Capital Resources
Cash Flows

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We have a number of alternatives available to fund the growth of our investment portfolio and our operations, including, but not limited to, raising equity, increasing debt and funding from operational cash flow. Additionally, we may reduce investment size by syndicating a portion of any given transaction. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate.
For the three months ended December 31, 2014, we experienced a net decrease in cash and cash equivalents of $22.5 million. During that period, we used $218.3 million of cash in operating activities, primarily for the funding of $722.3 million of investments and net revolvers, partially offset by $435.6 million of principal payments, PIK payments and sale proceeds received and $35.2 million of net investment income. During the same period, cash provided by financing activities was $195.8 million, primarily consisting of $300.1 million of net borrowings under our credit facilities, partially offset by $40.1 million of cash distributions paid and $62.1 million of repayments of secured borrowings.
For the three months ended December 31, 2013, we experienced a net decrease in cash and cash equivalents of $104.8 million. During that period, we used $475.4 million of cash in operating activities, primarily for the funding of $650.1 million of investments and net revolvers, partially offset by $169.9 million of principal payments, PIK payments and sale proceeds received and $36.2 million of net investment income. During the same period, cash provided by financing activities was $370.7 million, primarily consisting of $29.0 million of net borrowings of SBA debentures and $376.2 million of net borrowings under our credit facilities, partially offset by $30.2 million of cash distributions paid and $1.4 million of deferred financing costs paid.
As of December 31, 2014, we had $110.6 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.7 billion, $15.2 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $617.5 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.1 million of unsecured notes payable, $22.2 million of secured borrowings and unfunded commitments of $350.8 million.
As of September 30, 2014, we had $109.0 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.5 billion, $15.2 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $317.4 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $409.9 million of unsecured notes payable, $84.8 million of secured borrowings and unfunded commitments of $325.0 million.
Other Sources of Liquidity
We intend to continue to generate cash primarily from cash flows from operations, including interest earned, future borrowings and future offerings of securities. We generally maintain a universal shelf registration statement that allows for the public offering and sale of our common stock, debt securities and warrants to purchase such securities. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. In the future, we may also securitize a portion of our investments in first and second lien senior loans or unsecured debt or other assets. To securitize loans, we would likely create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in the subsidiary. Our primary use of funds is investments in our targeted asset classes and cash distributions to holders of our common stock.
Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, because our common stock has at times traded at a price below our then-current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.
In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. See "Regulated Investment Company Status and Distributions" below. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
As a business development company, under the 1940 Act, we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). This requirement limits the amount that we may borrow. As of December 31, 2014, we were in compliance with this requirement. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make

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investments will exceed the cost of such borrowing. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
Significant Capital Transactions
The following table reflects the distributions per share that our Board of Directors has declared, including shares issued under our DRIP, on our common stock for the two most recently completed fiscal years and the current fiscal year:
 
Date Declared
 
Record Date
 
Payment Date
 
Amount
per Share
 
Cash
Distribution
 
DRIP Shares
Issued
 
 
 
DRIP Shares
Value
January 14, 2013
 
March 15, 2013

March 29, 2013

$ 0.0958


$ 9.1 million

100,802




$ 1.1 million
January 14, 2013
 
April 15, 2013

April 30, 2013

0.0958


10.3 million

111,167




1.2 million
January 14, 2013
 
May 15, 2013

May 31, 2013

0.0958


10.3 million

127,152




1.3 million
May 6, 2013
 
June 14, 2013

June 28, 2013

0.0958


10.5 million

112,821




1.1 million
May 6, 2013
 
July 15, 2013

July 31, 2013

0.0958


10.2 million

130,944




1.3 million
May 6, 2013
 
August 15, 2013

August 30, 2013

0.0958


10.3 million

136,052




1.3 million
August 5, 2013
 
September 13, 2013

September 30, 2013

0.0958


10.3 million

135,027




1.3 million
August 5, 2013
 
October 15, 2013

October 31, 2013

0.0958


11.9 million

142,320




1.4 million
August 5, 2013
 
November 15, 2013

November 29, 2013

0.0958


12.0 million

145,063


(1)

1.4 million
November 21, 2013
 
December 13, 2013

December 30, 2013

0.0500


6.3 million

69,291


(1)

0.6 million
November 21, 2013
 
January 15, 2014

January 31, 2014

0.0833


10.5 million

114,033


(1)

1.1 million
November 21, 2013
 
February 14, 2014

February 28, 2014

0.0833


10.5 million

110,486


(1)

1.1 million
November 21, 2013
 
March 14, 2014

March 31, 2014

0.0833


11.0 million

64,748


(1)

0.6 million
November 21, 2013
 
April 15, 2014

April 30, 2014

0.0833


10.5 million

120,604


(1)

1.1 million
November 21, 2013
 
May 15, 2014

May 30, 2014

0.0833


11.1 million

58,003


(1)

0.5 million
February 6, 2014
 
June 16, 2014

June 30, 2014

0.0833


11.1 million

51,692




0.5 million
February 6, 2014
 
July 15, 2014

July 31, 2014

0.0833


12.2 million

54,739


(1)

0.5 million
February 6, 2014
 
August 15, 2014

August 29, 2014

0.0833


12.1 million

59,466




0.6 million
July 2, 2014
 
September 15, 2014

September 30, 2014

0.0917


13.4 million

73,141


(1)

0.7 million
July 2, 2014
 
October 15, 2014

October 31, 2014

0.0917


13.3 million

82,390


(1)

0.7 million
July 2, 2014
 
November 14, 2014

November 28, 2014

0.0917


13.4 million

80,775


(1)

0.7 million
November 20, 2014
 
December 15, 2014
 
December 30, 2014
 
0.0917

 
13.4 million
 
79,849

 
(1)
 
0.6 million
November 20, 2014
 
January 15, 2015
 
January 30, 2015
 
0.0917

 
 
 
 
 
 
 
 
February 3, 2014
 
March 16, 2015
 
March 31, 2015
 
0.06

 
 
 
 
 
 
 
 
February 3, 2014
 
April 15, 2015
 
April 30, 2015
 
0.06

 
 
 
 
 
 
 
 
February 3, 2014
 
May 15, 2015
 
May 29, 2015
 
0.06

 
 
 
 
 
 
 
 
February 3, 2014
 
June 15, 2015
 
June 30, 2015
 
0.06

 
 
 
 
 
 
 
 
February 3, 2014
 
July 15, 2015
 
July 31, 2015
 
0.06

 
 
 
 
 
 
 
 
February 3, 2014
 
August 14, 2015
 
August 31, 2015
 
0.06

 
 
 
 
 
 
 
 
 ______________
(1)
Shares were purchased on the open market and distributed.

The following table reflects share transactions that occurred from October 1, 2012 through December 31, 2014:
Date
 
Transaction
 
Shares
 
Public Offering Price
 
 
Gross Proceeds
December 2012
 
Public offering (1)
 
14,725,000
 
$
10.68

 
 
 
$157.3 million
April 2013
 
Public offering (1)
 
14,435,253
 
10.85

 
 
 
156.5 million
September 26, 2013
 
Public offering (1)
 
17,643,000
 
10.31

 
 
 
181.9 million
July 11, 2014
 
Public offering
 
13,250,000
 
9.95

 
 
 
131.8 million
  ______________
(1) Includes the underwriters' partial exercise of their over-allotment option.

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On August 22, 2014, we entered into an at-the-market offering ("ATM Program") with KeyBanc Capital Markets Inc. through which we may sell, from time to time at our sole discretion, up to $100,000,000 of our common stock. Since the inception of the ATM Program, we sold 841,456 shares of our common stock at an average price of $9.86 per share, and raised $8.3 million of net proceeds, under the ATM Program. Commissions to the broker-dealer on shares sold and offering costs were approximately $0.1 million. There were no issuances under the ATM Program for the three months ended December 31, 2014.
Borrowings
SBIC Subsidiaries
Through wholly-owned subsidiaries, we sought and obtained two licenses from the SBA to operate SBIC subsidiaries. Specifically, on February 3, 2010, our wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. ("FSMP IV"), received a license, effective February 1, 2010, from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. On May 15, 2012, our wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. ("FSMP V"), received a license, effective May 10, 2012, from the SBA to operate as an SBIC. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.
The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a 10-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with ten-year maturities.
SBA regulations currently limit the amount that an SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million when they have at least $112.5 million in regulatory capital.
As of December 31, 2014, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $137.0 million, as compared to $134.0 million as of September 30, 2014. These debentures bear interest at a weighted average interest rate of 3.567% (excluding the SBA annual charge), as follows: 
Rate Fix Date
 
Debenture
 Amount
 
Fixed
 Interest
 Rate
 
 
SBA
 Annual
 Charge
 
September 2010
 
$
73,000

 
3.215
%
 
0.285
%
March 2011
 
65,300

 
4.084
 
 
0.285
 
September 2011
 
11,700

 
2.877
 
 
0.285
 
As of December 31, 2014, FSMP V had $37.5 million in regulatory capital and $75.0 million in SBA-guaranteed debentures outstanding, which had a fair value of $64.7 million. These debentures bear interest at a weighted average interest rate of 2.835% (excluding the SBA annual charge), as follows:
Rate Fix Date
 
Debenture
Amount
 
Fixed
Interest
Rate
 
SBA
Annual Charge
 
March 2013
 
$
31,750

 
2.351
%
 
0.804
%
 
March 2014
 
43,250

 
3.191

 
0.804

 
As a result, the $225.0 million of SBA-guaranteed debentures held by our SBIC subsidiaries carry a weighted average interest rate of 3.323% as of December 31, 2014.
For the three months ended December 31, 2014 and December 31, 2013, we recorded interest expense of $2.4 million and $1.9 million, respectively, related to the SBA-guaranteed debentures of both SBIC subsidiaries.
We have received exemptive relief from the SEC to permit us to exclude the debt of our SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test by permitting us to borrow up to $225 million more than we would otherwise be able to absent the receipt of this exemptive relief.
Wells Fargo Facility

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On November 16, 2009, we and Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote special purpose subsidiary ("Funding"), entered into a Loan and Servicing Agreement ("Wells Agreement") with respect to a revolving credit facility (as subsequently amended, the "Wells Fargo facility") with Wells Fargo Bank, National Association ("Wells Fargo"), as successor to Wachovia Bank, National Association ("Wachovia"), Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time.
Effective February 21, 2014, we, together with Funding, terminated the Wells Fargo facility. In connection therewith, the Amended and Restated Loan and Servicing Agreement and other related documents governing the Wells Fargo facility were also terminated. As such, we have no borrowing capacity under the Wells Fargo facility as of December 31, 2014. Upon termination of the Wells Fargo facility, we accelerated the $0.7 million remaining unamortized fee balance into interest expense.
While in effect, the Wells Fargo facility permitted up to $150 million of borrowings (subject to collateral requirements) with an accordion feature allowing for future expansion of the facility up to a total of $250 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-month) plus 2.50% per annum, with no LIBOR floor. The maturity date of the Wells Fargo facility was April 25, 2016.
The Wells Fargo facility was secured by all of the assets of Funding, and all of our equity interest in Funding. We used the Wells Fargo facility to fund a portion of our loan origination activities and for general corporate purposes. Each loan origination under the facility was subject to the satisfaction of certain conditions. Our borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.749% for the three months ended December 31, 2013. For the three months ended December 31, 2013, we recorded interest expense of $0.7 million related to the Wells Fargo facility.
ING Facility
On May 27, 2010, we entered into a secured syndicated revolving credit facility (as subsequently amended, the "ING facility") pursuant to a Senior Secured Revolving Credit Agreement ("ING Credit Agreement") with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility allows us to request letters of credit from ING Capital LLC, as the issuing bank.
As of December 31, 2014, the ING facility permitted up to $705 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $800 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-, 2-, 3- or 6-month, at our option) plus 2.25% per annum, with no LIBOR floor, assuming we maintain our current credit rating. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on August 6, 2017 and the maturity date of the facility is August 6, 2018.
The ING facility is secured by substantially all of our assets, as well as the assets of our wholly-owned subsidiary, FSFC Holdings, Inc. ("Holdings"), and our indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC ("Fund of Funds"), subject to certain exclusions for, among other things, equity interests in any of our SBIC subsidiaries and equity interests in Funding and Fifth Street Funding II, LLC (which is defined and discussed below) as further set forth in a Guarantee, Pledge and Security Agreement ("ING Security Agreement") entered into in connection with the ING Credit Agreement, among Holdings, ING Capital LLC, as collateral agent, and us. Fifth Street Fund of Funds LLC and FSFC Holdings, Inc. were formed to hold certain of our portfolio companies for tax purposes and have no other operations. None of our SBIC subsidiaries, Funding or Fifth Street Funding II, LLC is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that we may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.
Pursuant to the ING Security Agreement, Holdings and Fund of Funds guaranteed the obligations under the ING Security Agreement, including our obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, we pledged our entire equity interest in Holdings and Holdings pledged its entire equity interest in Fund of Funds to the collateral agent pursuant to the terms of the ING Security Agreement.
The ING Credit Agreement and related agreements governing the ING facility required Holdings, Fund of Funds and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by us to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations. We are currently in compliance with all financial covenants under the ING facility.

89


Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. We cannot be assured that we will be able to borrow funds under the ING facility at any particular time or at all.
As of December 31, 2014, we had $582.0 million of borrowings outstanding under the ING facility, which had a fair value of $582.0 million. Our borrowings under the ING facility bore interest at a weighted average interest rate of 2.656% for the three months ended December 31, 2014. For the three months ended December 31, 2014 and December 31, 2013, we recorded interest expense of $2.9 million and $2.8 million, respectively, related to the ING facility.
Sumitomo Facility
On September 16, 2011, Fifth Street Funding II, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary ("Funding II"), entered into a Loan and Servicing Agreement ("Sumitomo Agreement") with respect to a seven-year credit facility ("Sumitomo facility") with Sumitomo Mitsui Banking Corporation ("SMBC"), an affiliate of Sumitomo Mitsui Financial Group, Inc., as administrative agent, and each of the lenders from time to time party thereto, in the amount of $200 million.
As of December 31, 2014, the Sumitomo facility permitted up to $125 million of borrowings (subject to collateral requirements), and borrowings under the facility bore interest at a rate of LIBOR (1-month) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on September 16, 2016, and the maturity date of the facility is September 16, 2020, with an option for a one-year extension.
In connection with the Sumitomo facility, we concurrently entered into a Purchase and Sale Agreement with Funding II, pursuant to which we will sell to Funding II certain loan assets we have originated or acquired, or will originate or acquire.
The Sumitomo Agreement and related agreements governing the Sumitomo facility required both Funding II and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities, including a prepayment penalty in certain cases. The Sumitomo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding II, and the failure by Funding II or us to materially perform under the Sumitomo Agreement and related agreements governing the Sumitomo facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations. Funding II was formed for the sole purpose of entering into the Sumitomo facility and has no other operations.
The Sumitomo facility is secured by all of the assets of Funding II. Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot be assured that Funding II will be able to borrow funds under the Sumitomo facility at any particular time or at all. As of December 31, 2014, we had $35.5 million of borrowings outstanding under the Sumitomo facility which had a fair value of $35.5 million. Our borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.447% for the three months ended December 31, 2014. For the three months ended December 31, 2014 and December 31, 2013, we recorded interest expense of $0.5 million and $0.5 million, respectively, related to the Sumitomo facility.
As of December 31, 2014, except for assets that were funded through our SBIC subsidiaries, substantially all of our assets were pledged as collateral under the ING facility or the Sumitomo facility. With respect to the assets funded through our SBIC subsidiaries, the SBA, as a creditor, will have a superior claim to the SBIC subsidiaries' assets over our stockholders.
The following table describes significant financial covenants with which we must comply under the ING facility on a quarterly basis. The Sumitomo facility does not require us to comply with significant financial covenants:
Financial Covenant
 
Description
 
Target Value
 
Reported Value (1)
Minimum shareholders' equity
 
Net assets shall not be less than the greater of (a) 40% of total assets and (b) $825 million plus 50% of the aggregate net proceeds of all sales of equity interests after August 6, 2013
 
$1,067 million
 
$1,478 million
Asset coverage ratio
 
Asset coverage ratio shall not be less than 2.10:1
 
2.10:1
 
2.76:1
Interest coverage ratio
 
Interest coverage ratio shall not be less than 2.50:1
 
2.50:1
 
4.15:1
 ___________ 
(1) As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Form 10-K for the year ended September 30, 2014. We were also in compliance with all financial covenants under these credit facilities based on the financial information contained in this Form 10-Q for the quarter ended December 31, 2014.

We and our SBIC subsidiaries are also subject to certain regulatory requirements relating to our borrowings. For a discussion of such requirements, see "Item 1. Business — Regulation — Business Development Company Regulations" and "— Small Business Investment Company Regulations" in our Annual Report on Form 10-K for the year ended September 30, 2014.

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The following table reflects material credit facility and SBA debenture transactions that have occurred since October 1, 2009. Amounts available are as of December 31, 2014.
Facility
 
Date
 
Transaction
 
Total
Facility
Amount
 
Upfront
fee Paid
 
Total  Facility
Availability
 
Amount
Drawn
 
Remaining
Availability
 
Interest Rate
Wells Fargo facility
 
11/16/2009
 
Entered into credit facility
 
50 million

 
0.8 million

 
 
 
 
 
 
 
LIBOR + 4.00%
 
 
5/26/2010
 
Expanded credit facility
 
100 million

 
0.9 million

 
 
 
 
 
 
 
LIBOR + 3.50%
 
 
2/28/2011
 
Amended credit facility
 
100 million

 
0.4 million

 
 
 
 
 
 
 
LIBOR + 3.00%
 
 
11/30/2011
 
Amended credit facility
 
100 million

 
—

 
 
 
 
 
 
 
LIBOR + 2.75%
 
 
4/23/2012
 
Amended credit facility
 
150 million

 
1.2 million

 
 
 
 
 
 
 
LIBOR + 2.75%
 
 
6/20/2013
 
Amended credit facility
 
150 million

 
—

 
 
 
 
 
 
 
LIBOR + 2.50%
 
 
2/21/2014
 
Terminated credit facility
 
—

 
—

 
—

 
—

 
—

 
 
ING facility
 
5/27/2010
 
Entered into credit facility
 
90 million

 
0.8 million

 
 
 
 
 
 
 
LIBOR + 3.50%
 
 
2/22/2011
 
Expanded credit facility
 
215 million

 
1.6 million

 
 
 
 
 
 
 
LIBOR + 3.50%
 
 
7/8/2011
 
Expanded credit facility
 
230 million

 
0.4 million

 
 
 
 
 
 
 
LIBOR + 3.00%/3.25%
 
 
2/29/2012
 
Amended credit facility
 
230 million

 
1.5 million

 
 
  
 
 
 
 
LIBOR + 3.00%/3.25%
 
 
11/30/2012
 
Amended credit facility
 
385 million

 
2.2 million

 
 
 
 
 
 
 
LIBOR + 2.75%
 
 
1/7/2013
 
Expanded credit facility
 
445 million

 
0.3 million

 
 
 
 
 
 
 
LIBOR + 2.75%
 
 
8/6/2013
 
Amended credit facility
 
480 million

 
1.8 million

 
 
 
 
 
 
 
LIBOR + 2.25%
 
 
10/22/2013
 
Expanded credit facility
 
605 million

 
0.7 million

 
 
 
 
 
 
 
LIBOR + 2.25%
 
 
1/30/2014
 
Expanded credit facility
 
650 million

 
0.1 million

 
 
 
 
 
 
 
LIBOR + 2.25%
 
 
5/2/2014
 
Expanded credit facility
 
670 million

 
0.2 million

 
 
 
 
 
 
 
LIBOR + 2.25%
 
 
8/12/2014
 
Expanded credit facility
 
680 million

 
0.1 million

 
 
 
 
 
 
 
LIBOR + 2.25%
 
 
9/26/2014
 
Expanded credit facility
 
705 million

 
0.2 million

 
705 million

 
582 million

 
123 million

 
LIBOR (4) + 2.25%
SBA
 
2/16/2010
 
Received capital commitment
 
75 million

 
0.8 million

 
 
 
 
 
 
 
 
 
 
9/21/2010
 
Received capital commitment
 
150 million

 
0.8 million

 
 
 
 
 
 
 
 
 
 
7/23/2012
 
Received capital commitment
 
225 million

 
0.8 million

 
225 million

  
225 million

 
—

 
3.323% (2)
Sumitomo facility
 
9/16/2011
 
Entered into credit facility
 
200 million

 
2.5 million

 
 
 
 
 
 
 
LIBOR + 2.25%
 
 
10/30/2013
 
Reduced credit facility
 
125 million

 
—

 
44 million

(1)
36 million

 
8 million

 
LIBOR (3) + 2.25%
 _______________
(1)
Availability to increase upon our decision to further collateralize the facility
(2)
Weighted average interest rate of locked debentures (excludes the SBA annual charge)
(3)
1-month
(4)
1-, 2-, 3- or 6-month LIBOR, at our option
Convertible Notes
On April 12, 2011, we issued $152 million of Convertible Notes, including $2 million issued to Leonard M. Tannenbaum, our former Chief Executive Officer. The Convertible Notes were issued pursuant to an Indenture, dated April 12, 2011 (the "Indenture"), between us and Deutsche Bank Trust Company Americas, as trustee (the "Trustee").
The Convertible Notes mature on April 1, 2016 (the "Maturity Date"), unless previously converted or repurchased in accordance with their terms. The Convertible Notes bear interest at a rate of 5.375% per annum payable semi-annually in arrears on April 1 and October 1 of each year. The Convertible Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles.
Prior to the close of business on the business day immediately preceding January 1, 2016, holders may convert their Convertible Notes only under certain circumstances set forth in the Indenture, such as during specified periods when our shares of common stock trade at more than 110% of the then applicable conversion price or the Convertible Notes trade at less than 98% of their conversion value. On or after January 1, 2016 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time. Upon conversion, we will deliver shares of our common stock. The conversion rate was initially, and currently is, 67.7415 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $14.76 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments, including for any cash dividends or distributions paid on shares of our common stock in excess of a monthly distribution of $0.1066 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. Based on the current conversion rate, the maximum number of shares of common stock that would be issued upon conversion of the $115.0 million Convertible Notes outstanding at December 31, 2014 is 7,790,273. If we deliver shares of common stock upon a conversion at the time our net asset value per share exceeds the conversion price in effect at such time, our stockholders may incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of our common stock upon our issuance of common stock in connection with the conversion of

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our Convertible Notes and any distributions paid on our common stock will also be paid on shares issued in connection with such conversion after such issuance. The shares of common stock issued upon a conversion are not subject to registration rights.
We may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect to us, holders of the Convertible Notes may require us to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.
The Indenture contains certain covenants, including covenants requiring us to provide financial information to the holders of the Convertible Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. We may repurchase the Convertible Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Convertible Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any Convertible Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the Indenture. During the three months ended December 31, 2014 and December 31, 2013, we did not repurchase any Convertible Notes in the open market. We have repurchased $37.0 million in principal amount of the Convertible Notes in the open market since they were issued.
For the three months ended December 31, 2014 and December 31, 2013, we recorded interest expense of $1.7 million and $1.7 million, respectively, related to the Convertible Notes.
As of December 31, 2014, there were $115.0 million Convertible Notes outstanding, which had a fair value of $118.9 million.
2019 Notes
On February 26, 2014, we issued $250.0 million in aggregate principal amount of our 4.875% unsecured notes due 2019 (the "2019 Notes") for net proceeds of $244.4 million after deducting original issue discount of $1.4 million, underwriting commissions and discounts of $3.7 million and offering costs of $0.5 million. The original issue discount on these notes is amortized on a straight-line basis over the term of the notes.
The 2019 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated February 26, 2014 (collectively, the "2019 Notes Indenture"), between us and the Trustee. The 2019 Notes are our general unsecured obligations that rank senior in right of payment to all of our existing and future indebtedness that is expressly subordinated in right of payment to the 2019 Notes. The 2019 Notes rank equally in right of payment with all of our existing and future liabilities that are not so subordinated. The 2019 Notes effectively rank junior to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness. The 2019 Notes rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities. 
Interest on the 2019 Notes is paid semi-annually on March 1 and September 1, at a rate of 4.875% per annum. The 2019 Notes mature on March 1, 2019 and may be redeemed in whole or in part at any time or from time to time at our option prior to maturity.
The 2019 Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 2019 Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2019 Notes Indenture. We may repurchase the 2019 Notes in accordance with the 1940 Act and the rules promulgated thereunder. In addition, holders of the 2019 Notes can require us to repurchase the 2019 Notes at 100% of their principal amount upon the occurrence of certain change of control events as described in the 2019 Notes Indenture. The 2019 Notes are issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. During the three months ended December 31, 2014, we did not repurchase any of the 2019 Notes in the open market.
For the three months ended December 31, 2014, we recorded interest expense of $3.5 million related to the 2019 Notes.
As of December 31, 2014, there were $250.0 million of 2019 Notes outstanding, which had a fair value of $258.2 million.
2024 Notes
On October 18, 2012, we issued $75.0 million in aggregate principal amount of our 5.875% 2024 Notes (the "2024 Notes") for net proceeds of $72.5 million after deducting underwriting commissions of $2.2 million and offering costs of $0.3 million.
The 2024 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated October 18, 2012 (collectively, the "2024 Notes Indenture"), between us and the Trustee. The 2024 Notes are our unsecured

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obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles.
Interest on the 2024 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 5.875% per annum. The 2024 Notes mature on October 30, 2024 and may be redeemed in whole or in part at any time or from time to time at our option on or after October 30, 2017. The 2024 Notes are listed on the New York Stock Exchange under the trading symbol "FSCE" with a par value of $25.00 per share.
The 2024 Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 2024 Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2024 Notes Indenture. We may repurchase the 2024 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2024 Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any 2024 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2024 Notes Indenture. During the three months ended December 31, 2014 and December 31, 2013, we did not repurchase any of the 2024 Notes in the open market.
For the three months ended December 31, 2014 and December 31, 2013, we recorded interest expense of $1.2 million and $1.2 million, respectively, related to the 2024 Notes.
As of December 31, 2014, there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.5 million.
2028 Notes
In April and May 2013, we issued $86.3 million in aggregate principal amount of our 6.125% unsecured notes due 2028 (the "2028 Notes") for net proceeds of $83.4 million after deducting underwriting commissions of $2.6 million and offering costs of $0.3 million. The proceeds included the underwriters' full exercise of their overallotment option.
The 2028 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the second supplemental indenture, dated April 4, 2013 (collectively, the "2028 Notes Indenture"), between us and the Trustee. The 2028 Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 2028 Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the 2028 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per annum. The 2028 Notes mature on April 30, 2028 and may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2018. The 2028 Notes are listed on the NASDAQ Global Select Market under the trading symbol "FSCFL" with a par value of $25.00 per share.
The 2028 Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 2028 Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2028 Notes Indenture. We may repurchase the 2028 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2028 Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any 2028 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2028 Notes Indenture. During the three months ended December 31, 2014 and December 31, 2013, we did not repurchase any of the 2028 Notes in the open market.
For the three months ended December 31, 2014 and December 31, 2013, we recorded interest expense of $1.4 million and $1.3 million, respectively, related to the 2028 Notes.
As of December 31, 2014, there were $86.3 million 2028 Notes outstanding, which had a fair value of $86.0 million.
Secured Borrowings

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We follow the guidance in ASC 860 when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a "participating interest," as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on our Consolidated Statement of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.
As of December 31, 2014, secured borrowings at fair value totaled $22.2 million and the fair value of the loan that is associated with these secured borrowings was $44.2 million. These secured borrowings were the result of the completion of partial loan sales of a senior secured debt investment totaling $22.8 million during the year ended September 30, 2014 that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and these partial loan sales were treated as secured borrowings. During the three months ended December 31, 2014, there were $62.1 million of repayments on secured borrowings.
As of September 30, 2014, secured borrowings at fair value totaled $84.8 million and the fair value of the investments that are associated with these secured borrowings was $154.0 million. These secured borrowings were the result of the our completion of partial loan sales of two senior secured debt investments totaling $87.8 million during the year ended September 30, 2014 that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and these partial loan sales were treated as secured borrowings. During the year ended September 30, 2014, there were $3.0 million of repayments on secured borrowings.
As of December 31, 2014, there were $22.5 million of secured borrowings outstanding, which had a fair value of $22.2 million. As of September 30, 2014, there were $84.8 million of secured borrowings outstanding, which had a fair value of $84.8 million.
For the three months ended December 31, 2014, we recorded interest expense of $0.5 million related to the secured borrowings.
Total interest expense for the three months ended December 31, 2014 and December 31, 2013 was $14.0 million and $10.2 million, respectively.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of December 31, 2014, our only off-balance sheet arrangements consisted of $350.8 million of unfunded commitments, which was comprised of $222.2 million to provide debt financing to certain of our portfolio companies, $106.4 million to provide debt and equity financing to SLF JV I and $22.2 million related to unfunded limited partnership interests. As of September 30, 2014, our only off-balance sheet arrangements consisted of $325.0 million, which was comprised of $185.4 million to provide debt financing to certain of our portfolio companies, $115.0 million to provide debt and equity financing to SLF JV I and $24.6 million related to unfunded limited partnership interests. Such commitments are subject to our portfolio companies' satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in our Consolidated Statements of Assets and Liabilities and are not reflected on our Consolidated Statements of Assets and Liabilities.
A summary of the composition of unfunded commitments (consisting of revolvers, term loans, SLF JV I subordinated notes and LLC interests, and limited partnership interests) as of December 31, 2014 and September 30, 2014 is shown in the table below:
 
 
December 31, 2014
 
September 30, 2014
 Senior Loan Fund JV 1, LLC
 
$
106,419

 
$
115,018

 Yeti Acquisition, LLC
 
30,000

 
15,000

 Lift Brands Holdings, Inc.
 
18,000

 
20,000

 BMC Software Finance, Inc.
 
15,000

 
15,000

 P2 Upstream Acquisition Co.
 
10,000

 
10,000

 TigerText, Inc.
 
10,000

 
—

 RP Crown Parent, LLC
 
9,868

 
10,000

 Deltek, Inc.
 
9,713

 
3,213

 Ameritox, Ltd.
 
8,533

 
—

 Trialcard Incorporated
 
7,800

 
—

 BeyondTrust Software, Inc.
 
6,495

 
9,375

 Refac Optical Group
 
6,400

 
6,400

 Thing5, LLC
 
6,000

 
6,000

 TIBCO Software, Inc.
 
5,800

 
—

 Integrated Petroleum Technologies, Inc.
 
5,397

 
5,397

 Integral Development Corporation
 
5,000

 
5,000

 OnCourse Learning Corporation
 
5,000

 
3,000

 EOS Fitness Opco Holdings, LLC
 
5,000

 
—


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 InMotion Entertainment Group, LLC
 
4,951

 
7,916

 Penn Foster, Inc.
 
4,932

 
—

 Metamorph US 3, LLC
 
4,900

 
—

 Adventure Interactive, Corp.
 
4,846

 
4,846

 Pingora MSR Opportunity Fund I, LP (limited partnership interest)
 
4,222

 
5,944

 World 50, Inc.
 
4,000

 
4,000

 First Choice ER, LLC (1)
 
3,681

 
9,181

 First American Payment Systems, LP
 
3,642

 
5,000

 All Web Leads, Inc.
 
3,500

 
3,500

 Discovery Practice Management, Inc.
 
3,468

 
2,682

 OmniSYS Acquisition Corporation
 
2,500

 
2,500

 Teaching Strategies, LLC
 
2,400

 
5,000

 Idera, Inc.
 
2,400

 
—

 TransTrade Operators, Inc.
 
2,194

 
2,255

 Chicago Growth Partners L.P. (limited partnership interest)
 
2,000

 
2,000

 Webster Capital III, L.P. (limited partnership interest)
 
2,000

 
2,000

 ExamSoft Worldwide, Inc.
 
2,000

 
—

 Miche Group, LLC
 
2,000

 
—

 Eagle Hospital Physicians, Inc.
 
1,820

 
1,820

 Tailwind (limited partnership interest)
 
1,699

 
1,726

 Beecken Petty O'Keefe Fund IV, L.P. (limited partnership interest)
 
1,433

 
1,433

 SPC Partners V, L.P. (limited partnership interest)
 
1,428

 
1,415

 Riverside Fund V, LP (limited partnership interest)
 
1,381

 
1,422

 Ansira Partners, Inc.
 
1,190

 
1,190

 Sterling Capital Partners IV, L.P. (limited partnership interest)
 
1,126

 
1,126

 Phoenix Brands Merger Sub LLC
 
1,071

 
1,286

 Psilos Group Partners IV, LP (limited partnership interest)
 
1,000

 
1,000

 L Squared Capital Partners (limited partnership interest)
 
1,000

 
1,000

 Moelis Capital Partners Opportunity Fund I-B, L.P. (limited partnership interest)
 
992

 
1,285

 RCP Direct II, LP (limited partnership interest)
 
900

 
990

 Total Military Management, Inc.
 
857

 
857

 HealthDrive Corporation
 
734

 
734

 Milestone Partners IV, LP (limited partnership interest)
 
666

 
869

 Garretson Firm Resolution Group, Inc.
 
641

 
859

 Bunker Hill Capital II (QP), LP (limited partnership interest)
 
620

 
632

 ACON Equity Partners III, LP (limited partnership interest)
 
502

 
502

 Enhanced Recovery Company, LLC
 
500

 
1,500

 Riverlake Equity Partners II, LP (limited partnership interest)
 
358

 
358

 Riverside Fund IV, LP (limited partnership interest)
 
357

 
357

 RCP Direct, LP (limited partnership interest)
 
344

 
344

 Baird Capital Partners V, LP (limited partnership interest)
 
153

 
174

 Drugtest, Inc.
 
—

 
10,900

 Charter Brokerage, LLC
 
—

 
4,000

 CPASS Acquisition Company
 
—

 
2,500

 Olson + Co., Inc.
 
—

 
1,673

 CCCG, LLC
 
—

 
1,520

 2Checkout.com, Inc.
 
—

 
850

 American Cadastre, LLC
 
—

 
405

Total
 
$
350,833

 
$
324,954

______________
(1) In addition to our revolving commitment, we have extended a $105.2 million delayed draw term loan facility to First Choice ER, LLC. Specific amounts are made available to the borrower as certain financial requirements are satisfied. As of December 31, 2014, the total amount available to the borrower under this delayed draw facility was $26.4 million, and the facility was drawn at $25.0 million as of such date.

Contractual Obligations
The following table reflects information pertaining to our debt outstanding under the SBA debentures, the ING facility, the Sumitomo facility, our Convertible Notes, our 2019 Notes, our 2024 Notes, our 2028 Notes and our secured borrowings:

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Debt Outstanding
as of September 30,
2014
 
Debt Outstanding
as of December 31,
2014
 
Weighted average  debt
outstanding for the
three months ended
December 31, 2014
 
Maximum
debt
outstanding
for the three months
December 31, 2014
SBA debentures
 
$
225,000

 
$
225,000

 
$
225,000

 
$
225,000

ING facility
 
267,395

 
581,995

 
301,843

 
601,995

Sumitomo facility
 
50,000

 
35,500

 
49,685

 
50,000

Convertible Notes
 
115,000

 
115,000

 
115,000

 
115,000

2019 Notes
 
250,000

 
250,000

 
250,000

 
250,000

2024 Notes
 
75,000

 
75,000

 
75,000

 
75,000

2028 Notes
 
86,250

 
86,250

 
86,250

 
86,250

Secured borrowings
 
84,750

 
22,525

 
80,358

 
84,750

Total debt
 
$
1,153,395

 
$
1,391,270

 
$
1,183,136

 
$
1,419,181

The following table reflects our contractual obligations arising from the SBA debentures, the ING facility, the Sumitomo facility, our Convertible Notes, our secured borrowings, our 2019 Notes, our 2024 Notes and our 2028 Notes:
 
 
 
Payments due by period as of December 31, 2014
 
 
Total
 
< 1 year
 
1-3 years
 
3-5 years
 
> 5 years
SBA debentures
 
$
225,000

 
$
—

 
$
—

 
$
—

 
$
225,000

Interest due on SBA debentures
 
64,439

 
8,862

 
17,749

 
17,725

 
20,103

ING facility
 
581,995

 
—

 
—

 
581,995

 
—

Interest due on ING facility
 
50,992

 
14,186

 
28,372

 
8,434

 
—

Sumitomo facility
 
35,500

 
—

 
—

 
—

 
35,500

Interest due on Sumitomo facility
 
4,891

 
856

 
1,712

 
1,712

 
611

Convertible Notes
 
115,000

 
—

 
115,000

 
—

 
—

Interest due on Convertible Notes
 
7,739

 
6,181

 
1,558

 
—

 
—

Secured borrowings
 
22,525

 
—

 
—

 
22,525

 
—

Interest due on secured borrowings
 
3,450

 
1,070

 
2,140

 
240

 
—

2019 Notes
 
250,000

 
—

 
—

 
250,000

 
—

Interest due on 2019 Notes
 
50,787

 
12,188

 
24,375

 
14,224

 
—

2024 Notes
 
75,000

 
—

 
—

 
—

 
75,000

Interest due on 2024 Notes
 
43,350

 
4,406

 
8,813

 
8,813

 
21,318

2028 Notes
 
86,250

 
—

 
—

 
—

 
86,250

Interest due on 2028 Notes
 
70,471

 
5,283

 
10,566

 
10,566

 
44,056

Total
 
$
1,687,389

 
$
53,032

 
$
210,285

 
$
916,234

 
$
507,838

Regulated Investment Company Status and Distributions
We elected, effective as of January 2, 2008, to be treated as a RIC under Subchapter M of the Code. As long as we continue to qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a year may differ from taxable income for that year as such distributions may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). As a RIC, we are also subject to a federal excise tax, based on distribution requirements of our taxable income on a calendar year basis (e.g., calendar year 2013). We anticipate timely distribution of our taxable income in

96


accordance with tax rules. We did not incur a U.S. federal excise tax for calendar years 2011, 2012 and 2013 and do not expect to incur a U.S. federal excise tax for the calendar year 2014. We may incur a federal excise tax in future years.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, we are partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to enable us to maintain our status as a RIC. We may have to request a waiver of the SBA's restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. Also, the covenants under the Sumitomo facility could, under certain circumstances, restrict Funding and Funding II from making distributions to us and, as a result, hinder our ability to satisfy the distribution requirement. Similarly, the covenants contained in the ING facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividend distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in our credit facilities and debt instruments. If we do not distribute a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.
Related Party Transactions
We have entered into an investment advisory agreement with our investment adviser, Fifth Street Management. Messrs. Berman, Dimitrov and Owens, each an interested member of our Board of Directors, have a direct or indirect pecuniary interest in Fifth Street Management. Fifth Street Management is a registered investment adviser under the Investment Advisers Act of 1940, that is partially and indirectly owned by Fifth Street Asset Management Inc. Pursuant to the investment advisory agreement, fees payable to our investment adviser equal to (a) a base management fee of 2.0% of the value of our gross assets, which includes any borrowings for investment purposes and excludes cash and cash equivalents, and (b) an incentive fee based on our performance. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our "Pre-Incentive Fee Net Investment Income" for the immediately preceding quarter, subject to a preferred return, or "hurdle," and a "catch up" feature. The second part is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement) and equals 20% of our "Incentive Fee Capital Gains," which equals our realized capital gains on a cumulative basis from inception through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. The investment advisory agreement may be terminated by either party without penalty upon no fewer than 60 days' written notice to the other. During the three months ended December 31, 2014 and December 31, 2013, we incurred fees of $22.8 million and $21.1 million, respectively, under the investment advisory agreement. During the three months ended December 31, 2014, the Investment Adviser voluntarily waived a portion of the base management fee which resulted in waivers of $0.1 million.
Pursuant to the administration agreement with FSC CT, which is a wholly-owned subsidiary of our investment adviser, FSC CT will furnish us with the facilities, including our principal executive offices and administrative services necessary to conduct our day-to-day operations, including equipment, clerical, bookkeeping and recordkeeping services at such facilities. In addition, FSC CT will

97


assist us in connection with the determination and publishing of our net asset value, the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders. We pay FSC CT its allocable portion of overhead and other expenses incurred by FSC CT in performing its obligations under the administration agreement, including a portion of the rent at market rates and the compensation of our chief financial officer and chief compliance officer and their respective staffs. The administration agreement may be terminated by either party without penalty upon no fewer than 60 days' written notice to the other. During the three months ended December 31, 2014 and December 31, 2013, we incurred expenses of $2.5 million and $1.7 million, respectively, under the administration agreement.
We have also entered into a license agreement with Fifth Street Capital LLC pursuant to which Fifth Street Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name "Fifth Street." Under this agreement, we will have a right to use the "Fifth Street" name, for so long as Fifth Street Management LLC or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the "Fifth Street" name. Fifth Street Capital LLC is controlled by Mr. Tannenbaum, our investment adviser's chief executive officer.
Recent Developments
During January 2015, one of our portfolio investments disclosed its substantial financial deterioration that occurred prior to the date of these Consolidated Financial Statements.  As a result, we reflected such information in our valuation of this portfolio investment as of December 31, 2014.  As more information becomes available, we may experience a further mark-down of the fair value of this investment in the future.  The investment may be placed on non-accrual status after the fiscal quarter ended December 31, 2014, as all accrued interest through that date has been paid to us. The investment represents 0.25% of the total portfolio at fair value as of December 31, 2014.
Effective January 21, 2015, our Board of Directors promoted Todd G. Owens to Chief Executive Officer from his former role as President, and also promoted Ivelin M. Dimitrov to President.  Leonard M. Tannenbaum, our former Chief Executive Officer, stepped down effective January 20, 2015.  Mr. Tannenbaum will continue in his role as Chief Executive Officer of our investment adviser.
On February 3, 2015, our Board of Directors declared the following dividends:
• $0.06 per share, payable on March 31, 2015 to stockholders of record on March 16, 2015;
• $0.06 per share, payable on April 30, 2015 to stockholders of record on April 15, 2015;
• $0.06 per share, payable on May 29, 2015 to stockholders of record on May 15, 2015;
• $0.06 per share, payable on June 30, 2015 to stockholders of record on June 15, 2015;
• $0.06 per share, payable on July 31, 2015 to stockholders of record on July 15, 2015; and
• $0.06 per share, payable on August 31, 2015 to stockholders of record on August 14, 2015.
Recently Issued Accounting Standards
See Note 2 to the Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on our Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent our debt investments include floating interest rates. In addition, our investments are carried at fair value as determined in good faith by our Board of Directors in accordance with the 1940 Act (See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investment Valuation"). Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments.
As of December 31, 2014, 75.3% of our debt investment portfolio (at fair value) and 74.9% of our debt investment portfolio (at cost) bore interest at floating rates. The composition of our floating rate debt investments by cash interest rate floor (excluding PIK) as of December 31, 2014 and September 30, 2014 was as follows: 

98


 
 
December 31, 2014
 
September 30, 2014
 
 
Fair Value
 
% of Floating
Rate Portfolio
 
Fair Value
 
% of Floating
Rate Portfolio
Under 1%
 
$
203,601

 
10.55
%
 
$
181,450

 
11.05
%
1% to under 2%
 
1,684,290

 
87.23

 
1,397,913

 
85.16

2% to under 3%
 
27,914

 
1.45

 
39,970

 
2.44

3% and over
 
14,957

 
0.77

 
22,143

 
1.35

Total
 
$
1,930,762

 
100.00
%
 
$
1,641,476

 
100.00
%
Based on our Consolidated Statement of Assets and Liabilities as of December 31, 2014, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure:
Basis point increase
 
Interest
income
 
Interest
expense
 
Net increase
(decrease)
500
 
$
77,600

 
$
(31,400
)
 
$
46,200

400
 
58,300

 
(25,100
)
 
33,200

300
 
39,000

 
(18,800
)
 
20,200

200
 
19,800

 
(12,500
)
 
7,300

100
 
2,400

 
(6,200
)
 
(3,800
)
 
We regularly measure exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. The following table shows a comparison of the interest rate base for our interest-bearing cash and outstanding investments, at principal, and our outstanding borrowings as of December 31, 2014 and September 30, 2014: 
 
 
December 31, 2014
 
September 30, 2014
 
 
Interest Bearing
Cash and
Investments
 
Borrowings
 
Interest Bearing
Cash and
Investments
 
Borrowings
Money market rate
 
$
110,553

 
$
—

 
$
109,046

 
$
—

Prime rate
 
4,044

 
135,600

 
1,040

 
80,000

LIBOR
 
 
 
 
 
 
 
 
30 day
 
62,809

 
481,895

 
62,509

 
237,395

90 day
 
1,909,300

 
34,775

 
1,546,536

 
84,750

Fixed rate
 
664,178

 
751,250

 
709,963

 
751,250

Total
 
$
2,750,884

 
$
1,403,520

 
$
2,429,094

 
$
1,153,395


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Item 4.    Controls and Procedures
All controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, in timely identifying, recording, processing, summarizing, and reporting any material information relating to us that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

100


PART II — OTHER INFORMATION

Item 1.     Legal Proceedings.
Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.
Item 1A. Risk Factors.
There have been no material changes during the three months ended December 31, 2014 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2014.


101


Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
We did not engage in any sales of unregistered securities during the three months ended December 31, 2014. Additionally, we did not issue any shares under our dividend reinvestment plan (“DRIP”).

Item 6.    Exhibits.

 
 
 
Exhibit
Number
  
Description of Exhibit
 
 
10.1*
  
Administration Agreement by and between Fifth Street Finance Corp. and FSC CT LLC dated as of January 1, 2014.
 
 
31.1*
  
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
31.2*
  
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
32.1*
  
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
32.2*
  
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
_______________
*
Filed herewith

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
FIFTH STREET FINANCE CORP.
Date: February 6, 2015
 
 
 
By:
/s/    Todd G. Owens
 
 
Todd G. Owens
 
 
Chief Executive Officer and Director
 
 
 
Date: February 6, 2015
By:
/s/    Richard A. Petrocelli
 
 
Richard A. Petrocelli
 
 
Chief Financial Officer



EXHIBIT INDEX

102


Exhibit
Number
  
Description of Exhibit
 
 
10.1*
  
Administration Agreement by and between Fifth Street Finance Corp. and FSC CT LLC dated as of January 1, 2015.
 
 
31.1*
  
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
31.2*
  
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
32.1*
  
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
 
32.2*
  
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
______________
*
Filed herewith


103

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