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Fifth Street Finance: Change At The Top

This is a reprint of a Daily Word From The Editor column from April 5th, 2017 regarding the unexpected changes at the helm of two major Business Development Companies.

SHOCKED

We’re frankly bothered and bewildered by the sudden departure of Patrick Dalton (announced April 5th 2017) from both Fifth Street Finance (FSC) and Fifth Street Senior Floating Rate (FSFR). We parsed the press release by Investment Advisor Fifth Street Asset Management (FSAM) like the State Department used to do with Soviet Central Party meeting communiques, trying to find meaning in the nuances of the wording. The press release says Mr Dalton left for “reasons unrelated to the Fifth Street companies’ operational or financial performance”.  That may be true in the strictest sense of the term and has the added benefit of avoiding additional regulatory disclosures. The press release suggests the new CEO (who’s also one of the key players at FSAM) Bernard Berman will continue the new strategic program which Mr Dalton laid out in February, but did not take questions about at the time. The BDC Reporter spelled out the multitude of challenges FSC faces in a long article at the time which bears re-reading (or reading for the first time even) given what has just occurred.  Yet, the very brief press release did end with these ominous words: ” will evaluate all opportunities to maximize shareholder value”.

FOR SALE SIGN UP ?

Does that mean FSAM will consider a sale or liquidation of the two public BDCs ? We hardly think so, given the huge loss of ongoing management fees that would be involved, and the assured destruction of FSAM (also a public company with shareholders of its own to consider) that would follow. Our best guess (and it’s just that) is something we mentioned in the February 2017 article: FSAM might seek to merge FSC and FSFR.  That might explain why FSAM and Leonard Tannenbaum have been buying up shares in the BDCs like crazy. Again, the BDC Reporter has been covering the subject for months. Just use the Search box and read for yourself. Or, and now we’re really spitballing, some or all the entities involved might be taken private. If that were to happen, FSC and FSFR shareholders might be made a offer they can’t refuse, given the alternative might be more ongoing dramas and sudden changes in direction, management and fee structures like the ones that have colored the last few years.

WE’LL GET BACK TO YOU LATER

The Fifth Street organization has a very poor track record where shareholder communications are concerned. (We assume the institutional analysts still have access by the side door). In the past, bad news and changes in direction have been accompanied by cancelled Conference calls; an unwillingness to take questions and general radio silence.  The sudden loss of Patrick Dalton calls out for a special meeting by Messrs Tannenbaum and Berman to discuss where things stand and where the BDCs are going, if only in the broadest terms. However, if shareholders, Note Holders and prospective investors (drawn from 3 public companies with an interest in the outcome) are only to get the above referenced two paragraph press release before the next earnings release (at least a month away), the BDC Reporter will be more suspicious than what we have here is not simply an unexpected loss of a new CEO, but a more substantive and far reaching change coming down the pike.