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Oaktree Specialty Lending Corporation
OCSL
#6173
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NZ$1.92 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
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  1. Oaktree Specialty Lending Corporation
  2. Quarterly Reports (10-Q)
  3. Submitted on 2016-02-09

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, 2015
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 150,262,924 shares of common stock outstanding as of February 8, 2016.



FIFTH STREET FINANCE CORP.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
 
 
 
 
 
 
 
PART I — FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Consolidated Financial Statements (unaudited):
 
 
 
Consolidated Statements of Assets and Liabilities as of December 31, 2015 and September 30, 2015
3
 
 
Consolidated Statements of Operations for the three months ended December 31, 2015 and 2014
4
 
 
Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2015 and 2014
5
 
 
Consolidated Statements of Cash Flows for the three months ended December 31, 2015 and 2014
6
 
 
Consolidated Schedule of Investments as of December 31, 2015
7
 
 
Consolidated Schedule of Investments as of September 30, 2015
21
 
 
Notes to Consolidated Financial Statements
35
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
80
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
109
Item 4.
Controls and Procedures
110
 
 
PART II — OTHER INFORMATION
 
Item 1.
Legal Proceedings
111
Item 1A.
Risk Factors
112
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
113
Item 3.
Defaults Upon Senior Securities
113
Item 4.
Mine Safety Disclosures
113
Item 5.
Other Information
113
Item 6.
Exhibits
113
Signatures
113




 


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, 2015
 
September 30, 2015
ASSETS
Investments at fair value:
 
 
 
 
Control investments (cost December 31, 2015: $344,798; cost September 30, 2015: $333,520)
 
$
315,527

 
$
318,893

Affiliate investments (cost December 31, 2015: $35,355; cost September 30, 2015: $36,637)
 
39,782

 
40,606

Non-control/Non-affiliate investments (cost December 31, 2015: $2,107,095; cost September 30, 2015: $2,102,781)
 
1,970,450

 
2,042,996

Total investments at fair value (cost December 31, 2015: $2,487,248; cost September 30, 2015: $2,472,938)
 
2,325,759

 
2,402,495

Cash and cash equivalents
 
82,591

 
138,377

Restricted cash
 
12,624

 
5,107

Interest, dividends and fees receivable
 
15,553

 
15,687

Due from portfolio companies
 
2,350

 
2,641

Receivables from unsettled transactions
 
—

 
5,168

Deferred financing costs
 
14,761

 
16,051

Other assets
 
39

 
131

Total assets
 
$
2,453,677

 
$
2,585,657

LIABILITIES AND NET ASSETS
Liabilities:
 

 
 
Accounts payable, accrued expenses and other liabilities
 
$
8,695

 
$
5,006

Base management fee and Part I incentive fee payable
 
3,525

 
16,531

Due to FSC CT
 
3,265

 
2,965

Interest payable
 
11,148

 
4,300

Amounts payable to syndication partners
 
—

 
1,316

Payables from unsettled transactions
 
9,091

 
3,648

Credit facilities payable
 
385,295

 
427,295

SBA debentures payable
 
225,000

 
225,000

Unsecured convertible notes payable
 
115,000

 
115,000

Unsecured notes payable
 
410,387

 
410,320

Secured borrowings at fair value (proceeds December 31, 2015: $19,975; proceeds September 30, 2015: $21,787)
 
19,158

 
21,182

Total liabilities
 
1,190,564

 
1,232,563

Commitments and contingencies (Note 16)
 

 
 
Net assets:
 
 
 
 
Common stock, $0.01 par value, 250,000 shares authorized; 150,263 and 150,668 shares issued and outstanding at December 31, 2015 and September 30, 2015, respectively
 
1,503

 
1,507

Additional paid-in-capital
 
1,628,989

 
1,631,523

Treasury stock, 423 shares at September 30, 2015
 
—

 
(2,538
)
Net unrealized depreciation on investments and secured borrowings
 
(160,673
)
 
(69,838
)
Net realized loss on investments and secured borrowings
 
(179,578
)
 
(180,945
)
Accumulated overdistributed net investment income
 
(27,128
)
 
(26,615
)
Total net assets (equivalent to $8.41 and $9.00 per common share at December 31, 2015 and September 30, 2015, respectively) (Note 12)
 
1,263,113

 
1,353,094

Total liabilities and net assets
 
$
2,453,677

 
$
2,585,657

See notes to Consolidated Financial Statements.

3

Fifth Street Finance Corp.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
 
Three months ended
December 31, 2015
 
Three months ended
December 31, 2014
(see Note 2)
Interest income:
 
 
 
 
Control investments
 
$
3,655

 
$
3,695

Affiliate investments
 
1,051

 
1,097

Non-control/Non-affiliate investments
 
46,397

 
49,211

Interest on cash and cash equivalents
 
63

 
10

Total interest income
 
51,166

 
54,013

PIK interest income:
 
 
 
 
Control investments
 
980

 
1,374

Affiliate investments
 
210

 
215

Non-control/Non-affiliate investments
 
2,104

 
2,424

Total PIK interest income
 
3,294

 
4,013

Fee income:
 
 
 
 
Control investments
 
842

 
623

Affiliate investments
 
8

 
12

Non-control/Non-affiliate investments
 
7,961

 
3,982

Total fee income
 
8,811

 
4,617

Dividend and other income:
 
 
 
 
Control investments
 
2,427

 
2,388

Non-control/Non-affiliate investments
 
(576
)
 
307

Total dividend and other income
 
1,851

 
2,695

Total investment income
 
65,122

 
65,338

Expenses:
 
 
 
 
Base management fee
 
11,792

 
14,155

Part I incentive fee
 
3,651

 
6,524

Professional fees
 
6,969

 
1,164

Board of Directors fees
 
356

 
180

Interest expense
 
14,047

 
13,992

Administrator expense
 
600

 
1,247

General and administrative expenses
 
1,221

 
1,780

Total expenses
 
38,636

 
39,042

Base management fee waived
 
(96
)
 
(111
)
Net expenses
 
38,540

 
38,931

Net investment income
 
26,582

 
26,407

Unrealized appreciation (depreciation) on investments:
 
 
 
 
Control investments
 
(14,644
)
 
(8,760
)
Affiliate investments
 
458

 
(135
)
Non-control/Non-affiliate investments
 
(76,861
)
 
(29,958
)
Net unrealized depreciation on investments
 
(91,047
)
 
(38,853
)
Net unrealized depreciation on secured borrowings
 
212

 
332

Realized gain (loss) on investments and secured borrowings:
 
 
 
 
Control investments
 
—

 
43

Non-control/Non-affiliate investments
 
1,367

 
(16,399
)
Net realized gain (loss) on investments and secured borrowings
 
1,367

 
(16,356
)
Net decrease in net assets resulting from operations
 
$
(62,886
)
 
$
(28,470
)
Net investment income per common share — basic
 
$
0.18

 
$
0.17

Loss per common share — basic
 
$
(0.42
)
 
$
(0.19
)
Weighted average common shares outstanding — basic
 
150,263

 
153,340

Net investment income per common share — diluted
 
$
0.18

 
$
0.17

Loss per common share — diluted (Note 5)
 
$
(0.42
)
 
$
(0.19
)
Weighted average common shares outstanding — diluted
 
158,053

 
161,131

Distributions per common share
 
$
0.18

 
$
0.28

See notes to Consolidated Financial Statements.

4


Fifth Street Finance Corp.
Consolidated Statements of Changes in Net Assets
(in thousands, except per share amounts)
(unaudited)
 
 
 
Three months ended
December 31, 2015
 
Three months ended
December 31, 2014
(see Note 2)
Operations:
 
 
 
 
Net investment income
 
$
26,582

 
$
26,407

Net unrealized depreciation on investments
 
(91,047
)
 
(38,853
)
Net unrealized depreciation on secured borrowings
 
212

 
332

Net realized gain (loss) on investments and secured borrowings
 
1,367

 
(16,356
)
Net decrease in net assets resulting from operations
 
(62,886
)
 
(28,470
)
Stockholder transactions:
 
 
 
 
Distributions to stockholders
 
(27,095
)
 
(42,183
)
Net decrease in net assets from stockholder transactions
 
(27,095
)
 
(42,183
)
Capital share transactions:
 
 
 
 
Issuance of common stock under dividend reinvestment plan
 
1,846

 
2,061

Repurchase of common stock under dividend reinvestment program
 
(1,846
)
 
(2,061
)
Net increase in net assets from capital share transactions
 
—

 
—

Total decrease in net assets
 
(89,981
)
 
(70,653
)
Net assets at beginning of period
 
1,353,094

 
1,478,475

Net assets at end of period
 
$
1,263,113

 
$
1,407,822

Net asset value per common share
 
$
8.41

 
$
9.18

Common shares outstanding at end of period
 
150,263

 
153,340

See notes to Consolidated Financial Statements.


5
Fifth Street Finance Corp.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


 
 
Three months ended
December 31, 2015
 
Three months ended
December 31, 2014
(see Note 2)
Operating activities:
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(62,886
)
 
$
(28,470
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided (used) by operating activities:
 
 
 
 
Net unrealized depreciation on investments
 
91,047

 
38,853

Net unrealized depreciation on secured borrowings
 
(212
)
 
(332
)
Net realized (gain) loss on investments and secured borrowings
 
(1,367
)
 
16,356

PIK interest income
 
(3,294
)
 
(4,013
)
Recognition of fee income
 
(8,811
)
 
(4,617
)
Accretion of original issue discount on investments
 
(1,139
)
 
(4,299
)
Accretion of original issue discount on unsecured notes payable
 
66

 
244

Amortization of deferred financing costs
 
1,290

 
1,349

Changes in operating assets and liabilities:
 

 
 
Fee income received
 
8,807

 
4,060

Increase in restricted cash
 
(7,517
)
 
(23,979
)
Decrease in interest, dividends and fees receivable
 
176

 
9

(Increase) decrease in due from portfolio companies
 
291

 
(4,275
)
(Increase) decrease in receivables from unsettled transactions
 
5,168

 
(51,103
)
(Increase) decrease in other assets
 
92

 
(94
)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
 
3,688

 
(42
)
Decrease in base management fee and Part I incentive fee payable
 
(13,006
)
 
(1,113
)
Increase in due to FSC CT
 
300

 
1,088

Increase in interest payable
 
6,848

 
5,858

Increase in payables from unsettled transactions
 
5,443

 
112,114

Decrease in amounts payable to syndication partners
 
(1,316
)
 
(3,756
)
Purchases of investments and net revolver activity
 
(351,930
)
 
(709,043
)
Principal payments received on investments (scheduled payments)
 
5,693

 
5,790

Principal payments received on investments (payoffs)
 
235,472

 
251,802

PIK interest income received in cash
 
577

 
658

Proceeds from the sale of investments
 
101,640

 
178,665

Net cash provided (used) by operating activities
 
15,120

 
(218,290
)
Financing activities:
 
 
 
 
Distributions paid in cash
 
(25,249
)
 
(40,122
)
Borrowings under credit facilities
 
230,000

 
355,600

Repayments of borrowings under credit facilities
 
(272,000
)
 
(55,500
)
Repayments of secured borrowings
 
(1,811
)
 
(62,099
)
Repurchases of common stock under dividend reinvestment plan
 
(1,846
)
 
(2,061
)
Net cash provided (used) by financing activities
 
(70,906
)
 
195,818

Net decrease in cash and cash equivalents
 
(55,786
)
 
(22,472
)
Cash and cash equivalents, beginning of period
 
138,377

 
86,731

Cash and cash equivalents, end of period
 
$
82,591

 
$
64,259

Supplemental information:
 
 
 
 
Cash paid for interest
 
$
5,843

 
$
6,601

Non-cash financing activities:
 
 
 
 
Issuance of shares of common stock under dividend reinvestment plan
 
$
1,846

 
$
2,061

See notes to Consolidated Financial Statements.

6
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
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
 
 
 
$
17,053

 
$
17,042

 
$
17,007

 LC Facility, 8.5% cash due 12/31/2016
 
 
 
1,444

 
1,440

 
1,444

 746,114 Series A Preferred Units
 
 
 
 
 
16,815

 
19,905

 746,114 Common Stock Units
 
 
 
 
 
5,316

 
2,739

 
 
 
 
 
 
40,613

 
41,095

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

 
15,572

 
9,717

 First Lien Revolver, 8% cash due 5/31/2016
 
 
 
6,115

 
6,115

 
3,720

 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 Holdings LLC
 
 
 
 
 
5,200

 
—

 
 
 
 
 
 
30,887

 
13,437

 First Star Aviation, LLC (16)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
 
 
 
4,389

 
4,390

 
4,296

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

 
9,406

 
 
 
 
 
 
14,494

 
13,702

 First Star Speir Aviation 1 Limited (11)(16)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash due 12/15/2020
 
 
 
56,145

 
54,642

 
55,171

 2,058,411.64 Common Units (6)
 
 
 
 
 
679

 
2,321

 
 
 
 
 
 
55,321

 
57,492

 First Star Bermuda Aviation Limited (11)(16)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 8/19/2018
 
 
 
24,869

 
24,869

 
24,810

 4,293,736 Common Units (6)
 
 
 
 
 
2,652

 
1,694

 
 
 
 
 
 
27,521

 
26,504

 Eagle Hospital Physicians, LLC
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan A, 8% PIK due 8/1/2016
 
 
 
13,376

 
13,376

 
13,284

 First Lien Term Loan B, 8.1% PIK due 8/1/2016
 
 
 
3,657

 
3,657

 
3,634

 First Lien Revolver, 8% cash due 8/1/2016
 
 
 
1,913

 
1,913

 
1,913

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

 
6,025

 
 
 
 
 
 
23,046

 
24,856

 Senior Loan Fund JV I, LLC (11)(15)
 
Multi-sector holdings (17)
 
 
 
 
 
 
 Subordinated Notes, LIBOR+8% cash due 5/2/2021 (13)
 
 
 
129,879

 
129,879

 
125,200

 87.5% LLC equity interest (6)
 
 
 
 
 
14,431

 
6,648

 
 
 
 
 
 
144,310

 
131,848

 Miche Group, LLC
 
Apparel, accessories
& luxury goods
 
 
 
 
 
 
 First Lien Revolver, 8% cash due 12/18/2016
 
 
 
2,500

 
2,500

 
2,500

 100 units in FSFC Miche, Inc.
 
 
 
 
 
6,106

 
4,093

 
 
 
 
 
 
8,606

 
6,593

 Total Control Investments (25.0% of net assets)
 
 
 
 
 
$
344,798

 
$
315,527

 Affiliate Investments (4)
 
 
 
 
 
 
 
 
 Caregiver Services, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
 
 
 
$
9,380

 
$
9,380

 
$
9,228

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

 
4,211

 
 
 
 
 
 
10,460

 
13,439

 AmBath/ReBath Holdings, Inc.
 
Home improvement retail
 
 
 
 
 
 
 First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
 
 
 
24,895

 
24,895

 
24,926

 4,668,788 Shares of Preferred Stock
 
 
 
 
 
—

 
1,417

 
 
 
 
 
 
24,895

 
26,343

 Total Affiliate Investments (3.1% of net assets)
 
 
 
 
 
$
35,355

 
$
39,782

See notes to Consolidated Financial Statements.

7
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

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

 
$
1,078

 
 
 
 
 
 
849

 
1,078

 HealthDrive Corporation (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan A, 10% cash due 12/31/2016
 
 
 
$
4,358

 
4,358

 
4,390

 First Lien Term Loan B, 12% cash 1% PIK due 12/31/2016
 
 
 
11,758

 
11,758

 
11,740

 First Lien Revolver, 12% cash due 12/31/2016
 
 
 
865

 
865

 
865

 
 
 
 
 
 
16,981

 
16,995

 Cenegenics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, 9.75% cash due 9/30/2019
 
 
 
30,556

 
30,532

 
30,073

 414,419 Common Units
 
 
 
 
 
598

 
1,240

 345,380.141 Preferred Units in Cenegenics, LLC
 
 
 
 
 
300

 
300

 
 
 
 
 
 
31,430

 
31,613

 Riverlake Equity Partners II, LP
 
Multi-sector holdings
 
 
 
 
 
 
 1.78% limited partnership interest (11)
 
 
 
 
 
762

 
656

 
 
 
 
 
 
762

 
656

 Riverside Fund IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.34% limited partnership interest (6)(11)
 
 
 
 
 
643

 
604

 
 
 
 
 
 
643

 
604

 JTC Education, Inc. (9)
 
Education services
 
 
 
 
 
 
 Subordinated Term Loan, 13% cash due 11/1/2017
 
 
 
16,006

 
14,435

 
—

 First Lien Term Loan, LIBOR+5% (1% floor) cash due 5/1/2017 (13)
 
 
 
42,500

 
3,624

 
7,174

 First Lien Revolver, LIBOR+5% cash due 5/1/2017 (13)
 
 
 
10,276

 
876

 
—

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

 
—

 17,391 Shares of Common Stock
 
 
 
 
 
187

 
—

 
 
 
 
 
 
19,435

 
7,174

 Mansell Group, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/31/2015 (13)
 
 
 
3,854

 
3,854

 
3,854

 First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 12/31/2015 (13)
 
 
 
9,753

 
9,753

 
9,753

 
 
 
 
 
 
13,607

 
13,607

 Bunker Hill Capital II (QP), L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.51% limited partnership interest (11)
 
 
 
 
 
810

 
695

 
 
 
 
 
 
810

 
695

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

 
1,154

 
 
 
 
 
 
265

 
1,154

 Phoenix Brands Merger Sub LLC (9)
 
Household products
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016 (13)
 
 
 
1,608

 
1,607

 
1,609

 Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017
 
 
 
38,736

 
31,388

 
5,150

 First Lien Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016 (13)
 
 
 
2,409

 
2,406

 
2,409

 
 
 
 
 
 
35,401

 
9,168


See notes to Consolidated Financial Statements.


8
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
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 (13)
 
 
 
$
35,458

 
$
34,259

 
$
17,059

 
 
 
 
 
 
34,259

 
17,059

 Maverick Healthcare Group, LLC (9)
 
Healthcare equipment
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+5.5% cash (1.75% floor) cash due 12/31/2016 (13)
 
 
 
16,205

 
15,969

 
16,245

 First Lien Term Loan B, LIBOR+9% cash (1.75% floor) cash due 12/31/2016 (13)
 
 
 
38,193

 
38,072

 
38,080

 CapEx Line, LIBOR+5.75% (1.75% floor) cash due 12/31/2016 (13)
 
 
 
1,250

 
1,208

 
1,232

 
 
 
 
 
 
55,249

 
55,557

 Refac Optical Group
 
Specialty stores
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018 (13)
 
 
 
8,196

 
8,137

 
8,093

 First Lien Term Loan B, LIBOR+8.5% cash, 1.75% PIK due 9/30/2018 (13)
 
 
 
34,047

 
33,875

 
33,545

 First Lien Term Loan C, 12% cash due 9/30/2018
 
 
 
3,416

 
3,416

 
3,349

 First Lien Revolver, LIBOR+7.5% cash due 9/30/2018 (13)
 
 
 
1,600

 
1,594

 
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

 
391

 
 
 
 
 
 
48,327

 
46,978

 Baird Capital Partners V, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.4% limited partnership interest (6)(11)
 
 
 
 
 
1,000

 
859

 
 
 
 
 
 
1,000

 
859

 Discovery Practice Management, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+7.5% cash due 11/4/2018 (13)
 
 
 
23,800

 
23,746

 
23,800

 Senior Revolver, LIBOR+7% cash due 11/4/2018 (13)
 
 
 
1,500

 
1,493

 
1,500

 Capex Line A, LIBOR+7% cash due 11/4/2018 (13)
 
 
 
1,000

 
1,000

 
1,000

 Capex Line B, LIBOR+7% cash due 11/4/2018 (13)
 
 
 
750

 
750

 
750

 
 
 
 
 
 
26,989

 
27,050

 Milestone Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.85% limited partnership interest (6)(11)
 
 
 
 
 
1,727

 
1,886

 
 
 
 
 
 
1,727

 
1,886

 National Spine and Pain Centers, LLC
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1.6% PIK due 9/27/2020
 
 
 
30,349

 
30,272

 
29,736

 317,282.97 Class A Units
 
 
 
 
 
317

 
479

 
 
 
 
 
 
30,589

 
30,215

 RCPDirect, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.91% limited partnership interest (6)(11)
 
 
 
 
 
812

 
971

 
 
 
 
 
 
812

 
971

 Riverside Fund V, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.48% limited partnership interest (11)
 
 
 
 
 
976

 
976

 
 
 
 
 
 
976

 
976

See notes to Consolidated Financial Statements.

9
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 ACON Equity Partners III, LP
 
 
 
 
 
 
 
 
 0.13% limited partnership interest (6)(11)
 
Multi-sector holdings
 
 
 
$
734

 
$
583

 
 
 
 
 
 
734

 
583

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

 
666

 50,000 Common Shares
 
 
 
 
 
1

 
134

 
 
 
 
 
 
501

 
800

 Ansira Partners, Inc.
 
Advertising
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 4/5/2021 (13)
 
 
 
$
38,000

 
38,000

 
37,890

 250 Preferred Units of Ansira Holdings, LLC (6)
 
 
 
 
209

 
214

 250 Class A Common Units of Ansira Holdings, LLC
 
 
 
 
 
—

 
159

 
 
 
 
 
 
38,209

 
38,263

 Edmentum, Inc.
 
Education services
 
 
 
 
 
 
 Unsecured Senior PIK Note, 8.5% PIK due 6/9/2020
 
 
 
2,096

 
2,096

 
1,995

 Unsecured Junior PIK Note, 10% PIK due 6/9/2020
 
 
9,487

 
9,487

 
9,000

 Unsecured Revolver, 5% cash due 6/9/2020 (10)
 
 
 
 
 
—

 
—

 126,127.80 Class A Common Units
 
 
 
 
 
126

 
—

 
 
 
 
 
 
11,709

 
10,995

 I Drive Safely, LLC
 
Education services
 
 
 
 
 
 
125,079 Class A Common Units of IDS Investments, LLC
 
 
 
 
 
1,000

 
661

 
 
 
 
 
 
1,000

 
661

 Yeti Acquisition, LLC (9)
 
Leisure products
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017 (13)
 
 
 
29,330

 
29,312

 
29,331

 First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK, due 6/15/2017 (13)
 
 
 
3,375

 
3,368

 
3,377

 First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)(13)
 
 
 
 
 
(6
)
 
—

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

 
15,246

 
 
 
 
 
 
34,174

 
47,954

 Vitalyst Holdings, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018
 
 
 
19,458

 
19,458

 
18,726

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

 
368

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

 
—

 
 
 
 
 
 
20,208

 
19,094

 Beecken Petty O'Keefe Fund IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (11)
 
 
 
 
 
1,148

 
1,100

 
 
 
 
 
 
1,148

 
1,100

 First American Payment Systems, LP
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019 (13)
 
 
 
23,304

 
23,304

 
22,954

 First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017 (13)
 
 
 
583

 
583

 
543

 
 
 
 
 
 
23,887

 
23,497

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

 
3,145

 
 
 
 
 
 
1,500

 
3,145

 Comprehensive Pharmacy Services LLC
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 11.25% cash 1.5% PIK due 11/30/2019
 
 
 
14,633

 
14,633

 
14,135

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

 
1,537

 
 
 
 
 
 
16,633

 
15,672

See notes to Consolidated Financial Statements.


10
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Garretson Firm Resolution Group, Inc.
 
Diversified support services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+6.5% (1% floor) cash due 5/22/2020 (13)
 
 
 
$
64

 
$
64

 
$
63

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

 
501

 50,000 Common Units in GRG Holdings, LP
 
 
 
 
 
5

 
—

 
 
 
 
 
 
564

 
564

 Teaching Strategies, LLC
 
Education services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (13)
 
 
 
7,518

 
7,510

 
7,355

 Senior Revolver, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (10)(13)
 
 
 
 
 
(1
)
 
—

 
 
 
 
 
 
7,509

 
7,355

 Omniplex World Services Corporation (9)
 
Security & alarm services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018
 
 
 
13,023

 
13,023

 
12,670

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

 
359

 64.041 units of Class A-1 Common Units in Omniplex Holdings Corp.
 
 
 
 
 
64

 
66

 
 
 
 
 
 
13,587

 
13,095

 Dominion Diagnostics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 Subordinated Term Loan, 11% cash 2% PIK due 10/8/2019
 
 
 
16,195

 
16,195

 
4,750

 
 
 
 
 
 
16,195

 
4,750

 AdVenture Interactive, Corp. (9)
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (13)
 
 
 
91,628

 
91,620

 
89,413

 First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (10)(13)
 
 
 
 
 
—

 
—

 2,419.7 Preferred Units of AVI Holdings, L.P.
 
 
 
 
 
1,625

 
824

 
 
 
 
 
 
93,245

 
90,237

 Sterling Capital Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.2% limited partnership interest (11)
 
 
 
 
 
1,479

 
1,479

 
 
 
 
 
 
1,479

 
1,479

 RP Crown Parent, LLC
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (13)
 
 
 
9,091

 
8,782

 
7,773

 
 
 
 
 
 
8,782

 
7,773

 Advanced Pain Management
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018 (13)
 
 
 
24,000

 
24,000

 
23,607

 
 
 
 
 
 
24,000

 
23,607

 Rocket Software, Inc.
 
Internet & software services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2019 (13)
 
 
 
10,475

 
10,452

 
10,429

 
 
 
 
 
 
10,452

 
10,429




See notes to Consolidated Financial Statements.


11
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 TravelClick, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/8/2021 (13)
 
 
 
$
4,450

 
$
3,956

 
$
4,183

 
 
 
 
 
 
3,956

 
4,183

 Pingora MSR Opportunity Fund I-A, LP
 
Thrift & mortgage finance
 
 
 
 
 
 
 1.9% limited partnership interest (6)(11)
 
 
 
 
 
9,684

 
9,613

 
 
 
 
 
 
9,684

 
9,613

 Credit Infonet, Inc. (9)
 
Data processing & outsourced services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 10/26/2018
 
 
 
13,561

 
13,561

 
12,792

 
 
 
 
 
 
13,561

 
12,792

 Bracket Holding Corp. (9)
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020 (13)
 
 
 
32,000

 
32,000

 
31,648

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

 
624

 
 
 
 
 
 
32,500

 
32,272

 HealthEdge Software, Inc.
 
Application software
 
 
 
 
 
 
 482,453 Series A-3 Preferred Stock Warrants (exercise price $1.450918)
 
 
 
 
 
213

 
724

 
 
 
 
 
 
213

 
724

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (13)
 
 
 
13,468

 
13,441

 
12,937

 First Lien Term Loan B, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (13)
 
 
 
5,871

 
5,639

 
5,670

 First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 10/1/2018 (13)
 
 
 
4,904

 
4,899

 
4,904

 CapEx Line, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (13)
 
 
 
872

 
866

 
872

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

 
807

 
 
 
 
 
 
25,845

 
25,190

 BMC Software Finance, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% (1% floor) cash due 9/10/2018 (10)(13)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Thing5, LLC (9)
 
Data processing & outsourced services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 10/11/2018 (12)(13)
 
 
 
54,726

 
54,693

 
52,350

 First Lien Revolver, LIBOR+7% (1% floor) cash due 10/11/2018 (13)
 
 
 
1,000

 
996

 
1,000

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

 
250

 
 
 
 
 
 
57,689

 
53,600

 Epic Health Services, Inc.
 
 
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 8/17/2021 (13)
 
Healthcare services
 
24,667

 
24,262

 
24,165

 
 
 
 
 
 
24,262

 
24,165

See notes to Consolidated Financial Statements.

12
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Kason Corporation
 
Industrial machinery
 
 
 
 
 
 
 Mezzanine Term Loan, 11.5% cash 1.75% PIK due 10/28/2019
 
 
 
$
5,823

 
$
5,823

 
$
5,817

 498.6 Class A Preferred Units in Kason Investment, LLC
 
 
 
 
 
499

 
533

 5,540 Class A Common Units in Kason Investment, LLC
 
 
 
 
 
55

 
101

 
 
 
 
 
 
6,377

 
6,451

 SPC Partners V, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.571% limited partnership interest (11)
 
 
 
 
 
1,013

 
908

 
 
 
 
 
 
1,013

 
908

 Systems Maintenance Services Holdings, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/18/2020 (13)
 
 
 
19,000

 
18,918

 
18,810

 
 
 
 
 
 
18,918

 
18,810

 P2 Upstream Acquisition Co.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% (1% floor) cash due 10/31/2018 (10)(13)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

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

 
39,065

 
37,879

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

 
3,705

 
 
 
 
 
 
40,023

 
41,584

 Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 11/4/2021 (13)
 
 
 
8,000

 
7,890

 
7,680

 
 
 
 
 
 
7,890

 
7,680

 The Active Network, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/15/2021 (13)
 
 
 
16,543

 
16,355

 
15,523

 
 
 
 
 
 
16,355

 
15,523

 OmniSYS Acquisition Corporation
 
Diversified support services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 11/21/2018 (13)
 
 
 
6,438

 
6,401

 
6,385

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 11/21/2018 (10)(13)
 
 
 
 
 
(4
)
 
—

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

 
1,335

 
 
 
 
 
 
7,397

 
7,720

 Moelis Capital Partners Opportunity Fund I-B, LP
 
Multi-sector holdings
 
 
 
 
 
 
 1.0% limited partnership interest (6)(11)
 
 
 
 
 
1,372

 
1,610

 
 
 
 
 
 
1,372

 
1,610

 Aden & Anais Merger Sub, Inc.
 
Apparel, accessories & luxury goods
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 6/23/2019
 
 
 
12,502

 
12,502

 
12,142

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

 
2,087

 
 
 
 
 
 
15,502

 
14,229

 Lift Brands Holdings Inc.
 
Leisure facilities
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/23/2019 (13)
 
 
 
22,716

 
22,643

 
22,265

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 12/23/2019 (13)
 
 
 
5,500

 
5,482

 
5,500

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

 
3,616

 
 
 
 
 
 
30,125

 
31,381

 Tailwind Capital Partners II, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.3% limited partnership interest (11)
 
 
 
 
 
719

 
736

 
 
 
 
 
 
719

 
736

See notes to Consolidated Financial Statements.

13
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)

 
Cost
 
Fair Value

 Long's Drugs Incorporated
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1% PIK due 1/31/2020
 
 
 
$
9,640

 
$
9,640

 
$
9,640

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

 
968

 
 
 
 
 
 
10,140

 
10,608

 Five9, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 2/20/2019 (13)
 
 
 
20,000

 
19,802

 
19,400

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

 
186

 
 
 
 
 
 
20,123

 
19,586

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

 
20,000

 
20,400

 
 
 
 
 
 
20,000

 
20,400

 Conviva Inc.
 
Application software
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.75% (1% floor) cash due 2/28/2018 (13)
 
 
 
5,000

 
4,946

 
4,939

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

 
124

 
 
 
 
 
 
5,051

 
5,063

 OnCourse Learning Corporation
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/28/2019 (13)
 
 
 
19,501

 
19,493

 
19,501

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 2/28/2019 (10)(13)
 
 
 
 
 
(1
)
 
—

 254,422 Class A Units in CIP OCL Investments, LLC
 
 
 
 
 
2,544

 
3,160

 
 
 
 
 
 
22,036

 
22,661

 ShareThis, Inc.
 
Internet software & services
 
 
 
 
 
 
 345,452 Series C Preferred Stock Warrants (exercise price $3.0395)
 
 
 
 
 
367

 
306

 
 
 
 
 
 
367

 
306

 Aptean, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/26/2021 (13)
 
 
 
3,000

 
3,000

 
2,892

 
 
 
 
 
 
3,000

 
2,892

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 3/31/2019 (13)
 
 
 
20,890

 
20,882

 
17,432

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 3/31/2019 (10)(13)
 
 
 
 
 
(1
)
 
—

 
 
 
 
 
 
20,881

 
17,432

 ExamSoft Worldwide, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1% floor) cash due 5/1/2019 (13)
 
 
 
15,000

 
14,880

 
14,518

 First Lien Revolver, LIBOR+8% (1% floor) cash due 5/1/2019 (10)(13)
 
 
 
 
 
—

 
—

 180,707 Class C Units in ExamSoft Investor LLC
 
 
 
 
 
181

 
38

 
 
 
 
 
 
15,061

 
14,556

 Language Line, LLC
 
Integrated telecommunication services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 7/7/2021 (13)
 
 
 
19,117

 
19,117

 
19,061

 Second Lien Term Loan, LIBOR+9.75 (1% floor) cash due 7/7/2022 (13)
 
 
 
26,000

 
26,000

 
25,773

 
 
 
 
 
 
45,117

 
44,834

 DigiCert, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 6/2/2020 (13)
 
 
 
81,500

 
80,714

 
80,685

 
 
 
 
 
 
80,714

 
80,685

See notes to Consolidated Financial Statements.

14
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 RCPDirect II, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (11)
 
 
 
 
 
$
246

 
$
246

 
 
 
 
 
 
246

 
246

 PR Wireless, Inc. (11)
 
Integrated telecommunication services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9% (1% floor) cash due 6/27/2020 (13)
 
 
 
$
12,812

 
12,463

 
11,337

 118.4211 Common Stock Warrants (exercise price $0.01)
 
 
 
 
 
—

 
514

 
 
 
 
 
 
12,463

 
11,851

 Integral Development Corporation
 
Other diversified financial services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9.5% (1% floor) cash due 7/10/2019 (13)
 
 
 
15,000

 
14,915

 
14,720

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

 
—

 
 
 
 
 
 
15,028

 
14,720

 Loftware, Inc.
 
Internet software & services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1% PIK due 7/18/2020
 
 
 
6,089

 
6,089

 
6,043

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

 
284

 
 
 
 
 
 
6,389

 
6,327

 Tectum Holdings, Inc.
 
Auto parts & equipment
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 1/28/2021 (13)
 
 
 
15,000

 
15,000

 
14,991

 
 
 
 
 
 
15,000

 
14,991

 TV Borrower US, LLC
 
Integrated telecommunication services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 7/8/2021 (11)(13)
 
 
 
30,000

 
29,291

 
28,950

 
 
 
 
 
 
29,291

 
28,950

 Webster Capital III, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
0.754% limited partnership interest (11)
 
 
 
 
 
869

 
869

 
 
 
 
 
 
869

 
869

 L Squared Capital Partners LLC
 
Multi-sector holdings
 
 
 
 
 
 
 2% limited partnership interest (11)
 
 
 
 
 
562

 
562

 
 
 
 
 
 
562

 
562

 ERS Acquisition Corp.
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 9/10/2018 (13)
 
 
 
40,086

 
40,086

 
38,489

 
 
 
 
 
 
40,086

 
38,489

 BeyondTrust Software, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Term Loan LIBOR+7% (1% floor) cash due 9/25/2019 (13)
 
 
 
40,895

 
39,974

 
40,453

 First Lien Revolver, LIBOR+7% (1% floor) cash due 9/25/2019 (10)(13)
 
 
 
 
 
(4
)
 
—

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

 
7,374

 
 
 
 
 
 
44,470

 
47,827

 Answers Corporation
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 10/1/2021 (13)
 
 
 
4,950

 
4,930

 
3,366

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 10/3/2022 (13)
 
 
 
37,000

 
35,190

 
12,254

 
 
 
 
 
 
40,120

 
15,620

 Idera, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, L+5.5% (1% floor) cash due 4/9/2021
 
 
 
30,000

 
28,568

 
27,450

 
 
 
 
 
 
28,568

 
27,450

 GOBP Holdings Inc.
 
Food retail
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/21/2022 (13)
 
 
 
11,000

 
10,860

 
10,849

 
 
 
 
 
 
10,860

 
10,849

 Kellermeyer Bergensons Services, LLC
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.50% (1% floor) cash due 4/29/2022 (13)
 
 
 
6,105

 
5,832

 
6,044

 
 
 
 
 
 
5,832

 
6,044


See notes to Consolidated Financial Statements.

15
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
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 (13)
 
 
 
$
7,789

 
$
7,789

 
$
7,567

 500,000 Class A Common Units in Skyline Data, News and Analytics LLC
 
 
 
 
 
500

 
704

 
 
 
 
 
 
8,289

 
8,271

 NAVEX Global, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 11/19/2021 (13)
 
 
 
1,957

 
1,957

 
1,898

 Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 11/18/2022 (13)
 
 
 
46,755

 
46,474

 
45,353

 
 
 
 
 
 
48,431

 
47,251

 Penn Foster, Inc.
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/24/2019 (13)
 
 
 
29,400

 
29,398

 
29,327

 First Lien Revolver, LIBOR+8.5% (1% floor) cash due 11/24/2019 (10)(13)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
29,398

 
29,327

 GTCR Valor Companies, Inc.
 
Advertising
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/30/2021 (13)
 
 
 
3,699

 
3,651

 
3,559

 
 
 
 
 
 
3,651

 
3,559

 Tecomet Inc.
 
Healthcare equipment
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 12/5/2022 (13)
 
 
 
17,000

 
15,692

 
14,450

 
 
 
 
 
 
15,692

 
14,450

 Metamorph US 3, LLC
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 12/1/2020 (13)
 
 
 
12,188

 
12,163

 
11,891

 First Lien Revolver, LIBOR+5.5% (1% floor) cash due 12/1/2020 (13)
 
 
 
1,225

 
1,220

 
1,225

 
 
 
 
 
 
13,383

 
13,116

 Schulman Associates Institutional Board Review, Inc.
 
Research & consulting services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1% floor) cash due 6/3/2021 (13)
 
 
 
17,000

 
17,000

 
16,559

 
 
 
 
 
 
17,000

 
16,559

 Janrain, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 6/5/2018 (13)
 
 
 
4,833

 
4,802

 
4,772

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

 
—

 
 
 
 
 
 
4,847

 
4,772

 TigerText, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.75% (1% floor) cash due 12/8/2017 (13)
 
 
 
5,000

 
4,961

 
4,761

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

 
358

 
 
 
 
 
 
5,021

 
5,119

 Survey Sampling International, LLC
 
Research & consulting services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 12/16/2021 (13)
 
 
 
18,700

 
18,383

 
18,326

 
 
 
 
 
 
18,383

 
18,326

 Abaco Energy Technologies LLC
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan B, LIBOR+7% (1% floor) cash due 11/21/2020 (13)
 
 
 
8,775

 
8,262

 
4,519

 
 
 
 
 
 
8,262

 
4,519

See notes to Consolidated Financial Statements.

16
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 Ameritox Ltd.
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 6/23/2019 (13)
 
 
 
$
93,906

 
$
93,828

 
$
60,621

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 6/23/2019 (13)
 
 
 
7,680

 
7,671

 
4,957

 
 
 
 
 
 
101,499

 
65,578

 PSC Industrial Holdings Corp.
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 12/3/2021 (13)
 
 
 
7,000

 
6,759

 
6,615

 
 
 
 
 
 
6,759

 
6,615

 TIBCO Software, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% cash due 11/25/2020 (13)
 
 
 
1,392

 
1,392

 
1,288

 
 
 
 
 
 
1,392

 
1,288

 EOS Fitness Opco Holdings, LLC
 
Leisure facilities
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.75% (0.75% floor) cash due 12/30/2019 (13)
 
 
 
3,960

 
3,960

 
3,776

 First Lien Revolver, LIBOR+8.75% (0.75% floor) cash due 12/30/2019 (10)(13)
 
 
 
 
 
—

 
—

 487.5 Class A Preferred Units
 
 
 
 
 
488

 
550

 12,500 Class B Common Units
 
 
 
 
 
13

 
171

 
 
 
 
 
 
4,461

 
4,497

 TrialCard Incorporated (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5.25% (1% floor) cash due 12/31/2019 (10)(13)
 
 
 
 
 
(49
)
 
—

 
 
 
 
 
 
(49
)
 
—

 Motion Recruitment Partners LLC
 
Human resources & employment services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+6% (1% floor) cash due 2/13/2020 (10)(13)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 WeddingWire, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 2/20/2020 (13)
 
 
 
27,500

 
27,500

 
27,283

 First Lien Revolver, LIBOR+8.5% (1% floor) cash due 2/20/2020 (10)(13)
 
 
 
 
 
—

 
—

 483,645 Common Shares of WeddingWire, Inc.
 
 
 
 
 
1,200

 
908

 
 
 
 
 
 
28,700

 
28,191

 xMatters, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+10% (1% floor) cash due 2/26/2019 (13)
 
 
 
15,000

 
14,426

 
13,859

 200,000 Common Stock Warrants (exercise price $1.78)
 
 
 
 
 
709

 
475

 
 
 
 
 
 
15,135

 
14,334

 Edge Fitness, LLC
 
Leisure facilities
 
 
 
 
 
 
 Delayed Draw Term Loan, LIBOR+7.75% (1% floor) cash due 12/31/2019 (13)
 
 
 
3,398

 
3,398

 
3,398

 
 
 
 
 
 
3,398

 
3,398

 Golden State Medical Supply, Inc.
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2.5% PIK due 4/24/2021
 
 
 
15,001

 
15,001

 
14,967

 
 
 
 
 
 
15,001

 
14,967

 My Alarm Center, LLC
 
Security & alarm services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+8% (1% floor) cash due 1/9/2018 (13)
 
 
 
3,000

 
3,000

 
2,991

 First Lien Term Loan B, LIBOR+8% (1% floor) cash due 1/9/2018 (13)
 
 
 
4,255

 
4,255

 
4,244

 First Lien Term Loan C, LIBOR+8% (1% floor) cash due 1/9/2018 (13)
 
 
 
931

 
931

 
924

 First Lien Term Loan D, L+8% (1% floor) cash due 1/9/2018 (13)
 
 
 
591

 
591

 
590

 First Lien Term Revolver, LIBOR+8% (1% floor) cash due 1/9/2018 (10)(13)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
8,777

 
8,749

 AirStrip Technologies, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+10% (1% floor) cash due 5/12/2018 (13)
 
 
 
16,000

 
15,926

 
15,723

 22,858.71 Series C-1 Preferred Stock Warrants (exercise price $34.99757)
 
 
 
 
 
90

 
74

 
 
 
 
 
 
16,016

 
15,797

See notes to Consolidated Financial Statements.


17
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)(14)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 Legalzoom.com, Inc.
 
Specialized consumer services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 5/13/2020 (13)
 
 
 
$
16,449

 
$
16,435

 
$
16,233

 First Lien Revolver, LIBOR+7% (1% floor) cash due 5/13/2020 (10)(13)
 
 
 
 
 
(4
)
 
—

 
 
 
 
 
 
16,431

 
16,233

 All Metro Health Care Services, Inc.
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 3/11/2020
 
 
 
15,701

 
15,688

 
15,505

 Delayed Draw Term Loan, 10% cash 2% PIK due 3/11/2020 (10)
 
 
 
 
 
(3
)
 
—

 
 
 
 
 
 
15,685

 
15,505

 Access Medical Acquisition, Inc.
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 1/2/2022
 
 
 
12,412

 
12,412

 
12,468

 450,000 Class A Common Stock in CMG Holding Company, LLC
 
 
 
 
 
450

 
645

 
 
 
 
 
 
12,862

 
13,113

 QuorumLabs, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 1/8/2019 (13)
 
 
 
7,500

 
7,179

 
7,227

 2,045,954 Common Stock Warrants (exercise price $0.0001)
 
 
 
 
 
375

 
216

 
 
 
 
 
 
7,554

 
7,443

 Worley Claims Services, LLC
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1% floor) cash due 10/31/2020 (13)
 
 
 
17,722

 
17,556

 
17,633

 
 
 
 
 
 
17,556

 
17,633

 Poseidon Merger Sub, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 8/18/2022 (13)
 
 
 
998

 
995

 
988

 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/15/2023 (13)
 
 
 
30,000

 
28,855

 
29,812

 
 
 
 
 
 
29,850

 
30,800

 American Seafoods Group LLC
 
Food distributors
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5% (1% floor) cash due 8/19/2021 (13)
 
 
 
5,985

 
5,929

 
5,935

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 2/19/2022 (13)
 
 
 
12,000

 
11,888

 
11,983

 
 
 
 
 
 
17,817

 
17,918

 Accentcare, Inc.
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.75% (1% floor) cash due 9/3/2021 (13)
 
 
 
5,000

 
4,953

 
4,909

 
 
 
 
 
 
4,953

 
4,909

 Valet Merger Sub, Inc.
 
Environmental & facilities services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/24/2021 (13)
 
 
 
64,796

 
63,852

 
63,825

 First Lien Revolver, LIBOR+7% (1% floor) cash due 9/24/2021 (13)
 
 
 
3,730

 
3,568

 
3,674

 
 
 
 
 
 
67,420

 
67,499

 Swipely, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 9/30/2019 (13)
 
 
 
12,500

 
12,500

 
12,325

 252,119 Common Stock Warrants (exercise price $1.77)
 
 
 
—

 
—

 
120

 
 
 
 
 
 
12,500

 
12,445

 Baart Programs, Inc.
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.75% cash due 10/9/2021 (13)
 
 
 
32,419

 
31,841

 
31,932

 First Lien Revolver, LIBOR+7.75% cash due 10/9/2021 (10)(13)
 
 
 
 
 
(73
)
 
—

 
 
 
 
 
 
31,768

 
31,932

 Falmouth Group Holdings Corp.
 
Specialty chemicals
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+6.75% (1% floor) cash due 12/13/2021 (13)
 
 
 
5,000

 
4,951

 
5,000

 
 
 
 
 
 
4,951

 
5,000

 Argon Medical Devices, Inc.
 
Healthcare equipment
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9.5% (1% floor) cash due 6/23/2022 (13)
 
 
 
43,000

 
43,000

 
43,000

 
 
 
 
 
 
43,000

 
43,000

 Total Non-Control/Non-Affiliate Investments (156.0% of net assets)
 
 
 
 
 
$
2,107,095

 
$
1,970,450

Total Portfolio Investments (184.1% of net assets)
 
 
 
 
 
$
2,487,248

 
$
2,325,759


See notes to Consolidated Financial Statements.

18
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)



(1)
All debt investments are income producing unless otherwise noted. All equity investments are non-income producing unless otherwise noted.
(2)
See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.
(3)
Control Investments generally are defined by the Investment Company Act of 1940, as amended ("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 generally 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 generally 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
TrialCard Incorporated
 
November 4, 2015
 
- 0.75% on Revolver
 
 
 
 Tier pricing per loan
agreement
Maverick Healthcare Group, LLC
 
October 1, 2015
 
 
 
+ 2.0% on First Lien Term Loan A, First Lien Term Loan B and CapEx Line
 
 Per loan amendment
 Omniplex World Services Corporation
 
October 1, 2015
 
 
 
+ 1.0% on Term Loan
 
 Per loan amendment
 JTC Education, Inc.
 
September 7, 2015
 
- 6.0% on Senior Term Loan
- 5.0% on Revolver
 
+ 6.0% on Term Loan
+ 5.0% on Revolver
 
 Per loan amendment
 Bracket Holding Corp.
 
September 1, 2015
 
+ 1.0% on Term Loan
 
 
 
 Tier pricing per loan
agreement
 Phoenix Brands Merger Sub LLC
 
May 1, 2015
 
+ 2.75% on Term Loan A & Revolver
 
 
 
 Per loan amendment
 Credit Infonet, Inc.
 
February 15, 2015
 
- 1.0% on Subordinated Term Loan
 
 + 0.5% on Subordinated Term Loan
 
 Per loan amendment
 JTC Education, Inc.
 
February 2, 2015
 
+ 0.25% on Mezzanine Term Loan
 
 
 
 Per loan amendment
 Thing5, LLC
 
January 20, 2015
 
+ 0.5% on Term Loan
 
 
 
 Per loan amendment
 AdVenture Interactive, Corp.
 
January 1, 2015
 
+ 0.75% on Term Loan & Revolver
 
 
 
 Per loan amendment
 TransTrade Operators, Inc.
 
January 1, 2015
 
- 6.0% on Term Loan
 
 - 3.0% on Term Loan
 
 Per loan amendment
 HealthDrive Corporation
 
January 1, 2015
 
+ 2.0% on Term Loan A
 
 + 1.0% on Term Loan B
 
 Per loan amendment
 Cenegenics, LLC
 
August 14, 2014
 
 
 
 + 2.0% 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
 
- 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
 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 & Revolver
 
 
 
 Tier pricing per loan
 agreement
(10)
Investment has undrawn commitments. A negative cost basis may result from unamortized fees. Unamortized fees are classified as unearned income which reduces cost basis.
(11)
Investment is not a "qualifying asset" as defined under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets.

19
Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2015
(dollar amounts in thousands)
(unaudited)

(12)
The sale of a portion of this loan does not qualify for true sale accounting under ASC Topic 860 - Transfers and Servicing, and therefore, the entire debt investment remains in the Consolidated Schedule of Investments. Accordingly, this amount includes $19.2 million in principal amount related to the Company's secured borrowings. (See Note 15 in the accompanying notes to the Consolidated Financial Statements.)
(13)
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.
(14)
Each of the Company's investments is 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.
(15)
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, 2015 in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to control.
(16)
First Star Aviation, LLC, First Star Bermuda Aviation Limited and First Star Speir Aviation 1 Limited are wholly-owned holding companies formed by the Company in order to facilitate its investment strategy. In accordance with ASU 2013-08, the Company has deemed the holding companies to be investment companies under GAAP and therefore deemed it appropriate to consolidate the financial results and financial position of the holding companies and to recognize dividend income versus a combination of interest income and dividend income. Accordingly, the debt and equity investments in the wholly-owned holding companies are disregarded for accounting purposes since the economic substance of these instruments are equity investments in the operating entities.
(17)
See Note 3 to the Consolidated Financial Statements for portfolio composition.


See notes to Consolidated Financial Statements.

20
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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
 
 
 
$
16,923

 
$
16,906

 
$
16,878

 LC Facility, 8.5% cash due 12/31/2016
 
 
 
1,444

 
1,438

 
1,444

 746,114 Series A Preferred Units
 
 
 
 
 
16,310

 
19,414

 746,114 Common Stock Units
 
 
 
 
 
5,316

 
5,930

 
 
 
 
 
 
39,970

 
43,666

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

 
15,572

 
8,713

 First Lien Revolver, 8% cash due 5/31/2016
 
 
 
2,850

 
2,850

 
1,555

 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 Holdings LLC
 
 
 
 
 
5,200

 
—

 
 
 
 
 
 
27,622

 
10,268

 First Star Aviation, LLC (17)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
 
 
 
5,390

 
5,389

 
5,313

 10,104,401 Common Units
 
 
 
 
 
10,104

 
9,500

 
 
 
 
 
 
15,493

 
14,813

 First Star Speir Aviation 1 Limited (12) (17)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash due 12/15/2015
 
 
 
46,321

 
46,321

 
47,824

 2,058,411.64 Common Units
 
 
 
 
 
—

 
1,965

 
 
 
 
 
 
46,321

 
49,789

 First Star Bermuda Aviation Limited (12) (17)
 
Airlines
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 8/19/2018
 
 
 
24,869

 
24,869

 
24,836

 4,293,736 Common Units
 
 
 
 
 
2,894

 
2,773

 
 
 
 
 
 
27,763

 
27,609

 Eagle Hospital Physicians, LLC
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan A, 8% PIK due 8/1/2016
 
 
 
13,106

 
13,106

 
13,066

 First Lien Term Loan B, 8.1% PIK due 8/1/2016
 
 
 
3,582

 
3,582

 
3,574

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

 
2,847

 
2,847

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

 
5,464

 
 
 
 
 
 
23,635

 
24,951

 Senior Loan Fund JV I, LLC (12)(16)
 
Multi-sector holdings
 
 
 
 
 
 
 Subordinated Notes, LIBOR+8% cash due 5/2/2021 (14)
 
 
 
129,879

 
129,879

 
128,917

 87.5% LLC equity interest (6)
 
 
 
 
 
14,431

 
12,205

 
 
 
 
 
 
144,310

 
141,122

 Miche Group, LLC
 
Apparel, accessories
& luxury goods
 
 
 
 
 
 
 First Lien Revolver, 8% cash due 12/18/2016
 
 
 
2,500

 
2,500

 
2,500

 100 units in FSFC Miche, Inc.
 
 
 
 
 
5,906

 
4,175

 
 
 
 
 
 
8,406

 
6,675

 Total Control Investments (23.6% of net assets)
 
 
 
 
 
$
333,520

 
$
318,893

 Affiliate Investments (4)
 
 
 
 
 
 
 
 
 Caregiver Services, Inc.
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
 
 
 
$
9,332

 
$
9,332

 
$
9,389

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

 
4,213

 
 
 
 
 
 
10,412

 
13,602

 AmBath/ReBath Holdings, Inc.
 
Home improvement retail
 
 
 
 
 
 
 First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
 
 
 
26,233

 
26,225

 
26,240

 4,668,788 Shares of Preferred Stock
 
 
 
 
 
—

 
764

 
 
 
 
 
 
26,225

 
27,004

 Total Affiliate Investments (3.0% of net assets)
 
 
 
 
 
$
36,637

 
$
40,606

See notes to Consolidated Financial Statements.

21
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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

 
$
969

 
 
 
 
 
 
849

 
969

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

 
4,358

 
4,401

 First Lien Term Loan B, 12% cash 1% PIK due 12/31/15
 
 
 
11,698

 
11,698

 
11,764

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

 
2,266

 
2,266

 
 
 
 
 
 
18,322

 
18,431

 Cenegenics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, 9.75% cash due 9/30/2019
 
 
 
30,849

 
30,817

 
31,042

 414,419 Common Units
 
 
 
 
 
598

 
1,031

 345,380.141 Preferred Units in Cenegenics, LLC
 
 
 
 
 
300

 
300

 
 
 
 
 
 
31,715

 
32,373

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

 
536

 
 
 
 
 
 
642

 
536

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

 
604

 
 
 
 
 
 
643

 
604

 JTC Education, Inc. (9)
 
Education services
 
 
 
 
 
 
 Subordinated Term Loan, 13% cash due 11/1/2017
 
 
 
16,006

 
14,436

 
—

 First Lien Term Loan, LIBOR+5% (1% floor) cash due 5/1/2017 (14)
 
 
 
42,500

 
3,624

 
7,174

 First Lien Revolver, LIBOR+5% cash due 5/1/2017 (14)
 
 
 
10,276

 
876

 
—

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

 
—

 17,391 Shares of Common Stock
 
 
 
 
 
187

 
—

 
 
 
 
 
 
19,436

 
7,174

 Psilos Group Partners IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
0.22% limited partnership interest (11)(12)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Mansell Group, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/31/2015 (14)
 
 
 
4,054

 
4,049

 
4,057

 First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 12/31/2015 (14)
 
 
 
9,715

 
9,715

 
9,719

 
 
 
 
 
 
13,764

 
13,776

 Bunker Hill Capital II (QP), L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.51% limited partnership interest (12)
 
 
 
 
 
602

 
488

 
 
 
 
 
 
602

 
488

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

 
1,105

 
 
 
 
 
 
265

 
1,105

 Phoenix Brands Merger Sub LLC (9)
 
Household products
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016 (14)
 
 
 
2,038

 
2,027

 
2,033

 Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017
 
 
 
37,178

 
31,389

 
7,666

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

 
2,989

 
3,000

 
 
 
 
 
 
36,405

 
12,699


See notes to Consolidated Financial Statements.


22
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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)
 
 
 
$
35,278

 
$
34,259

 
$
17,600

 
 
 
 
 
 
34,259

 
17,600

 Maverick Healthcare Group, LLC
 
Healthcare equipment
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+5.5% cash (1.75% floor) cash due 12/31/2016 (14)
 
 
 
16,251

 
15,951

 
16,181

 First Lien Term Loan B, LIBOR+9% cash (1.75% floor) cash due 12/31/2016 (14)
 
 
 
38,100

 
37,950

 
37,964

 CapEx Line, LIBOR+5.75% (1.75% floor) cash due 12/31/2016 (14)
 
 
 
1,247

 
1,193

 
1,245

 
 
 
 
 
 
55,094

 
55,390

 Refac Optical Group
 
Specialty stores
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018 (14)
 
 
 
18,710

 
18,632

 
18,520

 First Lien Term Loan B, LIBOR+8.5% cash, 1.75% PIK due 9/30/2018 (14)
 
 
 
33,951

 
33,755

 
33,607

 First Lien Term Loan C, 12% cash due 9/30/2018
 
 
 
3,416

 
3,416

 
3,362

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

 
1,583

 
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

 
757

 
 
 
 
 
 
58,691

 
57,846

 Baird Capital Partners V, LP
 
Multi-sector holdings
 
 
 
 
 
 
 0.4% limited partnership interest (6)(12)
 
 
 
 
 
1,000

 
851

 
 
 
 
 
 
1,000

 
851

 Discovery Practice Management, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+7.5% cash due 11/4/2018 (14)
 
 
 
24,117

 
24,054

 
24,459

 Senior Revolver, LIBOR+7% cash due 11/4/2018 (14)
 
 
 
500

 
491

 
500

 Capex Line A, LIBOR+7% cash due 11/4/2018 (14)
 
 
 
1,000

 
1,000

 
1,000

 Capex Line B, LIBOR+7% cash due 11/4/2018 (14)
 
 
 
500

 
500

 
500

 
 
 
 
 
 
26,045

 
26,459

 Milestone Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.85% limited partnership interest (6)(12)
 
 
 
 
 
1,571

 
1,647

 
 
 
 
 
 
1,571

 
1,647

 National Spine and Pain Centers, LLC
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1.6% PIK due 9/27/2017
 
 
 
30,226

 
30,138

 
29,700

 317,282.97 Class A Units (6)
 
 
 
 
 
317

 
520

 
 
 
 
 
 
30,455

 
30,220

 RCPDirect, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.91% limited partnership interest (6)(12)
 
 
 
 
 
812

 
1,005

 
 
 
 
 
 
812

 
1,005

 Riverside Fund V, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.48% limited partnership interest (12)
 
 
 
 
 
953

 
953

 
 
 
 
 
 
953

 
953

 World 50, Inc. (9)
 
Research & consulting services
 
 
 
 
 
 
 Senior Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (14)
 
 
 
14,220

 
14,176

 
14,049

 Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)(14)
 
 
 
 
 
(20
)
 
—

 
 
 
 
 
 
14,156

 
14,049

See notes to Consolidated Financial Statements.

23
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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 (6)(12)
 
Multi-sector holdings
 
 
 
$
682

 
$
602

 
 
 
 
 
 
682

 
602

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

 
653

 50,000 Common Shares (6)
 
 
 
 
 
1

 
114

 
 
 
 
 
 
501

 
767

 Ansira Partners, Inc. (9)
 
Advertising
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)(14)
 
 
 
 
 
(3
)
 
—

 250 Preferred Units of Ansira Holdings, LLC
 
 
 
 
250

 
371

 250 Class A Common Units of Ansira Holdings, LLC
 
 
 
 
 
—

 
107

 
 
 
 
 
 
247

 
478

 Edmentum, Inc.
 
Education services
 
 
 
 
 
 
 Unsecured Senior PIK Note, 8.5% PIK due 6/9/2020
 
 
 
$
2,052

 
2,052

 
2,012

 Unsecured Junior PIK Note, 10% PIK due 6/9/2020
 
 
9,250

 
9,250

 
9,043

 Unsecured Revolver, 5% cash due 6/9/2020
 
 
 
 
 
—

 
—

 126,127.80 Class A Common Units
 
 
 
 
 
126

 
3

 
 
 
 
 
 
11,428

 
11,058

 I Drive Safely, LLC
 
Education services
 
 
 
 
 
 
125,079 Class A Common Units of IDS Investments, LLC
 
 
 
 
 
1,000

 
869

 
 
 
 
 
 
1,000

 
869

 Yeti Acquisition, LLC (9)
 
Leisure products
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017 (14)
 
 
 
29,618

 
29,591

 
29,479

 First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK, due 6/15/2017 (14)
 
 
 
3,375

 
3,363

 
3,367

 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

 
12,335

 
 
 
 
 
 
34,444

 
45,181

 Vitalyst Holdings, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018
 
 
 
19,384

 
19,384

 
18,820

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

 
455

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

 
—

 
 
 
 
 
 
20,134

 
19,275

 Beecken Petty O'Keefe Fund IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.5% limited partnership interest (12)
 
 
 
 
 
802

 
749

 
 
 
 
 
 
802

 
749

 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

 
23,187

 First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017 (14)
 
 
 
775

 
775

 
767

 
 
 
 
 
 
24,079

 
23,954

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

 
3,459

 
 
 
 
 
 
1,500

 
3,459

 Comprehensive Pharmacy Services LLC
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 11.25% cash 1.5% PIK due 11/30/2019
 
 
 
14,578

 
14,578

 
14,691

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

 
1,865

 
 
 
 
 
 
16,578

 
16,556

See notes to Consolidated Financial Statements.


24
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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

 
Cost
 
Fair Value

 Garretson Firm Resolution Group, Inc.
 
Diversified support services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+6.5% (1% floor) cash due 5/22/2020 (14)
 
 
 
$
73

 
$
73

 
$
72

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

 
546

 50,000 Common Units in GRG Holdings, LP
 
 
 
 
 
5

 
—

 
 
 
 
 
 
573

 
618

 Teaching Strategies, LLC
 
Education services
 
 
 
 
 
 
 Senior Term Loan, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (14)
 
 
 
7,659

 
7,659

 
7,636

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

 
—

 
 
 
 
 
 
7,659

 
7,636

 Omniplex World Services Corporation
 
Security & alarm services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018
 
 
 
12,948

 
12,948

 
12,766

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

 
328

 
 
 
 
 
 
13,448

 
13,094

 Dominion Diagnostics, LLC (9)
 
Healthcare services
 
 
 
 
 
 
 Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018
 
 
 
16,153

 
16,153

 
16,184

 
 
 
 
 
 
16,153

 
16,184

 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

 
23,250

 
 
 
 
 
 
23,250

 
23,250

 AdVenture Interactive, Corp. (9)
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (14)
 
 
 
95,141

 
95,121

 
94,987

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

 2,419.7 Preferred Units of AVI Holdings, L.P.
 
 
 
 
 
2,046

 
1,461

 
 
 
 
 
 
97,166

 
96,448

 CoAdvantage Corporation
 
Human resources & employment services
 
 
 
 
 
 
 Mezzanine Term Loan, 11.5% cash 1.25% PIK due 12/31/2018
 
 
 
15,080

 
15,080

 
15,080

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

 
1,136

 
 
 
 
 
 
15,637

 
16,216

 EducationDynamics, LLC
 
Education services
 
 
 
 
 
 
 Mezzanine Term Loan, 12% cash 6% PIK due 1/16/2017
 
 
 
13,786

 
13,786

 
13,782

 
 
 
 
 
 
13,786

 
13,782

 Sterling Capital Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.2% limited partnership interest (12)
 
 
 
 
 
1,238

 
1,238

 
 
 
 
 
 
1,238

 
1,238

 RP Crown Parent, LLC
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (10)(14)
 
 
 
 
 
(349
)
 
—

 
 
 
 
 
 
(349
)
 
—

 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

 
23,943

 
 
 
 
 
 
24,000

 
23,943

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

 
10,450

 
10,475

 
 
 
 
 
 
10,450

 
10,475




See notes to Consolidated Financial Statements.


25
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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

 
Cost
 
Fair Value

 TravelClick, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/8/2021 (14)
 
 
 
$
4,450

 
$
3,948

 
$
4,389

 
 
 
 
 
 
3,948

 
4,389

 Pingora MSR Opportunity Fund I-A, LP
 
Thrift & mortgage finance
 
 
 
 
 
 
 1.9% limited partnership interest (12)
 
 
 
 
 
9,684

 
9,604

 
 
 
 
 
 
9,684

 
9,604

 Credit Infonet, Inc. (9)
 
Data processing & outsourced services
 
 
 
 
 
 
 Subordinated Term Loan, 12.25% cash 1.25% PIK due 10/26/2018
 
 
 
13,501

 
13,501

 
13,064

 
 
 
 
 
 
13,501

 
13,064

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

 
—

 
 
 
 
 
 
—

 
—

 Bracket Holding Corp. (9)
 
Healthcare services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020 (14)
 
 
 
32,000

 
32,000

 
31,385

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

 
612

 
 
 
 
 
 
32,500

 
31,997

 HealthEdge Software, Inc.
 
Application software
 
 
 
 
 
 
 482,453 Series A-3 Preferred Stock Warrants (exercise price $1.450918)
 
 
 
 
 
213

 
724

 
 
 
 
 
 
213

 
724

 InMotion Entertainment Group, LLC
 
Consumer electronics
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
13,640

 
13,640

 
13,406

 First Lien Term Loan B, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
5,946

 
5,693

 
5,882

 First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
4,904

 
4,904

 
4,904

 CapEx Line, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
 
 
 
883

 
883

 
883

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

 
975

 
 
 
 
 
 
26,120

 
26,050

 BMC Software Finance, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% (1% floor) cash due 9/10/2018 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

 Thing5, LLC
 
Data processing & outsourced services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 10/11/2018 (13)(14)
 
 
 
56,538

 
56,538

 
55,088

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

 
—

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

 
425

 
 
 
 
 
 
58,538

 
55,513

 Epic Health Services, Inc.
 
 
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/18/2019 (14)
 
Healthcare services
 
24,667

 
24,236

 
24,666

 
 
 
 
 
 
24,236

 
24,666

See notes to Consolidated Financial Statements.

26
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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
 
 
 
$
5,797

 
$
5,797

 
$
5,790

 498.6 Class A Preferred Units in Kason Investment, LLC
 
 
 
 
 
499

 
523

 5,540 Class A Common Units in Kason Investment, LLC (6)
 
 
 
 
 
55

 
84

 
 
 
 
 
 
6,351

 
6,397

 First Choice ER, LLC
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 10/31/2018 (14)
 
 
 
40,000

 
40,000

 
40,394

 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)
 
 
 
79,000

 
79,000

 
80,056

 
 
 
 
 
 
119,000

 
120,450

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

 
467

 
 
 
 
 
 
572

 
467

 Systems Maintenance Services Holdings, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/18/2020 (14)
 
 
 
19,000

 
18,912

 
18,905

 
 
 
 
 
 
18,912

 
18,905

 P2 Upstream Acquisition Co.
 
Application software
 
 
 
 
 
 
 First Lien Revolver, LIBOR+4% (1% floor) cash due 10/31/2018 (14)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
—

 
—

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

 
39,052

 
39,513

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

 
4,801

 
 
 
 
 
 
40,010

 
44,314

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

 
7,886

 
7,800

 
 
 
 
 
 
7,886

 
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

 
16,347

 
15,730

 
 
 
 
 
 
16,347

 
15,730

 OmniSYS Acquisition Corporation
 
Diversified support services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 11/21/2018 (14)
 
 
 
6,482

 
6,478

 
6,501

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

 
—

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

 
1,244

 
 
 
 
 
 
7,478

 
7,745

 Moelis Capital Partners Opportunity Fund I-B, LP
 
Multi-sector holdings
 
 
 
 
 
 
 1.0% limited partnership interest (6)(12)
 
 
 
 
 
1,076

 
1,116

 
 
 
 
 
 
1,076

 
1,116

 Aden & Anais Merger Sub, Inc.
 
Apparel, accessories & luxury goods
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 6/23/2019
 
 
 
12,439

 
12,439

 
12,465

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

 
3,302

 
 
 
 
 
 
15,439

 
15,767

 Lift Brands Holdings Inc.
 
Leisure facilities
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/23/2019 (14)
 
 
 
22,866

 
22,852

 
22,746

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 12/23/2019 (14)
 
 
 
3,000

 
2,997

 
3,000

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

 
3,506

 
 
 
 
 
 
27,849

 
29,252

 Tailwind Capital Partners II, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
 0.3% limited partnership interest (6)(12)
 
 
 
 
 
604

 
622

 
 
 
 
 
 
604

 
622

See notes to Consolidated Financial Statements.

27
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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
 
 
 
$
9,615

 
$
9,615

 
$
9,776

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

 
733

 
 
 
 
 
 
10,115

 
10,509

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

 
19,786

 
19,834

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

 
7

 
 
 
 
 
 
20,107

 
19,841

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

 
20,000

 
20,391

 
 
 
 
 
 
20,000

 
20,391

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

 
4,939

 
4,950

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

 
180

 
 
 
 
 
 
5,044

 
5,130

 OnCourse Learning Corporation
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/28/2019 (14)
 
 
 
24,625

 
24,594

 
24,670

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

 254,422 Class A Units in CIP OCL Investments, LLC
 
 
 
 
 
2,544

 
3,248

 
 
 
 
 
 
27,136

 
27,918

 ShareThis, Inc.
 
Internet software & services
 
 
 
 
 
 
 345,452 Series C Preferred Stock Warrants (exercise price $3.0395)
 
 
 
 
 
367

 
319

 
 
 
 
 
 
367

 
319

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

 
3,000

 
2,892

 
 
 
 
 
 
3,000

 
2,892

 Integrated Petroleum Technologies, Inc.
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 3/31/2019 (14)
 
 
 
21,030

 
21,012

 
18,751

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

 
 
 
 
 
 
21,009

 
18,751

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

 
14,870

 
14,943

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

 
—

 180,707 Class C Units in ExamSoft Investor LLC
 
 
 
 
 
181

 
167

 
 
 
 
 
 
15,051

 
15,110

 Language Line, LLC
 
Integrated telecommunication services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 7/7/2021 (14)
 
 
 
20,000

 
20,000

 
20,042

 Second Lien Term Loan, LIBOR+9.75 (1% floor) cash due 7/7/2022 (14)
 
 
 
26,000

 
26,000

 
26,130

 
 
 
 
 
 
46,000

 
46,172

 DigiCert, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 6/2/2020 (14)
 
 
 
33,250

 
33,250

 
33,250

 
 
 
 
 
 
33,250

 
33,250

See notes to Consolidated Financial Statements.

28
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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)
 
 
 
 
 
$
246

 
$
246

 
 
 
 
 
 
246

 
246

 PR Wireless, Inc. (12)
 
Integrated telecommunication services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+9% (1% floor) cash due 6/27/2020 (14)
 
 
 
$
12,845

 
12,476

 
11,366

 118.4211 Common Stock Warrants (exercise price $0.01)
 
 
 
 
 
—

 
516

 
 
 
 
 
 
12,476

 
11,882

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

 
14,910

 
15,127

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

 
—

 
 
 
 
 
 
15,023

 
15,127

 Loftware, Inc.
 
Internet software & services
 
 
 
 
 
 
 Mezzanine Term Loan, 11% cash 1% PIK due 7/18/2020
 
 
 
6,074

 
6,074

 
6,159

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

 
232

 
 
 
 
 
 
6,374

 
6,391

 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

 
15,048

 
 
 
 
 
 
15,000

 
15,048

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

 
29,259

 
29,300

 
 
 
 
 
 
29,259

 
29,300

 Webster Capital III, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
0.754% limited partnership interest (12)
 
 
 
 
 
851

 
851

 
 
 
 
 
 
851

 
851

 L Squared Capital Partners LLC
 
Multi-sector holdings
 
 
 
 
 
 
 2% limited partnership interest (12)
 
 
 
 
 
562

 
562

 
 
 
 
 
 
562

 
562

 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

 
38,262

 
 
 
 
 
 
40,000

 
38,262

 BeyondTrust Software, Inc.
 
Application software
 
 
 
 
 
 
 First Lien Term Loan LIBOR+7% (1% floor) cash due 9/25/2019 (14)
 
 
 
40,998

 
40,001

 
40,951

 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

 
7,285

 
 
 
 
 
 
44,495

 
48,236

 Answers Corporation
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 10/1/2021 (14)
 
 
 
4,963

 
4,941

 
3,652

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

 
35,190

 
20,479

 
 
 
 
 
 
40,131

 
24,131

 Idera, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (0.5% floor) cash due 11/5/2020 (14)
 
 
 
7,406

 
7,052

 
7,406

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

 
—

 
 
 
 
 
 
7,052

 
7,406

 GOBP Holdings Inc.
 
Food retail
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/21/2022 (14)
 
 
 
11,000

 
10,855

 
10,973

 
 
 
 
 
 
10,855

 
10,973

 Kellermeyer Bergensons Services, LLC
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.50% (1% floor) cash due 4/29/2022 (14)
 
 
 
6,105

 
5,821

 
6,136

 
 
 
 
 
 
5,821

 
6,136


See notes to Consolidated Financial Statements.

29
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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)
 
 
 
$
7,847

 
$
7,847

 
$
7,879

 500,000 Class A Common Units in Skyline Data, News and Analytics LLC
 
 
 
 
 
500

 
758

 
 
 
 
 
 
8,347

 
8,637

 NAVEX Global, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 11/19/2021 (14)
 
 
 
1,962

 
1,962

 
1,952

 Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 11/18/2022 (14)
 
 
 
30,755

 
30,704

 
30,448

 
 
 
 
 
 
32,666

 
32,400

 Penn Foster, Inc.
 
Education services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/24/2019 (14)
 
 
 
29,550

 
29,548

 
29,576

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

 
—

 
 
 
 
 
 
29,548

 
29,576

 GTCR Valor Companies, Inc.
 
Advertising
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/30/2021 (14)
 
 
 
3,699

 
3,649

 
3,671

 
 
 
 
 
 
3,649

 
3,671

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

 
15,645

 
15,300

 
 
 
 
 
 
15,645

 
15,300

 Metamorph US 3, LLC
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 12/1/2020 (14)
 
 
 
12,266

 
12,260

 
12,139

 First Lien Revolver, LIBOR+5.5% (1% floor) cash due 12/1/2020 (14)
 
 
 
1,225

 
1,224

 
1,225

 
 
 
 
 
 
13,484

 
13,364

 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

 
16,949

 
 
 
 
 
 
17,000

 
16,949

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

 
4,966

 
4,971

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

 
57

 
 
 
 
 
 
5,011

 
5,028

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

 
4,956

 
4,940

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

 
664

 
 
 
 
 
 
5,016

 
5,604

 Survey Sampling International, LLC
 
Research & consulting services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 12/16/2021 (14)
 
 
 
18,700

 
18,369

 
18,513

 
 
 
 
 
 
18,369

 
18,513

 Abaco Energy Technologies LLC
 
Oil & gas equipment services
 
 
 
 
 
 
 First Lien Term Loan B, LIBOR+7% (1% floor) cash due 11/21/2020 (14)
 
 
 
8,831

 
8,293

 
6,031

 
 
 
 
 
 
8,293

 
6,031

See notes to Consolidated Financial Statements.

30
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


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)
 
 
 
$
93,906

 
$
93,895

 
$
84,980

 First Lien Revolver, LIBOR+7.5% (1% floor) cash due 6/23/2019 (14)
 
 
 
6,400

 
6,399

 
6,400

 
 
 
 
 
 
100,294

 
91,380

 PSC Industrial Holdings Corp.
 
Diversified support services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 12/3/2021 (14)
 
 
 
7,000

 
6,745

 
6,895

 
 
 
 
 
 
6,745

 
6,895

 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)
 
 
 
3,970

 
3,970

 
3,925

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

 
—

 487.5 Class A Preferred Units
 
 
 
 
 
488

 
533

 12,500 Class B Common Units
 
 
 
 
 
13

 
30

 
 
 
 
 
 
4,471

 
4,488

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

 
 
 
 
 
 
(1
)
 
—

 Motion Recruitment Partners LLC
 
Human resources & employment services
 
 
 
 
 
 
 First Lien Revolver, LIBOR+6% (1% floor) cash due 2/13/2020 (10)(14)
 
 
 
 
 
(1
)
 
—

 
 
 
 
 
 
(1
)
 
—

 WeddingWire, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 2/20/2020 (14)
 
 
 
27,500

 
27,500

 
27,530

 First Lien Revolver, LIBOR+8.5% (1% floor) cash due 2/20/2020 (14)
 
 
 
 
 
—

 
—

 483,645 Common Shares of WeddingWire, Inc.
 
 
 
 
 
1,200

 
923

 
 
 
 
 
 
28,700

 
28,453

 xMatters, Inc.
 
Internet software & services
 
 
 
 
 
 
 Second Lien Term Loan, LIBOR+10% (1% floor) cash due 2/26/2019 (14)
 
 
 
15,000

 
14,381

 
14,241

 200,000 Common Stock Warrants (exercise price $1.78)
 
 
 
 
 
709

 
645

 
 
 
 
 
 
15,090

 
14,886

 Edge Fitness, LLC
 
Leisure facilities
 
 
 
 
 
 
 Delayed Draw Term Loan, LIBOR+7.75% (1% floor) cash due 12/31/2019 (14)
 
 
 
765

 
765

 
765

 
 
 
 
 
 
765

 
765

 Golden State Medical Supply, Inc.
 
Pharmaceuticals
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2.5% PIK due 4/24/2021
 
 
 
15,001

 
15,001

 
15,017

 
 
 
 
 
 
15,001

 
15,017

 My Alarm Center, LLC
 
Security & alarm services
 
 
 
 
 
 
 First Lien Term Loan A, LIBOR+8% (1% floor) cash due 1/9/2018 (14)
 
 
 
3,000

 
3,000

 
3,000

 First Lien Term Loan B, LIBOR+8% (1% floor) cash due 1/9/2018 (14)
 
 
 
4,756

 
4,756

 
4,784

 First Lien Term Loan C, LIBOR+8% (1% floor) cash due 1/9/2018 (14)
 
 
 
928

 
928

 
927

 First Lien Term Revolver, LIBOR+8% (1% floor) cash due 1/9/2018 (14)
 
 
 
200

 
200

 
200

 
 
 
 
 
 
8,884

 
8,911

 AirStrip Technologies, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+10% (1% floor) cash due 5/12/2018 (14)
 
 
 
16,000

 
15,918

 
15,917

 22,858.71 Series C-1 Preferred Stock Warrants (exercise price $34.99757)
 
 
 
 
 
90

 
81

 
 
 
 
 
 
16,008

 
15,998

See notes to Consolidated Financial Statements.


31
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


Portfolio Company/Type of Investment (1)(2)(5)(15)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
 Legalzoom.com, Inc.
 
Specialized consumer services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 5/13/2020 (14)
 
 
 
$
16,490

 
$
16,466

 
$
16,525

 First Lien Revolver, LIBOR+7% (1% floor) cash due 5/13/2020 (10)(14)
 
 
 
 
 
(7
)
 
—

 
 
 
 
 
 
16,459

 
16,525

 All Metro Health Care Services, Inc.
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 3/11/2020
 
 
 
15,701

 
15,680

 
15,685

 Delayed Draw Term Loan, 10% cash 2% PIK due 3/11/2020 (10)
 
 
 
 
 
(4
)
 
—

 
 
 
 
 
 
15,676

 
15,685

 Access Medical Acquisition, Inc.
 
Healthcare services
 
 
 
 
 
 
 Mezzanine Term Loan, 10% cash 2% PIK due 1/2/2022
 
 
 
12,413

 
12,412

 
12,412

 450,000 Class A Common Stock in CMG Holding Company, LLC
 
 
 
 
 
450

 
450

 
 
 
 
 
 
12,862

 
12,862

 QuorumLabs, Inc.
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 1/8/2019 (14)
 
 
 
7,500

 
7,152

 
7,125

 2,045,954 Common Stock Warrants (exercise price $0.0001)
 
 
 
 
 
375

 
375

 
 
 
 
 
 
7,527

 
7,500

 Worley Claims Services, LLC
 
Internet software & services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8% (1% floor) cash due 10/31/2020 (14)
 
 
 
13,317

 
13,187

 
13,250

 
 
 
 
 
 
13,187

 
13,250

 Poseidon Merger Sub, Inc.
 
Advertising
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 8/18/2022 (14)
 
 
 
1,000

 
997

 
1,000

 Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/15/2023 (14)
 
 
 
30,000

 
28,810

 
30,000

 
 
 
 
 
 
29,807

 
31,000

 American Seafoods Group LLC
 
Food distributors
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5% (1% floor) cash due 8/19/2021 (14)
 
 
 
6,000

 
5,942

 
5,970

 Second Lien Term Loan, LIBOR+9% (1% floor) cash due 2/19/2022 (14)
 
 
 
12,000

 
11,883

 
12,000

 
 
 
 
 
 
17,825

 
17,970

 Accentcare, Inc.
 
Healthcare services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+5.75% (1% floor) cash due 9/3/2021 (14)
 
 
 
5,000

 
4,950

 
4,975

 
 
 
 
 
 
4,950

 
4,975

 Valet Merger Sub, Inc.
 
Environmental & facilities services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/24/2021 (14)
 
 
 
79,450

 
79,434

 
79,450

 First Lien Revolver, LIBOR+7% (1% floor) cash due 9/24/2021 (10)(14)
 
 
 
 
 
(3
)
 
—

 
 
 
 
 
 
79,431

 
79,450

 Swipely, Inc.
 
IT consulting & other services
 
 
 
 
 
 
 First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 9/30/2019 (14)
 
 
 
12,500

 
12,500

 
12,500

 252,119 Common Stock Warrants (exercise price $1.77)
 
 
 
 
 
—

 
—

 
 
 
 
 
 
12,500

 
12,500

 Total Non-Control/Non-Affiliate Investments (151.0% of net assets)
 
 
 
 
 
2,102,781

 
2,042,996

Total Portfolio Investments (177.6% of net assets)
 
 
 
 
 
$
2,472,938

 
$
2,402,495


See notes to Consolidated Financial Statements.

32
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)



(1)
All debt investments are income producing unless otherwise noted. All equity investments are non-income producing unless otherwise noted.
(2)
See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.
(3)
Control Investments generally 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 generally 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 generally 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.
 
September 7, 2015
 
- 6.0% on Senior Term Loan
- 5.0% on Revolver
 
+ 6.0% on Term Loan and Revolver
 
 Per loan amendment
Bracket Holding Corp.
 
September 1, 2015
 
+ 1.0% on Term Loan
 
 
 
 Tier pricing per loan
agreement
World 50, Inc.
 
May 22, 2015
 
+ 1.75% on Term Loan A
 
 
 
Merger of debt tranches per loan amendment
 Phoenix Brands Merger Sub LLC
 
May 1, 2015
 
+ 2.75% on Term Loan A & Revolver
 
 
 
 Per loan amendment
 Credit Infonet, Inc.
 
February 15, 2015
 
- 1.0% on Subordinated Term Loan
 
 + 0.5% on Subordinated Term Loan
 
 Per loan amendment
 JTC Education, Inc.
 
February 2, 2015
 
+ 0.25% on Mezzanine Term Loan
 
 
 
 Per loan amendment
 AdVenture Interactive, Corp.
 
January 1, 2015
 
+ 0.75% on Term Loan & Revolver
 
 
 
 Per loan amendment
 TransTrade Operators, Inc.
 
January 1, 2015
 
- 6.0% on Term Loan
 
 - 3.0% on Term Loan
 
 Per loan amendment
 HealthDrive Corporation
 
January 1, 2015
 
+ 2.0% on Term Loan A
 
 + 1.0% on Term Loan B
 
 Per loan amendment
 Cenegenics, LLC
 
August 14, 2014
 
 
 
 + 2.0% 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
 
- 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
 Ansira Partners, Inc.
 
June 30, 2013
 
- 0.5% on Revolver
 
 
 
 Tier pricing per loan
 agreement
 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 & 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. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets.
(13)
The sale of a portion of this loan does not qualify for true sale accounting under ASC Topic 860 - Transfers and Servicing, and therefore, the entire debt investment remains in the Consolidated Schedule of Investments. Accordingly, this amount includes $21.8 million in principal amount related to the Company's secured borrowings. (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.

33
Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2015
(dollar amounts in thousands)


(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)
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).
(17)
First Star Aviation, LLC, First Star Bermuda Aviation Limited and First Star Speir Aviation 1 Limited are wholly-owned holding companies formed by the Company in order to facilitate its investment strategy. In accordance with ASU 2013-08, the Company has deemed the holding companies to be investment companies under US GAAP and therefore deemed it appropriate to consolidate the financial results and financial position of the holding companies and to recognize dividend income versus a combination of interest income and dividend income. Accordingly, the debt and equity investments in the wholly-owned holding companies are disregarded for accounting purposes since the economic substance of these instruments are equity investments in the operating entities.

See notes to Consolidated Financial Statements.





34
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 Finance Corp. (together with its consolidated subsidiaries, the "Company") is a specialty finance company that is a closed-end, non-diversified management investment company. The Company has elected to be regulated as a business development company under the 1940 Act. The Company has qualified and elected to be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986 (the "Code") for tax purposes.
The Company's investment objective is to produce current income from investing primarily in small and middle-market companies in the form of senior secured loans and subordinated debt investments. To a lesser extent, the Company also makes equity investments in connection with certain debt transactions. The Company's investments are generally made in connection with investments by private equity sponsors.
The Company is externally managed by Fifth Street Management LLC (the "Investment Adviser"), a subsidiary of Fifth Street Asset Management Inc. ("FSAM"), a publicly traded, leading alternative asset manager, pursuant to an investment advisory agreement. FSC CT LLC ("FSC CT"), a subsidiary of the Investment Adviser, also provides certain administrative and other services necessary for the Company to operate.

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 Consolidated Financial Statements have been made. All intercompany balances and transactions have been eliminated. The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 946, Financial Services - Investment Company ("ASC 946").
Use of Estimates:
The preparation of the 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. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material. Significant estimates include the valuation of investments and revenue recognition.
Consolidation:
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries, which were established to hold certain investments of the Company. Each subsidiary is wholly-owned and, as such, consolidated into the Consolidated Financial Statements. The subsidiaries hold investments which are treated as pass through entities for tax purposes. The assets of the Company's consolidated subsidiaries are not directly available to satisfy the claims of the creditors of the Company or any of its other subsidiaries.
Since the Company is an investment company, portfolio investments held by the Company and its subsidiaries are not consolidated into the Consolidated Financial Statements. The portfolio investments held by the Company and its subsidiaries are included on the Statements of Assets and Liabilities as investments at fair value.

Fair Value Measurements:
The Company values its investments in accordance with FASB ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), which 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. ASC 820 prioritizes the use of observable market prices derived from such prices over entity-specific inputs. 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.

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


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.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Generally, it is expected that all of the Company's investment securities will be valued using Level 3 inputs. This includes investment securities that are valued using "bid" and "ask" prices obtained from independent third party pricing services or directly from brokers. 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 adjustments for investment-specific factors or restrictions.
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. 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 the prices unless it has a reason to believe any such market quotations are not reflective of the fair value of an investment. 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.
The Company performs detailed valuations of its debt and equity investments for which market quotations are not readily available or are deemed not to represent fair value of the investments. The Company typically uses two different valuation techniques. The first valuation technique is an analysis of the enterprise value ("EV") of the portfolio company. EV means the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The primary method for determining EV uses a multiple analysis whereby appropriate multiples are applied to the portfolio company's EBITDA (generally defined as earnings before net interest expense, income tax expense, depreciation and amortization). EBITDA multiples are typically determined based upon review of market comparable transactions and publicly traded comparable companies, if any. The Company may also employ other valuation multiples to determine EV, such as revenues. The second method for determining EV uses a discounted cash flow analysis whereby future expected cash flows of the portfolio company are discounted to determine a present value using estimated discount rates (typically a weighted average cost of capital based on costs of debt and equity consistent with current market conditions). The EV analysis is typically performed to determine the value of equity investments and to determine if there is credit impairment for debt investments. If debt investments are credit impaired, an EV analysis may be used to value such debt investments; however, in addition to the methods outlined above, other alternative methods such as an asset liquidation model, expected recovery model or a recent observable or pending transaction may be utilized to estimate EV. The second valuation technique is a bond yield approach, which is typically performed for non-credit impaired debt investments. To determine fair value using a bond yield approach, a current price is imputed for the investment based upon an assessment of the expected market yield for a similarly structured investment with a similar level of risk. In the bond yield approach, the Company considers the current contractual interest rate, the capital structure and other terms of the investment relative to risk of the company and the specific investment. A key determinant of risk, among other things, is the leverage through the investment relative to the EV of the portfolio company. As debt investments held by the Company are substantially illiquid with no active transaction market, the Company

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


depends on primary market data, including newly funded transactions and industry specific market movements, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable.
The Company estimates the fair value of privately held warrants using a Black Scholes pricing model, which includes 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 Company's investments:
•
The quarterly valuation process begins with each portfolio company or investment being initially valued by the Investment Adviser's valuation team in conjunction with the Investment Adviser's portfolio management and capital markets teams;
•Preliminary valuations are then reviewed and discussed with principals of the Investment Adviser;
•
Separately, independent valuation firms engaged by the Board of Directors prepare valuations of the Company's 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 and provide such reports to the Investment Adviser and the Audit Committee of the Board of Directors;
•
The Investment Adviser compares and contrasts its preliminary valuations to the valuations of the independent valuation firms and prepares a valuation report for the Audit Committee of the Board of Directors;
•
The Audit Committee of the Board of Directors reviews the preliminary valuations with the portfolio managers of the Investment Adviser, and the Investment Adviser responds and supplements the preliminary valuations to reflect any discussions between the Investment Adviser and 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 the Company's investments at December 31, 2015 and September 30, 2015 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. As of December 31, 2015, 77.1% of the Company's portfolio at fair value was valued by independent valuation firms. 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.

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


Revisions to Prior Period Financial Information
The Company previously identified accounting errors from fiscal years ended 2012 through 2015 related to revenue recognition and consolidation. The revenue recognition errors were the result of certain fees which were historically recognized on the deal closing date, but should have been amortized over the life of the loan since the fees did not represent a separately identifiable revenue contract. These errors were partially offset by the overpayment of Part I Incentive Fees paid to the Investment Adviser. There were also errors resulting from not historically consolidating wholly-owned holding companies that should have been consolidated (First Star holding companies). The Company assessed the materiality of the errors on its prior quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s staff Accounting Bulletin (“SAB”) No. 99 and SAB 108, and concluded that the errors were not material to any of the previously issued financial statements. However, the Company recorded a cumulative out-of-period adjustment to correct these errors prior to October 1, 2014, as well as adjustments related to the three months ended December 31, 2014, which are included in the revised three months ended December 31, 2014 financial information. These errors did not impact the financial information for three months ended December 31, 2015. The revisions for the three months ended December 31, 2014 were as follows:
 
 
Three months ended December 31, 2014
Consolidated Statement of Operations:
 
As previously reported
 
Out of Period Adjustment
 
Current period adjustment
 
As revised(1)
Interest income
 
$
52,541

 
$
3,634

 
$
(2,162
)
 
$
54,013

PIK income
 
4,404

 
—

 
(391
)
 
4,013

Fee income
 
17,902

 
(8,450
)
 
(4,835
)
 
4,617

Dividend and other income
 
1,445

 
—

 
1,250

 
2,695

Total investment income
 
76,292

 
(4,816
)
 
(6,138
)
 
65,338

Part I incentive fee
 
8,715

 
(963
)
 
(1,228
)
 
6,524

Net expenses
 
41,122

 
(963
)
 
(1,228
)
 
38,931

Net investment income
 
35,170

 
(3,853
)
 
(4,910
)
 
26,407

Net unrealized depreciation on investments
 
(48,575
)
 
3,556

 
6,166

 
(38,853
)
Net realized loss on investments and secured borrowings
 
(17,588
)
 
1,260

 
(28
)
 
(16,356
)
Net decrease in net assets resulting from operations
 
$
(30,661
)
 
$
963

 
$
1,228

 
$
(28,470
)
Total investment income per common share
 
$
0.50

 
$
(0.03
)
 
$
(0.04
)
 
$
0.43

Net investment income per common share
 
$
0.23

 
$
(0.03
)
 
$
(0.03
)
 
$
0.17

Loss per common share
 
$
(0.20
)
 
$
0.01

 
$
0.01

 
$
(0.19
)


38
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
Consolidated Statement of Changes in Net Assets:
 
As previously reported
 
Out of Period Adjustment
 
Current period adjustment
 
As revised (1)
Net investment income
 
$
35,170

 
$
(3,853
)
 
$
(4,910
)
 
$
26,407

Net unrealized depreciation on investments
 
(48,575
)
 
3,556

 
6,166

 
(38,853
)
Net realized loss on investments and secured borrowings
 
(17,588
)
 
1,260

 
(28
)
 
(16,356
)
Net decrease in net assets resulting from operations
 
(30,661
)
 
963

 
1,228

 
(28,470
)
Total decrease in net assets
 
(72,844
)
 
963

 
1,228

 
(70,653
)
Net assets at beginning of period
 
1,478,475

 
—

 
—

 
1,478,475

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

 
$
963

 
$
1,228

 
$
1,407,822

Net asset value per common share at period end
 
$
9.17

 
$
0.01

 
$
0.01

 
$
9.18

 
 
Three months ended December 31, 2014
Consolidated Statement of Cash Flows:
 
As previously reported
 
Out of Period Adjustment
 
Current period adjustment
 
As revised (1)
Net increase in net assets resulting from operations
 
$
(30,661
)
 
$
963

 
$
1,228

 
$
(28,470
)
Net unrealized depreciation on investments
 
48,575

 
(3,556
)
 
(6,166
)
 
38,853

Net realized loss on investments and secured borrowings
 
17,588

 
(1,260
)
 
28

 
16,356

PIK interest income
 
(4,404
)
 
—

 
391

 
(4,013
)
Recognition of fee income
 
(17,902
)
 
8,450

 
4,835

 
(4,617
)
Accretion of original issue discount on investments
 
(258
)
 
(3,634
)
 
(407
)
 
(4,299
)
Fee income received
 
17,345

 
(8,450
)
 
(4,835
)
 
4,060

Decrease in base management and Part I incentive fee payable
 
1,078

 
(963
)
 
(1,228
)
 
(1,113
)
Purchases of investments and net revolver activity
 
(722,328
)
 
8,450

 
4,835

 
(709,043
)
Principal payments received on investments (payoffs)
 
250,483

 
—

 
1,319

 
251,802

Net cash used in operating activities
 
(218,290
)
 
—

 
—

 
(218,290
)
Net decrease in cash and cash equivalents
 
(22,472
)
 
—

 
—

 
(22,472
)
Cash and cash equivalents, beginning of period
 
86,731

 
—

 
—

 
86,731

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

 
$
—

 
$
—

 
$
64,259

____________
(1) Revised per share amounts may not sum due to rounding.
Investment Income:
Interest income, adjusted for accretion of original issue discount ("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.

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


The Company reversed $0.7 million of dividend income during the three months ended December 31, 2015 upon the receipt of updated information from a portfolio company regarding the characterization of a cash distribution received in a prior period. The related Part I incentive fee impact of this adjustment has been reflected in the current consolidated financial statements.
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, amendment 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. 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.
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 and restricted cash 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 ("FDIC") insured limit.
Restricted Cash:
As of December 31, 2015, included in restricted cash was $1.6 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 $11.0 million that represents collateral for standby letters of credit issued to portfolio companies.
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 scheduled 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, 2015 and December 31, 2014.

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


Income Taxes:
The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to be subject to tax as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute dividends to its stockholders of an amount generally at least equal to 90% of investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each taxable year. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to stockholders as a dividend. Depending on the level of taxable income earned during a taxable year, the Company may choose to retain taxable income in excess of current year dividend distributions and would distribute such taxable income in the next taxable year. The Company would then pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income, determined on a calendar year basis, could exceed estimated current calendar year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. 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 2013 and 2014 and does not expect to incur a U.S. federal excise tax for calendar year 2015. The Company may incur a U.S. federal excise tax in future years.
The Company holds certain portfolio investments through taxable subsidiaries. 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 consolidated for financial reporting purposes, and portfolio investments held by them are included in the Company’s consolidated financial statements as portfolio investments and recorded at fair value. The taxable subsidiaries are not consolidated with the Company for U.S. federal income tax purposes and may generate income tax expense, or benefit, and the related tax assets and liabilities, 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 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 2012, 2013 or 2014. The Company identifies its major tax jurisdictions as U.S. Federal, Connecticut and New York, 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 ("ASC 860") 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 Statements 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.
Amounts 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. If not redistributed by the reporting date, such amounts are recorded as payable to syndication partners on the Consolidated Statements of Assets and Liabilities.

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


Fair Value Option:
The Company adopted certain principles under ASC 825 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 $20.0 million and $21.8 million in the aggregate as of December 31, 2015 and September 30, 2015, respectively. 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.
However, the Company has not elected the fair value option to report other selected financial assets and liabilities at fair value. With the exception of the line items entitled "credit facilities payable", "SBA debentures payable", "unsecured convertible notes payable", and "unsecured notes payable," which are reported at amortized cost, all assets and liabilities approximate fair value on the Consolidated Statement of Assets and Liabilities. The carrying value of the lines titled "interest, dividends, and fees receivable," "due from portfolio companies," "receivables from unsettled transactions," "accounts payable, accrued expenses and other liabilities," "base management fee and part I incentive fee payable," "due to FSC CT," "interest payable," "accounts payable to syndication partners," and "payable from unsettled transactions" approximate fair value due to their short maturities.
Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2018 and early adoption is permitted on the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of this standard on its consolidated financial statements and its ongoing financial reporting.
In April 2015, the FASB issued ASU No. 2015-05, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs which requires debt issuance costs (deferred financing costs) related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the related debt liability, similar to the presentation of debt discounts. The update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Additionally, in August 2015, the FASB issued ASU 2015-15, which provides further clarification on the same topic and states that the SEC would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This guidance is not expected to have a material effect on the consolidated financial statements as it will result in a reclassification on the Consolidated Statements of Assets and Liabilities. Accordingly, there will be no impact on net asset value or net increase in net assets resulting from operations as a result of adoption of this guidance.
In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The new guidance removes the requirement that investments for which NAV is determined based on practical expedient reliance be reported utilizing the fair value hierarchy. ASU No. 2015-07 is required to be applied retrospectively for periods beginning on or after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall, which makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The new standard significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods therein.  Early adoption is permitted specifically for the amendments pertaining to the presentation of certain fair value changes for financial liabilities measured at fair value.  Early adoption of all other amendments is not permitted. Upon adoption, the Company will be required to make a cumulative-effect adjustment to the Consolidated Statement of Assets and Liabilities as of the beginning of the first reporting period in which the guidance is effective.  The Company did not early adopt the new guidance during the three months ended December 31, 2015.  The Company is evaluating the effect that ASU 2016-01 will have on its consolidated financial statements and related disclosures.

Note 3. Portfolio Investments
At December 31, 2015, 184.1% of net assets, or $2.3 billion, was invested in 131 portfolio investments, including the Company's investment in subordinated notes and limited liability company ("LLC") equity interests in Senior Loan Fund JV I, LLC ("SLF JV I")

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


which had a fair value of $125.2 million and $6.6 million, respectively. At December 31, 2015, 7.5% of net assets, or $95.2 million, was invested in cash and cash equivalents (including restricted cash). In comparison, at September 30, 2015, 177.6% of net assets, or $2.4 billion, was invested in 135 portfolio investments, including the Company's investment in subordinated notes and LLC equity interests in SLF JV I, which had a fair value of $128.9 million and $12.2 million, respectively, and 10.6% of net assets, or $143.5 million, was invested in cash and cash equivalents (including restricted cash). As of December 31, 2015, 80.5% 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, 2015 and December 31, 2014, the Company recorded net realized gains (losses) on investments and secured borrowings of $1.4 million and $(16.4) million, respectively. During the three months ended December 31, 2015 and December 31, 2014, the Company recorded net unrealized depreciation on investments and secured borrowings of $90.8 million and $38.5 million, respectively.
The composition of the Company's investments as of December 31, 2015 and September 30, 2015 at cost and fair value was as follows:
 
 
 
December 31, 2015
 
September 30, 2015
 
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Investments in debt securities
 
$
2,223,834

 
$
2,058,265

 
$
2,211,728

 
$
2,123,246

Investments in equity securities
 
119,104

 
135,646

 
116,900

 
138,127

Debt investment in SLF JV I
 
129,879

 
125,200

 
129,879

 
128,917

Equity investment in SLF JV I
 
14,431

 
6,648

 
14,431

 
12,205

Total
 
$
2,487,248

 
$
2,325,759

 
$
2,472,938

 
$
2,402,495

The composition of the Company's debt investments as of December 31, 2015 and September 30, 2015 at fixed rates and floating rates was as follows:
 
 
 
December 31, 2015
 
September 30, 2015
 
 
Fair Value
 
% of Debt
Portfolio
 
Fair Value
 
% of Debt
Portfolio
Fixed rate debt securities
 
$
465,880

 
21.34
%
 
$
507,027

 
22.51
%
Floating rate debt securities, including subordinated notes of SLF JV I
 
1,717,585

 
78.66

 
1,745,136

 
77.49

Total
 
$
2,183,465

 
100.00
%
 
$
2,252,163

 
100.00
%
The following table presents the financial instruments carried at fair value as of December 31, 2015, 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)
 
$
—

 
$
—

 
$
1,872,729

 
$
1,872,729

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

 
—

 
310,736

 
310,736

Investments in equity securities (preferred)
 
—

 
—

 
30,923

 
30,923

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

 
—

 
111,371

 
111,371

Total investments at fair value
 
$
—

 
$
—

 
$
2,325,759

 
$
2,325,759

Secured borrowings relating to senior secured debt investments
 
—

 
—

 
19,158

 
19,158

Total liabilities at fair value
 
$
—

 
$
—

 
$
19,158

 
$
19,158

The following table presents the financial instruments carried at fair value as of September 30, 2015, on the Company's Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820:
 

43
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)
 
$
—

 
$
—

 
$
1,893,135

 
$
1,893,135

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

 
—

 
359,028

 
359,028

Investments in equity securities (preferred)
 
—

 
—

 
30,806

 
30,806

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

 
—

 
119,526

 
119,526

Total investments at fair value
 
$
—

 
$
—

 
$
2,402,495

 
$
2,402,495

Secured borrowings relating to senior secured debt investments
 
—

 
—

 
21,182

 
21,182

Total liabilities at fair value
 
$
—

 
$
—

 
$
21,182

 
$
21,182

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 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, 2015 to December 31, 2015, for all investments and secured borrowings for which the Company determines fair value using unobservable (Level 3) factors:
 
 
Investments
 
Liabilities
 
 
Senior Secured Debt
 
Subordinated
Debt (including subordinated notes of SLF JV I)
 
Preferred
Equity
 
Common
Equity (including LLC equity interests of SLF JV I)
 
Total
 
Secured Borrowings
Fair value as of September 30, 2015
 
$
1,893,135

 
$
359,028

 
$
30,806

 
$
119,526

 
$
2,402,495

 
$
21,182

New investments & net revolver activity
 
347,464

 
—

 
299

 
4,167

 
351,930

 
—

Redemptions/repayments
 
(309,801
)
 
(29,006
)
 
(760
)
 
(3,464
)
 
(343,031
)
 
(1,812
)
Net accrual of PIK interest income
 
1,456

 
980

 
506

 
—

 
2,942

 
—

Accretion of OID
 
1,139

 
—

 
—

 
—

 
1,139

 
—

Net change in unearned income
 
(57
)
 
21

 
—

 
—

 
(36
)
 
—

Net unrealized appreciation (depreciation) on investments
 
(60,518
)
 
(20,287
)
 
72

 
(10,314
)
 
(91,047
)
 
—

Net unrealized depreciation on secured borrowings
 
—

 
—

 
—

 
—

 
—

 
(212
)
Realized gain (loss) on investments
 
(89
)
 
—

 
—

 
1,456

 
1,367

 
—

Fair value as of December 31, 2015
 
$
1,872,729

 
$
310,736

 
$
30,923

 
$
111,371

 
$
2,325,759

 
$
19,158

Net unrealized appreciation (depreciation) relating to Level 3 assets and liabilities still held at December 31, 2015 and reported within net unrealized appreciation (depreciation) on investments and secured borrowings in the Consolidated Statement of Operations for the three months ended December 31, 2015
 
$
(58,818
)
 
$
(20,291
)
 
$
72

 
$
(9,554
)
 
$
(88,591
)
 
$
(212
)

44
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 provides a roll-forward in the changes in fair value from September 30, 2014 to December 31, 2014, for all investments and secured borrowings for which the Company determines fair value using unobservable (Level 3) factors:
 
 
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
 
692,135

 
7,739

 
—

 
2,488

 
6,681

 
709,043

 
—

Redemptions/repayments
 
(392,928
)
 
(39,964
)
 
—

 
—

 
(3,756
)
 
(436,648
)
 
(62,352
)
Net accrual of PIK interest income
 
1,835

 
1,463

 
—

 
448

 
—

 
3,746

 
—

Accretion of OID
 
4,299

 
—

 
—

 
—

 
—

 
4,299

 
—

Net change in unearned income
 
353

 
224

 
—

 
—

 
—

 
577

 
—

Net unrealized depreciation on investments
 
(22,614
)
 
(15,542
)
 
(242
)
 
(220
)
 
(235
)
 
(38,853
)
 
—

Net unrealized appreciation on secured borrowings
 
—

 
—

 
—

 
—

 
—

 
—

 
(332
)
Realized gain (loss) on investments
 
(16,964
)
 
—

 
—

 
(1,173
)
 
1,654

 
(16,483
)
 
—

Realized gain on secured borrowings
 
—

 
—

 
—

 
—

 
—

 
—

 
127

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 and liabilities still held at December 31, 2014 and reported within net unrealized appreciation (depreciation) on investments and secured borrowings in the Consolidated Statement of Operations for the three months ended December 31, 2014
 
$
(39,578
)
 
$
(15,542
)
 
$
(242
)
 
$
(1,393
)
 
$
1,419

 
$
(55,336
)
 
$
73



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


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, 2015:
Asset
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Senior secured debt
 
$
1,188,057

 
Bond yield approach
 
Capital structure premium
 
(a)
0.0%
-
2.0%
 
0.8%
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(3.5)%
-
8.5%
 
1.2%
 
 
 
 
 
 
Size premium
 
(a)
0.5%
-
2.0%
 
1.2%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(2.9)%
-
9.8%
 
(0.5)%
 
 
115,502

 
Market and income approach
 
Weighted average cost of capital
 
 
18.0%
-
25.0%
 
19.8%
 
 
 
 
 
 
Company specific risk premium
 
(a)
2.0%
-
15.0%
 
9.7%
 
 
 
 
 
 
Revenue growth rate
 
 
(21.8)%
-
18.1%
 
(10.4)%
 
 
 
 
 
 
EBITDA multiple
 
(b)
0.9x
-
8.9x
 
6.4x
 
 
221,005

 
Transactions precedent approach
 
Transaction price
 
(d)
N/A
-
N/A
 
N/A
 
 
348,165

 
Market quotations
 
Broker quoted price
 
(e)
N/A
-
N/A
 
N/A
Subordinated debt
 
165,996

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk premium
 
(a)
1.0%
-
6.0%
 
2.9%
 
 
 
 
 
 
Size premium
 
(a)
0.5%
-
2.0%
 
1.1%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.4)%
-
0.5%
 
(0.7)%
 
 
9,900

 
Market and income approach
 
Weighted average cost of capital
 
 
13.0%
-
19.0%
 
16.1%
 
 
 
 
 
 
Company specific risk premium
 
(a)
2.0%
-
5.0%
 
3.6%
 
 
 
 
 
 
Revenue growth rate
 
 
(17.1)%
-
3.0%
 
(6.6)%
 
 
 
 
 
 
EBITDA multiple
 
(b)
1.2x
-
9.6x
 
5.6x
 
 
9,640

 
Transactions precedent approach
 
Transaction price
 
(d)
N/A
-
N/A
 
N/A
SLF JV I subordinated debt
 
125,200

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk discount
 
(a)
(1.0)%
-
(1.0)%
 
(1.0)%
 
 
 
 
 
 
Size premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Industry discount
 
(a)
(2.3)%
-
(2.3)%
 
(2.3)%
SLF JV I equity
 
6,648

 
Net asset value
 
Net asset value
 
 
N/A
-
N/A
 
N/A
Preferred & common equity
 
135,646

 
Market and income approach
 
Weighted average cost of capital
 
 
5.0%
-
29.0%
 
14.4%
 
 
 
 
 
 
Company specific risk premium
 
(a)
1.0%
-
15.0%
 
2.4%
 
 
 
 
 
 
Revenue growth rate
 
 
0.1%
-
187.9%
 
5.1%
 
 
 
 
 
 
EBITDA multiple
 
(b)
0.9x
-
23.8x
 
7.5x
Total
 
$
2,325,759

 
 
 
 
 
 
 
 
 
 
 
Liability
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Secured borrowings
 
$
19,158

 
Bond yield approach
 
Tranche specific risk premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Industry discount
 
(a)
(2.9)%
-
(2.9)%
 
(2.9)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
19,158

 
 
 
 
 
 
 
 
 
 
 
__________ 
(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.
(d)
Used when there is an observable transaction or pending event for the investment.

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


(e)
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. Since these prices are non-binding, they may not be indicative of fair value. Each quoted price is evaluated by the Audit Committee of the Company's Board of Directors in conjunction with additional information compiled by the Company, including financial performance, recent business developments and various other factors.
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 September 30, 2015:
Asset
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Senior secured debt
 
$
1,544,898

 
Bond yield approach
 
Capital structure premium
 
(a)
0.0%
-
2.0%
 
0.6%
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(3.5)%
-
8.5%
 
1.9%
 
 
 
 
 
 
Size premium
 
(a)
0.5%
-
2.0%
 
1.1%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(2.2)%
-
7.3%
 
(0.5)%
 
 
55,521

 
Market and income approach
 
Weighted average cost of capital
 
 
20.0%
-
27.0%
 
23.7%
 
 
 
 
 
 
Company specific risk premium
 
(a)
5.0%
-
15.0%
 
9.4%
 
 
 
 
 
 
Revenue growth rate
 
 
(29.3)%
-
30.8%
 
(1.7)%
 
 
292,716

 
Market quotations
 
Broker quoted price
 
(d)
N/A
-
N/A
 
N/A
Subordinated debt
 
222,445

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk premium
 
(a)
0.7%
-
8.2%
 
3.7%
 
 
 
 
 
 
Size premium
 
(a)
1.0%
-
2.0%
 
1.1%
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(2.2)%
-
0.6%
 
(0.4)%
 
 
7,666

 
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
 
 
(12.7)%
-
(12.7)%
 
(12.7)%
 
 
 
 
 
 
EBITDA multiple
 
(b)
11.7x
-
11.7x
 
11.7x
SLF JV I subordinated debt
 
128,917

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Tranche specific risk discount
 
(a)
(1.0)%
-
(1.0)%
 
(1.0)%
 
 
 
 
 
 
Size premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Industry discount
 
(a)
(1.9)%
-
(1.9)%
 
(1.9)%
SLF JV I equity
 
12,205

 
Net asset value
 
Net asset value
 
 
N/A
-
N/A
 
N/A
Preferred & common equity
 
138,127

 
Market and income approach
 
Weighted average cost of capital
 
 
6.0%
-
29.0%
 
14.1%
 
 
 
 
 
 
Company specific risk premium
 
(a)
1.0%
-
15.0%
 
2.4%
 
 
 
 
 
 
Revenue growth rate
 
 
1.8%
-
131.4%
 
21.6%
 
 
 
 
 
 
EBITDA multiple
 
(b)
1.4x
-
29.8x
 
7.9x
Total
 
$
2,402,495

 
 
 
 
 
 
 
 
 
 
 
Liability
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average (c)
Secured borrowings
 
$
21,182

 
Bond yield approach
 
Capital structure premium
 
(a)
0.0%
-
1.0%
 
0.8%
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(3.5)%
-
0.5%
 
(0.3)%
 
 
 
 
 
 
Size premium
 
(a)
2.0%
-
2.0%
 
2.0%
 
 
 
 
 
 
Industry premium
 
(a)
0.6%
-
0.6%
 
0.6%
Total
 
$
21,182

 
 
 
 
 
 
 
 
 
 
 
__________ 
(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.
(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. Since these prices are non-binding, they may not be indicative of fair value. Each quoted price is evaluated by the Audit Committee of the Company's Board of Directors in conjunction with additional information compiled by the Company, including financial performance, recent business developments and various other factors.

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



Under the bond yield approach, the significant unobservable inputs used in the fair value measurement of the Company's investments in debt securities and secured borrowings 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.
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 and EBITDA 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, 2015, 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
 
$
385,295

 
$
385,295

 
$
—

 
$
—

 
$
385,295

SBA debentures payable
 
225,000

 
$
198,299

 
—

 
—

 
198,299

Unsecured convertible notes payable
 
115,000

 
$
114,856

 
—

 
—

 
114,856

Unsecured notes payable
 
410,387

 
$
402,137

 
—

 
153,287

 
248,850

Total
 
$
1,135,682

 
$
1,100,587

 
$
—

 
$
153,287

 
$
947,300

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, 2015 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
 
$
427,295

 
$
427,295

 
$
—

 
$
—

 
$
427,295

SBA debentures payable
 
225,000

 
202,336

 
—

 
—

 
202,336

Unsecured convertible notes payable
 
115,000

 
116,581

 
—

 
—

 
116,581

Unsecured notes payable
 
410,320

 
419,053

 
—

 
160,178

 
258,875

Total
 
$
1,177,615

 
$
1,165,265

 
$
—

 
$
160,178

 
$
1,005,087


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 Global Select Market, respectively. As such, these securities are included in Level 2 of the hierarchy.
 

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


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, 2015
 
September 30, 2015
Cost:
 
 
 
 
 
 
 
 
Senior secured debt
 
$
1,982,131

 
79.68
%
 
$
1,942,019

 
78.54
%
Subordinated debt
 
241,703

 
9.72

 
269,709

 
10.90

Subordinated notes of SLF JV I
 
129,879

 
5.22

 
129,879

 
5.25

LLC equity interests of SLF JV I
 
14,431

 
0.58

 
14,431

 
0.58

Purchased equity
 
90,165

 
3.63

 
89,976

 
3.64

Equity grants
 
4,385

 
0.18

 
4,385

 
0.18

Limited partnership interests
 
24,554

 
0.99

 
22,539

 
0.91

Total
 
$
2,487,248

 
100.00
%
 
$
2,472,938

 
100.00
%
Fair Value:
 
 
 
 
 
 
 
 
Senior secured debt
 
$
1,872,729

 
80.51
%
 
$
1,893,135

 
78.80
%
Subordinated debt
 
185,536

 
7.98

 
230,111

 
9.58

Subordinated notes of SLF JV I
 
125,200

 
5.38

 
128,917

 
5.37

LLC equity interests of SLF JV I
 
6,648

 
0.29

 
12,205

 
0.51

Purchased equity
 
101,128

 
4.35

 
106,130

 
4.42

Equity grants
 
10,166

 
0.44

 
9,855

 
0.41

Limited partnership interests
 
24,352

 
1.05

 
22,142

 
0.91

Total
 
$
2,325,759

 
100.00
%
 
$
2,402,495

 
100.00
%

    
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, 2015
 
September 30, 2015
Cost:
 
 
 
 
 
 
 
 
Northeast U.S.
 
$
754,108

 
30.32
%
 
$
777,847

 
31.45
%
West U.S.
 
482,586

 
19.40

 
412,038

 
16.66

Southwest U.S.
 
459,654

 
18.48

 
480,743

 
19.44

Midwest U.S.
 
361,521

 
14.53

 
329,383

 
13.32

Southeast U.S.
 
304,782

 
12.25

 
357,108

 
14.44

International
 
124,597

 
5.00

 
115,819

 
4.69

Total
 
$
2,487,248

 
99.98
%
 
$
2,472,938

 
100.00
%
 
 
 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
 
 
Northeast U.S.
 
$
658,108

 
28.30
%
 
$
738,237

 
30.73
%
West U.S.
 
472,897

 
20.33

 
412,314

 
17.16

Southwest U.S.
 
438,226

 
18.84

 
461,930

 
19.23

Midwest U.S.
 
323,724

 
13.92

 
304,799

 
12.69

Southeast U.S.
 
308,006

 
13.24

 
366,636

 
15.26

International
 
124,798

 
5.37

 
118,579

 
4.93

Total
 
$
2,325,759

 
100.00
%
 
$
2,402,495

 
100.00
%
 

49
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, 2015 and September 30, 2015 were as follows:
 
 
December 31, 2015
 
September 30, 2015
Cost:
 
 
 
 
 
 
 
 
 Healthcare services
 
$
403,175

 
16.21
%
 
$
513,505

 
20.76
%
 Internet software & services
 
383,142

 
15.40

 
292,769

 
11.84

 Advertising
 
178,561

 
7.18

 
144,633

 
5.85

 Multi-sector holdings
 
159,180

 
6.40

 
157,165

 
6.36

 Healthcare equipment
 
113,940

 
4.58

 
70,738

 
2.86

 Airlines
 
97,337

 
3.91

 
89,578

 
3.62

 Education services
 
91,087

 
3.66

 
109,993

 
4.45

 Integrated telecommunication services
 
86,870

 
3.49

 
87,734

 
3.55

 Diversified support services
 
84,789

 
3.41

 
84,961

 
3.44

 Data processing & outsourced services
 
79,538

 
3.20

 
80,385

 
3.25

 Environmental & facilities services
 
67,419

 
2.71

 
79,431

 
3.21

 Oil & gas equipment services
 
63,402

 
2.55

 
63,561

 
2.57

 Pharmaceuticals
 
61,774

 
2.48

 
61,695

 
2.49

 Application software
 
58,515

 
2.35

 
49,403

 
2.00

 IT consulting & other services
 
51,627

 
2.08

 
51,547

 
2.08

 Specialty stores
 
48,328

 
1.94

 
58,692

 
2.37

 Industrial machinery
 
47,249

 
1.90

 
47,210

 
1.91

 Construction & engineering
 
40,613

 
1.63

 
39,969

 
1.62

 Leisure facilities
 
37,982

 
1.53

 
33,084

 
1.34

 Household products
 
35,402

 
1.42

 
36,405

 
1.47

 Research & consulting services
 
35,383

 
1.42

 
49,525

 
2.00

 Leisure products
 
34,173

 
1.37

 
34,443

 
1.39

 Air freight and logistics
 
30,887

 
1.24

 
27,622

 
1.12

 Consumer electronics
 
25,846

 
1.04

 
26,121

 
1.06

 Home improvement retail
 
24,896

 
1.00

 
26,225

 
1.06

 Apparel, accessories & luxury goods
 
24,108

 
0.97

 
23,844

 
0.96

 Security & alarm services
 
22,364

 
0.90

 
22,332

 
0.90

 Food distributors
 
17,817

 
0.72

 
17,825

 
0.72

 Auto parts & equipment
 
16,500

 
0.66

 
16,500

 
0.67

 Specialized consumer services
 
16,431

 
0.66

 
16,459

 
0.67

 Other diversified financial services
 
15,528

 
0.62

 
15,523

 
0.63

 Food retail
 
10,860

 
0.44

 
10,855

 
0.44

 Thrift & mortgage finance
 
9,684

 
0.39

 
9,684

 
0.39

 Healthcare technology
 
7,890

 
0.32

 
7,886

 
0.32

 Specialty chemicals
 
4,951

 
0.22

 
—

 
—

 Human resources & employment services
 
—

 
—

 
15,636

 
0.63

Total
 
$
2,487,248

 
100.00
%
 
$
2,472,938

 
100.00
%

 

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, 2015
 
September 30, 2015
Fair Value:
 
 
 
 
 
 
 
 
 Healthcare services
 
$
360,001

 
15.48
%
 
$
511,427

 
21.29
%
 Internet software & services
 
352,503

 
15.16

 
276,415

 
11.51

 Advertising
 
176,465

 
7.59

 
145,373

 
6.05

 Multi-sector holdings
 
146,587

 
6.30

 
153,659

 
6.39

 Healthcare equipment
 
113,007

 
4.86

 
70,690

 
2.94

 Airlines
 
97,699

 
4.20

 
92,211

 
3.84

 Integrated telecommunication services
 
85,635

 
3.68

 
87,353

 
3.64

 Diversified support services
 
84,083

 
3.62

 
84,715

 
3.53

 Education services
 
78,173

 
3.36

 
98,014

 
4.08

 Data processing & outsourced services
 
74,663

 
3.21

 
77,213

 
3.21

 Environmental & facilities services
 
67,499

 
2.90

 
79,450

 
3.31

 Pharmaceuticals
 
61,647

 
2.65

 
62,474

 
2.60

 Application software
 
61,387

 
2.64

 
54,090

 
2.25

 IT consulting & other services
 
50,349

 
2.16

 
50,680

 
2.11

 Industrial machinery
 
49,113

 
2.11

 
51,681

 
2.15

 Leisure products
 
47,954

 
2.06

 
45,180

 
1.88

 Specialty stores
 
46,978

 
2.02

 
57,847

 
2.41

 Construction & engineering
 
41,095

 
1.77

 
43,666

 
1.82

 Leisure facilities
 
39,274

 
1.69

 
34,506

 
1.44

 Oil & gas equipment services
 
39,010

 
1.68

 
42,382

 
1.76

 Research & consulting services
 
34,885

 
1.50

 
49,511

 
2.06

 Home improvement retail
 
26,343

 
1.13

 
27,005

 
1.12

 Consumer electronics
 
25,190

 
1.08

 
26,050

 
1.08

 Security & alarm services
 
21,843

 
0.94

 
22,005

 
0.92

 Apparel, accessories & luxury goods
 
20,822

 
0.90

 
22,443

 
0.93

 Auto parts & equipment
 
18,136

 
0.78

 
18,507

 
0.77

 Food distributors
 
17,919

 
0.77

 
17,970

 
0.75

 Specialized consumer services
 
16,233

 
0.70

 
16,525

 
0.69

 Other diversified financial services
 
15,520

 
0.67

 
15,893

 
0.66

 Air freight and logistics
 
13,437

 
0.58

 
10,268

 
0.43

 Food retail
 
10,849

 
0.47

 
10,973

 
0.46

 Thrift & mortgage finance
 
9,613

 
0.41

 
9,604

 
0.40

 Household products
 
9,167

 
0.39

 
12,699

 
0.53

 Healthcare technology
 
7,680

 
0.33

 
7,800

 
0.32

 Specialty chemicals
 
5,000

 
0.21

 
—

 
—

 Human resources & employment services
 
—

 
—

 
16,216

 
0.67

Total
 
$
2,325,759

 
100.00
%
 
$
2,402,495

 
100.00
%
The Company's investments are generally in small and mid-sized companies in a variety of industries. At December 31, 2015 and September 30, 2015, the Company had no single investment that represented greater than 10% 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, 2015 and December 31, 2014 no individual investment produced income that exceeded 10% of total investment income.


51
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 LLC
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. The subordinated notes mature on May 2, 2021. 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). As of December 31, 2015 and September 30, 2015, 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, 2015 and September 30, 2015, SLF JV I had total assets of $360.4 million and $419.0 million, respectively. The Company's investment in SLF JV I consisted of LLC equity interests of $6.6 million and subordinated notes of $125.2 million, at fair value as of December 31, 2015. As of September 30, 2015, the Company's investment consisted of LLC equity interests of $12.2 million and subordinated notes of $128.9 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 32 and 34 "eligible portfolio companies" (as defined in the Section 2(a)(46) of the 1940 Act) as of December 31, 2015 and September 30, 2015, respectively. The portfolio companies in SLF JV I are in industries similar to those in which the Company may invest directly.
As of December 31, 2015, 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 $164.9 million was funded as of December 31, 2015 and September 30, 2015, relating to these commitments, of which $144.3 million was from the Company. As of December 31, 2015 and September 30, 2015, the Company had commitments to fund subordinated notes to SLF JV I of $157.5 million, of which $27.6 million was unfunded. As of December 31, 2015 and September 30, 2015, the Company had commitments to fund LLC equity interests in SLF JV I of $17.5 million, of which $3.1 million was unfunded.
Additionally, SLF JV I has 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, 2015 and September 30, 2015. Borrowings under the Deutsche Bank facility bear interest at a rate equal to the 3-month LIBOR plus 2.25% per annum with no LIBOR floor as of December 31, 2015. Under the Deutsche Bank facility, $151.1 million and $188.6 million was outstanding as of December 31, 2015 and September 30, 2015, respectively.
On July 7, 2015, SLF JV I closed on a $200.0 million credit facility with Credit Suisse AG, Cayman Islands Branch (the "Credit Suisse facility"), bringing SLF JV I’s total debt capacity to $400.0 million as of December 31, 2015. As of December 31, 2015 and September 30, 2015, there were $46.5 million and $53.0 million of borrowings outstanding under the Credit Suisse facility, respectively. The Credit Suisse facility has a maturity date of July 7, 2023 and borrowings under the facility bear interest at a rate equal to LIBOR plus 2.50% per annum with no LIBOR floor.

52
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, 2015, borrowings under the Deutsche Bank facility and the Credit Suisse facility were secured by all of the assets of the respective special purpose financing vehicles of SLF JV I.
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, 2015 and September 30, 2015:

 
 
December 31, 2015
 
September 30, 2015
Senior secured loans (1)
 
$342,407
 
$395,193
Weighted average interest rate on senior secured loans (2)
 
7.87%
 
7.99%
Number of borrowers in SLF JV I
 
32
 
34
Largest loan exposure to a single borrower (1)
 
$28,971
 
$30,000
Total of five largest loan exposures to borrowers (1)
 
$107,583
 
$118,584
__________
(1) At principal amount.
(2) Computed using the annual interest rate on accruing senior secured loans.

SLF JV I Loan Portfolio as of December 31, 2015
Portfolio Company (4)
 
Industry
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
AdVenture Interactive, Corp. (3)
 
Advertising
 
First Lien
 
3/22/2018
 
LIBOR+7.75% (1% floor)
 
$
9,363

 
$
9,328

 
$
9,127

AF Borrower, LLC
 
IT consulting & other services
 
First Lien
 
1/28/2022
 
LIBOR+5.25% (1% floor)
 
8,734

 
8,759

 
8,576

Ameritox Ltd. (3) (5)
 
Healthcare services
 
First Lien
 
6/23/2019
 
LIBOR+7.5% (1% floor)
 
19,625

 
19,310

 
12,101

BeyondTrust Software, Inc. (3)
 
Application software
 
First Lien
 
9/25/2019
 
LIBOR+7% (1% floor)
 
9,925

 
9,839

 
9,769

Compuware Corporation
 
Internet software & services
 
First Lien
 
12/15/2019
 
LIBOR+5.25% (1% floor)
 
3,325

 
3,289

 
3,155

 
 
 
 
First Lien
 
12/15/2021
 
LIBOR+5.25% (1% floor)
 
9,900

 
9,744

 
9,261

Total Compuware Corporation
 
 
 
 
 
 
 
 
 
13,225

 
13,033

 
12,416

CRGT, Inc.
 
IT consulting & other services
 
First Lien
 
12/21/2020
 
LIBOR+6.5% (1% floor)
 
2,567

 
2,561

 
2,554

Digital River, Inc.
 
Internet software & services
 
First Lien
 
2/12/2021
 
LIBOR+6.5% (1% floor)
 
4,461

 
4,507

 
4,417

Dodge Data & Analytics LLC (3)
 
Data processing & outsourced services
 
First Lien
 
10/31/2019
 
LIBOR+8.75% (1% floor)
 
9,898

 
9,962

 
9,617

Edge Fitness, LLC
 
Leisure facilities
 
First Lien
 
12/31/2019
 
LIBOR+7.75% (1% floor)
 
10,600

 
10,603

 
10,417

EOS Fitness Opco Holdings, LLC (3)
 
Leisure facilities
 
First Lien
 
12/30/2019
 
LIBOR+8.75% (0.75% floor)
 
19,800

 
19,444

 
18,878

Garretson Resolution Group, Inc.
 
Diversified support services
 
First Lien
 
5/22/2021
 
LIBOR+6.5% (1% floor)
 
6,107

 
6,078

 
6,030

GTCR Valor Companies, Inc.
 
Advertising
 
First Lien
 
5/30/2021
 
LIBOR+5% (1% floor)
 
9,875

 
9,677

 
9,826

InMotion Entertainment Group, LLC (3)
 
Consumer electronics
 
First Lien
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,750

 
9,776

 
9,322

 
 
 
 
First Lien B
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,750

 
9,606

 
9,416

Total InMotion Entertainment Group, LLC
 
 
 
 
 
 
 
 
 
19,500

 
19,382

 
18,738

Integrated Petroleum Technologies, Inc. (3)
 
Oil & gas equipment services
 
First Lien
 
3/31/2019
 
LIBOR+7.5% (1% floor)
 
9,124

 
9,124

 
7,457

Legalzoom.com, Inc. (3)
 
Specialized consumer services
 
First Lien
 
5/13/2020
 
LIBOR+7% (1% floor)
 
9,925

 
9,705

 
9,709

Lift Brands, Inc. (3)
 
Leisure facilities
 
First Lien
 
12/23/2019
 
LIBOR+7.5% (1% floor)
 
19,427

 
19,391

 
18,872

MedTech Group, Inc.
 
Healthcare equipment
 
First Lien
 
9/7/2016
 
LIBOR+5.25% (1% floor)
 
12,001

 
11,991

 
11,925

Metamorph US 3, LLC (3)
 
Internet software & services
 
First Lien
 
12/1/2020
 
LIBOR+5.5% (1% floor)
 
12,188

 
12,030

 
11,891

Motion Recruitment Partners LLC
 
Human resources & employment services
 
First Lien
 
2/13/2020
 
LIBOR+6% (1% floor)
 
4,656

 
4,563

 
4,617


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


Novetta Solutions, LLC
 
Internet software & services
 
First Lien
 
9/30/2022
 
LIBOR+5% (1% floor)
 
6,500

 
6,437

 
6,348

OmniSYS Acquisition Corporation (3)
 
Diversified support services
 
First Lien
 
11/21/2018
 
LIBOR+7.5% (1% floor)
 
12,755

 
12,764

 
12,496

OnCourse Learning Corporation (3)
 
Education services
 
First Lien
 
2/28/2019
 
LIBOR+7.5% (1% floor)
 
19,687

 
19,663

 
19,687

Refac Optical Group (3)
 
Specialty stores
 
First Lien
 
9/30/2018
 
LIBOR+7.5%
 
9,410

 
9,316

 
9,291

TIBCO Software, Inc.
 
Internet software & services
 
First Lien
 
12/4/2020
 
LIBOR+5.5% (1% floor)
 
4,784

 
4,548

 
4,359

Too Faced Cosmetics, LLC
 
Personal products
 
First Lien
 
7/7/2021
 
LIBOR+5% (1% floor)
 
5,260

 
5,135

 
5,220

TravelClick, Inc. (3)
 
Internet software & services
 
Second Lien
 
11/8/2021
 
LIBOR+7.75% (1% floor)
 
8,460

 
8,460

 
7,952

TrialCard Incorporated
 
Healthcare services
 
First Lien
 
12/31/2019
 
LIBOR+4.5% (1% floor)
 
13,604

 
13,484

 
13,241

TV Borrower US, LLC
 
Integrated telecommunications services
 
First Lien
 
1/8/2021
 
LIBOR+5% (1% floor)
 
9,875

 
9,679

 
9,529

Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
First Lien
 
11/4/2020
 
LIBOR+5% (1% floor)
 
4,900

 
4,900

 
4,631

Vubiquity, Inc.
 
Application software
 
First Lien
 
8/12/2021
 
LIBOR+5.5% (1% floor)
 
2,700

 
2,675

 
2,687

Yeti Acquisition, LLC (3)
 
Leisure products
 
First Lien
 
6/15/2017
 
LIBOR+7% (1.25% floor)
 
20,346

 
20,316

 
20,320

 
 
 
 
First Lien
 
6/15/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
8,625

 
8,629

 
8,587

Total Yeti Acquisition, LLC
 
 
 
 
 
 
 
 
 
28,971

 
28,945

 
28,907

Shoes For Crews, LLC
 
Footwear
 
First Lien
 
10/27/2022
 
LIBOR+5% (1% floor)
 
4,500

 
4,455

 
4,466

 
 
 
 
 
 
 
 
 
 
$
342,407

 
$
339,748

 
$
325,751

__________
(1) Represents the interest rate as of December 31, 2015. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the current determination of fair value as of December 31, 2015 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.
(3) This investment is held by both the Company and SLF JV I at December 31, 2015.
(4) 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.
(5) This investment is on cash non-accrual status as of December 31, 2015.


SLF JV I Loan Portfolio as of September 30, 2015
Portfolio Company (4)
 
Industry
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
AdVenture Interactive, Corp. (3)
 
Advertising
 
First Lien
 
3/22/2018
 
LIBOR+7.75% (1% floor)
 
$
9,722

 
$
9,683

 
$
9,697

AF Borrower, LLC
 
IT consulting & other services
 
First Lien
 
1/28/2022
 
LIBOR+5.25% (1% floor)
 
8,756

 
8,782

 
8,712

Ameritox Ltd. (3)
 
Healthcare services
 
First Lien
 
6/23/2019
 
LIBOR+7.5% (1% floor)
 
19,625

 
19,287

 
17,748

Ansira Partners, Inc.
 
Advertising
 
First Lien
 
5/4/2017
 
LIBOR+5.0% (1.5% floor)
 
7,062

 
7,046

 
7,057

BeyondTrust Software, Inc. (3)
 
Application software
 
First Lien
 
9/25/2019
 
LIBOR+7% (1% floor)
 
9,950

 
9,858

 
9,839

Compuware Corporation
 
Internet software & services
 
First Lien
 
12/15/2019
 
LIBOR+5.25% (1% floor)
 
3,369

 
3,330

 
3,263

 
 
 
 
First Lien
 
12/15/2021
 
LIBOR+5.25% (1% floor)
 
9,925

 
9,762

 
9,590

Total Compuware Corporation
 
 
 
 
 
 
 
 
 
13,294

 
13,092

 
12,853

CRGT, Inc.
 
IT consulting & other services
 
First Lien
 
12/21/2020
 
LIBOR+6.5% (1% floor)
 
2,583

 
2,584

 
2,577

Digicert, Inc. (3)
 
Internet software & services
 
Second Lien
 
6/2/2020
 
LIBOR+8.25% (1% floor)
 
8,750

 
8,686

 
8,750

Digital River, Inc.
 
Internet software & services
 
First Lien
 
2/12/2021
 
LIBOR+6.5% (1% floor)
 
9,937

 
9,985

 
9,938

Dodge Data & Analytics LLC (3)
 
Data processing & outsourced services
 
First Lien
 
10/31/2019
 
LIBOR+8.75% (1% floor)
 
9,972

 
10,040

 
9,921

Edge Fitness, LLC
 
Leisure facilities
 
First Lien
 
12/31/2019
 
LIBOR+7.75% (1% floor)
 
10,600

 
10,603

 
10,596


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


EOS Fitness Opco Holdings, LLC (3)
 
Leisure facilities
 
First Lien
 
12/30/2019
 
LIBOR+8.75% (0.75% floor)
 
19,850

 
19,850

 
19,627

First Choice ER, LLC (3)
 
Healthcare services
 
First Lien
 
10/31/2018
 
LIBOR+7.5% (1% floor)
 
30,000

 
30,082

 
30,295

Garretson Resolution Group, Inc.
 
Diversified support services
 
First Lien
 
5/22/2021
 
LIBOR+6.5% (1% floor)
 
6,145

 
6,145

 
6,099

GTCR Valor Companies, Inc.
 
Advertising
 
First Lien
 
5/30/2021
 
LIBOR+5% (1% floor)
 
9,900

 
9,693

 
9,813

Idera Inc. (3)
 
Internet software & services
 
First Lien
 
11/5/2020
 
LIBOR+5.5% (0.5% floor)
 
9,875

 
9,744

 
9,875

InMotion Entertainment Group, LLC (3)
 
Consumer electronics
 
First Lien
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,875

 
9,903

 
9,662

 
 
 
 
First Lien B
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,875

 
9,718

 
9,769

Total InMotion Entertainment Group, LLC
 
 
 
 
 
 
 
 
 
19,750

 
19,621

 
19,431

Integrated Petroleum Technologies, Inc. (3)
 
Oil & gas equipment services
 
First Lien
 
3/31/2019
 
LIBOR+7.5% (1% floor)
 
9,185

 
9,185

 
8,087

Legalzoom.com, Inc. (3)
 
Specialized consumer services
 
First Lien
 
5/13/2020
 
LIBOR+7% (1% floor)
 
9,950

 
9,717

 
9,883

Lift Brands, Inc. (3)
 
Leisure facilities
 
First Lien
 
12/23/2019
 
LIBOR+7.5% (1% floor)
 
19,554

 
19,517

 
19,218

MedTech Group, Inc.
 
Healthcare equipment
 
First Lien
 
9/7/2016
 
LIBOR+5.25% (1% floor)
 
12,031

 
12,017

 
12,017

Metamorph US 3, LLC (3)
 
Internet software & services
 
First Lien
 
12/1/2020
 
LIBOR+5.5% (1% floor)
 
12,266

 
12,100

 
12,138

Motion Recruitment Partners LLC
 
Human resources & employment services
 
First Lien
 
2/13/2020
 
LIBOR+6% (1% floor)
 
4,781

 
4,682

 
4,730

OmniSYS Acquisition Corporation (3)
 
Diversified support services
 
First Lien
 
11/21/2018
 
LIBOR+7.5% (1% floor)
 
12,843

 
12,852

 
12,935

OnCourse Learning Corporation (3)
 
Education services
 
First Lien
 
2/28/2019
 
LIBOR+7.5% (1% floor)
 
19,812

 
19,787

 
19,649

TIBCO Software, Inc.
 
Internet software & services
 
First Lien
 
12/4/2020
 
LIBOR+5.5% (1% floor)
 
4,796

 
4,548

 
4,760

Too Faced Cosmetics, LLC
 
Personal products
 
First Lien
 
7/7/2021
 
LIBOR+5% (1% floor)
 
5,300

 
5,169

 
5,300

TravelClick, Inc. (3)
 
Internet software & services
 
Second Lien
 
11/8/2021
 
LIBOR+7.75% (1% floor)
 
8,460

 
8,460

 
8,344

TrialCard Incorporated
 
Healthcare services
 
First Lien
 
12/31/2019
 
LIBOR+5% (1% floor)
 
13,604

 
13,476

 
13,417

TV Borrower US, LLC
 
Integrated telecommunications services
 
First Lien
 
1/8/2021
 
LIBOR+5% (1% floor)
 
9,900

 
9,900

 
9,885

Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
First Lien
 
11/4/2020
 
LIBOR+5% (1% floor)
 
4,913

 
4,913

 
4,839

Vubiquity, Inc.
 
Application software
 
First Lien
 
8/12/2021
 
LIBOR+5.5% (1% floor)
 
2,700

 
2,700

 
2,686

World50, Inc. (3)
 
Research & consulting services
 
First Lien
 
3/30/2017
 
LIBOR+8.5% (1% floor)
 
10,155

 
10,033

 
10,019

Yeti Acquisition, LLC (3)
 
Leisure products
 
First Lien
 
6/15/2017
 
LIBOR+7% (1.25% floor)
 
20,547

 
20,511

 
20,420

 
 
 
 
First Lien
 
6/15/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
8,625

 
8,630

 
8,562

Total Yeti Acquisition, LLC
 
 
 
 
 
 
 
 
 
29,172

 
29,141

 
28,982

 
 
 
 
 
 
 
 
 
 
$
395,193

 
$
392,978

 
$
389,717

__________
(1) Represents the interest rate as of September 30, 2015. 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.
(3) This investment was held by both the Company and SLF JV I at September 30, 2015.
(4) 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.
The amortized cost and fair value of the subordinated notes held by the Company was $129.9 million and $125.2 million, respectively, as of December 31, 2015 and $129.9 million and $128.9 million at amortized cost and fair value, respectively, as of September 30, 2015. The subordinated notes bear interest at a rate of LIBOR plus 8.0% per annum and the Company earned interest income of $2.7 million and $1.2 million on its investments in these notes for the three months ended December 31, 2015 and

55
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, respectively. The cost and fair value of the LLC equity interests held by the Company was $14.4 million and $6.6 million, respectively, as of December 31, 2015, and $14.4 million and $12.2 million, respectively, as of September 30, 2015. The Company earned dividend income of $1.8 million and $1.1 million for the three months ended December 31, 2015 and December 31, 2014, respectively, with respect to its LLC equity interests. The LLC equity interests 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, 2015 and September 30, 2015 and for the three months ended December 31, 2015 and December 31, 2014:
 
 
December 31, 2015
 
September 30, 2015
Selected Balance Sheet Information:
 
 
 
 
Investments in loans at fair value (cost December 31, 2015: $339,748; cost September 30, 2015: $392,978)
 
$
325,751

 
$
389,717

Receivables from secured financing arrangements at fair value (cost December 31, 2015: $10,019; cost September 30, 2015: $10,021)
 
9,530

 
9,723

Cash and cash equivalents
 
13,438

 
7,354

Restricted cash
 
6,696

 
6,126

Other assets
 
4,967

 
6,033

Total assets
 
$
360,382

 
$
418,953

 
 
 
 
 
Senior credit facilities payable
 
$
197,686

 
$
241,572

Payables from unsettled transactions
 
4,455

 
7,745

Subordinated notes payable at fair value (proceeds December 31, 2015: $148,433 and September 30, 2015: $148,433)
 
143,086

 
147,334

Other liabilities
 
7,546

 
8,361

Total liabilities
 
$
352,773

 
$
405,012

Members' equity
 
7,609

 
13,941

Total liabilities and members' equity
 
$
360,382

 
$
418,953


 
 
Three months ended December 31, 2015
 
Three months ended December 31, 2014
Selected Statements of Operations Information:
 
 
 
 
Interest income
 
$
7,728

 
$
3,709

Other income
 
345

 
400

Total investment income
 
8,073

 
4,109

Interest expense
 
4,908

 
2,413

Other expenses
 
131

 
26

Total expenses (1)
 
5,039

 
2,439

Net unrealized depreciation
 
(6,892
)
 
(2,267
)
Net realized loss
 
—

 
(205
)
Net loss
 
$
(3,858
)
 
$
(802
)
 __________
(1) There are no management fees or incentive fees charged at SLF JV I.
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, 2015, the Company sold $9.4 million of senior secured debt investments at fair value to SLF JV I in exchange for $9.3 million cash consideration. The Company recognized a $0.1 million realized loss on these transactions.
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

56
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 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, amendment, structuring and prepayment fees, which are classified as fee income and recognized as they are earned. The ending unearned fee income balance as of December 31, 2015 and September 30, 2015 was $1.7 million.
As of December 31, 2015, the Company had structured $2.9 million in aggregate exit fees across four portfolio investments upon the future exit of those investments. 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.
For the three months ended December 31, 2015, the Company recorded total fee income of $8.8 million, $2.0 million of which was recurring in nature. For the three months ended December 31, 2014, the Company recorded total fee income of $4.6 million, $2.7 million of which was recurring in nature.

Note 5. Share Data and Distributions
Earnings per Share
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, 2015 and December 31, 2014:
 
 
Three months ended
December 31, 2015
 
Three months ended
December 31, 2014
(revised)
Earnings per common share — basic:
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(62,886
)
 
$
(28,470
)
Weighted average common shares outstanding — basic
 
150,262,924

 
153,340,371

Loss per common share — basic and diluted
 
$
(0.42
)
 
$
(0.19
)
Loss per common share — diluted:
 
 
 
 
Net decrease in net assets resulting from operations, before adjustments
 
$
(62,886
)
 
$
(28,470
)
Adjustments for interest on convertible notes, and related base management fees and incentive fees impact
 
1,367

 
1,364

Net decrease in net assets resulting from operations, as adjusted
 
$
(61,519
)
 
$
(27,106
)
Weighted average common shares outstanding — basic
 
150,262,924

 
153,340,371

Adjustments for dilutive effect of convertible notes
 
7,790,273

 
7,790,273

Weighted average common shares outstanding — diluted
 
158,053,197

 
161,130,644

Loss per common share — diluted (1)
 
$
(0.42
)
 
$
(0.19
)
__________
(1) Items relating to the Convertible Notes outstanding that are anti-dilutive to earnings per share have been excluded from the diluted earnings per share calculation.

Distributions
Distributions to common stockholders are recorded on the ex-dividend date. The Company is required to distribute dividends each taxable year to its stockholders of an amount equal to at least 90% of its investment company taxable income in order to be eligible for tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a distribution all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors and is based on management’s estimate of the Company’s annual taxable income.

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


The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of any distributions the Company declares in cash on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Company’s Board of Directors authorizes, and the Company declares, a cash dividend, then the Company’s stockholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. If the Company’s shares are trading at a premium to net asset value, the Company typically issues new shares to implement the dividend reinvestment plan. If the Company’s shares are trading at a discount to net asset value, the Company typically purchases shares in the open market in connection with the Company’s obligations under the dividend reinvestment plan.
For income tax purposes, the Company estimates that its distributions for the calendar year will be composed primarily of ordinary income, and will be reflected as such on the Form 1099-DIV for the calendar year. To the extent that the Company’s taxable earnings fall below the amount of dividends declared, however, a portion of the total amount of the Company’s dividends for the fiscal year may be deemed a return of capital for tax purposes to the Company’s stockholders.
The following table reflects the distributions per share that the Company has paid, including shares issued under the DRIP, on its common stock during the three months ended December 31, 2015 and December 31, 2014:
Date Declared
 
Record Date
 
Payment Date
 
Amount
per Share
 
Cash
Distribution
 
DRIP Shares
Issued
 
 
 
DRIP Shares
Value
August 4, 2015
 
October 15, 2015
 
October 30, 2015
 
$
0.06

 
$ 8.4 million
 
106,185

 
(1)
 
$ 0.6 million
August 4, 2015
 
November 16, 2015
 
November 30, 2015
 
0.06

 
8.4 million
 
91,335

 
(1)
 
0.6 million
November 30, 2015
 
December 15, 2015
 
December 30, 2015
 
0.06

 
8.4 million
 
99,673

 
(1)
 
0.6 million
Total for the three months ended December 31, 2015
 
$
0.18

 
$ 25.2 million
 
297,193

 
 
 
$ 1.8 million
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date Declared
 
Record Date
 
Payment Date
 
Amount
per Share
 
Cash
Distribution
 
DRIP Shares
Issued
 
 
 
DRIP Shares
Value
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
Total for the three months ended December 31, 2014
 
$
0.2751

 
$ 40.1 million
 
243,014

 
 
 
$ 2.0 million
 __________
(1) Shares were purchased on the open market and distributed.
Common Stock Offering
There were no common stock offerings during the three months ended December 31, 2015 and December 31, 2014.
Stock Repurchase Program
On November 30, 2015, the Company’s Board of Directors approved a common stock repurchase program authorizing the Company to repurchase up to $100 million in the aggregate of its outstanding common stock through November 30, 2016. Common stock repurchases under the program are to be made in the open market, privately negotiated transactions or otherwise at times, and in such amounts, as management deems appropriate subject to various factors, including company performance, capital availability, general economic and market conditions, regulatory requirements and other corporate considerations, as determined by management. The repurchase program may be suspended or discontinued at any time. The Company expects to finance any stock repurchases with existing cash balances or by incurring leverage. During the three months ended December 31, 2015 and December 31, 2014, the Company did not repurchase any shares of its common stock.

Note 6. Borrowings
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.

58
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, 2015, the ING facility permitted up to $710 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 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 Holdings, ING Capital LLC, as collateral agent, and the Company. Fund of Funds and Holdings 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, or Funding II, as defined below, 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 portfolio companies' 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. As of December 31, 2015, the Company was 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, 2015, the Company had $341.5 million of borrowings outstanding under the ING facility, which had a fair value of $341.5 million. The Company's borrowings under the ING facility bore interest at a weighted average interest rate of 2.636% for the year ended December 31, 2015. For the three months ended December 31, 2015 and December 31, 2014, the Company recorded interest expense of $3.3 million and $2.9 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 (as subsequently amended, the "Sumitomo Agreement"), as amended from time to time, 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.
As of December 31, 2015, 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 either (i) LIBOR (1-month) plus 2.00% per annum, with no LIBOR floor, if the borrowings under the Sumitomo facility are greater than 35% of the aggregate available borrowings under the Sumitomo facility or (ii) LIBOR (1-month) plus 2.25% per annum, if the borrowings under the Sumitomo Facility are less than or equal to 35% of the aggregate available borrowings under the Sumitomo facility. The period during which the Company may make and reinvest borrowings under the facility will expire on September 16, 2017, and the maturity date of the facility is September 16, 2021.
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.
  

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


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 the Company's portfolio companies' 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. As of December 31, 2015, the Company was in compliance with all financial covenants under the Sumitomo facility.
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, 2015, the Company had $43.8 million of borrowings outstanding under the Sumitomo facility, which had a fair value of $43.8 million. The Company's borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.273% for the year ended December 31, 2015. For the three months ended December 31, 2015 and December 31, 2014, the Company recorded interest expense of $0.4 million and $0.5 million, respectively, related to the Sumitomo facility.

SBIC Subsidiaries
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 ("SBA") to operate as a small business investment company "(SBIC") under Section 301(c) of the Small Business Investment Act of 1958, as amended. On May 15, 2012, the Company's consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. ("FSMP V," and together with FSMP IV, the "SBIC Subsidiaries"), 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 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 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 $350 million of debentures when they have at least $175 million in regulatory capital.
As of December 31, 2015, FSMP IV had $75.0 million in regulatory capital and $150.0 million in SBA-guaranteed debentures outstanding, which had a fair value of $135.3 million, as compared to $137.4 million as of September 30, 2015. 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, 2015, FSMP V had $37.5 million in regulatory capital and $75.0 million in SBA-guaranteed debentures outstanding, which had a fair value of $63.0 million, as compared to $65.0 million as of September 30, 2015. These debentures bear interest at a weighted average interest rate of 2.835% (excluding the SBA annual charge), as follows:

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


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, 2015, the $225.0 million of SBA-guaranteed debentures held by the SBIC Subsidiaries carry a weighted average interest rate of 3.323% (excluding the SBA annual charge).
For the three months ended December 31, 2015 and December 31, 2014, the Company recorded aggregate interest expense, including amortization of upfront fees, of $2.3 million and $2.4 million, respectively, related to the SBA-guaranteed debentures of the 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 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 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 $175 million more than it would otherwise be able to under the 1940 Act absent the receipt of this exemptive relief.
As of December 31, 2015, 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.
See Notes 13 through 15 for discussion of additional debt obligations of the Company.

Note 7. Interest and Dividend Income
Interest income, adjusted for accretion of OID is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company generally 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. Distributions of income from portfolio companies are recorded as dividend income on the ex-dividend date.
PIK interest on certain of the Company's debt investments, 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

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


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, 2015 and December 31, 2014 was as follows:
 
 
Three months ended
December 31, 2015
 
Three months ended
December 31, 2014
PIK balance at beginning of period
 
$
50,678

 
$
39,686

Gross PIK interest accrued
 
5,823

 
7,252

PIK income reserves (1)
 
(2,529
)
 
(3,239
)
PIK interest received in cash
 
(577
)
 
(658
)
PIK balance at end of period
 
$
53,395

 
$
43,041

 ___________________
(1)
PIK income is generally reserved for when a loan is placed on PIK non-accrual status.
As of December 31, 2015, there were five investments on which the Company had stopped accruing cash and/or PIK interest or OID income. As of September 30, 2015, there were four investments on which the Company had stopped accruing cash and/or PIK interest or OID income. As of December 31, 2014, there were four investments on which the Company had stopped accruing cash and/or PIK interest or OID income.
The percentages of the Company's debt investments at cost and fair value by accrual status as of December 31, 2015, September 30, 2015 and December 31, 2014 were as follows: 
 
 
December 31, 2015
 
September 30, 2015
 
December 31, 2014
 
 
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
 
$
2,136,516

 
90.79
%
 
$
2,083,424

 
95.42
%
 
$
2,226,334

 
95.08
%
 
$
2,206,418

 
97.97
%
 
$
2,523,714

 
95.97
%
 
$
2,505,354

 
97.67
%
PIK non-accrual
 
66,579

 
2.83

 
17,404

 
0.80

 
66,579

 
2.84

 
28,145

 
1.25

 
105,878

 
4.03

 
59,883

 
2.33

Cash non-accrual(1)
 
150,194

 
6.38

 
82,637

 
3.78

 
48,694

 
2.08

 
17,600

 
0.78

 
—

 
—

 
—

 
—

Total
 
$
2,353,289

 
100.00
%
 
$
2,183,465

 
100.00
%
 
$
2,341,607

 
100.00
%
 
$
2,252,163

 
100.00
%
 
$
2,629,592

 
100.00
%
 
$
2,565,237

 
100.00
%
 ___________________
(1)
PIK non-accrual status is inclusive of other noncash income, where applicable. Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.



62
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The non-accrual status of the Company's portfolio investments as of December 31, 2015, September 30, 2015 and December 31, 2014 was as follows: 
 
  
December 31, 2015
  
September 30, 2015
  
December 31, 2014
TransTrade Operators, Inc.
  
—
  
—
  
PIK non-accrual (1)
Phoenix Brands Merger Sub LLC - subordinated term loan
 
PIK non-accrual (1)
 
PIK non-accrual (1)
 
PIK non-accrual (1)
CCCG, LLC
 
Cash non-accrual (1)
 
Cash non-accrual (1)
 
PIK non-accrual (1)
JTC Education, Inc. - subordinated term loan
 
Cash non-accrual (1)
 
Cash non-accrual (1)
 
PIK non-accrual (1)
Answers Corporation - second lien term loan
 
PIK non-accrual (1)
 
PIK non-accrual (1)
 
—
Ameritox Ltd.
 
Cash non-accrual (1)
 
—
 
—
  __________________
(1)
PIK non-accrual status is inclusive of other noncash income, where applicable. 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, 2015 and December 31, 2014 are presented in the following table. Income non-accrual amounts may include amounts for investments that were no longer held at the end of the period.
 
 
 
Three months ended
December 31, 2015 (1)
 
Three months ended
December 31, 2014 (1)
Cash interest income
 
$
3,670

 
$
—

PIK interest income
 
2,528

 
3,239

OID income
 
6,960

 
583

Total
 
$
13,158

 
$
3,822

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

 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, 2015, the Company had net capital loss carryforwards of $154.7 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 $142.9 million will not expire, of which $5.6 million are available to offset future short-term capital gains and $137.3 million are available to offset future long-term capital gains.
Listed below is a reconciliation of "net increase (decrease) in net assets resulting from operations" to taxable income for the three months ended December 31, 2015.
Net decrease in net assets resulting from operations
 
$
(62,886
)
Net unrealized depreciation on investments and secured borrowings
 
90,835

Book/tax difference due to loan fees
 
(2,123
)
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
 
10,951

Book/tax difference due to capital losses not recognized
 
888

Other book-tax differences
 
(1,849
)
Taxable/Distributable Income(1)
 
$
35,365

__________ 

63
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


(1) The Company's taxable income for the three months ended December 31, 2015 is an estimate and will not be finally determined until the Company files its tax return for the Company's anticipated fiscal and taxable year ending September 30, 2016. Therefore, the final taxable income may be different than the estimate.
As of September 30, 2015, the components of accumulated undistributed income on a tax basis were as follows:
Undistributed ordinary income, net
$
462

Net realized capital losses
(154,653
)
Unrealized gains (losses), net
(69,838
)
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 $0.3 million. However, this amount has been fully offset by a valuation allowance, since it is more-likely-than-not that these deferred tax assets will not be realized.
The Company is permitted to carry forward any net capital losses, if any, incurred in taxable years beginning with the Company's tax year ended September 30, 2011 for an unlimited period. However, any losses incurred during such taxable years will be required to be utilized prior to the losses incurred in taxable years ended prior to December 23, 2010, which are subject to an expiration date. As a result of the ordering rule, capital loss carryforwards may be more likely to expire unused than under previous tax law.
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 2013 and 2014 and does not expect to incur a U.S. federal excise tax for calendar year 2015.

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, 2015, the Company recorded investment realization events, including the following:
•
In October 2015, the Company received a cash payment of $23.3 million from Affordable Care, 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 October 2015, the Company received a cash payment of $15.1 million from CoAdvantage Corporation 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. The Company also received an additional $1.3 million in connection with the sale of its equity investment, realizing a gain of $0.7 million;
•
In October 2015, the Company received a cash payment of $119.0 million from First Choice ER, 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 October 2015, the Company received a cash payment of $33.3 million from DigiCert, 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;

64
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


•
In October 2015, the Company received a cash payment of $7.4 million from Idera, 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 2015, the Company received a cash payment of $13.9 million from EducationDynamics, 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 2015, the Company received a cash payment of $14.2 million from World 50, 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; and
•
During the three months ended December 31, 2015, the Company received payments of $96.5 million primarily in connection with syndications of debt investments to other investors and sales of debt investments in the open market and recorded an aggregate net realized gain of $0.7 million on these transactions.
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

65
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 and sales of debt investments in the open market and recorded a net realized gain of $1.5 million on these transactions.
During the three months ended December 31, 2015 and December 31, 2014, the Company recorded net unrealized depreciation on investments and secured borrowings of $90.8 million and $38.5 million, respectively. For the three months ended December 31, 2015, the Company's net unrealized depreciation consisted of $79.0 million of net unrealized depreciation on debt investments, $9.7 million of net unrealized depreciation on equity investments and $2.3 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $0.2 million of net unrealized depreciation on secured borrowings.
For the three months ended December 31, 2014, the Company’s net unrealized depreciation consisted of $49.0 million of net unrealized depreciation on debt investments and $2.9 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) and $0.3 million of net unrealized depreciation on secured borrowings.

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, subject to annual renewal, 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
As of December 31, 2015, the base management fee was 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, 2015 and December 31, 2014, the Investment Adviser voluntarily waived a portion of the base management fee which resulted in waivers of $0.1 million for each period.
On July 14, 2015, the Company announced that its investment adviser voluntarily agreed to a revised base management fee arrangement (the “Revised Management Fee”) for the period commencing on July 1, 2015 and remaining in effect until January 1, 2017 (the “Waiver Period”).
The Revised Management Fee is intended to provide for a reduction in the base management fee payable by the Company to Fifth Street Management during the Waiver Period.  Neither the prior waiver of base management fees nor the Revised Management Fee in any way implies that Fifth Street Management will agree to waive management or incentive fees in any future period. The Revised Management Fee will be calculated quarterly and will be equal to the Company’s gross assets, including assets acquired with borrowed funds, but excluding any cash and cash equivalents, multiplied by 0.25 multiplied by the sum of (x) and (y), expressed as a percentage, where (x) is equal to 2% multiplied by the Baseline NAV Percentage, and (y) is equal to 1% multiplied by the Incremental NAV Percentage. The “Baseline NAV Percentage” is the percentage derived by dividing the Company’s net asset value as of March 31, 2015 (i.e., $1,407,774,000) (the “Baseline NAV”), by the net asset value of the Company at the beginning of the fiscal quarter for which the fee is being calculated (the “New NAV”). The “Incremental NAV Percentage” is the percentage derived by dividing the New NAV in excess of the Baseline NAV by the New NAV.
The Revised Management Fee modifies the base management fee payable to Fifth Street Management pursuant to the Company’s investment advisory agreement with Fifth Street Management and results in a blended annual base management fee rate that will not be less than 1%, or greater than 2%.  The initial computation of the Revised Management Fee will occur at the end of the quarter following the quarter in which the Company issues or sells shares of its common stock, including new shares issued as dividends or pursuant to the Company’s dividend reinvestment plan, but excluding non-ordinary course transactions as outlined below.  Prior to that time, the annual base management fee rate will remain at 2%.  Moreover, if any recalculation of the base management fee rate would

66
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


otherwise result in an increase of the blended rate used, the blended rate in effect immediately prior to such recalculation would remain in effect until such time, if any, as a recalculation following an equity issuance would result in a lower fee rate.
For the three months ended December 31, 2015 and December 31, 2014, base management fees (net of waivers) were $11.7 million and $14.0 million, respectively.
See Note 17 to the Consolidated Financial Statements for a description of certain changes to the base management fee effective as of January 1, 2016.
Incentive Fee
The incentive fee portion of the investment advisory agreement has two parts. The first part ("Part I incentive fee" or "income 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 OID, 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 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
The second part of the incentive fee ("Part II Incentive Fee" or "capital gain 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 gain incentive fee that would be payable after giving effect to the net unrealized capital appreciation. It should be noted that a fee so calculated and accrued would not be payable under the investment advisory agreement, and may never be paid based upon the computation of capital gain 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 gain incentive fees due to the accumulated realized and unrealized losses in the portfolio.
For the three months ended December 31, 2015 and December 31, 2014, incentive fees were $3.7 million and $6.5 million, respectively.
At December 31, 2015 and September 30, 2015, the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $3.5 million and $16.5 million, respectively, reflecting the unpaid portion of the base management fee and Part I incentive fee payable to the Investment Adviser.

67
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 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 Investment Adviser. In this regard, FSAM has indicated that it intends to seek indemnification under the investment advisory agreement with respect to any losses and expenses it may incur in connection with active lawsuits (see Note 16). To date, no amounts have been recorded in the consolidated financial statements related to these potential claims.
Administration Agreement
On January 1, 2015, the Company entered into an administration agreement with its administrator, FSC CT, under substantially similar terms as its prior administration agreement with FSC CT, Inc. Under the administration agreement with FSC CT, administrative services are provided to the Company, including providing the Company with 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, 2015, the Company accrued administrative expenses of $1.5 million, including $0.9 million of general and administrative expenses, which are due to FSC CT. At December 31, 2015, $3.3 million was included in Due to FSC CT in the Consolidated Statement of Assets and Liabilities. 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.


68
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, 2015
 
Three months ended
December 31, 2014
(revised)
Net asset value at beginning of period
 
$9.00
 
$9.64
Net investment income (4)
 
0.18
 
0.17
Net unrealized appreciation (depreciation) on investments and secured borrowings (4)
 
(0.60)
 
(0.25)
Net realized gain (loss) on investments, interest rate swap and secured borrowings (4)
 
0.01
 
(0.11)
Distributions to stockholders (4)
 
(0.18)
 
(0.28)
Net issuance/repurchase of common stock (4)
 
—
 
0.01
Net asset value at end of period
 
$8.41
 
$9.18
Per share market value at beginning of period
 
$6.17
 
$9.18
Per share market value at end of period
 
$6.38
 
$8.01
Total return (1)
 
6.43%
 
(9.88)%
Common shares outstanding at beginning of period
 
150,262,924
 
153,340,371
Common shares outstanding at end of period
 
150,262,924
 
153,340,371
Net assets at beginning of period
 
$1,353,094
 
$1,478,476
Net assets at end of period
 
$1,263,113
 
$1,407,822
Average net assets (2)
 
$1,312,513
 
$1,449,721
Ratio of net investment income to average net assets (5)
 
8.04%
 
7.23%
Ratio of total expenses to average net assets (excluding base management fee waiver) (5)
 
11.68%
 
10.68%
Base management fee waiver effect
 
(0.03)%
 
(0.03)%
Ratio of net expenses to average net assets (5)
 
11.65%
 
10.65%
Ratio of portfolio turnover to average investments at fair value
 
9.59%
 
4.90%
Weighted average outstanding debt (3)
 
$1,196,030
 
$1,182,007
Average debt per share (4)
 
$7.96
 
$7.71
 __________
(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 (the "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

69
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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 (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, 2015 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, as amended (the "Exchange Act"). These covenants are subject to limitations and exceptions that are described in the Indenture.
For the three months ended December 31, 2015 and December 31, 2014, 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, 2015.
Any net gain recognized in such a repurchase transaction would be included in the amount that must be distributed to the Company's stockholders in order for it to maintain its RIC status and would be classified as a component of net investment income in the Consolidated Statements of Operations. Such net gains would be 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. 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 (each as defined below) at a discount will be treated in a similar manner.
As of December 31, 2015, there were $115.0 million Convertible Notes outstanding, which had a fair value of $114.9 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 OID of $1.4 million, underwriting commissions and discounts of $3.7 million and offering costs of $0.5 million.  The OID 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 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

70
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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. 
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 Exchange Act. 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 were issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. During the three months ended December 31, 2015, the Company did not repurchase any of the 2019 Notes in the open market.
For the three months ended December 31, 2015 and December 31, 2014, the Company recorded interest expense of $3.3 million and $3.5 million, respectively, related to the 2019 Notes.
As of December 31, 2015, there were $249.1 million 2019 Notes outstanding, which had a fair value of $248.9 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 note.
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 Exchange Act. 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 three months ended December 31, 2015, the Company did not repurchase any of the 2024 Notes in the open market.
For the three months ended December 31, 2015 and December 31, 2014, the Company recorded interest expense of $1.2 million and $1.2 million, respectively, related to the 2024 Notes.
As of December 31, 2015, there were $75.0 million 2024 Notes outstanding, which had a fair value of $71.3 million.

71
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


2028 Notes
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 note.
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 Exchange Act. 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 three months ended December 31, 2015 the Company did not repurchase any of the 2028 Notes in the open market.
For the three months ended December 31, 2015 and December 31, 2014, the Company recorded interest expense of $1.4 million and $1.4 million, respectively, related to the 2028 Notes.
As of December 31, 2015, there were $86.3 million 2028 Notes outstanding, which had a fair value of $82.0 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 Statements 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, 2015, secured borrowings at fair value totaled $19.2 million and the fair value of the investment that is associated with these secured borrowings was $52.4 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, 2015 and December 31, 2014, there were $1.8 million and $62.1 million of repayments on secured borrowings, respectively.
For the three months ended December 31, 2015 and December 31, 2014, the Company recorded interest expense of $0.4 million and $0.5 million, respectively, related to the secured borrowings.
As of December 31, 2015, there were $20.0 million of secured borrowings outstanding, which had a fair value of $19.2 million.


72
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Note 16. Commitments and Contingencies
Shareholder Actions and Legal Proceedings
On November 6, 2015, RiverNorth Institutional Partners, L.P. (“RiverNorth”) delivered a letter to the Company (i) nominating a slate of three individuals for election to the Company's Board of Directors and (ii) submitting a business proposal for the Company's shareholders to vote on terminating the investment advisory agreement with Fifth Street Management LLC (the “Investment Advisory Agreement”), in each case, at the Company's 2016 annual stockholders’ meeting. RiverNorth has filed a Schedule 13D with the Securities and Exchange Commission disclosing that RiverNorth and certain of its affiliates beneficially own approximately 8.5% of the Company's common stock (of which approximately 1.6% is via cash-settled total return swaps) and outlined in a letter certain changes that it seeks the Company to implement, including: (a) the reduction of the Investment Advisory Agreement’s base management and incentive fees, (b) the application of a total return high watermark to the Investment Advisory Agreement’s net investment income incentive fee calculation and (c) a significant increase to the size of the Company's common stock buyback program.
The Company has been named as a defendant in three putative securities class-action lawsuits. The first lawsuit was filed on October 1, 2015, in the United States District Court for the Southern District of New York and is captioned Howard Randall, Trustee, Howard & Gale Randall Trust FBO Kimberly Randall Irrevocable Trust UA Feb 15, 2000 v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-07759. The second lawsuit was filed on October 14, 2015, in the United States District Court for the District of Connecticut and is captioned Lynn Waters-Cottrell v. Fifth Street Finance Corp., et al., Case No. 3:15-cv-01488. The third lawsuit was filed on November 12, 2015, in the United States District Court for the Southern District of New York and is captioned Robert J. Hurwitz v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-08908. The defendants in all three cases are Leonard M. Tannenbaum, Bernard D. Berman, Alexander C. Frank, Todd G. Owens, Ivelin M. Dimitrov, and Richard Petrocelli (collectively, the “Individual Defendants”), the Company and FSAM.
The lawsuits allege violations of Sections 10(b) and 20(a) of the Exchange Act on behalf of a putative class of investors who purchased common stock of the Company between July 7, 2014, and February 6, 2015, inclusive.  The lawsuits allege in general terms that defendants engaged in a purportedly fraudulent scheme designed to artificially inflate the true value of the Company’s investment portfolio and investment income in order to increase FSAM’s revenue, which FSAM received as the asset manager and investment adviser of the Company.  For example, the lawsuits allege that the Company improperly delayed the write-down of five of its investments until the fiscal quarter ending in December 31, 2014, after FSAM conducted its initial public offering (“IPO”) in October 2014, when the Company should have taken the write-down before FSAM’s IPO.  The plaintiffs seek compensatory damages and attorneys’ fees and costs, among other relief, but have not specified the amount of damages being sought in any of the actions.
On December 4, 2015, a putative stockholder derivative action captioned Solomon Chau v. Leonard M. Tannenbaum, et al., Case No. 3:15-cv-01795, was filed on behalf of the Company in the United States District Court for the District of Connecticut. The complaint names certain current and past officers and/or directors, consisting of Leonard Tannenbaum, Bernard D. Berman, Todd G. Owens, Ivelin M. Dimitrov, Alexander C. Frank, Steven M. Noreika, David H. Harrison, Brian S. Dunn, Douglas F. Ray, Richard P. Dutkiewicz, Byron J. Haney, James Castro-Blanco, Richard A. Petrocelli and Frank C. Meyer, and FSAM as defendants and the Company as the nominal defendant (collectively, the “Derivative Action Defendants”). On December 31, 2015, a second putative stockholder derivative action captioned Scott Avera v. Leonard M. Tannenbaum, et al., Case No. 3-15:cv-01889 was filed on behalf of the Company in the United States District Court for the District of Connecticut. The complaint names certain current and past officers and/or directors, consisting of the Derivative Action Defendants. The underlying allegations in each of these derivative actions are related to the allegations in the securities class actions against the Company and others described in the preceding paragraphs. The complaints allege that the Company’s board of directors approved unfair advisory and management agreements with entities related to FSAM and that certain defendants engaged in allegedly improper conduct to make FSAM appear more attractive to potential investors before its initial public offering. The plaintiffs seek cancellation or amendment of the investment advisory agreement with the Investment Adviser, actions to reform and improve the Company’s corporate governance and certain restitution, among other relief, but have not specified the amount of damages being sought in any of the actions.
On January 27, 2016, two stockholder derivative actions were filed on behalf of the Company in the Superior Court Judicial District of Stamford/Norwalk at Stamford, The first complaint is captioned John Durgerian v. Leonard M. Tannenbaum, et al. and names certain current and past officers and/or directors, consisting of Leonard Tannenbaum, Bernard D. Berman, Alexander C. Frank, Todd G. Owens, Ivelin M. Dimitrov, Richard A. Petrocelli, James Castro-Blanco, Brian S. Dunn, Richard P. Dutkiewicz, Byron J. Haney, Jeffrey R. Kay, Douglas F. Ray, Sandeep K. Khorana, Steven M. Noreika, David H. Harrison and Frank C. Meyer, and FSAM as defendants and the Company as the nominal defendant (collectively, the “Connecticut Action Defendants”). The second complaint is captioned Kamile Dahne v. Leonard M. Tannenbaum, et al., and names certain current and past officers and/or directors, consisting of the Connecticut Action Defendants. The underlying allegations in each of these derivative actions are related to the allegations in the securities class actions against the Company and others described in Note 16. The complaints allege that the Company’s board of directors approved unfair advisory and management agreements with entities related to FSAM and that certain defendants engaged in allegedly improper conduct to make FSAM appear more attractive to potential investors before its initial public offering. The plaintiffs

73
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


seek actions to reform and improve the Company’s corporate governance and certain restitution, among other relief, but have not specified the amount of damages being sought in any of the actions.
On January 29, 2016, a putative stockholder class action lawsuit captioned James Craig v. Bernard D. Berman, et. al. was filed in the Court of Chancery of the State of Delaware. The complaint names certain current officers and/or directors, consisting of Bernard D. Berman, James Castro-Blanco, Ivelin M. Dimitrov, Brian S. Dunn, Richard P. Dutkiewicz, Byron J. Haney, Sandeep K. Khorana, Todd G. Owens and Douglas F. Ray, the Investment Adviser, FSAM, the Company and Fifth Street Holdings L.P. as defendants. The complaint alleges that the defendants breached their fiduciary duties to the Company’s stockholders by, among other things, perpetuating and failing to terminate the Company’s investment advisory agreement with Fifth Street Management LLC; seeking to have existing board members and management remain in place; and including certain disclosures in the Company’s proxy materials, including, among other things, the effect that termination of the investment advisory agreement would have on the Company’s debt obligations, business and operations. The complaint seeks, among other things, an injunction preventing the Company and its board of directors from soliciting proxies for the 2016 annual meeting until additional disclosures are made; a declaration that the defendants have breached their fiduciary duties by refusing to terminate the investment advisory agreement and by acting to have the Company’s board of directors and Fifth Street Management LLC remain in place; a declaration that any shares repurchased by the Company after the record date of the 2016 annual meeting will not be considered outstanding shares for purposes of the stockholder approvals sought at the annual meeting; and awarding plaintiff costs and disbursements.
The Company intends to defend itself vigorously against the allegations raised in these lawsuits.  Neither the outcome of the lawsuits nor an estimate of any reasonable possible losses is determinable at this time. No provisions for any losses related to the lawsuits have been recorded in the accompanying consolidated financial statements as of December 31, 2015. An adverse judgment for monetary damages could have a material adverse effect on the operations and liquidity of the Company. FSAM has indicated that it intends to seek indemnification under the investment advisory agreement with respect to any losses and expenses it may incur in connection with these lawsuits. To date, no amounts have been recorded in the consolidated financial statements related to these potential claims.
In connection with the matters described above, the Company has incurred professional fees of $5.8 million for the three months ended December 31, 2015. Certain of the expenses associated with defense of the lawsuits may also be covered by insurance, and the Company may seek reimbursement from the appropriate carriers. We cannot assure you, however, that these expenses will ultimately be reimbursed in whole, or at all.

Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements consisted of $269.1 million and $305.3 million of unfunded commitments to provide debt and equity financing to its portfolio companies or to fund limited partnership interests as of December 31, 2015 and September 30, 2015, 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 with delayed draw components, SLF JV I subordinated notes and LLC interests and limited partnership interests) as of December 31, 2015 and September 30, 2015 is shown in the table below:
 
December 31, 2015
 
September 30, 2015
 Yeti Acquisition, LLC
$
40,000

 
$
40,000

 Senior Loan Fund JV 1, LLC
30,690

 
30,690

 BMC Software Finance, Inc.
15,000

 
15,000

 Lift Brands Holdings, Inc.
14,500

 
17,000

 P2 Upstream Acquisition Co.
10,000

 
10,000

 TigerText, Inc.
10,000

 
10,000

 Legalzoom.com, Inc.
8,815

 
8,815

 Valet Merger Sub, Inc.
7,461

 
13,700

 Refac Optical Group
6,400

 
6,400

 InMotion Entertainment Group, LLC
6,319

 
6,308

 BeyondTrust Software, Inc.
5,995

 
5,995

 Integrated Petroleum Technologies, Inc.
5,397

 
5,397

 My Alarm Center, LLC
5,300

 
2,068

 Ameritox, Ltd
5,120

 
6,400

 Discovery Practice Management, Inc.
5,005

 
6,347

 EOS Fitness Opco Holdings, LLC
5,000

 
5,000


74
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


 Integral Development Corporation
5,000

 
5,000

 OnCourse Learning Corporation
5,000

 
5,000

 Penn Foster, Inc.
5,000

 
5,000

 Thing5, LLC
5,000

 
6,000

 Trialcard Incorporated
4,900

 
4,900

 Adventure Interactive, Corp.
4,846

 
4,846

 Baart Programs, Inc.
4,762

 
—

 First American Payment Systems, LP
4,417

 
4,225

 TIBCO Software, Inc.
4,408

 
5,800

 Metamorph US 3, LLC
3,675

 
3,675

 All Metro Health Care Services, Inc.
3,300

 
3,300

 WeddingWire, Inc.
3,000

 
3,000

 Motion Recruitment Partners LLC
2,900

 
2,900

 Eagle Hospital Physicians, Inc.
2,753

 
1,820

 Edmentum, Inc.
2,664

 
2,664

 OmniSYS Acquisition Corporation
2,500

 
2,500

 QuorumLabs, Inc.
2,500

 
2,500

 Teaching Strategies, LLC
2,400

 
2,400

 HealthDrive Corporation
2,134

 
734

 ExamSoft Worldwide, Inc.
2,000

 
2,000

 Phoenix Brands Merger Sub LLC
1,877

 
1,286

 Tailwind Capital Partners II, L.P. (limited partnership interest)
1,281

 
1,396

 Webster Capital III, L.P. (limited partnership)
1,131

 
1,149

 Edge Fitness, LLC
1,103

 
3,735

 Riverside Fund V, LP (limited partnership interest)
1,024

 
1,047

 Garretson Firm Resolution Group, Inc.
1,002

 
993

 SPC Partners V, L.P. (limited partnership interest)
987

 
1,428

 Beecken Petty O'Keefe Fund IV, L.P. (limited partnership interest)
852

 
1,198

 RP Crown Parent, LLC
777

 
9,868

 RCP Direct II, LP (limited partnership interest)
754

 
754

 TransTrade Operators, Inc.
694

 
1,559

 Moelis Capital Partners Opportunity Fund I-B, L.P. (limited partnership interest)
628

 
924

 Sterling Capital Partners IV, L.P. (limited partnership interest)
521

 
762

 L Squared Capital Partners (limited partnership interest)
438

 
438

 Riverside Fund IV, LP (limited partnership interest)
357

 
357

 Pingora MSR Opportunity Fund I, LP (limited partnership interest)
316

 
316

 Milestone Partners IV, LP (limited partnership interest)
273

 
429

 ACON Equity Partners III, LP (limited partnership interest)
266

 
318

 Riverlake Equity Partners II, LP (limited partnership interest)
238

 
358

 Bunker Hill Capital II (QP), LP (limited partnership interest)
190

 
398

 RCP Direct, LP (limited partnership interest)
188

 
188

 Ansira Partners, Inc.
—

 
1,190

 Chicago Growth Partners L.P. (limited partnership interest)
—

 
2,000

 First Choice ER, LLC
—

 
9,451

 Idera, Inc.
—

 
2,400

 Psilos Group Partners IV, LP (limited partnership interest)
—

 
1,000

 World 50, Inc.
—

 
3,000

Total
$
269,058

 
$
305,326


Note 17. Subsequent Events
The Company’s management evaluated subsequent events through the date of issuance of the Consolidated Financial Statements. There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the Consolidated Financial Statements as of and for the three months ended December 31, 2015 except as discussed below:
On January 20, 2016, the Company announced that the Investment Adviser has agreed to an amendment to the investment advisory agreement to permanently reduce the base management fee. Beginning January 1, 2016, the base management fee on total gross assets (excluding cash and cash equivalents) has been reduced from 2% to 1.75%. The other commercial terms of the Company’s existing investment advisory arrangement with the Investment Adviser remain unchanged.

75

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, 2015
Portfolio Company/Type of Investment (1)
 
Amount of
Interest,
Fees or
Dividends
Credited in
Income (2)
 
Fair Value
at October 1,
2015
 
Gross
Additions (3)
 
Gross
Reductions (4)
 
Fair Value
at December 31, 2015
Control Investments
 
 
 
 
 
 
 
 
 
 
Traffic Solutions Holdings, Inc.
 
 
 
 
 
 
 
 
 
 
 Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016
 
$
656

 
$
16,878

 
$
136

 
$
(7
)
 
$
17,007

 LC Facility, 8.5% cash due 12/31/2016
 
33

 
1,444

 
2

 
(2
)
 
1,444

 746,114 Series A Preferred Units
 
506

 
19,414

 
506

 
(15
)
 
19,905

 746,114 Common Stock Units
 
—

 
5,930

 
—

 
(3,191
)
 
2,739

TransTrade Operators, Inc.
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
 
210

 
8,713

 
1,009

 
(5
)
 
9,717

 First Lien Revolver, 8% cash due 5/31/2016
 
73

 
1,555

 
3,265

 
(1,100
)
 
3,720

 596.67 Series A Common Units in TransTrade Holdings LLC
 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

First Star Aviation, LLC (6)
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
 
185

 
5,313

 
73

 
(1,090
)
 
4,296

 10,104,401 Common Units
 
—

 
9,500

 
—

 
(94
)
 
9,406

First Star Speir Aviation 1 Limited (6)
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan, 9% cash due 12/15/2020
 
733

 
47,824

 
11,537

 
(4,190
)
 
55,171

 2,058,411.64 Common Units
 
—

 
1,965

 
679

 
(323
)
 
2,321

First Star Bermuda Aviation Limited (6)
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan, 9% cash 3% PIK due 8/19/2018
 
583

 
24,836

 
261

 
(287
)
 
24,810

 4,293,756 Common Units
 
—

 
2,773

 
—

 
(1,079
)
 
1,694

 Eagle Hospital Physicians, LLC
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan A, 8% PIK due 8/1/2016
 
270

 
13,066

 
270

 
(52
)
 
13,284

 First Lien Term Loan B, 8.1% PIK due 8/1/2016
 
75

 
3,574

 
75

 
(15
)
 
3,634

 First Lien Revolver, 8% cash due 8/1/2016
 
60

 
2,847

 
2

 
(936
)
 
1,913

 4,100,000 Class A Common Units
 
—

 
5,464

 
561

 
—

 
6,025

Senior Loan Fund JV I, LLC (5)
 
 
 
 
 
 
 
 
 
 
 Subordinated Notes, LIBOR+8% cash due 5/2/2021
 
2,720

 
128,917

 
—

 
(3,717
)
 
125,200

 87.5% equity interest
 
1,750

 
12,205

 
—

 
(5,557
)
 
6,648

 Miche Group, LLC
 
 
 
 
 
 
 
 
 
—

 First Lien Revolver, 8% cash due 12/18/2016
 
50

 
2,500

 
—

 
—

 
2,500

 100 units in FSFC Miche, Inc.
 
—

 
4,175

 
200

 
(282
)
 
4,093

Total Control Investments
 
$
7,904

 
$
318,893

 
$
18,576

 
$
(21,942
)
 
$
315,527

Affiliate Investments
 
 
 
 
 
 
 
 
 
 
Caregiver Services, Inc.
 
 
 
 
 
 
 
 
 
 
 Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
 
$
287

 
$
9,389

 
$
48

 
$
(208
)
 
$
9,229

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

 
4,213

 
—

 
(2
)
 
4,211

AmBath/ReBath Holdings, Inc.
 
 
 
 
 
 
 
 
 
 
 First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
 
982

 
26,240

 
186

 
(1,500
)
 
24,926

 4,668,788 shares of Preferred Stock
 
—

 
764

 
653

 
—

 
1,417

Total Affiliate Investments
 
$
1,269

 
$
40,606

 
$
887

 
$
(1,710
)
 
$
39,783

Total Control & Affiliate Investments
 
$
9,173

 
$
359,499

 
$
19,463

 
$
(23,652
)
 
$
355,310


76

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 are 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 Affiliate categories.
(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).
(6)
First Star Aviation, LLC, First Star Bermuda Aviation Limited and First Star Speir Aviation 1 Limited are wholly-owned holding companies formed by the Company in order to facilitate its investment strategy. In accordance with ASU 2013-08, the Company has deemed the holding companies to be investment companies under GAAP and therefore deemed it appropriate to consolidate the financial results and financial position of the holding companies and to recognize dividend income versus a combination of interest income and dividend income. Accordingly, the debt and equity investments in the wholly-owned holding companies are disregarded for accounting purposes since the economic substance of these instruments are equity investments in the operating entities.


77

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
 
—

 
10,328

 
1,531

 
—

 
11,859

First Star Speir Aviation 1 Limited (7)
 
 
 
 
 
 
 
 
 
 
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 (7)
 
 
 
 
 
 
 
 
 
 
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)
 
—

 
5,649

 
860

 
(1,754
)
 
4,755

 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

 
$
394,872

 
$
22,886

 
$
(39,707
)
 
$
378,051

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

 
$
435,636

 
$
23,251

 
$
(40,446
)
 
$
418,441


78

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 are 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).
(6)
First Star Aviation, LLC, First Star Bermuda Aviation Limited and First Star Speir Aviation 1 Limited are wholly-owned holding companies formed by the Company in order to facilitate its investment strategy. In accordance with ASU 2013-08, the Company has deemed the holding companies to be investment companies under GAAP and therefore deemed it appropriate to consolidate the financial results and financial position of the holding companies and to recognize dividend income versus a combination of interest income and dividend income. Accordingly, the debt and equity investments in the wholly-owned holding companies are disregarded for accounting purposes since the economic substance of these instruments are equity investments in the operating entities.
(7)
As discussed in Note 2, the Company revised previously filed amounts related to First Star holding companies that should have been historically consolidated with the respective operating entities and treated as equity investments of those operating entities. As a result, interest income and PIK income increased by $2.6 million and $0.4 million as compared to previously filed amounts, respectively, partially offset by an increase of $1.3 million to dividend income for the three months ended December 31, 2014.



79


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;
•
the timing of cash flows, if any, from the operations of our portfolio companies; and
•
the cost or potential outcome of any litigation to which we may be a party.
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, 2015 and elsewhere in this quarterly report on Form 10-Q for the quarter ended December 31, 2015. 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, small business investment companies, or SBICs, or regulated investment companies, 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 is a closed-end, non-diversified management investment company. We have elected to be regulated as a business development company under the Investment Company Act of 1940 ("1940 Act"). We have qualified and elected to be treated as a RIC under the Internal Revenue Code of 1986, as amended (the "Code"), for tax purposes.
Our investment objective is to produce current income from investing primarily in small and middle-market companies in the form of senior secured loans and subordinated debt investments. To a lesser extent, we also make equity investments in connection with certain debt transactions. Our investments are generally made in connection with investments by private equity sponsors.
We are externally managed by Fifth Street Management LLC (the "Investment Adviser"), a subsidiary of Fifth Street Asset Management Inc., or FSAM, a publicly traded, leading alternative asset manager, pursuant to an investment advisory agreement. FSC CT LLC ("FSC CT"), a subsidiary of the Investment Adviser, also provides certain administrative and other services necessary for us to operate.



80


Critical Accounting Policies

Basis of Presentation
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or 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 Consolidated Financial Statements have been made. All intercompany balances and transactions have been eliminated. We are an investment company following the accounting and reporting guidance in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 946, Financial Services-Investment Company, or ASC 946.
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.
We value our investments in accordance with FASB ASC 820 Fair Value Measurements and Disclosures, or ASC 820, which 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. ASC 820 prioritizes the use of observable market prices derived from such prices over entity-specific inputs. 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.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Generally, it is expected that all of our investment securities will be valued using Level 3 inputs. This includes investment securities that are valued using "bid" and "ask" prices obtained from independent third party pricing services or directly from brokers. 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 adjustments for investment-specific factors or restrictions.
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 Investment Adviser's 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.
Our Investment Adviser 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, our Investment Adviser looks at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Our Investment Adviser does not adjust the prices unless it has a reason to believe any such market quotations are not reflective of the fair value of an investment. 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 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, 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.
We perform detailed valuations of our debt and equity investments for which market quotations are not readily available or are deemed not to represent fair value of the investments. We typically use two different valuation techniques. The first valuation technique is an analysis of the enterprise value ("EV") of the portfolio company. EV means the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The primary method for determining EV uses a multiple analysis whereby appropriate multiples are applied to the portfolio company's EBITDA (generally defined as earnings before net interest expense, income tax expense, depreciation and amortization). EBITDA multiples are typically determined based upon review of market comparable transactions and publicly traded comparable companies, if any. We may also employ other valuation multiples to determine EV, such as revenues. The second method for determining EV uses a discounted

81


cash flow analysis whereby future expected cash flows of the portfolio company are discounted to determine a present value using estimated discount rates (typically a weighted average cost of capital based on costs of debt and equity consistent with current market conditions). The EV analysis is typically performed to determine the value of equity investments and to determine if there is credit impairment for debt investments. If debt investments are credit impaired, an EV analysis may be used to value such debt investments; however, in addition to the methods outlined above, other alternative methods such as an asset liquidation model, expected recovery model or a recent observable or pending transaction may be utilized to estimate EV. The second valuation technique is a bond yield approach, which is typically performed for non-credit impaired debt investments. To determine fair value using a bond yield approach, a current price is imputed for the investment based upon an assessment of the expected market yield for a similarly structured investment with a similar level of risk. In the bond yield approach, we consider the current contractual interest rate, the capital structure and other terms of the investment relative to risk of the company and the specific investment. A key determinant of risk, among other things, is the leverage through the investment relative to the EV of the portfolio company. As debt investments held by us are substantially illiquid with no active transaction market, we depend on primary market data, including newly funded transactions and industry specific market movements, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable.
We estimate the fair value of privately held warrants using a Black Scholes pricing model, which includes 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.
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 Investment Adviser's valuation team in conjunction with the Investment Adviser's portfolio management and capital markets teams;
•Preliminary valuations are then reviewed and discussed with principals of our Investment Adviser;
•
Separately, independent valuation firms engaged by our Board of Directors prepare 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 us and provide such reports to our Investment Adviser and the Audit Committee of our Board of Directors;
•
The Investment Adviser compares and contrasts its preliminary valuations to the valuations of the independent valuation firms and prepares a valuation report for the Audit Committee of our Board of Directors;
•
The Audit Committee of our Board of Directors reviews the preliminary valuations with the portfolio managers of the Investment Adviser, and our Investment Adviser responds and supplements the preliminary valuations to reflect any discussions between our Investment Adviser and the Audit Committee;
•
The Audit Committee of our Board of Directors makes a recommendation to our Board of Directors regarding the fair value of the investments in our portfolio; and
•
Our Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith.
The fair value of our investments at December 31, 2015 and September 30, 2015 was determined in good faith by our Board of Directors. Our Board of Directors has authorized the engagement of independent valuation firms to provide valuation assistance. We will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of a portion of our 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. As of December 31, 2015, 77.1% of our portfolio at fair value was valued by independent valuation firms. The percentage of our portfolio valued by independent valuation firms may vary from period to period based on the availability of market quotations for our portfolio investments during the respective periods. However, our 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 our valuation policy and a consistently applied valuation process.

82


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, 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
%
For the quarter ended March 31, 2015
 
72.9
%
For the quarter ended June 30, 2015
 
73.1
%
For the quarter ended September 30, 2015
 
88.3
%
For the quarter ended December 31, 2015
 
77.1
%
As of December 31, 2015 and September 30, 2015, approximately 94.8% and 92.9%, respectively, of our total assets represented investments in portfolio companies valued at prices equal to 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. In connection with its investment, we sometimes receives nominal cost equity that is valued as part of the negotiation process with the particular portfolio company. When we receive nominal cost equity, we allocate 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. Distributions of income from portfolio companies are generally recorded as dividend income on the ex-dividend date.
As of December 31, 2015, there were five investments on which we had stopped accruing cash and/or PIK interest or OID income.
Fee Income
We receive a variety of fees in the ordinary course of business including servicing, advisory, amendment, 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, 2015, we had structured $2.9 million in aggregate exit fees across four 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. The accrual of PIK interest on our

83


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.
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, 2015.
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 $53.4 million, or 2.3%, of the fair value of our portfolio of investments as of December 31, 2015 and $50.7 million, or 2.1%, as of September 30, 2015. The net increases in loan balances as a result of contractual PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.
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 attractive 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, 2015
 
September 30, 2015
Cost:
 
 
 
 
Senior secured debt
 
79.68
%
 
78.54
%
Subordinated debt
 
9.72

 
10.90

Subordinated notes of SLF JV I
 
5.22

 
5.25

LLC equity interests of SLF JV I
 
0.58

 
0.58

Purchased equity
 
3.63

 
3.64

Equity grants
 
0.18

 
0.18

Limited partnership interests
 
0.99

 
0.91

Total
 
100.00
%
 
100.00
%
 
 
 
December 31, 2015
 
September 30, 2015
Fair value:
 
 
 
 
Senior secured debt
 
80.51
%
 
78.80
%
Subordinated debt
 
7.98

 
9.58

Subordinated notes of SLF JV I
 
5.38

 
5.37

LLC equity interests of SLF JV I
 
0.29

 
0.51

Purchased equity
 
4.35

 
4.42

Equity grants
 
0.44

 
0.41

Limited partnership interests
 
1.05

 
0.91

Total
 
100.00
%
 
100.00
%

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The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:

 
 
December 31, 2015
 
September 30, 2015
Cost:
 
 
 
 
 Healthcare services
 
16.21
%
 
20.76
%
 Internet software & services
 
15.40

 
11.84

 Advertising
 
7.18

 
5.85

 Multi-sector holdings
 
6.40

 
6.36

 Healthcare equipment
 
4.58

 
2.86

 Airlines
 
3.91

 
3.62

 Education services
 
3.66

 
4.45

 Integrated telecommunication services
 
3.49

 
3.55

 Diversified support services
 
3.41

 
3.44

 Data processing & outsourced services
 
3.20

 
3.25

 Environmental & facilities services
 
2.71

 
3.21

 Oil & gas equipment services
 
2.55

 
2.57

 Pharmaceuticals
 
2.48

 
2.49

 Application software
 
2.35

 
2.00

 IT consulting & other services
 
2.08

 
2.08

 Specialty stores
 
1.94

 
2.37

 Industrial machinery
 
1.90

 
1.91

 Construction & engineering
 
1.63

 
1.62

 Leisure facilities
 
1.53

 
1.34

 Household products
 
1.42

 
1.47

 Research & consulting services
 
1.42

 
2.00

 Leisure products
 
1.37

 
1.39

 Air freight and logistics
 
1.24

 
1.12

 Consumer electronics
 
1.04

 
1.06

 Home improvement retail
 
1.00

 
1.06

 Apparel, accessories & luxury goods
 
0.97

 
0.96

 Security & alarm services
 
0.90

 
0.90

 Food distributors
 
0.72

 
0.72

 Auto parts & equipment
 
0.66

 
0.67

 Specialized consumer services
 
0.66

 
0.67

 Other diversified financial services
 
0.62

 
0.63

 Food retail
 
0.44

 
0.44

 Thrift & mortgage finance
 
0.39

 
0.39

 Healthcare technology
 
0.32

 
0.32

 Specialty chemicals
 
0.22

 
—

 Human resources & employment services
 
—

 
0.63

Total
 
100.00
%
 
100.00
%

85


 
 
December 31, 2015
 
September 30, 2015
Fair value:
 
 
 
 
 Healthcare services
 
15.48
%
 
21.29
%
 Internet software & services
 
15.16

 
11.51

 Advertising
 
7.59

 
6.05

 Multi-sector holdings
 
6.30

 
6.39

 Healthcare equipment
 
4.86

 
2.94

 Airlines
 
4.20

 
3.84

 Integrated telecommunication services
 
3.68

 
3.64

 Diversified support services
 
3.62

 
3.53

 Education services
 
3.36

 
4.08

 Data processing & outsourced services
 
3.21

 
3.21

 Environmental & facilities services
 
2.90

 
3.31

 Pharmaceuticals
 
2.65

 
2.60

 Application software
 
2.64

 
2.25

 IT consulting & other services
 
2.16

 
2.11

 Industrial machinery
 
2.11

 
2.15

 Leisure products
 
2.06

 
1.88

 Specialty stores
 
2.02

 
2.41

 Construction & engineering
 
1.77

 
1.82

 Leisure facilities
 
1.69

 
1.44

 Oil & gas equipment services
 
1.68

 
1.76

 Research & consulting services
 
1.50

 
2.06

 Home improvement retail
 
1.13

 
1.12

 Consumer electronics
 
1.08

 
1.08

 Security & alarm services
 
0.94

 
0.92

 Apparel, accessories & luxury goods
 
0.90

 
0.93

 Auto parts & equipment
 
0.78

 
0.77

 Food distributors
 
0.77

 
0.75

 Specialized consumer services
 
0.70

 
0.69

 Other diversified financial services
 
0.67

 
0.66

 Air freight and logistics
 
0.58

 
0.43

 Food retail
 
0.47

 
0.46

 Thrift & mortgage finance
 
0.41

 
0.40

 Household products
 
0.39

 
0.53

 Healthcare technology
 
0.33

 
0.32

 Specialty chemicals
 
0.21

 
—

 Human resources & employment services
 
—

 
0.67

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.
•
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

86


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, 2015 and September 30, 2015:
Investment Ranking
 
December 31, 2015
 
 
 
September 30, 2015
 
 
Fair Value
 
% of Portfolio
 
Leverage Ratio
 
 
 
Fair Value
 
% of Portfolio
 
Leverage Ratio
 
 
1
 
$
68,354

 
2.94
%
 
0.96

 
  
 
$
215,095

 
8.95
%
 
1.85

 
  
2
 
2,117,226

 
91.03

 
4.85

 
  
 
2,040,006

 
84.91

 
4.94

 
  
3
 
35,388

 
1.52

 
5.08

 

 
122,128

 
5.08

 
5.54

 
 
4
 
104,791

 
4.51

 
NM

 
(1)
 
25,266

 
1.06

 
NM

 
(1)
Total
 
$
2,325,759

 
100.00
%
 
4.71

 
  
 
$
2,402,495

 
100.00
%
 
4.60

 
  
__________________
(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, 2015, we had modified the payment terms of our investments in 16 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, 2015, there were five investments on which we had stopped accruing cash and/or PIK interest or OID income. As of September 30, 2015, there were four investment on which we had stopped accruing cash and/or PIK interest or OID income. As of December 31, 2014, there were four investments on which we had stopped accruing cash and/or PIK interest or OID income.
The percentages of our debt investments at cost and fair value by accrual status as of December 31, 2015, September 30, 2015 and December 31, 2014 were as follows:
 
 
 
December 31, 2015
 
September 30, 2015
 
December 31, 2014
 
 
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
 
$
2,136,516

 
90.79
%
 
$
2,083,424

 
95.42
%
 
$
2,226,334

 
95.08
%
 
$
2,206,418

 
97.97
%
 
$
2,523,714

 
95.97
%
 
$
2,505,354

 
97.67
%
PIK non-accrual
 
66,579

 
2.83

 
17,404

 
0.80

 
66,579

 
2.84

 
28,145

 
1.25

 
105,878

 
4.03

 
59,883

 
2.33

Cash non-accrual(1)
 
150,194

 
6.38

 
82,637

 
3.78

 
48,694

 
2.08

 
17,600

 
0.78

 
—

 
—

 
—

 
—

Total
 
$
2,353,289

 
100.00
%
 
$
2,183,465

 
100.00
%
 
$
2,341,607

 
100.00
%
 
$
2,252,163

 
100.00
%
 
$
2,629,592

 
100.00
%
 
$
2,565,237

 
100.00
%
 ___________________
(1)
Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.


87


The non-accrual status of our portfolio investments as of December 31, 2015, September 30, 2015 and December 31, 2014 was as follows:

 
  
December 31, 2015
  
September 30, 2015
  
December 31, 2014
TransTrade Operators, Inc.
  
—
  
—
  
PIK non-accrual (1)
Phoenix Brands Merger Sub LLC - subordinated term loan
 
PIK non-accrual (1)
 
PIK non-accrual (1)
 
PIK non-accrual (1)
CCCG, LLC
 
Cash non-accrual (1)
 
Cash non-accrual (1)
 
PIK non-accrual (1)
JTC Education, Inc. - subordinated term loan
 
Cash non-accrual (1)
 
Cash non-accrual (1)
 
PIK non-accrual (1)
Answers Corporation - second lien term loan
 
PIK non-accrual (1)
 
PIK non-accrual (1)
 
—
Ameritox Ltd.
 
Cash non-accrual (1)
 
—
 
—
  __________________
(1)
PIK non-accrual status is inclusive of other noncash income, where applicable. 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, 2015 and December 31, 2014 are presented in the following table. Income non-accrual amounts may include amounts for investments that were no longer held at the end of the period.
 
 
 
Three months ended
December 31, 2015 (1)
 
Three months ended
December 31, 2014 (1)
Cash interest income
 
$
3,670

 
$
—

PIK interest income
 
2,528

 
3,239

OID income
 
6,960

 
583

Total
 
$
13,158

 
$
3,822

  __________________
(1)
Income non-accrual amounts for the period 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 a limited liability company, or LLC, agreement with Trinity Universal Insurance Company, a subsidiary of Kemper Corporation, or Kemper, to form Senior Loan Fund JC I, LLC, or 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. The subordinated notes mature on May 2, 2021. 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). As of December 31, 2015 and September 30, 2015, we and Kemper owned, in the aggregate, 87.5% and 12.5%, respectively, of each of the outstanding subordinated notes and LLC equity interests.
On June 30, 2014, SLF JV I closed on a $200.0 million credit facility with Deutsche Bank AG, New York Branch. The facility has a maturity date of July 1, 2019 and borrowings under the facility bear interest at a rate equal to the London Interbank Offered Rate, or LIBOR, plus 2.25% per annum. $151.1 million and $188.6 million was outstanding under this facility as of December 31, 2015 and September 30, 2015, respectively.
On July 7, 2015, SLF JV I closed on a $200.0 million credit facility with Credit Suisse AG, Cayman Islands Branch, bringing SLF JV I’s total debt capacity to $400.0 million.  The facility has a maturity date of July 7, 2023 and borrowings under the facility bear interest at a rate equal to LIBOR plus 2.50% per annum. $46.5 million and $53.0 million, respectively, was outstanding under this facility as of December 31, 2015 and September 30, 2015.
Borrowings under the Deutsche Bank facility and Credit Suisse facility are secured by all of the assets of SLF JV I and all of the equity interests in SLF JV I.
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.

88


As of December 31, 2015 and September 30, 2015, SLF JV I had total assets of $360.4 million and $419.0 million, respectively. Our investment in SLF JV I consisted of LLC equity interests of $6.6 million and subordinated notes of $125.2 million, at fair value as of December 31, 2015. As of September 30, 2015, our investment consisted of LLC equity interests of $12.2 million and subordinated notes of $128.9 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 32 and 34 "eligible portfolio companies" (as defined in the Section 2(a)(46) of the 1940 Act) as of December 31, 2015 and September 30, 2015, respectively. The portfolio companies in SLF JV I are in industries similar to those in which we may invest directly.
As of December 31, 2015 and September 30, 2015, 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 $164.9 million was funded as of December 31, 2015 and September 30, 2015 relating to these commitments, of which $144.3 million was from us. As of December 31, 2015 and September 30, 2015, we had commitments to fund subordinated notes to SLF JV I of $157.5 million, of which $27.6 million was unfunded. As of December 31, 2015 and September 30, 2015, we had commitments to fund LLC equity interests in SLF JV I of $17.5 million, of which $3.1 million was unfunded.
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, 2015 and September 30, 2015:

 
 
December 31, 2015
 
September 30, 2015
Senior secured loans (1)
 
$342,407
 
$395,193
Weighted average interest rate on senior secured loans (2)
 
7.87%
 
7.99%
Number of borrowers in SLF JV I
 
32
 
34
Largest loan exposure to a single borrower (1)
 
$28,971
 
$30,000
Total of five largest loan exposures to borrowers (1)
 
$107,583
 
$118,584
__________________
(1) At principal amount.
(2) Computed using the annual interest rate on accruing senior secured loans.

SLF JV I Loan Portfolio as of December 31, 2015
Portfolio Company (4)
 
Industry
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
AdVenture Interactive, Corp. (3)
 
Advertising
 
First Lien
 
3/22/2018
 
LIBOR+7.75% (1% floor)
 
$
9,363

 
$
9,328

 
$
9,127

AF Borrower, LLC
 
IT consulting & other services
 
First Lien
 
1/28/2022
 
LIBOR+5.25% (1% floor)
 
8,734

 
8,759

 
8,576

Ameritox Ltd. (3) (5)
 
Healthcare services
 
First Lien
 
6/23/2019
 
LIBOR+7.5% (1% floor)
 
19,625

 
19,310

 
12,101

BeyondTrust Software, Inc. (3)
 
Application software
 
First Lien
 
9/25/2019
 
LIBOR+7% (1% floor)
 
9,925

 
9,839

 
9,769

Compuware Corporation
 
Internet software & services
 
First Lien
 
12/15/2019
 
LIBOR+5.25% (1% floor)
 
3,325

 
3,289

 
3,155

 
 
 
 
First Lien
 
12/15/2021
 
LIBOR+5.25% (1% floor)
 
9,900

 
9,744

 
9,261

Total Compuware Corporation
 
 
 
 
 
 
 
 
 
13,225

 
13,033

 
12,416

CRGT, Inc.
 
IT consulting & other services
 
First Lien
 
12/21/2020
 
LIBOR+6.5% (1% floor)
 
2,567

 
2,561

 
2,554

Digital River, Inc.
 
Internet software & services
 
First Lien
 
2/12/2021
 
LIBOR+6.5% (1% floor)
 
4,461

 
4,507

 
4,417

Dodge Data & Analytics LLC (3)
 
Data processing & outsourced services
 
First Lien
 
10/31/2019
 
LIBOR+8.75% (1% floor)
 
9,898

 
9,962

 
9,617

Edge Fitness, LLC
 
Leisure facilities
 
First Lien
 
12/31/2019
 
LIBOR+7.75% (1% floor)
 
10,600

 
10,603

 
10,417

EOS Fitness Opco Holdings, LLC (3)
 
Leisure facilities
 
First Lien
 
12/30/2019
 
LIBOR+8.75% (0.75% floor)
 
19,800

 
19,444

 
18,878

Garretson Resolution Group, Inc.
 
Diversified support services
 
First Lien
 
5/22/2021
 
LIBOR+6.5% (1% floor)
 
6,107

 
6,078

 
6,030

GTCR Valor Companies, Inc.
 
Advertising
 
First Lien
 
5/30/2021
 
LIBOR+5% (1% floor)
 
9,875

 
9,677

 
9,826

InMotion Entertainment Group, LLC (3)
 
Consumer electronics
 
First Lien
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,750

 
9,776

 
9,322

 
 
 
 
First Lien B
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,750

 
9,606

 
9,416


89


Total InMotion Entertainment Group, LLC
 
 
 
 
 
 
 
 
 
19,500

 
19,382

 
18,738

Integrated Petroleum Technologies, Inc. (3)
 
Oil & gas equipment services
 
First Lien
 
3/31/2019
 
LIBOR+7.5% (1% floor)
 
9,124

 
9,124

 
7,457

Legalzoom.com, Inc. (3)
 
Specialized consumer services
 
First Lien
 
5/13/2020
 
LIBOR+7% (1% floor)
 
9,925

 
9,705

 
9,709

Lift Brands, Inc. (3)
 
Leisure facilities
 
First Lien
 
12/23/2019
 
LIBOR+7.5% (1% floor)
 
19,427

 
19,391

 
18,872

MedTech Group, Inc.
 
Healthcare equipment
 
First Lien
 
9/7/2016
 
LIBOR+5.25% (1% floor)
 
12,001

 
11,991

 
11,925

Metamorph US 3, LLC (3)
 
Internet software & services
 
First Lien
 
12/1/2020
 
LIBOR+5.5% (1% floor)
 
12,188

 
12,030

 
11,891

Motion Recruitment Partners LLC
 
Human resources & employment services
 
First Lien
 
2/13/2020
 
LIBOR+6% (1% floor)
 
4,656

 
4,563

 
4,617

Novetta Solutions, LLC
 
Internet software & services
 
First Lien
 
9/30/2022
 
LIBOR+5% (1% floor)
 
6,500

 
6,437

 
6,348

OmniSYS Acquisition Corporation (3)
 
Diversified support services
 
First Lien
 
11/21/2018
 
LIBOR+7.5% (1% floor)
 
12,755

 
12,764

 
12,496

OnCourse Learning Corporation (3)
 
Education services
 
First Lien
 
2/28/2019
 
LIBOR+7.5% (1% floor)
 
19,687

 
19,663

 
19,687

Refac Optical Group (3)
 
Specialty stores
 
First Lien
 
9/30/2018
 
LIBOR+7.5%
 
9,410

 
9,316

 
9,291

TIBCO Software, Inc.
 
Internet software & services
 
First Lien
 
12/4/2020
 
LIBOR+5.5% (1% floor)
 
4,784

 
4,548

 
4,359

Too Faced Cosmetics, LLC
 
Personal products
 
First Lien
 
7/7/2021
 
LIBOR+5% (1% floor)
 
5,260

 
5,135

 
5,220

TravelClick, Inc. (3)
 
Internet software & services
 
Second Lien
 
11/8/2021
 
LIBOR+7.75% (1% floor)
 
8,460

 
8,460

 
7,952

TrialCard Incorporated
 
Healthcare services
 
First Lien
 
12/31/2019
 
LIBOR+4.5% (1% floor)
 
13,604

 
13,484

 
13,241

TV Borrower US, LLC
 
Integrated telecommunications services
 
First Lien
 
1/8/2021
 
LIBOR+5% (1% floor)
 
9,875

 
9,679

 
9,529

Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
First Lien
 
11/4/2020
 
LIBOR+5% (1% floor)
 
4,900

 
4,900

 
4,631

Vubiquity, Inc.
 
Application software
 
First Lien
 
8/12/2021
 
LIBOR+5.5% (1% floor)
 
2,700

 
2,675

 
2,687

Yeti Acquisition, LLC (3)
 
Leisure products
 
First Lien
 
6/15/2017
 
LIBOR+7% (1.25% floor)
 
20,346

 
20,316

 
20,320

 
 
 
 
First Lien
 
6/15/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
8,625

 
8,629

 
8,587

Total Yeti Acquisition, LLC
 
 
 
 
 
 
 
 
 
28,971

 
28,945

 
28,907

Shoes For Crews, LLC
 
Footwear
 
First Lien
 
10/27/2022
 
LIBOR+5% (1% floor)
 
4,500

 
4,455

 
4,466

 
 
 
 
 
 
 
 
 
 
$
342,407

 
$
339,748

 
$
325,751

__________________
(1) Represents the current interest rate as of December 31, 2015. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the current determination of fair value as of December 31, 2015 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.
(3) This investment is held by both us and SLF JV I at December 31, 2015.
(4) 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, we have provided the applicable margin over LIBOR based on each respective credit agreement.
(5) This investment is on cash non-accrual status as of December 31, 2015.



SLF JV I Loan Portfolio as of September 30, 2015
Portfolio Company (4)
 
Industry
 
Investment Type
 
Maturity Date
 
Current Interest Rate (1)
 
Principal
 
Cost
 
Fair Value (2)
AdVenture Interactive, Corp. (3)
 
Advertising
 
First Lien
 
3/22/2018
 
LIBOR+7.75% (1% floor)
 
$
9,722

 
$
9,683

 
$
9,697

AF Borrower, LLC
 
IT consulting & other services
 
First Lien
 
1/28/2022
 
LIBOR+5.25% (1% floor)
 
8,756

 
8,782

 
8,712

Ameritox Ltd. (3)
 
Healthcare services
 
First Lien
 
6/23/2019
 
LIBOR+7.5% (1% floor)
 
19,625

 
19,287

 
17,748

Ansira Partners, Inc.
 
Advertising
 
First Lien
 
5/4/2017
 
LIBOR+5.0% (1.5% floor)
 
7,062

 
7,046

 
7,057

BeyondTrust Software, Inc. (3)
 
Application software
 
First Lien
 
9/25/2019
 
LIBOR+7% (1% floor)
 
9,950

 
9,858

 
9,839

Compuware Corporation
 
Internet software & services
 
First Lien
 
12/15/2019
 
LIBOR+5.25% (1% floor)
 
3,369

 
3,330

 
3,263


90


 
 
 
 
First Lien
 
12/15/2021
 
LIBOR+5.25% (1% floor)
 
9,925

 
9,762

 
9,590

Total Compuware Corporation
 
 
 
 
 
 
 
 
 
13,294

 
13,092

 
12,853

CRGT, Inc.
 
IT consulting & other services
 
First Lien
 
12/21/2020
 
LIBOR+6.5% (1% floor)
 
2,583

 
2,584

 
2,577

Digicert, Inc. (3)
 
Internet software & services
 
Second Lien
 
6/2/2020
 
LIBOR+8.25% (1% floor)
 
8,750

 
8,686

 
8,750

Digital River, Inc.
 
Internet software & services
 
First Lien
 
2/12/2021
 
LIBOR+6.5% (1% floor)
 
9,937

 
9,985

 
9,938

Dodge Data & Analytics LLC (3)
 
Data processing & outsourced services
 
First Lien
 
10/31/2019
 
LIBOR+8.75% (1% floor)
 
9,972

 
10,040

 
9,921

Edge Fitness, LLC
 
Leisure facilities
 
First Lien
 
12/31/2019
 
LIBOR+7.75% (1% floor)
 
10,600

 
10,603

 
10,596

EOS Fitness Opco Holdings, LLC (3)
 
Leisure facilities
 
First Lien
 
12/30/2019
 
LIBOR+8.75% (0.75% floor)
 
19,850

 
19,850

 
19,627

First Choice ER, LLC (3)
 
Healthcare services
 
First Lien
 
10/31/2018
 
LIBOR+7.5% (1% floor)
 
30,000

 
30,082

 
30,295

Garretson Resolution Group, Inc.
 
Diversified support services
 
First Lien
 
5/22/2021
 
LIBOR+6.5% (1% floor)
 
6,145

 
6,145

 
6,099

GTCR Valor Companies, Inc.
 
Advertising
 
First Lien
 
5/30/2021
 
LIBOR+5% (1% floor)
 
9,900

 
9,693

 
9,813

Idera Inc. (3)
 
Internet software & services
 
First Lien
 
11/5/2020
 
LIBOR+5.5% (0.5% floor)
 
9,875

 
9,744

 
9,875

InMotion Entertainment Group, LLC (3)
 
Consumer electronics
 
First Lien
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,875

 
9,903

 
9,662

 
 
 
 
First Lien B
 
10/1/2018
 
LIBOR+7.75% (1.25% floor)
 
9,875

 
9,718

 
9,769

Total InMotion Entertainment Group, LLC
 
 
 
 
 
 
 
 
 
19,750

 
19,621

 
19,431

Integrated Petroleum Technologies, Inc. (3)
 
Oil & gas equipment services
 
First Lien
 
3/31/2019
 
LIBOR+7.5% (1% floor)
 
9,185

 
9,185

 
8,087

Legalzoom.com, Inc. (3)
 
Specialized consumer services
 
First Lien
 
5/13/2020
 
LIBOR+7% (1% floor)
 
9,950

 
9,717

 
9,883

Lift Brands, Inc. (3)
 
Leisure facilities
 
First Lien
 
12/23/2019
 
LIBOR+7.5% (1% floor)
 
19,554

 
19,517

 
19,218

MedTech Group, Inc.
 
Healthcare equipment
 
First Lien
 
9/7/2016
 
LIBOR+5.25% (1% floor)
 
12,031

 
12,017

 
12,017

Metamorph US 3, LLC (3)
 
Internet software & services
 
First Lien
 
12/1/2020
 
LIBOR+5.5% (1% floor)
 
12,266

 
12,100

 
12,138

Motion Recruitment Partners LLC
 
Human resources & employment services
 
First Lien
 
2/13/2020
 
LIBOR+6% (1% floor)
 
4,781

 
4,682

 
4,730

OmniSYS Acquisition Corporation (3)
 
Diversified support services
 
First Lien
 
11/21/2018
 
LIBOR+7.5% (1% floor)
 
12,843

 
12,852

 
12,935

OnCourse Learning Corporation (3)
 
Education services
 
First Lien
 
2/28/2019
 
LIBOR+7.5% (1% floor)
 
19,812

 
19,787

 
19,649

TIBCO Software, Inc.
 
Internet software & services
 
First Lien
 
12/4/2020
 
LIBOR+5.5% (1% floor)
 
4,796

 
4,548

 
4,760

Too Faced Cosmetics, LLC
 
Personal products
 
First Lien
 
7/7/2021
 
LIBOR+5% (1% floor)
 
5,300

 
5,169

 
5,300

TravelClick, Inc. (3)
 
Internet software & services
 
Second Lien
 
11/8/2021
 
LIBOR+7.75% (1% floor)
 
8,460

 
8,460

 
8,344

TrialCard Incorporated
 
Healthcare services
 
First Lien
 
12/31/2019
 
LIBOR+5% (1% floor)
 
13,604

 
13,476

 
13,417

TV Borrower US, LLC
 
Integrated telecommunications services
 
First Lien
 
1/8/2021
 
LIBOR+5% (1% floor)
 
9,900

 
9,900

 
9,885

Vitera Healthcare Solutions, LLC
 
Healthcare technology
 
First Lien
 
11/4/2020
 
LIBOR+5% (1% floor)
 
4,913

 
4,913

 
4,839

Vubiquity, Inc.
 
Application software
 
First Lien
 
8/12/2021
 
LIBOR+5.5% (1% floor)
 
2,700

 
2,700

 
2,686

World50, Inc. (3)
 
Research & consulting services
 
First Lien
 
3/30/2017
 
LIBOR+8.5% (1% floor)
 
10,155

 
10,033

 
10,019

Yeti Acquisition, LLC (3)
 
Leisure products
 
First Lien
 
6/15/2017
 
LIBOR+7% (1.25% floor)
 
20,547

 
20,511

 
20,420

 
 
 
 
First Lien
 
6/15/2017
 
LIBOR+10.25% (1.25% floor) 1% PIK
 
8,625

 
8,630

 
8,562

Total Yeti Acquisition, LLC
 
 
 
 
 
 
 
 
 
29,172

 
29,141

 
28,982

 
 
 
 
 
 
 
 
 
 
$
395,193

 
$
392,978

 
$
389,717

 ___________________
(1) Represents the current interest rate as of September 30, 2015. All interest rates are payable in cash, unless otherwise noted.

91


(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.
(3) This investment was held by both us and SLF JV I at September 30, 2015.
(4) 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, we have provided the applicable margin over LIBOR based on each respective credit agreement.

The amortized cost and fair value of the subordinated notes held by us was $129.9 million and $125.2 million, respectively, as of December 31, 2015 and $129.9 million and $128.9 million at amortized cost and fair value, respectively, as of September 30, 2015. The subordinated notes bear interest at a rate of LIBOR plus 8.0% per annum and we earned interest income of $2.7 million and $1.2 million on our investments in these notes for the three months ended December 31, 2015 and December 31, 2014, respectively. The cost and fair value of the LLC equity interests held by us was $14.4 million and $6.6 million, respectively, as of December 31, 2015, and $14.4 million and $12.2 million, respectively, as of September 30, 2015. We earned dividend income of $1.8 million and $1.1 million, respectively, for the three months ended December 31, 2015 and December 31, 2014 with respect to our LLC equity interests. The LLC equity interests are dividend producing to the extent there is residual income to be distributed on a quarterly basis. The total investment income earned on SLF JV I represented a 13.0% and 15.4% weighted average annualized return on our total investment as of December 31, 2015 and September 30, 2015, respectively.
Below is certain summarized financial information for SLF JV I as of December 31, 2015 and September 30, 2015 and for the three months ended December 31, 2015 and December 31, 2014:
 
 
December 31, 2015
 
September 30, 2015
Selected Balance Sheet Information:
 
 
 
 
Investments in loans at fair value (cost December 31, 2015: $339,748; cost September 30, 2015: $392,978)
 
$
325,751

 
$
389,717

Receivables from secured financing arrangements at fair value (cost December 31, 2015: $10,019; cost September 30, 2015: $10,021)
 
9,530

 
9,723

Cash and cash equivalents
 
13,438

 
7,354

Restricted cash
 
6,696

 
6,126

Other assets
 
4,967

 
6,033

Total assets
 
$
360,382

 
$
418,953

 
 
 
 
 
Senior credit facilities payable
 
$
197,686

 
$
241,572

Payables from unsettled transactions
 
4,455

 
7,745

Subordinated notes payable at fair value (proceeds December 31, 2015: $148,433 and September 30, 2015: $148,433)
 
143,086

 
147,334

Other liabilities
 
7,546

 
8,361

Total liabilities
 
$
352,773

 
$
405,012

Members' equity
 
7,609

 
13,941

Total liabilities and members' equity
 
$
360,382

 
$
418,953


(numbers in thousands)
 
Three months ended December 31, 2015
 
Three months ended December 31, 2014
Selected Statements of Operations Information:
 
 
 
 
Interest income
 
$
7,728

 
$
3,709

Other income
 
345

 
400

Total investment income
 
8,073

 
4,109

Interest expense
 
4,908

 
2,413

Other expenses
 
131

 
26

Total expenses (1)
 
5,039

 
2,439

Net unrealized depreciation
 
(6,892
)
 
(2,267
)
Net realized loss
 
—

 
(205
)
Net loss
 
$
(3,858
)
 
$
(802
)

92


 __________
(1) There are no management fees or incentive fees charged at SLF JV I.

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, 2015, we sold $9.4 million of senior secured debt investments to SLF JV I at fair value in exchange for $9.3 million cash consideration. We recognized a $0.1 million realized loss on these transactions.
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. The Company recognized a $0.05 million realized loss on these transactions.
Discussion and Analysis of Results and Operations
Revisions to Prior Period Financial Information
We previously identified accounting errors from fiscal years ended 2012 through 2015 related to revenue recognition and consolidation. The revenue recognition errors were the result of certain fees which were historically recognized on the deal closing date, but should have been amortized over the life of the loan since the fees did not represent a separately identifiable revenue contract. These errors were partially offset by the overpayment of Part I Incentive Fees paid to the Investment Adviser. There were also errors resulting from not historically consolidating wholly-owned holding companies that should have been consolidated (First Star holding companies). We assessed the materiality of the errors on its prior quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s staff Accounting Bulletin (“SAB”) No. 99 and SAB 108, and concluded that the errors were not material to any of the previously issued financial statements. However, we recorded a cumulative out-of-period adjustment to correct these errors prior to October 1, 2014, as well as adjustments related to the three months ended December 31, 2014, which are included in the revised three months ended December 31, 2014 financial information. These errors did not impact the financial information for three months ended December 31, 2015. See Note 2 to the Consolidated Financial Statements for the total immaterial revisions for the three months ended December 31, 2014.
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 secured borrowings 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, 2015 and December 31, 2014
Total Investment Income
Total investment income includes interest on our investments, fee income and other investment income. Fee income consists of the monthly servicing fees, advisory fees, structuring fees, exit fees and prepayment fees that we receive in connection with its debt investments. These fees are recognized as earned. Other investment income consists primarily of dividend income received from certain of our equity investments.
Total investment income for the three months ended December 31, 2015 and December 31, 2014 was $65.1 million and $65.3 million, respectively. For the three months ended December 31, 2015, this amount primarily consisted of $54.5 million of interest income from portfolio investments (which included $3.3 million of PIK interest) and $8.8 million of fee income. For the three months ended December 31, 2014, this amount primarily consisted of $58.0 million of interest income from portfolio investments (which included $4.0 million of PIK interest) and $4.6 million of fee income.
Total investment income for the three months ended December 31, 2015, as compared to the three months ended December 31, 2014 remained relatively unchanged due to an increase in fee income primarily driven by prepayment fees received in the quarter, offset by lower interest income due to a decrease in the size of our investment portfolio.

93


Expenses
Net expenses (expenses net of base management fee waivers) for the three months ended December 31, 2015 and December 31, 2014 were $38.5 million and $38.9 million, respectively. Net expenses decreased for the three months ended December 31, 2015, as compared to the three months ended December 31, 2014, by $0.4 million, due primarily to a $2.9 million decrease in incentive fees, which was attributable to a 8.2% decrease in pre-incentive fee net investment income for the year-over-year period, and a $2.4 million decrease in base management fees, which was due to a 16.8% decrease in our total assets for the year-over-year period. The decrease in fees paid to our investment adviser was partially offset by a $5.8 million increase in professional fees, related to the pending FSC litigation and year end audit and, to a lesser extent, preparation for our annual meeting.
Net Investment Income
As a result of the $0.2 million decrease in total investment income and the $0.4 million decrease in net expenses, net investment income for the year ended December 31, 2015 increased by $0.2 million, or 0.7%, compared to the three months ended December 31, 2014.
Realized Gain (Loss) on Investments and Secured Borrowings
Realized gain (loss) is the difference between the net proceeds received from dispositions of portfolio investments and secured borrowings 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, 2015, we recorded investment realization events, including the following:
•
In October 2015, we received a cash payment of $23.3 million from Affordable Care, 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 October 2015, we received a cash payment of $15.1 million from CoAdvantage Corporation 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. We also received an additional $1.3 million in connection with the sale of its equity investment, realizing a gain of $0.7 million;
•
In October 2015, we received a cash payment of $119.0 million from First Choice ER, 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 October 2015, we received a cash payment of $33.3 million from DigiCert, 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 October 2015, we received a cash payment of $7.4 million from Idera, 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 2015, we received a cash payment of $13.9 million from EducationDynamics, 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 2015, we received a cash payment of $14.2 million from World 50, 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; and
•
During the three months ended December 31, 2015, we received payments of $96.5 million primarily in connection with syndications of debt investments to other investors and sales of debt investments in the open market and recorded an aggregate net realized gain of $0.7 million on these transactions.
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;

94


•
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;
•
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 and sales of debt investments in the open market and recorded a net realized gain of $1.5 million on these transactions.
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 and secured borrowings 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, 2015, we recorded net unrealized depreciation on investments and secured borrowings of $90.8 million. This consisted of $79.0 million of net unrealized depreciation on debt investments, $9.7 million of net unrealized depreciation on equity investments and $2.3 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $0.2 million of net unrealized depreciation on secured borrowings. For the three months ended December 31, 2015, approximately 40% of our portfolio losses were due to broader market fluctuations, including spread widening, with the remainder due to credit deterioration in a small number of investments.
During the three months ended December 31, 2014, we recorded net unrealized depreciation on investments and secured borrowings of $38.5 million. This consisted of $49.0 million of net unrealized depreciation on debt investments and $2.9 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) and $0.3 million of net unrealized depreciation on secured borrowings.

95


Financial Condition, Liquidity and Capital Resources
Cash Flows
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, 2015, we experienced a net decrease in cash and cash equivalents of $55.8 million. During that period, we received $15.1 million of net cash from operating activities, primarily from $343.4 million of principal payments, PIK payments and sale proceeds received and the cash activities related to $26.6 million of net investment income, partially offset by funding $351.9 million of investments and net revolvers. During the same period, net cash used by financing activities was $70.9 million, primarily consisting of $42.0 million of net borrowings under our credit facilities, $25.2 million of cash distributions paid to our stockholders, $1.8 million of repayments of secured borrowings and $1.8 million of repurchases of common stock under our DRIP.
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 net cash in operating activities, primarily for the funding of $709.0 million of investments and net revolvers, partially offset by $436.9 million of principal payments, PIK payments and sale proceeds received and cash activities related to $26.4 million of net investment income. During the same period, net 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, $62.1 million of repayments of secured borrowings and $2.1 million of repurchases of common stock under our DRIP.
As of December 31, 2015, we had $95.2 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.3 billion, $15.6 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $385.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.4 million of unsecured notes payable, $19.2 million of secured borrowings and unfunded commitments of $269.1 million.
As of September 30, 2015, we had $143.5 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.4 billion, $15.7 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $427.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.3 million of unsecured notes payable, $21.2 million of secured borrowings and unfunded commitments of $305.3 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 (which has primarily been the case for the past several months) 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 as dividends to our stockholders each taxable year 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

96


exceed 50% of the value of our assets). This requirement limits the amount that we may borrow. We received exemptive relief from the SEC to permit us to exclude the debt of our SBIC subsidiaries guaranteed by the small business administration from the definition of senior securities in the 200% asset coverage ratio we are required to maintain under the 1940 Act. As of December 31, 2015, we were in compliance with this asset coverage requirement, as modified by our exemptive relief. 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 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.
We may from time to time be required to refinance previously issued debt securities upon their maturities. For example, we expect to repay in full our Convertible Notes on or before their maturity date of April 1, 2016. In order to fund this repayment, we may utilize other sources of leverage, including borrowings on our revolving credit facilities or the issuance of public debt securities.
Significant Capital Transactions
The following table reflects the distributions per share that our Board of Directors has declared, including shares issued under our dividend reinvestment plan, or DRIP, on our common stock since October 1, 2013:
 
Date Declared
 
Record Date
 
Payment Date
 
Amount
per Share
 
Cash
Distribution
 
DRIP Shares
Issued
 
 
 
DRIP Shares
Value
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


13.4 million

79,138


(1)

0.6 million
February 3, 2015

March 16, 2015

March 31, 2015

0.06


8.8 million

56,295


(1)

0.4 million
February 3, 2015
 
April 15, 2015
 
April 30, 2015
 
0.06

 
8.8 million
 
54,818

 
(1)
 
0.4 million
February 3, 2015
 
May 15, 2015
 
May 29, 2015
 
0.06

 
8.8 million
 
60,714

 
(1)
 
0.4 million
February 3, 2015
 
June 15, 2015
 
June 30, 2015
 
0.06

 
8.8 million
 
66,707

 
(1)
 
0.4 million
February 3, 2015
 
July 15, 2015
 
July 31, 2015
 
0.06

 
8.8 million
 
71,412

 
(1)
 
0.4 million
February 3, 2015
 
August 14, 2015
 
August 31, 2015
 
0.06

 
8.7 million
 
69,370

 
(1)
 
0.5 million
August 4, 2015
 
September 15, 2015
 
September 30, 2015
 
0.06

 
8.5 million
 
113,881

 
(1)
 
0.7 million
August 4, 2015
 
October 15, 2015
 
October 30, 2015
 
0.06

 
8.4 million
 
106,185

 
(1)
 
0.6 million
August 4, 2015
 
November 16, 2015
 
November 30, 2015
 
0.06

 
8.4 million
 
91,335

 
(1)
 
0.6 million
November 30, 2015

December 15, 2015

December 30, 2015

0.06


8.4 million

99,673


(1)

0.6 million
November 30, 2015
 
January 15, 2016
 
January 28, 2016
 
0.06

 
 
 
 
 
 
 
 
November 30, 2015
 
February 12, 2016
 
February 26, 2016
 
0.06

 
 
 
 
 
 
 
 
 ______________
(1)
Shares were purchased on the open market and distributed.


97


The following table reflects share transactions that occurred from October 1, 2012 through December 31, 2015:
Date
 
Transaction
 
Shares
 
Public Offering Price Per Share
 
 
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 2013
 
Public offering (1)
 
17,643,000
 
10.31

 
 
 
181.9 million
July 2014
 
Public offering
 
13,250,000
 
9.95

 
 
 
131.8 million
  ______________
(1) Includes the underwriters' partial exercise of their option to purchase additional shares.
On November 30, 2015, our Board of Directors approved a common stock repurchase program authorizing us to repurchase up to $100 million in the aggregate of the outstanding shares of our common stock through November 30, 2016. Common stock repurchases under the program are to be made in the open market, privately negotiated transactions or otherwise at times, and in such amounts, as our management deems appropriate subject to various factors, including company performance, capital availability, general economic and market conditions, regulatory requirements and other corporate considerations, as determined by management. The repurchase program may be suspended or discontinued at any time. We expect to finance any stock repurchases with existing cash balances or by incurring leverage. During the three months ended December 31, 2015 and December 31, 2014, we did not repurchase any shares of our common stock, however, we intend to repurchase shares of our common stock during the three months ended March 31, 2016.
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., or 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, as amended. On May 15, 2012, our wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P., or 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 $350 million of debentures when they have at least $175 million in regulatory capital.
As of December 31, 2015, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $135.3 million, as compared to $137.4 million as of September 30, 2015. 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, 2015, FSMP V had $37.5 million in regulatory capital and $75.0 million in SBA-guaranteed debentures outstanding, which had a fair value of $63.0 million, as compared to $65.0 million as of September 30, 2015. 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


98


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, 2015.
For the three months ended December 31, 2015 and December 31, 2014, we recorded aggregate interest expense of $2.3 million and $2.4 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 $175 million more than we would otherwise be able to absent the receipt of this exemptive relief.
ING Facility
On May 27, 2010, we entered into a secured syndicated revolving credit facility, or as subsequently amended, the ING facility, pursuant to a Senior Secured Revolving Credit Agreement, or 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, 2015, the ING facility permitted up to $710 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., or Holdings, and our indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC, or Fund of Funds, subject to certain exclusions for, among other things, equity interests in our SBIC subsidiaries and equity interests in 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. Fund of Funds and Holdings 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 portfolio companies' 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. As of December 31, 2015, we were 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. 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, 2015, we had $341.5 million of borrowings outstanding under the ING facility, which had a fair value of $341.5 million. Our borrowings under the ING facility bore interest at a weighted average interest rate of 2.636% for the three months ended December 31, 2015. For the three months ended December 31, 2015 and December 31, 2014, we recorded interest expense of $3.3 million and $2.9 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, or Funding II, entered into a Loan and Servicing Agreement, or Sumitomo Agreement, as amended from time to time, with

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respect to a seven-year credit facility ("Sumitomo facility") with Sumitomo Mitsui Banking Corporation, or 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, 2015, 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 either (i) LIBOR (1-month) plus 2.00% per annum, with no LIBOR floor, if the borrowings under the Sumitomo facility are greater than 35% of the aggregate available borrowings under the Sumitomo facility or (ii) LIBOR (1-month) plus 2.25% per annum, if the borrowings under the Sumitomo Facility are less than or equal to 35% of the aggregate available borrowings under the Sumitomo facility. The period during which we may make and reinvest borrowings under the facility will expire on September 16, 2017, and the maturity date of the facility is September 16, 2021.
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. As of December 31, 2015, we were in compliance with all financial covenants under the Sumitomo facility.
The Sumitomo facility is secured by all of the assets of Funding II. Each loan origination under the Sumitomo 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, 2015, we had $43.8 million of borrowings outstanding under the Sumitomo facility which had a fair value of $43.8 million. Our borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.273% for the year ended December 31, 2015. For the three months ended December 31, 2015 and December 31, 2014, we recorded interest expense of $0.4 million and $0.5 million, respectively, related to the Sumitomo facility.
As of December 31, 2015, 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 Sumitomo facility does not require us to comply with significant financial covenants. The following table describes significant financial covenants with which we must comply under the ING facility on a quarterly basis:
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
 
$1,034 million
 
$1,353 million
Asset coverage ratio
 
Asset coverage ratio shall not be less than 2.10:1
 
2.10:1
 
2.42:1
Interest coverage ratio
 
Interest coverage ratio shall not be less than 2.50:1
 
2.50:1
 
3.05:1
 ___________ 
(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, 2015. 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, 2015.

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, 2015.
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, 2015):

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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

 
 
 
 
 
 
 
LIBOR (4) + 2.25%
 
 
11/12/2015
 
Expanded credit facility
 
710 million

 
0.1 million

 
$710 million

 
$341 million

 
$369 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

 
—

 
 
 
 
 
 
 
LIBOR (3) + 2.25%
 
 
8/17/2015
 
Amended credit facility
 
125 million

 
0.4 million

 
62 million

(1)
44 million

 
18 million

 
LIBOR (3) + 2%/2.25% (5)
 _______________
(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
(5)
LIBOR +2.0% when the facility is drawn more than 35%. Otherwise, LIBOR +2.25%
Convertible Notes
On April 12, 2011, we issued $152 million of convertible notes, or the 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 or, the Indenture, between us and Deutsche Bank Trust Company Americas, as trustee, or the Trustee.
The Convertible Notes mature on April 1, 2016, or 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 could 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, 2015 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, as amended (the "Exchange Act"). 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, 2015, 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, 2015 and December 31, 2014, we recorded interest expense of $1.7 million and $1.7 million, respectively, related to the Convertible Notes.
As of December 31, 2015, there were $115.0 million Convertible Notes outstanding, which had a fair value of $114.9 million.
2019 Notes
On February 26, 2014, we issued $250.0 million in aggregate principal amount of our 4.875% unsecured notes due 2019, or, 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 supplemental indenture, dated February 26, 2014, or 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 Exchange Act. 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 were issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. During the year ended December 31, 2015, we did not repurchase any of the 2019 Notes in the open market.
For the three months ended December 31, 2015 and December 31, 2014, we recorded interest expense of $3.3 million and $3.5 million, respectively, related to the 2019 Notes.
As of December 31, 2015, there were $249.1 million of 2019 Notes outstanding, which had a fair value of $248.9 million.
2024 Notes
On October 18, 2012, we issued $75.0 million in aggregate principal amount of our 5.875% 2024 Notes, or 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.

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The 2024 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated October 18, 2012, or collectively, the 2024 Notes Indenture, between us and the Trustee. The 2024 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 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 Exchange Act. 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 year ended December 31, 2015, we did not repurchase any of the 2024 Notes in the open market.
For the three months ended December 31, 2015 and December 31, 2014, we recorded interest expense of $1.2 million and $1.2 million, respectively, related to the 2024 Notes.
As of December 31, 2015, there were $75.0 million 2024 Notes outstanding, which had a fair value of $71.3 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, or 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, or 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 Exchange Act. 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 years ended December 31, 2015 and December 31, 2014, we did not repurchase any of the 2028 Notes in the open market.
For the three months ended December 31, 2015 and December 31, 2014, we recorded interest expense of $1.4 million and $1.4 million, respectively, related to the 2028 Notes.

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As of December 31, 2015, there were $86.3 million 2028 Notes outstanding, which had a fair value of $82.0 million.
Secured Borrowings
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 Statements 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, 2015, secured borrowings at fair value totaled $19.2 million and the fair value of the loan that is associated with these secured borrowings was $52.4 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 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, 2015 and December 31, 2014, there were $1.8 million and $62.1 million of repayments on secured borrowings, respectively.
For the three months ended December 31, 2015 and December 31, 2014, we recorded interest expense of $0.4 million and $0.5 million, respectively, related to the secured borrowings.
As of December 31, 2015, there were $20.0 million of secured borrowings outstanding, which had a fair value of $19.2 million.
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, 2015, our only off-balance sheet arrangements consisted of $269.1 million of unfunded commitments, which was comprised of $229.0 million to provide debt financing to certain of our portfolio companies, $30.7 million to provide debt and equity financing to SLF JV I and $9.4 million related to unfunded limited partnership interests. As of September 30, 2015, our only off-balance sheet arrangements consisted of $305.3 million, which was comprised of $260.2 million to provide debt financing to certain of our portfolio companies, $30.7 million to provide debt and equity financing to SLF JV I and $14.4 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. We believe that our assets will provide adequate cover to satisfy all of our unfunded commitments as of December 31, 2015.
A summary of the composition of unfunded commitments (consisting of revolvers, term loans with delayed draw components, SLF JV I subordinated notes and LLC interests, and limited partnership interests) as of December 31, 2015 and September 30, 2015 is shown in the table below:
 
 
December 31, 2015
 
September 30, 2015
 Yeti Acquisition, LLC
 
$
40,000

 
$
40,000

 Senior Loan Fund JV 1, LLC
 
30,690

 
30,690

 BMC Software Finance, Inc.
 
15,000

 
15,000

 Lift Brands Holdings, Inc.
 
14,500

 
17,000

 P2 Upstream Acquisition Co.
 
10,000

 
10,000

 TigerText, Inc.
 
10,000

 
10,000

 Legalzoom.com, Inc.
 
8,815

 
8,815

 Valet Merger Sub, Inc.
 
7,461

 
13,700

 Refac Optical Group
 
6,400

 
6,400

 InMotion Entertainment Group, LLC
 
6,319

 
6,308

 BeyondTrust Software, Inc.
 
5,995

 
5,995

 Integrated Petroleum Technologies, Inc.
 
5,397

 
5,397

 My Alarm Center, LLC
 
5,300

 
2,068

 Ameritox, Ltd
 
5,120

 
6,400

 Discovery Practice Management, Inc.
 
5,005

 
6,347

 EOS Fitness Opco Holdings, LLC
 
5,000

 
5,000

 Integral Development Corporation
 
5,000

 
5,000

 OnCourse Learning Corporation
 
5,000

 
5,000

 Penn Foster, Inc.
 
5,000

 
5,000

 Thing5, LLC
 
5,000

 
6,000


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 Trialcard Incorporated
 
4,900

 
4,900

 Adventure Interactive, Corp.
 
4,846

 
4,846

 Baart Programs, Inc.
 
4,762

 
—

 First American Payment Systems, LP
 
4,417

 
4,225

 TIBCO Software, Inc.
 
4,408

 
5,800

 Metamorph US 3, LLC
 
3,675

 
3,675

 All Metro Health Care Services, Inc.
 
3,300

 
3,300

 WeddingWire, Inc.
 
3,000

 
3,000

 Motion Recruitment Partners LLC
 
2,900

 
2,900

 Eagle Hospital Physicians, Inc.
 
2,753

 
1,820

 Edmentum, Inc.
 
2,664

 
2,664

 OmniSYS Acquisition Corporation
 
2,500

 
2,500

 QuorumLabs, Inc.
 
2,500

 
2,500

 Teaching Strategies, LLC
 
2,400

 
2,400

 HealthDrive Corporation
 
2,134

 
734

 ExamSoft Worldwide, Inc.
 
2,000

 
2,000

 Phoenix Brands Merger Sub LLC
 
1,877

 
1,286

 Tailwind Capital Partners II, L.P. (limited partnership interest)
 
1,281

 
1,396

 Webster Capital III, L.P. (limited partnership)
 
1,131

 
1,149

 Edge Fitness, LLC
 
1,103

 
3,735

 Riverside Fund V, LP (limited partnership interest)
 
1,024

 
1,047

 Garretson Firm Resolution Group, Inc.
 
1,002

 
993

 SPC Partners V, L.P. (limited partnership interest)
 
987

 
1,428

 Beecken Petty O'Keefe Fund IV, L.P. (limited partnership interest)
 
852

 
1,198

 RP Crown Parent, LLC
 
777

 
9,868

 RCP Direct II, LP (limited partnership interest)
 
754

 
754

 TransTrade Operators, Inc.
 
694

 
1,559

 Moelis Capital Partners Opportunity Fund I-B, L.P. (limited partnership interest)
 
628

 
924

 Sterling Capital Partners IV, L.P. (limited partnership interest)
 
521

 
762

 L Squared Capital Partners (limited partnership interest)
 
438

 
438

 Riverside Fund IV, LP (limited partnership interest)
 
357

 
357

 Pingora MSR Opportunity Fund I, LP (limited partnership interest)
 
316

 
316

 Milestone Partners IV, LP (limited partnership interest)
 
273

 
429

 ACON Equity Partners III, LP (limited partnership interest)
 
266

 
318

 Riverlake Equity Partners II, LP (limited partnership interest)
 
238

 
358

 Bunker Hill Capital II (QP), LP (limited partnership interest)
 
190

 
398

 RCP Direct, LP (limited partnership interest)
 
188

 
188

 Ansira Partners, Inc.
 
—

 
1,190

 Chicago Growth Partners L.P. (limited partnership interest)
 
—

 
2,000

 First Choice ER, LLC
 
—

 
9,451

 Idera, Inc.
 
—

 
2,400

 Psilos Group Partners IV, LP (limited partnership interest)
 
—

 
1,000

 World 50, Inc.
 
—

 
3,000

Total
 
$
269,058

 
$
305,326



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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:
 
 
Debt Outstanding
as of September 30,
2015
 
Debt Outstanding
as of December 31,
2015
 
Weighted average  debt
outstanding for the
three months ended
December 31, 2015
 
Maximum debt
outstanding
for the three months ended
December 31, 2015
SBA debentures
 
$
225,000

 
$
225,000

 
$
225,000

 
$
225,000

ING facility
 
383,495

 
341,500

 
381,191

 
483,495

Sumitomo facility
 
43,800

 
43,800

 
43,800

 
43,800

Convertible Notes
 
115,000

 
115,000

 
115,000

 
115,000

2019 Notes
 
250,000

 
249,100

 
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
 
21,787

 
19,975

 
21,197

 
21,787

Total debt
 
$
1,200,332

 
$
1,155,625

 
$
1,197,438

 

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, 2015
 
 
Total
 
< 1 year
 
1-3 years
 
3-5 years
 
> 5 years
SBA debentures
 
$
225,000

 
$
—

 
$
—

 
$
—

 
$
225,000

Interest due on SBA debentures
 
55,577

 
8,887

 
17,725

 
17,749

 
11,216

ING facility
 
341,495

 
—

 
341,495

 
—

 
—

Interest due on ING facility
 
26,253

 
8,751

 
17,502

 
—

 
—

Sumitomo facility
 
43,800

 
—

 
—

 
—

 
43,800

Interest due on Sumitomo facility
 
5,869

 
1,027

 
2,054

 
2,054

 
734

Convertible Notes
 
115,000

 
115,000

 
—

 
—

 
—

Interest due on Convertible Notes
 
1,558

 
1,558

 
—

 
—

 
—

Secured borrowings
 
19,975

 
—

 
19,975

 
—

 
—

Interest due on secured borrowings
 
2,222

 
999

 
1,223

 
—

 
—

2019 Notes
 
250,000

 
—

 
—

 
250,000

 
—

Interest due on 2019 Notes
 
38,599

 
12,188

 
24,375

 
2,036

 
—

2024 Notes
 
75,000

 
—

 
—

 
—

 
75,000

Interest due on 2024 Notes
 
38,944

 
4,406

 
8,813

 
8,813

 
16,912

2028 Notes
 
86,250

 
—

 
—

 
—

 
86,250

Interest due on 2028 Notes
 
65,188

 
5,283

 
10,566

 
10,566

 
38,773

Total
 
$
1,390,730

 
$
158,099

 
$
443,728

 
$
291,218

 
$
497,685

Regulated Investment Company Status and Distributions
We elected 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 as dividends, 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 taxable year may differ from taxable income for that taxable year as such distributions may include the distribution of taxable income derived from the current taxable year or the distribution of taxable income derived from the prior taxable year carried forward into and distributed in the current taxable 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

106


net long-term capital losses, if any), determined without regard to any deduction for dividends paid. 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 2014). We anticipate timely distribution of our taxable income in accordance with tax rules. We did not incur a U.S. federal excise tax for calendar years 2013 and 2014 and do not expect to incur a U.S. federal excise tax for the calendar year 2015. 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, as amended, 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 and taxable year fall below the total amount of our dividend distributions for that fiscal and taxable 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.
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 certain limitations regarding the aggregate amount of cash to be distributed to all stockholders. 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 guidelines.
Related Party Transactions
We have entered into an investment advisory agreement with our Investment Adviser. Messrs. Berman, Dimitrov, Owens and Sandeep K. Khorana, each an interested member of our Board of Directors, have a direct or indirect pecuniary interest in our Investment Adviser. The Investment Adviser is a registered investment adviser under the Investment Advisers Act of 1940, as amended, that is partially and indirectly owned by Fifth Street Asset Management Inc. Pursuant to the investment advisory agreement, as of December 31, 2015, fees payable to our Investment Adviser equaled (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 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, 2015 and December 31, 2014, we incurred fees of $15.9 million and $20.7 million, respectively, under the investment advisory agreement.
On July 14, 2015, we announced that our Investment Adviser voluntarily agreed to a revised base management fee arrangement, or the Revised Management Fee, for the period commencing on July 1, 2015 and remaining in effect until January 1, 2017, or the Waiver Period.
The Revised Management Fee is intended to provide for a reduction in the base management fee payable by us our Investment Adviser during the Waiver Period.  Neither the prior waiver of base management fees nor the Revised Management Fee in any way implies that our Investment Adviser will agree to waive management or incentive fees in any future period. The Revised Management

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Fee will be calculated quarterly and will be equal to our gross assets, including assets acquired with borrowed funds, but excluding any cash and cash equivalents, multiplied by 0.25 multiplied by the sum of (x) and (y), expressed as a percentage, where (x) is equal to 2% multiplied by the Baseline NAV Percentage, and (y) is equal to 1% multiplied by the Incremental NAV Percentage. The "Baseline NAV Percentage" is the percentage derived by dividing our net asset value as of March 31, 2015 (i.e., $1,407,774,000) (the "Baseline NAV"), by the net asset value at the beginning of the fiscal quarter for which the fee is being calculated (the "New NAV"). The “Incremental NAV Percentage” is the percentage derived by dividing the New NAV in excess of the Baseline NAV by the New NAV.
The Revised Management Fee modifies the base management fee payable to our Investment Adviser pursuant to our investment advisory agreement with our Investment Adviser and results in a blended annual base management fee rate that will not be less than 1%, or greater than 2%.  The initial computation of the Revised Management Fee will occur at the end of the quarter following the quarter in which we issue or sell shares of our common stock, including new shares issued as dividends or pursuant to our dividend reinvestment plan, but excluding non-ordinary course transactions as outlined below.  Prior to that time, the annual base management fee rate will remain at 2%.  Moreover, if any recalculation of the base management fee rate would otherwise result in an increase of the blended rate used, the blended rate in effect immediately prior to such recalculation would remain in effect until such time, if any, as a recalculation following an equity issuance would result in a lower fee rate.
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 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, 2015 and December 31, 2014, we incurred expenses of $1.5 million and $2.5 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
On January 20, 2016, we announced that our Investment Adviser has agreed to an amendment to the investment advisory agreement to permanently reduce the base management fee. Beginning January 1, 2016, the base management fee on total gross assets (excluding cash and cash equivalents) has been reduced from 2% to 1.75%. The other commercial terms of our existing investment advisory arrangement with our Investment Adviser remain unchanged.
On February 8, 2016, our Board of Directors declared the following distributions:
•
$0.06 per share, payable on March 31, 2016 to stockholders of record on March 15, 2016; 
•
$0.06 per share, payable on April 29, 2016 to stockholders of record on April 15, 2016; and
•
$0.06 per share, payable on May 31, 2016 to stockholders of record on May 13, 2016.
For a discussion of the developments in the litigation to which we are a party, see Part II - Other Information - Item 1. Legal Proceedings.
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.

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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. 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, 2015, 78.7% of our debt investment portfolio (at fair value) and 77.4% 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, 2015 and September 30, 2015 was as follows: 
 
 
December 31, 2015
 
September 30, 2015
 
 
Fair Value
 
% of Floating
Rate Portfolio
 
Fair Value
 
% of Floating
Rate Portfolio
Under 1%
 
$
239,090

 
13.92
%
 
$
220,165

 
12.62
%
1% to under 2%
 
1,464,889

 
85.29

 
1,511,195

 
86.59

2% to under 3%
 
—

 
—

 
—

 
—

3% and over
 
13,606

 
0.79

 
13,776

 
0.79

Total
 
$
1,717,585

 
100.00
%
 
$
1,745,136

 
100.00
%
Based on our Consolidated Statement of Assets and Liabilities as of December 31, 2015, 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(1)
 
Interest
income
 
Interest
expense
 
Net increase
(decrease)
500
 
$
72,100

 
$
(19,700
)
 
$
52,400

400
 
55,600

 
(15,800
)
 
39,800

300
 
39,100

 
(11,800
)
 
27,300

200
 
22,700

 
(7,800
)
 
14,900

100
 
6,600

 
(3,900
)
 
2,700

 
(1)
A decline in interest rates would not have a material impact on our Consolidated Financial Statements.
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, 2015 and September 30, 2015: 
 
 
December 31, 2015
 
September 30, 2015
 
 
Interest Bearing
Cash and
Investments
 
Borrowings
 
Interest Bearing
Cash and
Investments
 
Borrowings
Money market rate
 
$
95,215

 
$
—

 
$
143,484

 
$
—

Prime rate
 
15,006

 
—

 
2,076

 
6,000

LIBOR
 
 
 
 
 
 
 
 
30 day
 
43,843

 
385,295

 
52,661

 
421,295

90 day
 
1,829,839

 
19,975

 
1,797,527

 
21,787

Fixed rate
 
543,820

 
751,250

 
561,906

 
751,250

Total
 
$
2,527,723

 
$
1,156,520

 
$
2,557,654

 
$
1,200,332



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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2015. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that, as of December 31, 2015, as a result of the ongoing material weakness described below, the design and operation of our disclosure controls and procedures were not effective.
Material Weakness in Internal Control over Financial Reporting
As of September 30, 2015, management determined that we did not design or maintain effective controls to internally communicate current accounting policies and procedures including the nature of supporting documentation required to validate certain portfolio company data. Specifically, our policies and procedures with respect to loan origination fees, while in accordance with GAAP, were not properly communicated between departments and personnel to allow for appropriate validation of support as the Fifth Street platform grew and diversified, which has led to out of period adjustments and revisions to prior period financial information. This material weakness remained as of December 31, 2015 primarily because the remediation actions described below remain in process.
Remediation of Material Weakness in Internal Control over Financial Reporting
To remediate the material weakness described above, we have initiated a number of actions including, but not limited to, formalizing policies and procedures in all significant areas and communicating them throughout the organization, adding senior experienced accounting and financial reporting personnel and reallocating existing internal resources as necessary. Management is committed to improving our internal control processes and believes that the measures described above should be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal year 2016. However, we cannot assure you that the steps we have taken and continue to take will remediate such weakness, nor can we be certain of whether additional actions will be required or the costs of any such actions.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts described above, there were no changes in our internal control over financial reporting during the three months ended December 31, 2015 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.


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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, except as described below, we are currently not a party to any pending material legal proceedings.

We have been named as a defendant in three putative securities class-action lawsuits. The first lawsuit was filed on October 1, 2015, in the United States District Court for the Southern District of New York and is captioned Howard Randall, Trustee, Howard & Gale Randall Trust FBO Kimberly Randall Irrevocable Trust UA Feb 15, 2000 v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-07759. The second lawsuit was filed on October 14, 2015, in the United States District Court for the District of Connecticut and is captioned Lynn Waters-Cottrell v. Fifth Street Finance Corp., et al., Case No. 3:15-cv-01488. The third lawsuit was filed on November 12, 2015, in the United States District Court for the Southern District of New York and is captioned Robert J. Hurwitz v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-08908. The defendants in all three cases are Leonard M. Tannenbaum, Bernard D. Berman, Alexander C. Frank, Todd G. Owens, Ivelin M. Dimitrov, and Richard Petrocelli (collectively, the “Individual Defendants”), us and Fifth Street Asset Management Inc. (“FSAM”).
The lawsuits allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of investors who purchased our common stock between July 7, 2014, and February 6, 2015, inclusive.  The lawsuits allege in general terms that defendants engaged in a purportedly fraudulent scheme designed to artificially inflate the true value of our investment portfolio and investment income in order to increase FSAM’s revenue, which FSAM received as our asset manager and investment adviser.  For example, the lawsuits allege that we improperly delayed the write-down of five of our investments until the fiscal quarter ending in December 31, 2014, after FSAM conducted its initial public offering (“IPO”) in October 2014, when we should have taken the write-down before FSAM’s IPO.  The plaintiffs seek compensatory damages and attorneys’ fees and costs, among other relief, but have not specified the amount of damages being sought in any of the actions.
On December 4, 2015, a putative stockholder derivative action captioned Solomon Chau v. Leonard M. Tannenbaum, et al., Case No. 3:15-cv-01795, was filed on behalf of us in the United States District Court for the District of Connecticut. The complaint names certain current and past officers and/or directors, consisting of Leonard Tannenbaum, Bernard D. Berman, Todd G. Owens, Ivelin M. Dimitrov, Alexander C. Frank, Steven M. Noreika, David H. Harrison, Brian S. Dunn, Douglas F. Ray, Richard P. Dutkiewicz, Byron J. Haney, James Castro-Blanco, Richard A. Petrocelli and Frank C. Meyer, and FSAM as defendants and us as the nominal defendant (collectively, the “Derivative Action Defendants”). On December 31, 2015, a second putative stockholder derivative action captioned Scott Avera v. Leonard M. Tannenbaum, et al., Case No. 3-15:cv-01889 was filed on behalf of us in the United States District Court for the District of Connecticut. The complaint names certain current and past officers and/or directors, consisting of the Derivative Action Defendants. The underlying allegations in each of these derivative actions are related to the allegations in the securities class actions against us and others described in the preceding paragraphs. The complaints allege that our board of directors approved unfair advisory and management agreements with entities related to FSAM and that certain defendants engaged in allegedly improper conduct to make FSAM appear more attractive to potential investors before its initial public offering. The plaintiffs seek cancelation or amendment of the investment advisory agreement with the Investment Adviser, actions to reform and improve our corporate governance and certain restitution, among other relief, but have not specified the amount of damages being sought in any of the actions.
On January 27, 2016, two stockholder derivative actions were filed on behalf of us in the Superior Court Judicial District of Stamford/Norwalk at Stamford, The first complaint is captioned John Durgerian v. Leonard M. Tannenbaum, et al. and names certain current and past officers and/or directors, consisting of Leonard Tannenbaum, Bernard D. Berman, Alexander C. Frank, Todd G. Owens, Ivelin M. Dimitrov, Richard A. Petrocelli, James Castro-Blanco, Brian S. Dunn, Richard P. Dutkiewicz, Byron J. Haney, Jeffrey R. Kay, Douglas F. Ray, Sandeep K. Khorana, Steven M. Noreika, David H. Harrison and Frank C. Meyer, and FSAM as defendants and us as the nominal defendant (collectively, the “Connecticut Action Defendants”). The second complaint is captioned Kamile Dahne v. Leonard M. Tannenbaum, et al., and names certain current and past officers and/or directors, consisting of the Connecticut Action Defendants. The underlying allegations in each of these derivative actions are related to the allegations in the securities class actions against us and others described in Note 16. The complaints allege that our board of directors approved unfair advisory and management agreements with entities related to FSAM and that certain defendants engaged in allegedly improper conduct to make FSAM appear more attractive to potential investors before its initial public offering. The plaintiffs seek actions to reform and improve our corporate governance and certain restitution, among other relief, but have not specified the amount of damages being sought in any of the actions.
On January 29, 2016, a putative stockholder class action lawsuit captioned James Craig v. Bernard D. Berman, et. al. was filed in the Court of Chancery of the State of Delaware. The complaint names certain current officers and/or directors, consisting of Bernard D. Berman, James Castro-Blanco, Ivelin M. Dimitrov, Brian S. Dunn, Richard P. Dutkiewicz, Byron J. Haney, Sandeep K. Khorana, Todd G. Owens and Douglas F. Ray, the Investment Adviser, FSAM, us and Fifth Street Holdings L.P. as defendants. The complaint alleges that the defendants breached their fiduciary duties to our stockholders by, among other things, perpetuating and failing to terminate the investment advisory agreement with Fifth Street Management LLC;

111


seeking to have existing board members and management remain in place; and including certain disclosures in our proxy materials, including, among other things, the effect that termination of the investment advisory agreement would have on our debt obligations, business, and operations. The complaint seeks, among other things, an injunction preventing us and our board of directors from soliciting proxies for the 2016 annual meeting until additional disclosures are made; a declaration that the defendants have breached their fiduciary duties by refusing to terminate the investment advisory agreement and by acting to have our board of directors and Fifth Street Management LLC remain in place; a declaration that any shares repurchased by us after the record date of the 2016 annual meeting will not be considered outstanding shares for purposes of the stockholder approvals sought at the annual meeting; and awarding plaintiff costs and disbursements.
We intend to defend ourselves vigorously against the plaintiff’s allegations.  Neither the outcome of the lawsuits nor an estimate of any reasonable possible losses is determinable at this time. No provisions for any losses related to the lawsuits have been recorded in the accompanying consolidated financial statements as of December 31, 2015. An adverse judgment for monetary damages could have a material adverse effect on our operations and liquidity. FSAM, the Investment Adviser and Fifth Street Holdings L.P. have indicated that they intend to seek indemnification under the investment advisory agreement with respect to any losses they may incur in connection with these lawsuits.

Item 1A. Risk Factors
There have been no material changes during the three months ended December 31, 2015 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2015.


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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4.     Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.

Item 6.    Exhibits.

 
 
 
Exhibit
Number
  
Description of Exhibit
 
 
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 Section 13 or 15(d) 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.
 
 
By:
 
/s/    Todd G. Owens
 
 
Todd G. Owens
 
 
Chief Executive Officer
 
 
By:
 
/s/    Steven M. Noreika
 
 
Steven M. Noreika
 
 
Chief Financial Officer
Date: February 8, 2016


113




EXHIBIT INDEX
Exhibit
Number
  
Description of Exhibit
 
 
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


114

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