A recent quarterly conference call made by Fifth Street Finance Corp. (NASDAQ:FSC) shows the company’s indifferent towards its shareholders. The company mainly earns profits by supplying to other companies at a rate higher than the purchase price. The format of the business is simple and straight forward.
Another way the company earns money is self-production. In other words, the company gives out loans of $0.99 on the dollar to borrowers and later markets the loan for a face value of $1, hence getting a 1% originating fee for its time and amount of work.
The chief financial officer of Fifth Street Finance Corp. (NASDAQ:FSC), Rich Petrocelli explained that generally the economics on a syndication can be 50 basis points to 100 basis points of added income, but it actually depends on the loan. Providentially upon taking down the entire piece, one takes additional risk, which enables the company to capture some of that when it syndicates down.
The concept is very simple to grasp. Fifth Street Finance Corp. (NASDAQ:FSC) can easily make more money for its shareholders by gaining loans at a discount for reselling purpose. It is very similar to any retailer that buys inventory in bulk and resells it for a profit. The concept adds another source of income, besides the income generated by the company’s interest and dividend, which comes from its record of investments.
In the same conference call, the company’s CEO Len Tannenbaum was questioned about the purchase of shares at the current price. The company trades at a 10% discount to its book value. Hence it can efficiently purchase $1 of its current portfolio on the open market for $0.90 by recovering its own shares.
Tannenbaum responded to the question by saying that he did not think that making a forecast regarding the buyback is not appropriate. He further said that the company had previously said that it’s not for trade and that the company issue stock and buys it back. He said that if the stock is traded at a discount, then the company will utilize it.
If there is an option of buying $1 bills for $0.99 via new loans or for $0.99 by repurchasing the stocks, then for the benefit of the shareholders, the obvious choice a company would take is repurchase of stock for $0.90. In fact a company would become richer by buying $1 bills over and over again for $0.90. The fact that Fifth Street Finance Corp. (NASDAQ:FSC) is not utilizing the option shows that the company has no interest in the growth of its shareholders.
It is rather frustrating that a company that is willing to trade loans to gain 1% on every turn will refuse to trade its stock to gain 10% on every turn. The reason of this indifference is that although repurchasing of shares is a preferable deal for shareholders, it reduces the profits of the company’s external manager. This is the reason why Fifth Street Finance Corp. (NASDAQ:FSC) is not interested in taking up the option.