Two weeks after Oaktree Capital, a global investment manager founded by Howard Marks (Trades, Portfolio), announced it would become investment adviser to two business development companies, Fifth Street Finance Corp. (FSC, Financial) and Fifth Street Senior Floating Rate Corp. (FSFR, Financial), it disclosed Monday it would also obtain certain voting rights through beneficial ownership of shares as part of the deal.
According to a filing, Oaktree will also be deemed to have voting control over 19.2%, or 27,044,419 shares of Fifth Street Finance Corp. Through an agreement, the holders of the shares will vote according to Oaktree's directions. The agreement comes as part of Oaktree's deal to become the company's investment adviser.
Similar to venture capital firms, business development companies like Fifth Street Finance invest in and help grow small and medium-sized businesses, particularly those in financial distress. The aims of the entities integrate with Oaktree’s credit and value-driven specializations. Together, Oaktree’s new business development companies will manage around $2.5 billion in assets.
Fifth Street entered the voting agreement as a "condition of and inducement to" Oaktree to become a part of a larger asset purchase agreement of the two entities.Â
“We are excited about the opportunity to serve as the investment adviser for FSC and FSFR,” Jay Wintrob, CEO of CEO of Oaktree, said July 14.
“These BDCs are a clear strategic fit with Oaktree’s direct lending expertise, and the completion of this transaction will create a BDC platform with scale that leverages our deep credit expertise, loan origination capabilities and underwriting skills. Importantly, Oaktree has the investment experience and acumen to manage these portfolios effectively and to pursue new investment opportunities to maximize value for BDC investors over time.”
Business development companies also allow public investors to trade in debt and equity of private companies. A rule requiring the entities to pay out 90% of their earnings means they often offer sizable dividends.
Fifth Street Finance reported losses in 2016 and over the trailing-12 months, and cut its monthly dividend to 2 cents in March from 6 cents in February. It has increased the dividend to 12.5 cents for September. As of Monday, the company has an 8.51% trailing dividend yield.
Marks’ Oaktree, which has more than $100 billion in assets, is taking leadership of Fifth Street Finance after it experienced two years of falling revenue, following steady growth since 2008. The company ended the first quarter with $84.6 million in cash and $887.6 million in long-term debt. In 2016, it generated cash flow of $164.8 million.
Fifth Street Finance’s stock has trailed down 2.55% over the past year and 46.92% over the past five years. On Monday, the price declined 2.2% to $5.34 per share.
At the close of the transaction, slated for the fourth quarter, Fifth Street Finance will change its name to Oaktree Specialty Lending Corporation and trade with the stock symbol OCSL. Fifth Street Senior Floating Rate will change to Oaktree Strategic Income Corporation, under the ticker symbol OCSI.
See Oaktree's long stock portfolio here.Â
