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Fifth Street Asset Management: Restated Revolver Agreement

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On July 7, 2017 Fifth Street Asset Management (FSAM) filed a copy of the Amended & Restated Credit Agreement between its wholly-owned subsidiary Fifth Street Holdings, L.P and Sumitomo Bank, acting as administrative agent. There has been a $100mn loan by the bank group since 2014, but the parties chose to fully restate the Credit Agreement rather than just undertake amendments. Given the fast changing situation at FSAM, which also affects its two public BDC companies – Fifth Street Finance (FSC) and Fifth Street Senior Floating (FSFR) – the BDC Reporter reviewed the 80 page agreement for BDC News Of The Day readers.

DETAILS

The Credit Agreement is allowing FSAM to finance its Working Capital Needs ( a defined term in the document). However, the lenders are secured by all the assets of FSAM and have strict rules about the application of any proceeds from equity raises (unlikely in any case) or asset sales (including the presumed disposition of FSC and FSFR’s management contracts).

Technically the loan matures in August 2019. However, from January 1 2018 the lenders are requiring amortization of the loan and sharply raise the interest rate on outstandings.

Technically FSC and FSFR are not parties to the agreement between FSAM and its lending group. However, much of the Credit Agreement includes references to the two BDCs, and incorporates actions that might be taken at the public funds in the covenants.

Here is a table of the lenders to FSAM:

Lender   Loans  
Morgan Stanley Bank, N.A.   $ 23,579,545.46  
Sumitomo Mitsui Banking Corporation   $ 23,579,545.44  
JPMorgan Chase Bank, N.A.   $ 16,477,272.73  
Royal Bank of Canada   $ 16,477,272.73  
Credit Suisse AG, Cayman Islands Branch   $ 11,363,636.37  
East West Bank   $ 8,522,727.27  
TOTAL   $ 100,000,000.00  

ANALYSIS

A reading of the Agreement makes clear that the facility is intended as a short term arrangement until FSAM is sold or in some way receives capital to pay off its lenders through the end of 2017.

While the lenders are allowing FSAM to continue operations, the payment of distributions to the shareholders is forbidden. See Section 6.4.

There are a couple of exceptions regarding tax distributions, both the normal kind and those associated with the recent sale of the CLO subsidiary.

The lenders are also keeping close tabs on any proceeds that might be received from selling FSAM’s equity interests in FSC and FSFR which, along with the management “rights”, are the major forms of collateral supporting the loan.

If we had any doubt before, the BDC Reporter is now perfectly convinced FSAM and the lending group will be parting ways as soon as practical.

There does not seem to be any way FSAM could “go private” and continue to be supported by the Sumitomo-led banks.

In fact, the lending group – like FSAM, FSC and FSFR shareholders – appear to be waiting on the expected “sale” of the two public BDCs management agreements to Oaktree Capital (even though the would-be buyer is not mentioned by name).

See Section 2.8 (iv)which explicitly requires all proceeds from such a sale to pay off the Credit Agreement.

The Agreement even calls for (Section 5.12) for a telephone conference call between FSAM and its borrowers every fifteen days to discus any non-ordinary “Asset sales” and (which is disturbing by its implication) any investigation by the U.S. government.


OUR VIEW

Notwithstanding the restatement of the Credit Agreement and the ability by FSAM to pay its bills, this remains a very toughly constructed document intended to push the borrower to the door and effect repayment ASAP.

Presumably Sumitomo has agreed to what is essentially a 6 month extension on the anticipation that Oaktree Capital or another buyer will be found by FSAM and have the funds necessary to pay off the outstanding debt.

In the interim, the lenders are not allowing distributions or even permitting FSAM to waive anything more than a modest percentage of management fees payable by FSC and FSFR.

If the loan arrives at its amortization period, it’s unclear how FSAM would come up with the cash to meet its debt obligations, starting in 2018.

Clearly FSAM is in a “must sell” situation, but the 6 month window allowed here does give the asset manager some flexibility to find another buyer for its public BDC proteges should the Oaktree Capital deal fall through.

If FSAM cannot sell, for whatever reason, its management contracts a default is possible before the maturity of the Credit Agreement.

The lenders are understandably jumpy – and loading up the Agreement with covenants – because the on balance sheet assets of FSAM (principally shares in FSC and FSFR) – are less than borrowings, even after the CLO subsidiary sale.

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