Oaktree Capital assumes the management of Fifth Street Finance and Fifth Street Senior Floating Rate BDCs

Eleanor Steed
By Eleanor Steed July 19, 2017 16:17

Oaktree Capital assumes the management of Fifth Street Finance and Fifth Street Senior Floating Rate BDCs

Fifth Street Asset Management (FSAM) announced that it has signed a definitive asset purchase agreement with Oaktree Capital (Oaktree), an affiliate of Oaktree Capital Group, under which Oaktree will become the new investment adviser to two Business Development Companies (BDCs): Fifth Street Finance (FSC) and Fifth Street Senior Floating Rate Corp. FSFR. Oaktree will pay gross cash consideration of $320 million in cash to Fifth Street Management (FSM), an affiliate of FSAM, upon the close of the transaction. The shares of common stock of FSC and FSFR owned by Fifth Street Holdings (FSH) are not included in the transaction. The transaction is expected to be completed in the fourth quarter of 2017.

The transaction follows a strategic review conducted by the FSAM management team and Board of Directors, including a Special Committee, in conjunction with legal and financial advisors, of a range of alternatives to maximize the value of the Fifth Street platform. A Special Committee of FSAM’s Board of Directors, formed to review the asset sale transaction and related matters, and Board of Directors each unanimously determined that this transaction is in the best interest of FSAM and its stockholders.

“We believe this transaction combining FSAM’s established presence in the BDC space and Oaktree’s deep credit expertise offers a compelling value for FSAM’s assets and allows the FSC and FSFR stockholders to participate in the future growth potential of the portfolio under a larger, more diversified manager led by a highly experienced investment team. Oaktree’s long-term investment approach, emphasizing return consistency and downside protection, along with its proposed fee structure, made Oaktree the appropriate manager to stabilize and grow the BDC portfolios, which should provide enhanced returns for FSC and FSFR stockholders going forward. We have recommended and fully support the FSC and FSFR boards’ decision to approve the agreements with Oaktree,” said Leonard M. Tannenbaum, FSAM’s Chairman and Chief Executive Officer.

Tom Harrison, the Chairman of the Special Committee of FSAM’s Board of Directors, said, “After careful consideration of the proposed transaction with Oaktree and FSAM’s other potential alternatives, the Special Committee has determined that the proposed transaction with Oaktree is the best alternative course of action for, and is in the best interests of, FSAM and its stockholders.”

At the closing of the transaction, Oaktree will replace FSM as the investment adviser to the BDCs and an Oaktree affiliate will become their administrator. Under Oaktree’s proposed investment advisory agreements, the management fee rate for FSC will be reduced from 1.75% to 1.50%, and the incentive fee will be reduced from 20.0% to 17.5% with respect to both income and capital gains. The incentive fee for FSFR will also be reduced from 20.0% to 17.5% with respect to both income and capital gains. The current FSFR management fee rate of 1.0% will remain unchanged.

The new investment advisory agreements, which have been unanimously approved by the independent directors of the boards of directors of FSC and FSFR, are subject to approval by the stockholders of FSC and FSFR. The FSC and FSFR boards of directors unanimously recommend that the stockholders of each BDC vote in favor of the new investment advisory agreement with Oaktree and related corporate governance matters, including the new director nominees. FSH and Mr. Tannenbaum have agreed to vote their shares in favor of the proposed investment advisory agreements and related corporate governance matters, including the new director nominees.

At the closing of the transaction, all current FSC board members except Richard P. Dutkiewicz, and all current FSFR board members except Richard W. Cohen, will resign. Each BDC board has nominated Marc H. Gamsin, Craig Jacobson, Richard G. Ruben and Bruce Zimmerman as new independent directors and John Frank, Vice Chairman of Oaktree, as a new interested director of the board, each of whom would take office upon approval of the stockholders and closing of the transaction. Mr. Frank is expected to serve as Chairman of each BDC board. The executive officers of FSC and FSFR will resign and will be replaced with certain individuals affiliated with Oaktree at the closing of the transaction.

Following the closing of the transaction, FSAM’s Board of Directors currently intends to make an initial cash distribution to FSAM stockholders in the amount of approximately $2.75 per share of Class A common stock. In addition, FSAM’s Board of Directors currently expects that it will seek to approve in the future additional distributions to FSAM stockholders. The declaration of, the record date and timing of payment for, and the form and amount of, any anticipated dividends or distributions will be determined by FSAM’s Board of Directors at an appropriate time following the closing after taking into account all relevant factors, including regarding whether FSAM is able to satisfy the necessary legal tests required to make any such dividend or distribution.

FSH and FSM have agreed to reimburse up to $5 million of Oaktree’s expenses incurred in connection with the transaction upon closing of the transaction. In addition, FSH and FSM have agreed to indemnify Oaktree, FSC and FSFR for certain liabilities following the closing. $42 million of the cash purchase price will be escrowed at the closing to support these indemnification obligations. FSH has also agreed to pledge $35 million of FSC common stock and $10 million of FSFR common stock to support certain of these indemnification obligations.

FSC and FSFR will shortly file preliminary proxy statements with the U.S. Securities and Exchange Commission (SEC) in connection with the stockholder approval process and special meetings of the stockholders of each of FSC and FSFR.

Consummation of the transactions contemplated by the asset purchase agreement are subject to FSAM stockholder approval, approval of the new investment advisory agreements and related corporate governance matters, including the new director nominees by the stockholders of both BDCs, Hart-Scott-Rodino antitrust clearance and certain other closing conditions.

Morgan Stanley is serving as financial advisor to FSAM, Houlihan Lokey is serving as financial advisor to the Special Committee of FSAM’s Board of Directors and Skadden, Arps, Slate, Meagher & Flom is serving as legal advisor to FSAM and the Special Committee of FSAM’s Board of Directors. Rutan & Tucker is serving as legal advisor to Mr. Tannenbaum in his personal capacity. Sullivan & Worcester is serving as legal advisor to the independent directors of FSC and FSFR.

Eleanor Steed
By Eleanor Steed July 19, 2017 16:17