Oaktree Specialty Lending Corp - Quarter Report: 2013 December (Form 10-Q)

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller reporting company)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)



	þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2013



	¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-33901

Fifth Street Finance Corp.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)




DELAWARE		26-1219283
(State or jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10 Bank Street, 12^th Floor White Plains, NY		10606
(Address of principal executive office)		(Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:

(914) 286-6800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) YES ¨ NO þ

The registrant had 139,137,757 shares of common stock outstanding as of February 5, 2014.

Table of Contents

FIFTH STREET FINANCE CORP.

FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2013

TABLE OF CONTENTS




		PART I — FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited):
		Consolidated Statements of Assets and Liabilities as of December 31, 2013 and September 30, 2013	1
		Consolidated Statements of Operations for the three months ended December 31, 2013 and December 31, 2012	2
		Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2013 and December 31, 2012	3
		Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and December 31, 2012	4
		Consolidated Schedule of Investments as of December 31, 2013	5
		Consolidated Schedule of Investments as of September 30, 2013	15
		Notes to Consolidated Financial Statements	25
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		57
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		81
Item 4.	Controls and Procedures		81
		PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		83
Item 1A.	Risk Factors		83
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		83
Item 6.	Exhibits		83
Signatures			84

Table of Contents

PART I – FINANCIAL INFORMATION



Item 1.	Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Statements of Assets and Liabilities

(in thousands, except per share amounts)

(unaudited)



	December 31, 2013			September 30, 2013
ASSETS
Investments at fair value:
Control investments (cost December 31, 2013: $231,291; cost September 30, 2013: $207,518)	$	239,695		$	215,502
Affiliate investments (cost December 31, 2013: $38,803; cost September 30, 2013: $29,807)	41,712			31,932
Non-control/Non-affiliate investments (cost December 31, 2013: $2,078,941; cost September 30, 2013: $1,622,326)	2,095,305			1,645,612
Total investments at fair value (cost December 31, 2013: $2,349,035; cost September 30, 2013: $1,859,651)	2,376,712			1,893,046
Cash and cash equivalents	42,600			147,359
Interest and fees receivable	11,782			10,379
Due from portfolio company	3,094			1,814
Deferred financing costs	19,575			19,548
Other assets	720			187
Total assets	$	2,454,483		$	2,072,333

LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	3,030		$	1,166
Base management fee payable	12,059			9,625
Incentive fee payable	9,054			7,175
Due to FSC, Inc.	2,133			840
Interest payable	7,011			2,939
Payables from unsettled transactions	—			35,716
Credit facilities payable	564,228			188,000
SBA debentures payable	210,750			181,750
Unsecured convertible notes payable	115,000			115,000
Unsecured notes payable	161,250			161,250
Total liabilities	1,084,515			703,461
Commitments and contingencies (Note 3)
Net assets:
Common stock, $0.01 par value, 250,000 shares authorized; 139,138 and 139,041 shares issued and outstanding at December 31, 2013 and September 30, 2013, respectively	1,391			1,390
Additional paid-in-capital	1,510,548			1,509,546
Net unrealized appreciation on investments	27,677			33,395
Net realized loss on investments and interest rate swap	(151,385		)	(154,591		)
Accumulated overdistributed net investment income	(18,263		)	(20,868		)
Total net assets (equivalent to $9.85 per common share at December 31, 2013 and September 30, 2013) (Note 12)	1,369,968			1,368,872
Total liabilities and net assets	$	2,454,483		$	2,072,333

See notes to Consolidated Financial Statements.

Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)



	Three months ended December 31, 2013			Three months ended December 31, 2012
Interest income:
Control investments	$	2,419		$	882
Affiliate investments	766			584
Non-control/Non-affiliate investments	45,296			33,454
Interest on cash and cash equivalents	3			3
Total interest income	48,484			34,923
PIK interest income:
Control investments	2,408			108
Affiliate investments	335			456
Non-control/Non-affiliate investments	2,870			3,156
Total PIK interest income	5,613			3,720
Fee income:
Control investments	567			99
Affiliate investments	170			12
Non-control/Non-affiliate investments	16,401			12,683
Total fee income	17,138			12,794
Dividend and other income:
Non-control/Non-affiliate investments	96			346
Total dividend and other income	96			346
Total investment income	71,331			51,783
Expenses:
Base management fee	12,059			8,046
Incentive fee	9,054			6,639
Professional fees	1,025			1,188
Board of Directors fees	155			129
Interest expense	10,213			7,156
Administrator expense	853			930
General and administrative expenses	1,754			1,139
Total expenses	35,113			25,227
Net investment income	36,218			26,556
Unrealized appreciation (depreciation) on investments:
Control investments	420			(1,222		)
Affiliate investments	783			(156		)
Non-control/Non-affiliate investments	(6,921		)	(7,961		)
Net unrealized depreciation on investments	(5,718		)	(9,339		)
Realized gain (loss) on investments:
Non-control/Non-affiliate investments	3,206			626
Net realized gain on investments	3,206			626
Net increase in net assets resulting from operations	$	33,706		$	17,843
Net investment income per common share — basic	$	0.26		$	0.28
Earnings per common share — basic	$	0.24		$	0.19
Weighted average common shares outstanding — basic	139,126			94,889
Net investment income per common share — diluted	$	0.26		$	0.27
Earnings per common share — diluted	$	0.24		$	0.19
Weighted average common shares outstanding — diluted	146,916			102,679

See notes to Consolidated Financial Statements.

Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Changes in Net Assets

(in thousands, except per share amounts)

(unaudited)



	Three months ended December 31, 2013			Three months ended December 31, 2012
Operations:
Net investment income	$	36,218		$	26,556
Net unrealized depreciation on investments	(5,718		)	(9,339		)
Net realized gain on investments	3,206			626
Net increase in net assets resulting from operations	33,706			17,843
Stockholder transactions:
Distributions to stockholders from ordinary income	(33,613		)	(27,593		)
Net decrease in net assets from stockholder transactions	(33,613		)	(27,593		)
Capital share transactions:
Issuance of common stock, net	—			151,334
Issuance of common stock under dividend reinvestment plan	3,411			1,725
Repurchases of common stock under stock repurchase program	(406		)	—
Repurchases of common stock under dividend reinvestment plan	(2,002		)	—
Net increase in net assets from capital share transactions	1,003			153,059
Total increase in net assets	1,096			143,309
Net assets at beginning of period	1,368,872			903,570
Net assets at end of period	$	1,369,968		$	1,046,879
Net asset value per common share	$	9.85		$	9.88
Common shares outstanding at end of period	139,138			105,943

See notes to Consolidated Financial Statements.

Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Cash Flows

(in thousands, except per share amounts)

(unaudited)



	Three months ended December 31, 2013			Three months ended December 31, 2012
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	33,706		$	17,843
Adjustments to reconcile net increase in net assets resulting from operations to net cash used by operating activities:
Net unrealized depreciation on investments	5,718			9,339
Net realized gains on investments	(3,206		)	(626		)
PIK interest income	(5,613		)	(3,720		)
Recognition of fee income	(17,138		)	(12,794		)
Accretion of original issue discount on investments	(164		)	(132		)
Amortization of deferred financing costs	1,405			1,275
Changes in operating assets and liabilities:
Fee income received	16,920			10,862
Increase in interest and fees receivable	(1,342		)	(635		)
(Increase) decrease in due from portfolio company	(1,280		)	1,608
Decrease in receivables from unsettled transactions	—			1,500
Increase in other assets	(135		)	(89		)
Increase in accounts payable, accrued expenses and other liabilities	1,982			400
Increase (decrease) in base management fee payable	2,435			(5,025		)
Increase (decrease) in incentive fee payable	1,879			(4,349		)
Increase (decrease) in due to FSC, Inc.	1,293			(867		)
Increase in interest payable	4,072			877
Decrease in payables from unsettled transactions	(35,716		)	—
Purchases of investments and net revolver activity, net of syndications	(650,118		)	(398,808		)
Principal payments received on investments (scheduled payments)	10,346			12,630
Principal payments received on investments (payoffs)	43,746			56,250
PIK interest income received in cash	4,226			313
Proceeds from the sale of investments	111,556			34,051
Net cash used by operating activities	(475,428		)	(280,097		)
Cash flows from financing activities:
Distributions paid in cash	(30,202		)	(25,868		)
Borrowings under SBA debentures payable	29,000			31,750
Borrowings under credit facilities	475,057			323,000
Repayments of borrowings under credit facilities	(98,829		)	(306,251		)
Proceeds from the issuance of unsecured notes	—			72,465
Proceeds from the issuance of common stock	—			151,668
Repurchases of common stock under stock repurchase program	(406		)	—
Repurchases of common stock under dividend reinvestment plan	(2,002		)	—
Deferred financing costs paid	(1,432		)	(3,125		)
Offering costs paid	(517		)	(497		)
Net cash provided by financing activities	370,669			243,142
Net decrease in cash and cash equivalents	(104,759		)	(36,955		)
Cash and cash equivalents, beginning of period	147,359			74,393
Cash and cash equivalents, end of period	$	42,600		$	37,438
Supplemental information:
Cash paid for interest	$	4,834		$	5,107
Non-cash financing activities:
Issuance of shares of common stock under dividend reinvestment plan	$	3,411		$	1,725

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost			Fair Value
Control Investments (3)
Traffic Solutions Holdings, Inc.	Construction and engineering
Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016		$	14,606	$	14,597		$	14,635
LC Facility, 8.5% cash due 12/31/2016 (10)				(3		)	—
746,114 Series A Preferred Units				13,193			16,297
746,114 Class A Common Stock Units				5,316			10,589
				33,103			41,521
TransTrade Operators, Inc. (9)	Air freight and logistics
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016		14,154		14,154			14,021
First Lien Revolver, 8% cash due 5/31/2016		—		—			—
596.67 Series A Common Units in TransTrade Holding LLC				—			—
3,033,333.33 Preferred Units in TransTrade Holding LLC				4,117			685
				18,271			14,706
HFG Holdings, LLC	Specialized finance
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019		94,087		94,087			94,187
860,000 Class A Units (12)				22,347			22,782
				116,434			116,969
First Star Aviation, LLC	Airlines
First Lien Term Loan, 9% cash 3% PIK due 1/9/2018		33,862		33,862			33,900
10,104,401 Common Units				10,104			11,057
				43,966			44,957
Eagle Hospital Physicians, LLC	Healthcare services
First Lien Term Loan A, 8% PIK due 8/1/2016		11,379		11,379			11,344
First Lien Term Loan B, 8.1% PIK due 8/1/2016		3,105		3,105			3,103
First Lien Revolver, 8% cash due 8/1/2016		933		933			932
4,100,000 Class A Common Units				4,100			6,163
				19,517			21,542
Total Control Investments (17.5% of net assets)				$	231,291		$	239,695
Affiliate Investments (4)
Caregiver Services, Inc.	Healthcare services
Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019		$	9,007	$	9,007		$	9,015
1,080,399 shares of Series A Preferred Stock				1,080			3,569
				10,087			12,584
AmBath/ReBath Holdings, Inc. (9)	Home improvement retail
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016		2,873		2,873			2,947
First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016		25,843		25,843			25,665
4,668,788 Shares of Preferred Stock				—			516
				28,716			29,128
Total Affiliate Investments (3.0% of net assets)				$	38,803		$	41,712
Non-Control/Non-Affiliate Investments (7)
Fitness Edge, LLC	Leisure facilities
1,000 Common Units (6)				$	43		$	215
				43			215
Thermoforming Technology Group LLC (formerly Capital Equipment Group, Inc.)	Industrial machinery
2.28% membership interest				849			849
				849			849
HealthDrive Corporation (9)	Healthcare services
First Lien Term Loan A, 10% cash due 7/17/2014		$	4,164	4,162			4,076
First Lien Term Loan B, 12% cash 1% PIK due 7/17/2014		10,791		10,791			10,790
First Lien Revolver, 12% cash due 7/17/2014		2,266		2,266			2,282
				17,219			17,148
Cenegenics, LLC	Healthcare services
First Lien Term Loan, 9.75% cash due 9/30/2019		33,200		33,177			33,239
414,419 Common Units (6)				598			1,303
				33,775			34,542

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost		Fair Value
Riverlake Equity Partners II, LP	Multi-sector holdings
1.78% limited partnership interest (6)(12)			436		427
			436		427
Riverside Fund IV, LP	Multi-sector holdings
0.34% limited partnership interest (6)(12)			713		654
			713		654
Psilos Group Partners IV, LP	Multi-sector holdings
2.35% limited partnership interest (11)(12)			—		—
			—		—
Mansell Group, Inc. (9)	Advertising
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2015		5,998	5,956		6,060
First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 4/30/2015		9,461	9,408		9,547
First Lien Revolver, LIBOR+6% (3% floor) cash due 4/30/2015 (10)			(11	)	—
			15,353		15,607
Enhanced Recovery Company, LLC	Diversified support services
First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015		11,500	11,416		11,497
First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015		16,014	15,930		16,021
First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015		500	470		500
			27,816		28,018
Specialty Bakers LLC	Food distributors
First Lien Term Loan A, LIBOR+8.5% cash due 9/15/2015		3,139	3,035		3,138
First Lien Term Loan B, LIBOR+11% (2.5% floor) cash due 9/15/2015		11,000	10,899		10,995
First Lien Revolver, LIBOR+8.5% cash due 9/15/2015		2,000	1,963		2,003
			15,897		16,136
Welocalize, Inc.	Internet software & services
3,393,060 Common Units in RPWL Holdings, LLC			3,393		7,277
			3,393		7,277
Miche Bag, LLC (9)	Apparel, accessories & luxury goods
First Lien Term Loan B, LIBOR+10% (3% floor) 3% PIK due 12/7/2015		17,666	16,543		17,409
First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015 (10)			(29	)	—
10,371 Series A Preferred Equity units in Miche Bag Holdings, LLC			1,037		40
1,358.854 Series C Preferred Equity units in Miche Bag Holdings, LLC			136		—
19,417 Series A Common Equity units in Miche Bag Holdings, LLC			—		—
146,289 Series D Common Equity units in Miche Bag Holdings, LLC			1,463		—
			19,150		17,449
Bunker Hill Capital II (QP), LP	Multi-sector holdings
0.51% limited partnership interest (12)			361		263
			361		263
Drugtest, Inc. (9)	Human resources & employment services
First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 6/27/2018		38,317	38,189		38,605
First Lien Term Loan B, LIBOR+10% (1% floor) 1.5% PIK due 6/27/2018		15,792	15,712		15,767
First Lien Revolver, LIBOR+6% (1% floor) cash due 6/27/2018 (10)			(38	)	—
			53,863		54,372
Physicians Pharmacy Alliance, Inc. (9)	Healthcare services
First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016		11,433	11,293		11,434
First Lien Revolver, LIBOR+6% cash due 1/4/2016 (10)			(16	)	—
			11,277		11,434
Cardon Healthcare Network, LLC	Diversified support services
69,487 Class A Units			265		507
			265		507
Phoenix Brands Merger Sub LLC (9)	Household products
Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016		5,196	5,122		5,119
Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017		21,821	21,556		21,001
Senior Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016		3,000	2,930		3,000
			29,608		29,120

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost	Fair Value
CCCG, LLC (9)	Oil & gas equipment services
First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 12/29/2017		35,328	34,926	34,727
First Lien Revolver, LIBOR+5.5% (1.75% floor) cash due 12/31/2014			—	—
			34,926	34,727
Maverick Healthcare Group, LLC	Healthcare equipment
First Lien Term Loan A, LIBOR+9% (1.75% floor) cash due 12/31/2016		9,900	9,900	9,919
First Lien Term Loan B, LIBOR+9% (1.75% floor) cash due 12/31/2016		38,800	38,470	38,745
			48,370	48,664
Refac Optical Group	Specialty stores
First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018		23,846	23,704	23,928
First Lien Term Loan B, LIBOR+8.5% cash 1.75% PIK due 9/30/2018		33,023	32,752	33,131
First Lien Term Loan C, 12% cash due 12/31/2014		7,757	7,757	7,757
First Lien Revolver, LIBOR+7.5% cash due 9/30/2018		4,400	4,341	4,400
1,550.9435 Shares of Common Stock in Refac Holdings, Inc.			1	—
500.9435 Shares of Series A-2 Preferred Stock in Refac Holdings, Inc.			305	—
1,000 Shares of Series A Preferred Stock in Refac Holdings, Inc.			999	889
			69,859	70,105
GSE Environmental, Inc. (9)	Environmental & facilities services
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/27/2016		3,780	3,730	3,175
			3,730	3,175
Baird Capital Partners V, LP	Multi-sector holdings
0.40% limited partnership interest (12)			649	743
			649	743
Charter Brokerage, LLC	Oil & gas equipment services
Senior Term Loan, LIBOR+6.5% (1.5% floor) cash due 10/10/2016		28,534	28,458	28,840
Subordinated Term Loan, 11.75% cash 2% PIK due 10/10/2017		12,036	11,986	11,999
Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 10/10/2016		1,067	1,030	1,067
			41,474	41,906
Discovery Practice Management, Inc. (9)	Healthcare services
First Lien Term Loan, LIBOR+9.75% cash due 11/4/2018		20,568	20,481	20,568
First Lien Revolver, LIBOR+6% cash due 11/4/2018		600	580	600
			21,061	21,168
Milestone Partners IV, LP	Multi-sector holdings
0.86% limited partnership interest (6)(12)			709	772
			709	772
Insight Pharmaceuticals LLC	Pharmaceuticals
Second Lien Term Loan, LIBOR+11.75% (1.5% floor) cash due 8/25/2017		13,517	13,445	13,599
			13,445	13,599
National Spine and Pain Centers, LLC	Healthcare services
Subordinated Term Loan, 11% cash 1.6% PIK due 9/27/2017		29,382	29,215	29,655
317,282.97 Class A Units			317	428
			29,532	30,083
RCPDirect, LP	Multi-sector holdings
0.91% limited partnership interest (6)(12)			641	559
			641	559
The MedTech Group, Inc. (9)	Healthcare equipment
Senior Term Loan, LIBOR+5.5% (1.25% floor) cash due 9/7/2016		12,366	12,303	12,373
			12,303	12,373
Digi-Star Acquisition Holdings, Inc.	Industrial machinery
Subordinated Term Loan, 12% cash 1.5% PIK due 11/18/2017		16,509	16,428	16,694
264.37 Class A Preferred Units			115	115
2,954.87 Class A Common Units (6)			36	359
			16,579	17,168

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost		Fair Value
CPASS Acquisition Company	Internet software & services
First Lien Term Loan, LIBOR+9% (1.5% floor) cash 1% PIK due 11/21/2016		7,986	7,909		8,058
First Lien Revolver, LIBOR+9% (1.5% floor) cash due 11/21/2016		250	239		250
			8,148		8,308
Genoa Healthcare Holdings, LLC	Pharmaceuticals
Senior Term Loan, LIBOR+5.25% (1.25% floor) cash due 12/1/2016		8,663	8,663		8,663
Subordinated Term Loan, 12% cash 2% PIK due 6/1/2017		13,039	12,961		13,163
Senior Revolver, LIBOR+5.25% (1.25% floor) cash due 12/1/2016			—		—
500,000 Preferred units (6)			261		282
500,000 Class A Common Units			25		651
			21,910		22,759
ACON Equity Partners III, LP	Multi-sector holdings
0.15% limited partnership interest (6)(12)			336		151
			336		151
CRGT, Inc.	IT consulting & other services
Subordinated Term Loan, 12.5% cash 3% PIK due 3/9/2018		26,947	26,770		27,753
			26,770		27,753
Riverside Fund V, LP	Multi-sector holdings
0.48% limited partnership interest (12)			418		354
			418		354
World 50, Inc.	Research & consulting services
First Lien Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017		10,537	10,451		10,701
First Lien Term Loan B, 12.5% cash due 3/30/2017		7,000	6,947		7,111
Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)			(39	)	—
			17,359		17,812
Nixon, Inc.	Apparel, accessories & luxury goods
First Lien Term Loan, 8.75% cash 2.75% PIK due 4/16/2018		9,242	9,171		9,341
			9,171		9,341
JTC Education, Inc. (9)	Education services
Subordinated Term Loan, 13% cash due 11/1/2017		14,500	14,420		14,605
17,391 Shares of Series A-1 Preferred Stock			313		393
17,391 Shares of Common Stock			187		11
			14,920		15,009
BMC Acquisition, Inc.	Diversified financial services
Senior Term Loan, LIBOR+5.5% (1% floor) cash due 5/1/2017		5,220	5,192		5,212
Senior Revolver, LIBOR+5% (1% floor) cash due 5/1/2017 (10)			(6	)	—
500 Series A Preferred Shares			499		553
50,000 Common Shares			1		—
			5,686		5,765
Ansira Partners, Inc. (9)	Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017		10,320	10,261		10,328
First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)			(6	)	—
250 Preferred Units & 250 Class A Common Units of Ansira Holdings, LLC			250		323
			10,505		10,651
Edmentum, Inc.	Education services
Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019		17,000	17,000		17,100
			17,000		17,100
I Drive Safely, LLC	Education services
First Lien Term Loan, LIBOR+8.5% (1.5% floor) cash due 5/25/2017		27,000	26,986		27,440
First Lien Revolver, LIBOR+6.5% (1.5% floor) cash due 5/25/2017 (10)			(3	)	—
75,000 Class A Common Units of IDS Investments, LLC			750		946
			27,733		28,386

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost		Fair Value
Yeti Acquisition, LLC (9)	Leisure products
First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017		18,100	18,082		18,186
First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK due 6/15/2017		12,000	11,993		12,025
First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)			(6	)	—
1,500 Common Stock Units of Yeti Holdings, Inc.			1,500		3,451
			31,569		33,662
Specialized Education Services, Inc.	Education services
Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 6/28/2017		8,891	8,891		8,887
Subordinated Term Loan, 11% cash 1.5% PIK due 6/28/2018		17,907	17,907		17,949
			26,798		26,836
PC Helps Support, LLC	IT consulting & other services
Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018		18,876	18,876		19,046
675 Series A Preferred Units of PCH Support Holdings, Inc.			675		515
7,500 Class A Common Stock Units of PCH Support Holdings, Inc.			75		—
			19,626		19,561
Olson + Co., Inc. (9)	Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/30/2017		13,853	13,853		13,854
First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 9/30/2017			—		—
			13,853		13,854
Beecken Petty O’Keefe Fund IV, L.P.	Multi-sector holdings
0.5% limited partnership interest (12)			211		211
			211		211
Deltek, Inc. (9)	IT consulting & other services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019		25,000	25,000		25,371
First Lien Revolver, LIBOR+4.75% (1.25% floor) cash due 10/10/2017			—		—
			25,000		25,371
First American Payment Systems, LP	Diversified support services
Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019		25,000	25,000		25,178
First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017		233	233		233
			25,233		25,411
Dexter Axle Company	Auto parts & equipment
Subordinated Term Loan, 11.25% cash 2% PIK due 11/1/2019		30,717	30,717		31,073
1,500 Common Shares in Dexter Axle Holding Company			1,500		1,809
			32,217		32,882
SumTotal Systems, LLC	Internet software & services
Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 5/16/2019		20,000	20,000		20,002
			20,000		20,002
Comprehensive Pharmacy Services, LLC	Pharmaceuticals
Subordinated Term Loan, 11.25% cash 1.5% PIK due 11/30/2019		14,201	14,201		14,572
20,000 Common Shares in MCP CPS Group Holdings, Inc. (6)			2,000		2,319
			16,201		16,891
Reliance Communications, LLC	Internet software & services
First Lien Term Loan A, LIBOR+7% (1% floor) cash due 12/18/2017		21,477	21,450		21,562
First Lien Term Loan B, LIBOR+11.5% (1% floor) cash due 12/18/2017		11,333	11,320		11,379
First Lien Revolver, LIBOR+7% (1% floor) cash due 12/18/2017 (10)			(6	)	—
			32,764		32,941
Garretson Firm Resolution Group, Inc.	Diversified support services
First Lien Term Loan, LIBOR+5% (1.25% floor) cash due 12/20/2018		7,124	7,124		7,163
Subordinated Term Loan, 11% cash 1.5% PIK due 6/20/2019		5,038	5,038		5,063
First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017		713	712		713
4,950,000 Preferred Units in GRG Holdings, LP			495		378
50,000 Common Units in GRG Holdings, LP			5		—
			13,374		13,317

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost		Fair Value
Teaching Strategies, LLC	Education services
First Lien Term Loan A, LIBOR+6% (1.25% floor) cash due 12/21/2017		59,850	59,822		60,346
First Lien Term Loan B, LIBOR+8.35% (1.25% floor) cash 3.15% PIK due 12/21/2017		27,902	27,889		28,019
First Lien Revolver, LIBOR+6% (1.25% floor) cash due 12/21/2017		1,000	996		1,000
			88,707		89,365
Omniplex World Services Corporation	Security & alarm services
Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018		12,664	12,664		12,652
500 Class A Common Units in Omniplex Holdings Corp.			500		542
			13,164		13,194
Dominion Diagnostics, LLC	Healthcare services
Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018		15,827	15,827		16,073
			15,827		16,073
Affordable Care, Inc.	Healthcare services
Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019		21,500	21,500		21,920
			21,500		21,920
Aderant North America, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/20/2019		7,000	7,000		7,047
			7,000		7,047
AdVenture Interactive, Corp.	Advertising
First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018		91,989	91,981		92,068
First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018			—		—
2,000 Preferred Units of AVI Holdings, L.P. (6)			2,000		1,271
			93,981		93,339
CoAdvantage Corporation	Human resources & employment services
Subordinated Term Loan, 11.5% cash 1.25% PIK due 12/31/2018		10,126	10,126		10,329
50,000 Class A Units in CIP CoAdvantage Investments LLC			500		388
			10,626		10,717
EducationDynamics, LLC	Education services
Subordinated Term Loan, 12% cash 6% PIK due 1/16/2017		11,232	11,232		11,196
			11,232		11,196
Vestcom International, Inc.	Data processing & outsourced services
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 12/26/2018		9,925	9,925		9,956
			9,925		9,956
Sterling Capital Partners IV, L.P.	Multi-sector holdings
0.20% limited partnership interest (6)(12)			460		501
			460		501
Devicor Medical Products, Inc.	Healthcare equipment
First Lien Term Loan, LIBOR+5% (2% floor) cash due 7/8/2015		9,429	9,429		9,427
			9,429		9,427
RP Crown Parent, LLC	Application software
First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (10)			(583	)	—
			(583	)	—
Advanced Pain Management Holdings, Inc.	Healthcare services
First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018		24,000	24,000		24,412
			24,000		24,412
Rocket Software, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2019		10,475	10,437		10,551
			10,437		10,551
TravelClick, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 3/26/2018		15,000	15,000		15,069
			15,000		15,069

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost	Fair Value
ISG Services, LLC	Diversified support services
First Lien Term Loan, LIBOR+8% (1% floor) cash due 3/28/2018		94,416	94,404	94,829
First Lien Revolver, LIBOR+8% (1% floor) cash due 3/28/2018		4,000	3,999	4,000
			98,403	98,829
Joerns Healthcare, LLC	Healthcare services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 9/28/2018		20,000	20,000	19,846
			20,000	19,846
Pingora MSR Opportunity Fund I, LP	Thrift & mortgage finance
1.90% limited partnership interest (12)			208	127
			208	127
Chicago Growth Partners III, LP	Multi-sector holdings
0.50% limited partnership interest (11)(12)			—	—
			—	—
Credit Infonet, Inc.	Data processing & outsourced services
Subordinated Term Loan, 12.25% cash due 10/26/2018		13,250	13,250	13,583
			13,250	13,583
H.D. Vest, Inc.	Specialized finance
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 6/18/2019		8,750	8,750	8,813
			8,750	8,813
2Checkout.com, Inc.	Diversified support services
First Lien Revolver, LIBOR+5% cash due 6/26/2016		1,650	1,648	1,650
			1,648	1,650
Meritas Schools Holdings, LLC	Education services
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 6/25/2019		9,943	9,943	10,035
			9,943	10,035
Personable Holdings, Inc.	Other diversified financial services
First Lien Term Loan, LIBOR+6% (1.25% floor) cash due 5/16/2018		10,969	10,969	10,980
First Lien Revolver, LIBOR+6% (1.25% floor) cash due 5/16/2018			—	—
			10,969	10,980
Ikaria Acquisition, Inc.	Healthcare services
First Lien Term Loan B, LIBOR+6% (1.25% floor) cash due 7/3/2018		9,750	9,750	9,751
Second Lien Term Loan, LIBOR+9.75% (1.25% floor) cash due 7/3/2019		8,000	8,000	7,983
			17,750	17,734
Royal Adhesives and Sealants, LLC	Specialty chemicals
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 1/31/2019		13,500	13,500	13,498
			13,500	13,498
Bracket Holding Corp.	Healthcare services
Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020		32,000	32,000	32,003
50,000 Common Units in AB Group Holdings, LP			500	458
			32,500	32,461
Salus CLO 2012-1, Ltd.	Asset management & custody banks
Class F Deferrable Notes - A, LIBOR+11.5% cash due 3/5/2021 (12)		7,500	7,500	7,500
Class F Deferrable Notes - B, LIBOR+10.85% cash due 3/5/2021 (12)		22,000	22,000	22,000
			29,500	29,500
HealthEdge Software, Inc.	Application software
Second Lien Term Loan, 12% cash due 9/30/2018		12,500	12,500	12,509
			12,500	12,509
InMotion Entertainment Group, LLC	Consumer electronics
First Lien Term Loan, LIBOR+7.75% (1.25% floor) cash due 10/1/2018		33,700	33,674	33,700
First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 10/1/2018		1,703	1,697	1,703
CapEx Line, LIBOR+7.75% (1.25% floor) cash due 10/1/2018		385	379	385
1,000,000 Class A Units in InMotion Entertainment Holdings, LLC			1,000	1,000
			36,750	36,788

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost		Fair Value
BMC Software Finance, Inc.	Application software
First Lien Revolver, LIBOR+4% (1% floor) cash due 9/10/2018			—		—
			—		—
CT Technologies Intermediate Holdings, Inc.	Healthcare services
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/4/2020		12,000	12,000		12,000
			12,000		12,000
Thing5, LLC	Data processing & outsourced services
First Lien Term Loan, LIBOR+7% (1% floor) cash due 10/11/2018		45,000	44,967		45,000
First Lien Revolver, LIBOR+7% (1% floor) cash due 10/11/2018 (10)			(4	)	—
2,000,000 Common Units in T5 Investment Vehicle, LLC			2,000		2,000
			46,963		47,000
Epic Health Services, Inc.	Healthcare services
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/16/2019		30,000	30,000		30,000
			30,000		30,000
Kason Corporation	Industrial machinery
Subordinated Term Loan, 11.5% cash 1.75% PIK due 10/28/2019		5,620	5,620		5,620
450 Class A Preferred Units in Kason Investment, LLC			450		450
5,000 Class A Common Units in Kason Investment, LLC			50		50
			6,120		6,120
First Choice ER, LLC	Healthcare services
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 10/31/2018		75,000	74,978		75,000
First Lien Revolver, LIBOR+7.5% (1% floor) cash due 10/31/2018 (10)			(3	)	—
First Lien Delayed Draw Term Loan, LIBOR+7.5% (1% floor) cash due 4/30/2015 (10)			(50	)	—
			74,925		75,000
SPC Partners V, LP	Multi-sector holdings
0.4% limited partnership interest (12)			277		277
			277		277
Systems Maintenance Services Holdings, Inc.	IT consulting & other services
Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/18/2020		24,000	24,000		24,000
			24,000		24,000
Vandelay Industries Merger Sub, Inc.	Industrial machinery
Second Lien Term Loan, 10.75% cash 1% PIK due 11/12/2019		32,044	32,044		32,044
2,500,000 Class A Common Units in Vandelay Industries, LP			2,500		2,500
			34,544		34,544
Vitera Healthcare Solutions, LLC	Healthcare technology
First Lien Term Loan, LIBOR+5% (1% floor) cash due 11/4/2020		5,000	5,000		5,000
Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 11/4/2021		8,000	8,000		8,000
			13,000		13,000
Renaissance Learning, Inc.	Education services
Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 5/13/2021		16,000	16,000		16,000
			16,000		16,000
SugarSync, Inc.	Internet software & services
First Lien Term Loan, LIBOR+10% (0.5% floor) cash due 11/18/2016		6,500	6,500		6,500
			6,500		6,500
The Active Network, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/15/2021		13,600	13,600		13,600
			13,600		13,600
OmniSYS Acquisition Corporation	Diversified support services
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 11/21/2018		21,000	20,962		21,000
First Lien Revolver, LIBOR+7.5% (1% floor) cash due 11/21/2018 (10)			(4	)	—
100,000 Common Units in OSYS Holdings, LLC			1,000		1,000
			21,958		22,000

See notes to Consolidated Financial Statements

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)	Cost			Fair Value
Med-Data, Incorporated	Diversified support services
First Lien Term Loan, LIBOR+7.25% (1% floor) cash due 11/22/2018		55,000	54,962			55,000
First Lien Revolver, LIBOR+7.25% (1% floor) cash due 11/22/2018 (10)			(4		)	—
			54,958			55,000
All Web Leads, Inc.	Advertising
First Lien Term Loan, LIBOR+8% (1% floor) cash due 11/26/2018		50,750	50,713			50,750
First Lien Revolver, LIBOR+8% (1% floor) cash due 11/26/2018 (10)			(5		)	—
			50,708			50,750
Moelis Capital Partners Opportunity Fund I-B, LP	Multi-sector holdings
1.0% limited partnership interest (11)(12)			—			—
			—			—
Aden & Anais Merger Sub, Inc.	Apparel, accessories & luxury goods
Subordinated Term Loan, 10% cash 2% PIK due 6/23/2019		12,006	12,006			12,006
30,000 Common Units in Aden & Anais Holdings, Inc.			3,000			3,000
			15,006			15,006
Lift Brands, Inc.	Leisure facilities
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/23/2019		80,000	79,926			80,000
First Lien Revolver, LIBOR+7.5% (1% floor) cash due 12/23/2019 (10)			(18		)	—
2,000,000 Class A Common Units in Snap Investments, LLC			2,000			2,000
			81,908			82,000
Tailwind Capital Partners II, LP	Multi-sector holdings
0.3% limited partnership interest (11)(12)			—			—
			—			—

Total Non-Control/Non-Affiliate Investments (152.9% of net assets)			$	2,078,941		$	2,095,305
Total Portfolio Investments (173.5% of net assets)			$	2,349,035		$	2,376,712

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

December 31, 2013

(unaudited)


(1)	All debt investments are income producing unless otherwise noted. Equity is non-income producing unless otherwise noted.


(2)	See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.


(3)	Control Investments are defined by the Investment Company Act of 1940 (“1940 Act”) as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.


(4)	Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.


(5)	Equity ownership may be held in shares or units of companies related to the portfolio companies.


(6)	Income producing through payment of dividends or distributions.


(7)	Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.


(8)	Principal includes accumulated PIK interest and is net of repayments.

(9)Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to tier pricing arrangements or financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:



Portfolio Company	Effective date	Cash interest	PIK interest	Reason
Olson + Co., Inc.	December 13, 2013	+ 0.25% on Term Loan & Revolver		Per loan amendment
Phoenix Brands Merger Sub LLC	November 21, 2013	+ 2.75% on Senior Term Loan, Revolver and Subordinated Term Loan		Per loan agreement
GSE Environmental, Inc.	November 1, 2013	+ 2.5% on Term Loan		Per loan amendment
TransTrade Operators, Inc.	October 1, 2013	- 11.0% on Term Loan	+ 11.0% on Term Loan	Per loan amendment
HealthDrive Corporation	October 1, 2013	- 4.0% on Term Loan A - 6.0% on Term Loan B	+ 6.0% on Term Loan A + 7.0% on Term Loan B	Per loan amendment
Miche Bag, LLC	July 26, 2013	- 3.0% on Term Loan B	- 1.0% on Term Loan B	Per loan amendment
Ansira Partners, Inc.	June 30, 2013	- 0.5% on Term Loan & Revolver		Tier pricing per loan agreement
Drugtest, Inc.	June 27, 2013	- 1.5% on Term Loan A - 0.75% on Term Loan B - 0.25% on Revolver	- 0.5% on Term Loan B	Per loan amendment
The MedTech Group, Inc.	June 12, 2013	- 0.50% on Term Loan		Per loan amendment
Physicians Pharmacy Alliance, Inc.	April 1, 2013	+ 3.0% on Term Loan & Revolver	+ 1.0% on Term Loan	Per loan agreement
Discovery Practice Management, Inc.	April 1, 2013	- 1.0% on Term Loan A - 1.0% on Revolver	- 1.0% on Term Loan B	Tier pricing per loan agreement
Deltek, Inc.	February 1, 2013	- 1.0% on Revolver		Per loan amendment
JTC Education, Inc.	January 1, 2013	+ 0.25% on Term Loan		Per loan amendment
Mansell Group, Inc.	January 1, 2013	+ 2.0% on Term Loan A, Term Loan B & Revolver		Per loan agreement
CCCG, LLC	November 15, 2012	+ 0.5% on Term Loan	+ 1.0% on Term Loan	Per loan amendment
Yeti Acquisition, LLC	October 1, 2012	– 1.0% on Term Loan A, Term Loan B & Revolver		Tier pricing per loan agreement
Ambath/Rebath Holdings, Inc.	April 1, 2012	– 2.0% on Term Loan A – 4.5% on Term Loan B	+ 2.0% on Term Loan A + 4.5% on Term Loan B	Per loan amendment


(10)	Investment has undrawn commitments and a negative cost basis as a result of unamortized fees. Unamortized fees are classified as unearned income which reduces cost basis.


(11)	Represents an unfunded commitment to fund limited partnership interest.


(12)	Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act, in whole or in part.

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost			Fair Value
Control Investments (3)
Traffic Solutions Holdings, Inc.	Construction and engineering
Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016		$	14,494	$	14,480		$	14,499
LC Facility, 8.5% cash due 12/31/2016 (10)				(5		)	—
746,114 Series A Preferred Units				12,786			15,891
746,114 Class A Common Stock Units				5,316			10,529
				32,577			40,919
TransTrade Operators, Inc.	Air freight and logistics
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016		13,660		13,660			13,524
596.67 Series A Common Units in TransTrade Holding LLC				—			—
3,033,333.33 Preferred Units in TransTrade Holding LLC				3,033			539
				16,693			14,063
HFG Holdings, LLC	Specialized finance
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019		93,135		93,135			93,297
860,000 Class A Units (12)				22,347			22,346
				115,482			115,643
First Star Aviation, LLC	Airlines
First Lien Term Loan, 9% cash 3% PIK due 1/9/2018		19,211		19,211			19,211
5,264,207 Common Units				5,264			5,264
				24,475			24,475
Eagle Hospital Physicians, LLC (13)	Healthcare services
First Lien Term Loan A, 8% PIK due 8/1/2016		11,150		11,150			11,149
First Lien Term Loan B, 8.1% PIK due 8/1/2016		3,041		3,041			3,050
First Lien Revolver, 8% cash due 8/1/2016				—			—
4,100,000 Class A Common Units				4,100			6,203
				18,291			20,402
Total Control Investments (15.7% of net assets)				$	207,518		$	215,502
Affiliate Investments (4)
Caregiver Services, Inc.	Healthcare services
1,080,399 shares of Series A Preferred Stock				$	1,080		$	3,256
				1,080			3,256
AmBath/ReBath Holdings, Inc. (9)	Home improvement retail
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016		$	3,223	3,219			3,272
First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016		25,515		25,508			25,317
4,668,788 Shares of Preferred Stock				—			87
				28,727			28,676
Total Affiliate Investments (2.3% of net assets)				$	29,807		$	31,932
Non-Control/Non-Affiliate Investments (7)
Fitness Edge, LLC	Leisure facilities
1,000 Common Units (6)				$	43		$	190
				43			190
Capital Equipment Group, Inc. (9)	Industrial machinery
Second Lien Term Loan, 12% cash 2.75% PIK due 12/27/2015		$	4,007	4,007			4,003
33,786 shares of Common Stock				345			1,206
				4,352			5,209
Western Emulsions, Inc.	Construction materials
Second Lien Term Loan, 12.5% cash 2.5% PIK due 6/30/2014		7,200		7,170			7,297
				7,170			7,297
HealthDrive Corporation (9)	Healthcare services
First Lien Term Loan A, 10% cash due 7/17/2014		4,151		4,148			4,213
First Lien Term Loan B, 12% cash 1% PIK due 7/17/2014		10,573		10,573			10,497
First Lien Revolver, 12% cash due 7/17/2014		2,266		2,266			2,266
				16,987			16,976

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost			Fair Value
Cenegenics, LLC	Healthcare services
First Lien Term Loan, 9.75% cash due 9/30/2019		$	33,500	$	33,468		$	33,527
414,419 Common Units (6)				598			1,317
				34,066			34,844
Riverlake Equity Partners II, LP	Multi-sector holdings
1.78% limited partnership interest (6)(12)				362			325
				362			325
Riverside Fund IV, LP	Multi-sector holdings
0.34% limited partnership interest (6)(12)				713			658
				713			658
Psilos Group Partners IV, LP	Multi-sector holdings
2.35% limited partnership interest (11)(12)				—			—
				—			—
Mansell Group, Inc. (9)	Advertising
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2015		6,551		6,498			6,616
First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 4/30/2015		9,424		9,362			9,510
First Lien Revolver, LIBOR+6% (3% floor) cash due 4/30/2015 (10)		—		(13		)	—
				15,847			16,126
Enhanced Recovery Company, LLC	Diversified support services
First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015		11,500		11,398			11,522
First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015		16,013		15,913			15,999
First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015		500		463			500
				27,774			28,021
Specialty Bakers LLC	Food distributors
First Lien Term Loan A, LIBOR+8.5% cash due 9/15/2015		3,720		3,596			3,721
First Lien Term Loan B, LIBOR+11% (2.5% floor) cash due 9/15/2015		11,000		10,882			11,011
First Lien Revolver, LIBOR+8.5% cash due 9/15/2015		4,000		3,957			4,000
				18,435			18,732
Welocalize, Inc.	Internet software & services
3,393,060 Common Units in RPWL Holdings, LLC				3,393			7,695
				3,393			7,695
Miche Bag, LLC (9)	Apparel, accessories & luxury goods
First Lien Term Loan B, LIBOR+10% (3% floor) 3% PIK due 12/7/2015		17,576		16,307			17,514
First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015 (10)				(33		)	—
10,371 Series A Preferred Equity units in Miche Bag Holdings, LLC				1,037			419
1,358.854 Series C Preferred Equity units in Miche Bag Holdings, LLC				136			—
19,417 Series A Common Equity units in Miche Bag Holdings, LLC				—			—
146,289 Series D Common Equity units in Miche Bag Holdings, LLC				1,463			—
				18,910			17,933

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost			Fair Value
Bunker Hill Capital II (QP), LP	Multi-sector holdings
0.51% limited partnership interest (12)				$	214		$	121
				214			121
Drugtest, Inc. (9)	Human resources & employment services
First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 6/27/2018		$	38,809	38,702			38,864
First Lien Term Loan B, LIBOR+10% (1% floor) 1.5% PIK due 6/27/2018		15,752		15,682			15,899
First Lien Revolver, LIBOR+6% (1% floor) cash due 6/27/2018 (10)				(34		)	—
				54,350			54,763
Saddleback Fence and Vinyl Products, Inc. (9)	Building products
First Lien Term Loan, 8% cash due 11/30/2013		635		635			635
First Lien Revolver, 8% cash due 11/30/2013		100		100			100
				735			735
Physicians Pharmacy Alliance, Inc. (9)	Healthcare services
First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016		11,435		11,266			11,399
First Lien Revolver, LIBOR+6% cash due 1/4/2016 (10)				(20		)	—
				11,246			11,399
Cardon Healthcare Network, LLC	Diversified support services
65,903 Class A Units				250			523
				250			523
Phoenix Brands Merger Sub LLC (9)	Household products
Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016		5,518		5,432			5,423
Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017		21,610		21,323			20,842
Senior Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016		3,000		2,922			3,000
				29,677			29,265
CCCG, LLC (9)	Oil & gas equipment services
First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 12/29/2017		35,148		34,717			34,988
First Lien Revolver, LIBOR+5.5% (1.75% floor) cash due 12/31/2014				—			—
				34,717			34,988
Maverick Healthcare Group, LLC	Healthcare equipment
First Lien Term Loan A, LIBOR+9% (1.75% floor) cash due 12/31/2016		9,950		9,950			9,956
First Lien Term Loan B, LIBOR+9% (1.75% floor) cash due 12/31/2016		38,900		38,546			38,838
				48,496			48,794
Refac Optical Group (14)	Specialty stores
First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018		24,674		24,510			24,923
First Lien Term Loan B, LIBOR+8.5% cash 1.75% PIK due 9/30/2018		32,932		32,639			33,205
First Lien Term Loan C, 12% cash due 12/31/2014		10,000		10,000			10,013
First Lien Revolver, LIBOR+7.5% cash due 9/30/2018 (10)				(69		)	—
1,550.9435 Shares of Common Stock in Refac Holdings, Inc.				1			—
500.9435 Shares of Series A-2 Preferred Stock in Refac Holdings, Inc.				305			—
1,000 Shares of Series A Preferred Stock in Refac Holdings, Inc.				999			884
				68,385			69,025
GSE Environmental, Inc. (9)	Environmental & facilities services
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/27/2016		8,812		8,755			8,113
				8,755			8,113
Baird Capital Partners V, LP	Multi-sector holdings
0.40% limited partnership interest (12)				649			728
				649			728

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost			Fair Value
Charter Brokerage, LLC	Oil & gas equipment services
Senior Term Loan, LIBOR+6.5% (1.5% floor) cash due 10/10/2016		$	28,914	$	28,828		$	29,462
Subordinated Term Loan, 11.75% cash 2% PIK due 10/10/2017		11,976		11,921			12,004
Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 10/10/2016 (10)				(40		)	—
				40,709			41,466
Stackpole Powertrain International Holding, L.P.	Auto parts & equipment
1,000 Common Units (12)				1,000			3,200
				1,000			3,200
Discovery Practice Management, Inc. (9)	Healthcare services
First Lien Term Loan A, LIBOR+7.5% cash due 8/8/2016		5,756		5,706			5,761
First Lien Term Loan B, 12% cash 3% PIK due 8/8/2016		6,606		6,559			6,608
First Lien Revolver, LIBOR+7% cash due 8/8/2016		3,000		2,977			3,000
				15,242			15,369
CTM Group, Inc.	Leisure products
Subordinated Term Loan A, 11% cash 2% PIK due 2/10/2017		10,966		10,896			11,024
Subordinated Term Loan B, 18.4% PIK due 2/10/2017		4,553		4,532			4,559
				15,428			15,583
Milestone Partners IV, LP	Multi-sector holdings
0.86% limited partnership interest (6)(12)				586			638
				586			638
Insight Pharmaceuticals LLC	Pharmaceuticals
Second Lien Term Loan, LIBOR+11.75% (1.5% floor) cash due 8/25/2017		13,517		13,439			13,607
				13,439			13,607
National Spine and Pain Centers, LLC	Healthcare services
Subordinated Term Loan, 11% cash 1.6% PIK due 9/27/2017		29,263		29,084			29,535
317,282.97 Class A Units				317			404
				29,401			29,939
RCPDirect, LP	Multi-sector holdings
0.91% limited partnership interest (6)(12)				476			569
				476			569
The MedTech Group, Inc. (9)	Healthcare equipment
Senior Term Loan, LIBOR+5.5% (1.25% floor) cash due 9/7/2016		12,448		12,379			12,454
				12,379			12,454
Digi-Star Acquisition Holdings, Inc.	Industrial machinery
Subordinated Term Loan, 12% cash 1.5% PIK due 11/18/2017		12,316		12,231			12,439
264.37 Class A Preferred Units				264			304
2,954.87 Class A Common Units				36			246
				12,531			12,989
CPASS Acquisition Company	Internet software & services
First Lien Term Loan, LIBOR+9% (1.5% floor) cash 1% PIK due 11/21/2016		8,069		8,005			8,166
First Lien Revolver, LIBOR+9% (1.5% floor) cash due 11/21/2016 (10)				(12		)	—
				7,993			8,166
Genoa Healthcare Holdings, LLC	Pharmaceuticals
Senior Term Loan, LIBOR+5.25% (1.25% floor) cash due 12/1/2016		8,775		8,775			8,797
Subordinated Term Loan, 12% cash 2% PIK due 6/1/2017		12,973		12,890			13,206
Senior Revolver, LIBOR+5.25% (1.25% floor) cash due 12/1/2016				—			—
500,000 Preferred units (6)				261			275
500,000 Class A Common Units				25			466
				21,951			22,744

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost			Fair Value
ACON Equity Partners III, LP	Multi-sector holdings
0.15% limited partnership interest (6)(12)				$	329		$	361
				329			361
CRGT, Inc.	IT consulting & other services
Subordinated Term Loan, 12.5% cash 3% PIK due 3/9/2018		$	26,741	26,553			27,445
				26,553			27,445
Riverside Fund V, LP	Multi-sector holdings
0.48% limited partnership interest (12)				288			239
				288			239
World 50, Inc.	Research & consulting services
First Lien Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017		10,718		10,622			10,834
First Lien Term Loan B, 12.5% cash due 3/30/2017		7,000		6,941			7,078
Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)				(42		)	—
				17,521			17,912
Nixon, Inc.	Apparel, accessories & luxury goods
First Lien Term Loan, 8.75% cash 2.75% PIK due 4/16/2018		9,551		9,476			9,791
				9,476			9,791
JTC Education, Inc. (9)	Education services
Subordinated Term Loan, 13% cash due 11/1/2017		14,500		14,415			14,503
17,391 Shares of Series A-1 Preferred Stock				313			174
17,391 Shares of Common Stock				187			—
				14,915			14,677
BMC Acquisition, Inc.	Diversified financial services
Senior Term Loan, LIBOR+5.5% (1% floor) cash due 5/1/2017		5,315		5,285			5,311
Senior Revolver, LIBOR+5% (1% floor) cash due 5/1/2017 (10)				(7		)	—
500 Series A Preferred Shares				500			534
50,000 Common Shares				1			—
				5,779			5,845
Ansira Partners, Inc. (9)	Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017		10,593		10,529			10,580
First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)				(6		)	—
250 Preferred Units & 250 Class A Common Units of Ansira Holdings, LLC				250			334
				10,773			10,914
Edmentum, Inc.	Education services
Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019		17,000		17,000			17,288
				17,000			17,288

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost		Fair Value
I Drive Safely, LLC	Education services
First Lien Term Loan, LIBOR+8.5% (1.5% floor) cash due 5/25/2017		$	27,000	26,975		$	27,521
First Lien Revolver, LIBOR+6.5% (1.5% floor) cash due 5/25/2017 (10)				(5	)	—
75,000 Class A Common Units of IDS Investments, LLC				750		755
				27,720		28,276
Yeti Acquisition, LLC (9)	Leisure products
First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017		18,345		18,317		18,523
First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK due 6/15/2017		12,000		11,988		12,089
First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)				(10	)	—
1,500 Common Stock Units of Yeti Holdings, Inc.				1,500		3,755
				31,795		34,367
Specialized Education Services, Inc.	Education services
Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 6/28/2017		8,988		8,988		9,056
Subordinated Term Loan, 11% cash 1.5% PIK due 6/28/2018		17,839		17,839		18,200
				26,827		27,256
PC Helps Support, LLC	IT consulting & other services
Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018		18,804		18,804		18,989
675 Series A Preferred Units of PCH Support Holdings, Inc.				675		674
7,500 Class A Common Stock Units of PCH Support Holdings, Inc.				75		—
				19,554		19,663
Olson + Co., Inc.	Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/30/2017		12,853		12,853		12,853
First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 9/30/2017				—		—
				12,853		12,853
Beecken Petty O’Keefe Fund IV, L.P.	Multi-sector holdings
0.5% limited partnership interest (11)(12)				—		—
				—		—
Deltek, Inc. (9)	IT consulting & other services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019		25,000		25,000		25,415
First Lien Revolver, LIBOR+4.75% (1.25% floor) cash due 10/10/2017		1,333		1,333		1,333
				26,333		26,748
First American Payment Systems, LP	Diversified support services
Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019		25,000		25,000		25,130
First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017				—		—
				25,000		25,130
Dexter Axle Company	Auto parts & equipment
Subordinated Term Loan, 11.25% cash 2% PIK due 11/1/2019		30,561		30,561		31,009
1,500 Common Shares in Dexter Axle Holding Company				1,500		1,795
				32,061		32,804
IG Investments Holdings, LLC	IT consulting & other services
Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 10/31/2020		10,000		10,000		10,059
				10,000		10,059

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost			Fair Value
SumTotal Systems, LLC	Internet software & services
Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 5/16/2019		$	20,000	$	20,000		$	20,015
				20,000			20,015
Comprehensive Pharmacy Services, LLC	Pharmaceuticals
Subordinated Term Loan, 11.25% cash 1.5% PIK due 11/30/2019		14,148		14,148			14,401
20,000 Common Shares in MCP CPS Group Holdings, Inc. (6)				2,000			2,036
				16,148			16,437
Reliance Communications, LLC	Internet software & services
First Lien Term Loan A, LIBOR+7% (1% floor) cash due 12/18/2017		21,774		21,769			21,898
First Lien Term Loan B, LIBOR+11.5% (1% floor) cash due 12/18/2017		11,333		11,331			11,398
First Lien Revolver, LIBOR+7% (1% floor) cash due 12/18/2017		2,250		2,249			2,250
				35,349			35,546
Garretson Firm Resolution Group, Inc.	Diversified support services
First Lien Term Loan, LIBOR+5% (1.25% floor) cash due 12/20/2018		7,264		7,264			7,283
Subordinated Term Loan, 11% cash 1.5% PIK due 6/20/2019		5,019		5,019			5,025
First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017		1,250		1,250			1,250
4,950,000 Preferred Units in GRG Holdings, LP				495			489
50,000 Common Units in GRG Holdings, LP				5			—
				14,033			14,047
Teaching Strategies, LLC	Education services
First Lien Term Loan A, LIBOR+6% (1.25% floor) cash due 12/21/2017		36,662		36,656			37,173
First Lien Term Loan B, LIBOR+8.35% (1.25% floor) cash 3.15% PIK due 12/21/2017		19,605		19,603			19,888
First Lien Revolver, LIBOR+6% (1.25% floor) cash due 12/21/2017 (10)				(1		)	—
				56,258			57,061
Omniplex World Services Corporation	Security & alarm services
Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018		12,624		12,624			12,627
500 Class A Common Units in Omniplex Holdings Corp.				500			477
				13,124			13,104
Dominion Diagnostics, LLC	Healthcare services
Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018		15,746		15,746			16,016
				15,746			16,016
Affordable Care, Inc.	Healthcare services
Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019		21,500		21,500			21,957
				21,500			21,957
Aderant North America, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/20/2019		7,000		7,000			7,067
				7,000			7,067
AdVenture Interactive, Corp.	Advertising
First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018		112,575		112,555			112,760
First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (10)				(1		)	—
2,000 Preferred Units of AVI Holdings, L.P. (6)				2,000			2,123
				114,554			114,883

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost		Fair Value
CoAdvantage Corporation	Human resources & employment services
Subordinated Term Loan, 11.5% cash 1.25% PIK due 12/31/2018		$	10,094	$	10,094	$	10,229
50,000 Class A Units in CIP CoAdvantage Investments LLC				500		400
				10,594		10,629
EducationDynamics, LLC	Education services
Subordinated Term Loan, 12% cash 6% PIK due 1/16/2017		11,062		11,062		10,961
				11,062		10,961
Vestcom International, Inc.	Data processing & outsourced services
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 12/26/2018		9,950		9,950		10,010
				9,950		10,010
Sterling Capital Partners IV, L.P.	Multi-sector holdings
0.20% limited partnership interest (6)(12)				472		517
				472		517
Devicor Medical Products, Inc.	Healthcare equipment
First Lien Term Loan, LIBOR+5% (2% floor) cash due 7/8/2015		9,619		9,619		9,618
				9,619		9,618
RP Crown Parent, LLC	Application software
First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017		1,000		379		1,000
				379		1,000
SESAC Holdco II LLC	Diversified support services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/28/2019		4,000		4,000		4,097
				4,000		4,097
Advanced Pain Management Holdings, Inc.	Healthcare services
First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018		24,000		24,000		24,454
				24,000		24,454
Rocket Software, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2019		10,475		10,435		10,482
				10,435		10,482
TravelClick, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 3/26/2018		15,000		15,000		15,106
				15,000		15,106
ISG Services, LLC	Diversified support services
First Lien Term Loan, LIBOR+8% (1% floor) cash due 3/28/2018		95,000		94,972		95,111
First Lien Revolver, LIBOR+8% (1% floor) cash due 3/28/2018		4,000		3,997		4,000
				98,969		99,111
Joerns Healthcare, LLC	Healthcare services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 9/28/2018		20,000		20,000		19,965
				20,000		19,965
Pingora MSR Opportunity Fund I, LP	Thrift & mortgage finance
1.90% limited partnership interest (12)				208		139
				208		139
Chicago Growth Partners III, LP	Multi-sector holdings
0.50% limited partnership interest (11)(12)				—		—
				—		—
Credit Infonet, Inc.	Data processing & outsourced services
Subordinated Term Loan, 12.25% cash due 10/26/2018		13,250		13,250		13,285
				13,250		13,285

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)	Industry	Principal (8)		Cost		Fair Value
Harden Healthcare, LLC	Healthcare services
First Lien Term Loan, LIBOR+5.5% (1.25% floor) cash due 5/1/2018		$	8,888	$	8,888	$	8,929
				8,888		8,929
H.D. Vest, Inc.	Specialized finance
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 6/18/2019		8,750		8,750		8,757
				8,750		8,757
2Checkout.com, Inc.	Diversified support services
First Lien Revolver, LIBOR+5% cash due 6/26/2016		150		148		150
				148		150
Meritas Schools Holdings, LLC	Education services
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 6/25/2019		12,968		12,968		12,973
				12,968		12,973
Personable Holdings, Inc.	Other diversified financial services
First Lien Term Loan, LIBOR+6% (1.25% floor) cash due 5/16/2018		11,109		11,109		11,109
First Lien Revolver, LIBOR+6% (1.25% floor) cash due 5/16/2018				—		—
				11,109		11,109
Ikaria Acquisition, Inc.	Healthcare services
First Lien Term Loan B, LIBOR+6% (1.25% floor) cash due 7/3/2018		9,875		9,875		9,875
Second Lien Term Loan, LIBOR+9.75% (1.25% floor) cash due 7/3/2019		8,000		8,000		8,000
				17,875		17,875
Blue Coat Systems, Inc.	Internet software & services
Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 6/28/2020		10,000		10,000		10,000
				10,000		10,000
Royal Adhesives and Sealants, LLC	Specialty chemicals
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 1/31/2019		20,000		20,000		20,000
				20,000		20,000
Bracket Holding Corp.	Healthcare services
Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020		32,000		32,000		32,000
50,000 Common Units in AB Group Holdings, LP				500		500
				32,500		32,500
Digital Insight Corporation	Other diversified financial services
First Lien Term Loan, LIBOR+4.25% (1.25% floor) cash due 8/1/2019		5,000		5,000		5,000
Second Lien Term Loan, LIBOR+8.25% (1.25% floor) cash due 8/1/2020		20,000		20,000		20,000
				25,000		25,000
Salus CLO 2012-1, Ltd.	Asset management & custody banks
Class F Deferrable Notes - A, LIBOR+11.5% cash due 3/5/2021 (12)		7,500		7,500		7,500
Class F Deferrable Notes - B, LIBOR+10.85% cash due 3/5/2021 (12)		22,000		22,000		22,000
				29,500		29,500
HealthEdge Software, Inc.	Application software
Second Lien Term Loan, 12% cash due 9/30/2018		12,500		12,500		12,500
				12,500		12,500
Total Non-Control/Non-Affiliate Investments (120.2% of net assets)				$	1,622,326	$	1,645,612
Total Portfolio Investments (138.3% of net assets)				$	1,859,651	$	1,893,046

See notes to Consolidated Financial Statements.

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2013


(1)	All debt investments are income producing unless otherwise noted. Equity is non-income producing unless otherwise noted.


(2)	See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.


(3)	Control Investments are defined by the Investment Company Act of 1940 (“1940 Act”) as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.


(4)	Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.


(5)	Equity ownership may be held in shares or units of companies related to the portfolio companies.


(6)	Income producing through payment of dividends or distributions.


(7)	Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.


(8)	Principal includes accumulated PIK interest and is net of repayments.



Portfolio Company	Effective date	Cash interest	PIK interest	Reason
Phoenix Brands Merger Sub LLC	July 31, 2013	+ 2.25% on Senior Term Loan + 2.25% on Revolver + 0.75% on Subordinated Term Loan		Per loan agreement
GSE Environmental, Inc.	July 30, 2013	+ 2.0% on Term Loan		Per loan amendment
Miche Bag, LLC	July 26, 2013	- 3.0% on Term Loan B	- 1.0% on Term Loan B	Per loan amendment
Ansira Partners, Inc.	June 30, 2013	- 0.5% on Term Loan & Revolver		Tier pricing per loan agreement
Drugtest, Inc.	June 27, 2013	- 1.5% on Term Loan A - 0.75% on Term Loan B - 0.25% on Revolver	- 0.5% on Term Loan B	Per loan amendment
The MedTech Group, Inc.	June 12, 2013	- 0.50% on Term Loan		Per loan amendment
Physicians Pharmacy Alliance, Inc.	April 1, 2013	+ 3.0% on Term Loan & Revolver	+ 1.0% on Term Loan	Per loan agreement
Discovery Practice Management, Inc.	April 1, 2013	- 1.0% on Term Loan A - 1.0% on Revolver	- 1.0% on Term Loan B	Tier pricing per loan agreement
Deltek, Inc.	February 1, 2013	- 1.0% on Revolver		Per loan amendment
HealthDrive Corporation	January 1, 2013	+ 2.0% on Term Loan A	+ 1.0% on Term Loan B	Per loan amendment
JTC Education, Inc.	January 1, 2013	+ 0.25% on Term Loan		Per loan amendment
Mansell Group, Inc.	January 1, 2013	+ 2.0% on Term Loan A, Term Loan B & Revolver		Per loan agreement
Saddleback Fence & Vinyl Products, Inc.	December 1, 2012	+ 4.0% on Term Loan + 4.0% on Revolver		Per loan amendment
Capital Equipment Group, Inc.	November 30, 2012		- 1.25% on Term Loan	Per loan amendment
CCCG, LLC	November 15, 2012	+ 0.5% on Term Loan	+ 1.0% on Term Loan	Per loan amendment
Yeti Acquisition, LLC	October 1, 2012	- 1.0% on Term Loan A, Term Loan B & Revolver		Tier pricing per loan agreement
Ambath/Rebath Holdings, Inc.	April 1, 2012	- 2.0% on Term Loan A - 4.5% on Term Loan B	+ 2.0% on Term Loan A + 4.5% on Term Loan B	Per loan amendment


(10)	Investment has undrawn commitments and a negative cost basis as a result of unamortized fees. Unamortized fees are classified as unearned income which reduces cost basis.


(11)	Represents an unfunded commitment to fund limited partnership interest.


(12)	Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act, in whole or in part.


(13)	Eagle Hospital Physicians, LLC, is the successor entity to Eagle Hospital Physicians, Inc. and was formed as part of the restructuring process.


(14)	Prior to fiscal year end, the Company closed on a $33.4 million incremental investment in Refac Optical Group that had not yet settled as of September 30, 2013. As such, this amount was recorded in "Payables from unsettled transactions" in the Statement of Assets and Liabilities.

See notes to Consolidated Financial Statements.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Note 1. Organization

Fifth Street Mezzanine Partners III, L.P. (the “Partnership”), a Delaware limited partnership, was organized on February 15, 2007 to primarily invest in debt securities of small and middle market companies. FSMPIII GP, LLC was the Partnership’s general partner (the “General Partner”). The Partnership’s investments were managed by Fifth Street Management LLC (the “Investment Adviser”). The General Partner and Investment Adviser were under common ownership.

Effective January 2, 2008, the Partnership merged with and into Fifth Street Finance Corp. (the “Company”), an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940 (the “1940 Act”). The Company is managed by the Investment Adviser. Prior to January 2, 2008, references to the Company are to the Partnership.

The Company also has certain wholly-owned subsidiaries, including subsidiaries that are not consolidated for income tax purposes, which hold certain portfolio investments of the Company. The subsidiaries are consolidated with the Company for accounting purposes, and the portfolio investments held by the subsidiaries are included in the Company’s Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.

On November 28, 2011, the Company transferred the listing of its common stock from the New York Stock Exchange to the NASDAQ Global Select Market, where it continues to trade under the symbol “FSC.” The following table reflects common stock offerings that occurred from inception through December 31, 2013:

Date

Transaction

Offering

price

Gross

proceeds

June 17, 2008

Initial public offering

10,000,000

14.12

141.2 million

July 21, 2009

Follow-on public offering (including underwriters’ exercise of over-allotment option)

9,487,500

9.25

87.8 million

September 25, 2009

Follow-on public offering (including underwriters’ exercise of over-allotment option)

5,520,000

10.5

58.0 million

January 27, 2010

Follow-on public offering

7,000,000

11.2

78.4 million

February 25, 2010

Underwriters’ partial exercise of over-allotment option

300,500

11.2

3.4 million

June 21, 2010

Follow-on public offering (including underwriters’ exercise of over-allotment option)

9,200,000

11.5

105.8 million

December 2010

At-the-Market offering

429,110

11.87

)

5.1 million

February 4, 2011

Follow-on public offering (including underwriters’ exercise of over-allotment option)

11,500,000

12.65

145.5 million

June 24, 2011

Follow-on public offering (including underwriters’ partial exercise of over-allotment option)

5,558,469

11.72

65.1 million

January 26, 2012

Follow-on public offering

10,000,000

10.07

100.7 million

September 14, 2012

Follow-on public offering (including underwriters’ partial exercise of over-allotment option)

8,451,486

10.79

91.2 million

December 7, 2012

Follow-on public offering

14,000,000

10.68

149.5 million

December 14, 2012

Underwriters’ partial exercise of over-allotment option

725,000

10.68

7.7 million

April 15, 2013

Follow-on public offering

13,500,000

10.85

146.5 million

April 26, 2013

Underwriters’ partial exercise of over-allotment option

935,253

10.85

10.1 million

September 26, 2013

Follow-on public offering (including underwriters’ partial exercise of over-allotment option)

17,643,000

10.31

181.9 million

_______________________

(1) Average offering price

On February 3, 2010, the Company’s consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. (“FSMP IV”), received a license, effective February 1, 2010, from the United States Small Business Administration, or SBA, to operate as a small business investment company, or SBIC, under Section 301(c) of the Small Business Investment Act of 1958. On May 15, 2012, the Company’s consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. (“FSMP V”), received a license, effective May 10, 2012, from the SBA to operate as an SBIC. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.

The SBIC licenses allow the Company’s SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the satisfaction of certain customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a 10-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid

prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million when they have at least $112.5 million in regulatory capital. As of December 31, 2013, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $123.4 million. These debentures bear interest at a weighted average interest rate of 3.567% (excluding the SBA annual charge), as follows:



Rate Fix Date	Debenture Amount		Fixed Interest Rate		SBA Annual Charge
September 2010	$	73,000	3.215	%	0.285	%
March 2011	65,300		4.084		0.285
September 2011	11,700		2.877		0.285

As of December 31, 2013, FSMP V had $37.5 million in regulatory capital and $60.8 million in SBA-guaranteed debentures outstanding ($29.0 million of which do not yet have a locked interest rate), which had a fair value of $40.3 million. In March 2013, the SBA fixed the interest rate on such SBIC subsidiary’s $31.8 million of drawn leverage at an interest rate of 2.351% (excluding the SBA annual charge of 0.804%). As a result, the $181.8 million of rate locked SBA-guaranteed debentures held by the Company’s SBIC subsidiaries carry a weighted average interest rate of 3.355% as of December 31, 2013.

For the three months ended December 31, 2013 and December 31, 2012, the Company recorded interest expense of $1.9 million and $1.6 million, respectively, related to the SBA-guaranteed debentures of both subsidiaries.

The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, the Company’s SBIC subsidiaries may also be limited in their ability to make distributions to the Company if they do not have sufficient capital, in accordance with SBA regulations.

The Company’s SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that the SBIC subsidiaries will receive SBA-guaranteed debenture funding and is further dependent upon the SBIC subsidiaries continuing to be in compliance with SBA regulations and policies.

The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders in the event the Company liquidates the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries upon an event of default.

The Company has received exemptive relief from the Securities and Exchange Commission (“SEC”) to permit it to exclude the debt of the SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the Company’s 200% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200% asset coverage test by permitting it to borrow up to $225 million more than it would otherwise be able to under the 1940 Act absent the receipt of this exemptive relief.

Note 2. Significant Accounting Policies

Basis of Presentation:

The Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. In the opinion of management, all adjustments of a normal recurring nature considered necessary for the fair presentation of the Consolidated Financial Statements have been made. The financial results of the Company’s portfolio investments are not consolidated in the Company’s Consolidated Financial Statements.

Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements and accompanying notes. These estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions and

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

conditions. The most significant estimates inherent in the preparation of the Company’s Consolidated Financial Statements are the valuation of investments and revenue recognition.

The Consolidated Financial Statements include portfolio investments at fair value of $2.38 billion and $1.89 billion at December 31, 2013 and September 30, 2013, respectively. The portfolio investments represent 173.5% and 138.3% of net assets at December 31, 2013 and September 30, 2013, respectively, and their fair values have been determined by the Company’s Board of Directors in good faith in the absence of readily available market values. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation; “Affiliate Investments” are defined as investments in companies in which the Company owns between 5% and 25% of the voting securities; and “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments.

Fair Value Measurements:

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 Fair Value Measurements and Disclosures (“ASC 820”) defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

Assets recorded at fair value in the Company’s Consolidated Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:


•	Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.


•	Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.


•	Level 3 — Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Under ASC 820, the Company performs detailed valuations of its debt and equity investments on an individual basis, using bond yield, market and income approaches as appropriate. In general, the Company utilizes the bond yield method in determining the fair value of its debt investments, as long as it is appropriate. If, in the Company’s judgment, the bond yield approach is not appropriate, it may use the market or income approach in determining the fair value of the Company’s investment in the portfolio company. Investments for which market quotations are readily available may be valued at such market quotations. In order to validate market quotations, the Company looks at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. In certain instances, the Company may use alternative methodologies, including an asset liquidation, expected recovery model or other alternative approaches.

Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Company reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.

Under the market approach, the Company estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value. To estimate the enterprise value of a

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

portfolio company, the Company analyzes various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization), cash flows, net income or revenues. The Company generally requires portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year. The Company determines the fair value of its limited partnership interests based on the most recently available net asset value of the partnership.

Under the income approach, the Company generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.

The Company’s Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of the Company’s investments:


•	The quarterly valuation process begins with each portfolio company or investment being initially valued by the Company’s finance department;

•Preliminary valuations are then reviewed and discussed with principals of the Investment Adviser;


•	Separately, independent valuation firms are engaged by the Board of Directors to prepare preliminary valuations on a selected basis and submit the reports to the Company;


•	The finance department compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;


•	The finance department prepares a valuation report for the Audit Committee of the Board of Directors;


•	The Audit Committee of the Board of Directors is apprised of the preliminary valuations of the independent valuation firms;


•	The Audit Committee of the Board of Directors reviews the preliminary valuations with the portfolio managers of the Investment Adviser, and the finance department responds and supplements the preliminary valuations to reflect any comments provided by the Audit Committee;


•	The Audit Committee of the Board of Directors makes a recommendation to the Board of Directors regarding the fair value of the investments in the Company’s portfolio; and


•	The Board of Directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith.

The fair value of each of the Company’s investments at December 31, 2013 and September 30, 2013 was determined by the Board of Directors. The Board of Directors has authorized the engagement of independent valuation firms to provide valuation assistance. The Company will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of selected portfolio securities each quarter; however, the Board of Directors is ultimately and solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company’s valuation policy and a consistently applied valuation process.

A portion of the Company's portfolio is valued by independent third parties on a quarterly basis, with a substantial portion being valued over the course of each fiscal year. In certain cases, an independent valuation firm may perform a portfolio company valuation which is reviewed and, where appropriate, relied upon by the Company's Board of Directors in determining the fair value of such investment.

Investment Income:

Interest income, adjusted for accretion of original issue discount or “OID,” is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. In connection with its investment, the Company sometimes receives nominal cost equity that is valued as part of the negotiation process with the particular portfolio company. When the Company receives nominal cost equity, the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. Any resulting discount from recording the loan, or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan.

Distributions of earnings from portfolio companies are recorded as dividend income when the distribution is received.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

The Company has investments in debt securities which contain payment-in-kind (“PIK”) interest provisions. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income.

Fee income consists of the monthly servicing fees, advisory fees, structuring fees and prepayment fees that the Company receives in connection with its debt investments. These fees are recognized as earned.

The Company has also structured exit fees across certain of its portfolio investments to be received upon the future exit of those investments. Exit fees are fees which are payable upon the exit of a debt security. These fees are to be paid to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan.

Gain on Extinguishment of Convertible Notes:

The Company may repurchase its convertible notes (“Convertible Notes”) in accordance with the 1940 Act and the rules promulgated thereunder and may surrender these Convertible Notes to Deutsche Bank Trust Company Americas (the “Trustee”), as trustee, for cancellation. If the repurchase occurs at a purchase price below par value, a gain on the extinguishment of these Convertible Notes is recorded. The amount of the gain recorded is the difference between the reacquisition price and the net carrying amount of the Convertible Notes, net of the proportionate amount of unamortized debt issuance costs.

Cash and Cash Equivalents:

Cash and cash equivalents consist of demand deposits and highly liquid investments with maturities of three months or less, when acquired. The Company places its cash and cash equivalents with financial institutions and, at times, cash held in bank accounts may exceed the Federal Deposit Insurance Corporation insured limit. Included in cash and cash equivalents is $1.9 million that was held at Wells Fargo Bank, National Association (“Wells Fargo”) in connection with the Company’s Wells Fargo facility and $2.1 million that was held at U.S. Bank, National Association in connection with the Company’s Sumitomo facility (as defined in Note 6 — Lines of Credit). The Company is restricted in terms of access to this cash until such time as the Company submits its required monthly reporting schedules and Wells Fargo and Sumitomo Mitsui Banking Corporation verify the Company’s compliance per the terms of their respective credit agreements with the Company.

Deferred Financing Costs:

Deferred financing costs consist of fees and expenses paid in connection with the closing or amending of credit facilities and debt offerings, and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the terms of the respective credit facilities and debt securities. This amortization expense is included in interest expense in the Company’s Consolidated Statements of Operations.

Offering Costs:

Offering costs consist of fees and expenses incurred in connection with the public offer and sale of the Company’s common stock, including legal, accounting and printing fees. There were no offering costs charged to capital during the three months ended December 31, 2013.

Income Taxes:

As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Company intends to distribute between 90% and 100% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a 4% federal excise tax based on distribution requirements of its taxable income on a calendar year basis. The Company anticipates timely distribution of its taxable income within the tax rules; however, the Company incurred a de minimis federal excise tax for calendar year 2010. The Company did not incur a federal excise tax for calendar years 2011 and 2012 and does not expect to incur a federal excise tax for calendar year 2013. The Company may incur a federal excise tax in future years.

The purpose of the Company’s taxable subsidiaries is to permit the Company to hold equity investments in portfolio companies which are “pass through” entities for federal tax purposes in order to comply with the “source income” requirements

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

contained in the RIC tax requirements. The taxable subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense as a result of their ownership of certain portfolio investments. This income tax expense, if any, would be reflected in the Company’s Consolidated Statements of Operations. The Company uses the asset and liability method to account for its taxable subsidiaries’ income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences.

ASC 740 Accounting for Uncertainty in Income Taxes (“ASC 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the Company’s Consolidated Financial Statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company recognizes the tax benefits of uncertain tax positions only where the position is “more-likely-than-not” to be sustained assuming examination by tax authorities. Management has analyzed the Company’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years 2010, 2011 or 2012. The Company identifies its major tax jurisdictions as U.S. Federal and New York State, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.

Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act will be automatically deemed an investment company under the new GAAP definition. As such, the Company anticipates no impact from adopting this standard on the Company’s consolidated financial results. The Company is currently assessing the additional disclosure requirements. ASU 2013-08 will be effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.

Note 3. Portfolio Investments

At December 31, 2013, 173.5% of net assets or $2.38 billion was invested in 111 portfolio investments and 3.1% of net assets or $42.6 million was invested in cash and cash equivalents. In comparison, at September 30, 2013, 138.3% of net assets or $1.89 billion was invested in 99 portfolio investments and 10.8% of net assets or $147.4 million was invested in cash and cash equivalents. As of December 31, 2013, 81.1% of the Company’s portfolio at fair value consisted of senior secured debt investments that were secured by priority liens on the assets of the portfolio companies. Moreover, the Company held equity investments in certain of its portfolio companies consisting of common stock, preferred stock, limited partnership interests or limited liability company interests. These equity instruments generally do not produce a current return but are held for potential investment appreciation and capital gain.

During the three months ended December 31, 2013 and December 31, 2012, the Company recorded net realized gains of $3.2 million and $0.6 million, respectively. During the three months ended December 31, 2013 and December 31, 2012, the Company recorded net unrealized losses of $5.7 million and $9.3 million, respectively.

The composition of the Company’s investments as of December 31, 2013 and September 30, 2013 at cost and fair value was as follows:



	December 31, 2013				September 30, 2013
	Cost		Fair Value		Cost		Fair Value
Investments in debt securities	$	2,249,767	$	2,261,742	$	1,779,201	$	1,793,463
Investments in equity securities	99,268		114,970		80,450		99,583
Total	$	2,349,035	$	2,376,712	$	1,859,651	$	1,893,046

The composition of the Company’s debt investments as of December 31, 2013 and September 30, 2013 at fixed rates and floating rates was as follows:

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)



	December 31, 2013				September 30, 2013
	Fair Value		% of Debt Portfolio		Fair Value		% of Debt Portfolio
Fixed rate debt securities	$	629,984	27.85	%	$	584,876	32.61	%
Floating rate debt securities	1,631,758		72.15		1,208,587		67.39	%
Total	$	2,261,742	100.00	%	$	1,793,463	100.00	%

The following table presents the financial instruments carried at fair value as of December 31, 2013, by caption on the Company’s Consolidated Statements of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820:



	Level 1		Level 2		Level 3		Total
Investments in debt securities (senior secured)	$	—	$	—	$	1,928,209	$	1,928,209
Investments in debt securities (subordinated)	—		—		304,033		304,033
Investments in debt securities (Collateralized loan obligation, or CLO)	—		—		29,500		29,500
Investments in equity securities (preferred)	—		—		25,952		25,952
Investments in equity securities (common)	—		—		89,018		89,018
Total investments at fair value	$	—	$	—	$	2,376,712	$	2,376,712

The following table presents the financial instruments carried at fair value as of September 30, 2013, by caption on the Company’s Consolidated Statements of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820:



	Level 1		Level 2		Level 3		Total
Investments in debt securities (senior secured)	$	—	$	—	$	1,467,665	$	1,467,665
Investments in debt securities (subordinated)	—		—		296,298		296,298
Investments in debt securities (CLO)	—		—		29,500		29,500
Investments in equity securities (preferred)	—		—		25,648		25,648
Investments in equity securities (common)	—		—		73,935		73,935
Total investments at fair value	$	—	$	—	$	1,893,046	$	1,893,046

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors are the most significant to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated by external sources). Accordingly, the appreciation (depreciation) in the tables below includes changes in fair value due in part to observable factors that are part of the valuation methodology.

The following table provides a roll-forward in the changes in fair value from September 30, 2013 to December 31, 2013, for all investments for which the Company determines fair value using unobservable (Level 3) factors:



	Senior Secured Debt			Subordinated Debt			CLO Debt		Preferred Equity			Common Equity			Total
Fair value as of September 30, 2013	$	1,467,665		$	296,298		$	29,500	$	25,648		$	73,935		$	1,893,046
New investments & net revolver activity	609,340			21,746			—		1,533			17,524			650,143
Redemptions/repayments	(148,528		)	(13,756		)	—		(150		)	(2,695		)	(165,129		)
Net accrual of PIK interest income	1,459			(493		)	—		406			—			1,372
Accretion of original issue discount	164			—			—		—			—			164
Net change in unearned income	1			156			—		—			—			157
Net unrealized depreciation	(2,213		)	(74		)	—		(1,485		)	(1,946		)	(5,718		)
Unrealized adjustments due to deal exits	321			156			—		—			2,200			2,677
Transfer into (out of) Level 3	—			—			—		—			—			—
Fair value as of December 31, 2013	$	1,928,209		$	304,033		$	29,500	$	25,952		$	89,018		$	2,376,712
Net unrealized appreciation (depreciation) relating to Level 3 assets still held at December 31, 2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended December 31, 2013	$	(1,892	)	$	82		$	—	$	(1,485	)	$	254		$	(3,041	)

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

The following table provides a roll-forward in the changes in fair value from September 30, 2012 to December 31, 2012 for all investments for which the Company determines fair value using unobservable (Level 3) factors:



	Senior Secured Debt			Subordinated Debt		CLO Debt		Preferred Equity		Common Equity		Total
Fair value as of September 30, 2012	$	1,035,750		$	205,447	$	—	$	24,240	$	22,671	$	1,288,108
New investments & net revolver activity	301,836			91,243		—		670		5,059		398,808
Redemptions/repayments	(103,179		)	—		—		—		—		(103,179		)
Net accrual of PIK interest income	2,098			1,109		—		200		—		3,407
Accretion of original issue discount	132			—		—		—		—		132
Net change in unearned income	1,549			86		—		—		—		1,635
Net unrealized appreciation (depreciation)	(14,630		)	678		—		802		3,811		(9,339		)
Unrealized adjustments due to deal exits	876			—		—		—		—		876
Transfer into (out of) Level 3	—			—		—		—		—		—
Fair value as of December 31, 2012	$	1,224,432		$	298,563	$	—	$	25,912	$	31,541	$	1,580,448
Net unrealized appreciation (depreciation) relating to Level 3 assets still held at December 31, 2012 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended December 31, 2012	$	(13,754	)	$	678	$	—	$	802	$	3,811	$	(8,463	)

The Company generally utilizes a bond yield model to estimate the fair value of its debt investments when there is not a readily available market value (Level 3) which model is based on the present value of expected cash flows from the debt investments. The significant observable inputs into the model are market interest rates for debt with similar characteristics, which are adjusted for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position. These factors are incorporated into the calculation of the capital structure premium, tranche specific risk premium/(discount), size premium and industry premium/(discount), which are significant unobservable inputs into the model.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Significant Unobservable Inputs for Level 3 Investments

The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments, which are carried at fair value as of December 31, 2013:



Asset	Fair Value		Valuation Technique	Unobservable Input	Range				Weighted Average (c)
Senior secured debt	$	1,928,209	Bond yield approach	Capital structure premium	(a)	0.0%	-	2.0%	0.5%
				Tranche specific risk premium/(discount)	(a)	(4.0)%	-	13.9%	2.2%
				Size premium	(a)	0.5%	-	2.0%	1.1%
				Industry premium/(discount)	(a)	(1.1)%	-	2.7%	0.2%
Subordinated debt	304,033		Bond yield approach	Capital structure premium	(a)	2.0%	-	2.0%	2.0%
				Tranche specific risk premium	(a)	1.0%	-	11.0%	4.7%
				Size premium	(a)	0.5%	-	2.0%	1.0%
				Industry premium/(discount)	(a)	(1.0)%	-	1.2%	0.0%
CLO debt	29,500		Bond yield approach	Credit spread		11.3%	-	11.8%	11.6%
				Discount rate		13.5%	-	14.0%	13.8%

Preferred & common equity	114,970		Market and income approach	Weighted average cost of capital		16.0%	-	31.0%	19.1%
				Company specific risk premium	(a)	1.0%	-	15.0%	2.4%
				Revenue growth rate		2.3%	-	50.2%	3.0%
				EBITDA multiple	(b)	5.4x	-	49.8x	8.5x
				Revenue multiple	(b)	4.1x	-	5.3x	4.7x
				Book value multiple	(b)	0.9x	-	1.1x	1.0x
Total	$	2,376,712


(a)	Used when market participant would take into account this premium or discount when pricing the investment.


(b)	Used when market participant would use such multiples when pricing the investment.


(c)	Weighted averages are calculated based on fair value of investments.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments, which are carried at fair value as of September 30, 2013:



Asset	Fair Value			Valuation Technique	Unobservable Input	Range				Weighted Average (d)
Senior secured debt	$	1,467,665		Bond yield approach	Capital structure premium	(a)	0.0%	-	2.0%	0.5%
					Tranche specific risk premium/(discount)	(a)	(4.0)%	-	13.0%	2.0%
					Size premium	(a)	0.5%	-	2.0%	1.1%
					Industry premium/(discount)	(a)	(1.1)%	-	3.3%	0.3%
Subordinated debt	296,298			Bond yield approach	Capital structure premium	(a)	2.0%	-	2.0%	2.0%
					Tranche specific risk premium	(a)	1.0%	-	11.0%	4.7%
					Size premium	(a)	0.5%	-	2.0%	1.1%
					Industry premium/(discount)	(a)	(1.0)%	-	1.4%	0.0%
CLO debt	29,500		(c)	Recent market transaction	Market yield		11.4%		11.4%	11.4%
Preferred & common equity	99,583			Market and income approach	Weighted average cost of capital		11.0%	-	31.0%	17.4%
					Company specific risk premium	(a)	1.0%	-	15.0%	2.4%
					Revenue growth rate		0.6%	-	81.9%	8.4%
					EBITDA multiple	(b)	5.4x	-	15.3x	7.4x
					Revenue multiple	(b)	4.1x		5.3x	4.7x
					Book value multiple	(b)	0.9x		1.1x	1.0x
Total	$	1,893,046


(a)	Used when market participant would take into account this premium or discount when pricing the investment.


(b)	Used when market participant would use such multiples when pricing the investment.


(c)	The Company's $29.5 million CLO debt investment in Salus CLO 2012-1, Ltd. was valued at its acquisition price as it closed near fiscal year end.


(d)	Weighted averages are calculated based on fair value of investments.

Under the bond yield approach, the significant unobservable inputs used in the fair value measurement of the Company’s investments in debt securities are capital structure premium, tranche specific risk premium/(discount), size premium and industry premium/(discount). Significant increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement, respectively.

Under the market and income approaches, the significant unobservable inputs used in the fair value measurement of the Company’s investments in debt or equity securities are the weighted average cost of capital, company specific risk premium, revenue growth rate and EBITDA multiple. Significant increases or decreases in a portfolio company’s weighted average cost of capital or company specific risk premium in isolation may result in a significantly lower or higher fair value measurement, respectively. Significant increases or decreases in the revenue growth rate or valuation multiples in isolation may result in a significantly higher or lower fair value measurement, respectively.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31, 2013 and the level of each financial liability within the fair value hierarchy:



	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Credit facilities payable	$	564,228	$	564,228	$	—	$	—	$	564,228
SBA debentures payable	210,750		163,724		—		—		163,724
Unsecured convertible notes payable	115,000		122,619		—		—		122,619
Unsecured notes payable	161,250		138,653		—		138,653		—
Total	$	1,051,228	$	989,224	$	—	$	138,653	$	850,571

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

The carrying values of credit facilities payable approximates their fair values and are included in Level 3 of the hierarchy.

The Company utilizes the bond yield approach to estimate the fair value of its SBA debentures payable, which are included in Level 3 of the hierarchy. Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flows streams for the debentures. The Company reviews various sources of data involving investments with similar characteristics and assesses the information in the valuation process.

The Company uses the non-binding indicative quoted price as of the valuation date to estimate the fair value of the unsecured convertible notes payable, which are included in Level 3 of the hierarchy.

The Company uses the unadjusted quoted price as of the valuation date to calculate the fair value of its 5.875% unsecured notes due 2024 and its 6.125% unsecured notes due 2028, which trade under the symbol “FSCE” on the New York Stock Exchange and the symbol "FSCFL" on the NASDAQ Stock Exchange, respectively. As such, these securities are included in Level 2 of the hierarchy.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements consisted of $239.9 million and $149.5 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of December 31, 2013 and September 30, 2013, respectively. Such commitments are subject to the portfolio companies’ satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company's Consolidated Statement of Assets and Liabilities and are not reflected in the Company’s Consolidated Statements of Assets and Liabilities.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

A summary of the composition of the unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of December 31, 2013 and September 30, 2013 is shown in the table below:



	December 31, 2013		September 30, 2013
Drugtest, Inc.	$	20,000	$	20,000
Snap Fitness Holdings, Inc.	20,000		—
BMC Software Finance, Inc.	15,000		—
RP Crown Parent, LLC	10,000		9,000
Deltek, Inc.	10,000		8,667
P2 Upstream Acquisition Co.	10,000		—
First Choice ER, LLC (1)	10,000		—
Pingora MSR Opportunity Fund I, LP (limited partnership interest)	9,792		9,792
InMotion Entertainment Group, LLC	9,335		—
Yeti Acquisition, LLC	7,500		7,500
ISG Services, LLC	6,000		6,000
Thing5, LLC	6,000		—
Med-Data, Incorporated	6,000		1,000
I Drive Safely, LLC	5,000		5,000
HealthEdge Software, Inc.	5,000		5,000
Adventure Interactive, Corp.	5,000		5,000
Reliance Communications, LLC	5,000		2,750
All Web Leads, Inc.	5,000		—
Discovery Practice Management, Inc.	4,989		—
First American Payment Systems, LP	4,767		5,000
Teaching Strategies, LLC	4,000		5,000
World 50, Inc.	4,000		4,000
Refac Optical Group	3,600		8,000
Enhanced Recovery Company LLC	3,500		3,500
Phoenix Brands Merger Sub LLC	3,429		3,429
Personable Holdings, Inc.	3,409		3,409
Charter Brokerage, LLC	2,933		4,000
OmniSYS Acquisition Corporation	2,500		—
CPASS Acquisition Company	2,250		2,500
Mansell Group, Inc.	2,000		2,000
Physicians Pharmacy Alliance, Inc.	2,000		2,000
Chicago Growth Partners III, LP (limited partnership interest)	2,000		2,000
Moelis Capital Partners Opportunity Fund I-B, LP (limited partnership interest)	2,000		—
Tailwind Capital Partners, LP (limited partnership interest)	2,000		—
Specialty Bakers, LLC	2,000		—
Beecken Petty O'Keefe Fund IV, LP (limited partnership interest)	1,789		2,000
SPC Partners V, LP (limited partnership interest)	1,723		—
Riverside Fund V, LP (limited partnership interest)	1,582		1,712
Olson + Co., Inc.	1,554		2,105
Sterling Capital Partners IV, LP (limited partnership interest)	1,540		1,528
CCCG, LLC	1,520		1,520
Miche Bag, LLC	1,500		1,500
2Checkout.com, Inc.	1,350		2,850
Milestone Partners IV, LP (limited partnership interest)	1,291		1,414
BMC Acquisition, Inc.	1,250		1,250
Ansira Partners, Inc.	1,190		1,190
Psilos Group Partners IV, LP (limited partnership interest)	1,000		1,000
Genoa Healthcare Holdings, LLC	1,000		1,000
Eagle Hospital Physicians, Inc.	933		1,867
HealthDrive Corporation	734		734
ACON Equity Partners III, LP (limited partnership interest)	664		671
Bunker Hill Capital II (QP), LP (limited partnership interest)	639		786

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)



Riverlake Equity Partners II, LP (limited partnership interest)	564		638
Garretson Firm Resolution Group, Inc.	538		—
TransTrade Operators, Inc.	500		—
RCP Direct, LP (limited partnership interest)	359		524
Baird Capital Partners V, LP (limited partnership interest)	351		351
Riverside Fund IV, LP (limited partnership interest)	287		287
Total	$	239,862	$	149,474

________________

(1) In addition to its revolving commitment, the Company has extended a $175.0 million delayed draw term loan facility to First Choice ER, LLC. Specific amounts are made available to the borrower as certain financial requirements are satisfied. As of December 31, 2013, the total amount available to the borrower under this delayed draw facility was $17.0 million, and the facility was undrawn as of this date.

Portfolio Composition

Summaries of the composition of the Company’s investment portfolio at cost and fair value as a percentage of total investments are shown in the following tables:



	December 31, 2013				September 30, 2013
Cost:
Senior secured debt	$	1,919,466	81.71	%	$	1,456,710	78.33	%
Subordinated debt	300,801		12.81	%	292,991		15.76	%
CLO debt	29,500		1.26		29,500		1.59
Purchased equity	89,629		3.82		71,835		3.86
Equity grants	4,222		0.18		4,316		0.23
Limited partnership interests	5,417		0.22		4,299		0.23
Total	$	2,349,035	100.00	%	$	1,859,651	100.00	%

Fair Value:
Senior secured debt	$	1,928,209	81.13	%	$	1,467,665	77.53	%
Subordinated debt	304,033		12.79	%	296,298		15.65	%
CLO debt	29,500		1.24		29,500		1.56
Purchased equity	104,287		4.39		89,688		4.74
Equity grants	5,644		0.24		5,599		0.30
Limited partnership interests	5,039		0.21		4,296		0.22
Total	$	2,376,712	100.00	%	$	1,893,046	100.00	%

The Company primarily invests in portfolio companies located in North America. The following tables show the portfolio composition by geographic region at cost and fair value as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.



	December 31, 2013				September 30, 2013
Cost:
Northeast U.S.	$	850,228	36.19	%	$	744,582	40.04	%
Southeast U.S.	391,308		16.66		277,342		14.91
Midwest U.S.	439,874		18.73		314,653		16.92
Southwest U.S.	436,970		18.60		279,369		15.02
West U.S.	230,655		9.82		242,705		13.05
Canada	—		—		1,000		0.06
Total	$	2,349,035	100.00	%	$	1,859,651	100.00	%

Fair Value:
Northeast U.S.	$	858,200	36.11	%	$	753,263	39.79	%
Southeast U.S.	400,025		16.83		285,648		15.09
Midwest U.S.	441,787		18.59		317,958		16.80
Southwest U.S.	436,681		18.37		280,247		14.80
West U.S.	240,019		10.10		252,730		13.35
Canada	—		—		3,200		0.17
Total	$	2,376,712	100.00	%	$	1,893,046	100.00	%

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

The composition of the Company’s portfolio by industry at cost and fair value as of December 31, 2013 and September 30, 2013 were as follows:



	December 31, 2013				September 30, 2013
Cost:
Healthcare services	$	390,971	16.64	%	$	266,823	14.35	%
Diversified support services	243,657		10.37		170,174		9.15
Education services	212,332		9.04		166,750		8.97
Advertising	184,400		7.85		154,026		8.28
Specialized finance	125,184		5.33		124,232		6.68
Internet software & services	116,842		4.97		109,170		5.87
IT consulting & other services	95,395		4.06		82,440		4.43
Leisure facilities	81,951		3.49		43		—
Oil & gas equipment services	76,400		3.25		75,426		4.06
Data processing & outsourced services	70,138		2.99		23,200		1.25
Healthcare equipment	70,102		2.98		70,494		3.79
Specialty stores	69,860		2.97		68,386		3.68
Human resources & employment services	64,488		2.75		64,944		3.49
Industrial machinery	58,093		2.47		16,883		0.91
Pharmaceuticals	51,557		2.19		51,538		2.77
Airlines	43,967		1.87		24,475		1.32
Apparel, accessories & luxury goods	43,327		1.84		28,385		1.53
Consumer electronics	36,750		1.56		—		—
Construction and engineering	33,102		1.41		32,577		1.75
Auto parts & equipment	32,217		1.37		33,061		1.78
Leisure products	31,569		1.34		47,222		2.54
Household products	29,608		1.26		29,677		1.60
Asset management & custody banks	29,500		1.26		29,500		1.59
Home improvement retail	28,716		1.22		28,726		1.54
Air freight and logistics	18,271		0.78		16,693		0.9
Research & consulting services	17,359		0.74		17,521		0.94
Other diversified financial services	16,655		0.71		41,888		2.25
Food distributors	15,897		0.68		18,435		0.99
Specialty chemicals	13,500		0.57		20,000		1.08
Security & alarm services	13,164		0.56		13,124		0.71
Healthcare technology	13,000		0.55		—		—
Application software	11,917		0.51		12,879		0.69
Multi-sector holdings	5,208		0.25		4,091		0.2
Environmental & facilities services	3,730		0.16		8,755		0.47
Thrift & mortgage finance	208		0.01		208		0.01
Construction materials	—		—		7,170		0.39
Building products	—		—		735		0.04
Total	$	2,349,035	100.00	%	$	1,859,651	100.00	%

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)



	December 31, 2013				September 30, 2013
Fair Value:
Healthcare services	$	397,947	16.74	%	$	273,880	14.47	%
Diversified support services	244,731		10.30		171,078		9.04
Education services	213,927		9.00		168,492		8.90
Advertising	184,202		7.75		154,777		8.18
Specialized finance	125,782		5.29		124,400		6.57
Internet software & services	121,294		5.10		114,077		6.03
IT consulting & other services	96,685		4.07		83,916		4.43
Leisure facilities	82,215		3.46		190		0.01
Oil & gas equipment services	76,633		3.22		76,454		4.04
Data processing & outsourced services	70,540		2.97		23,295		1.23
Healthcare equipment	70,462		2.96		70,866		3.74
Specialty stores	70,105		2.95		69,024		3.65
Human resources & employment services	65,090		2.74		65,391		3.45
Industrial machinery	58,682		2.47		18,197		0.96
Pharmaceuticals	53,249		2.24		52,787		2.79
Airlines	44,957		1.89		24,475		1.29
Apparel, accessories & luxury goods	41,796		1.76		27,724		1.46
Construction and engineering	41,521		1.75		40,919		2.16
Consumer electronics	36,788		1.55		—		0.00
Leisure products	33,663		1.42		49,952		2.64
Auto parts & equipment	32,882		1.38		36,004		1.90
Asset management & custody banks	29,500		1.24		29,500		1.56
Home improvement retail	29,128		1.23		28,677		1.51
Household products	29,120		1.23		29,264		1.55
Research & consulting services	17,812		0.75		17,912		0.95
Other diversified financial services	16,745		0.70		41,954		2.22
Food distributors	16,136		0.68		18,732		0.99
Air freight & logistics	14,706		0.62		14,063		0.74
Specialty chemicals	13,498		0.57		20,000		1.06
Security & alarm services	13,194		0.56		13,104		0.69
Healthcare technology	13,000		0.55		—		—
Application software	12,509		0.53		13,500		0.71
Multi-sector holdings	4,911		0.19		4,158		0.21
Environmental & facilities services	3,175		0.13		8,113		0.43
Thrift & mortgage finance	127		0.01		139		0.01
Construction materials	—		—		7,297		0.39
Building products	—		—		735		0.04
Total	$	2,376,712	100.00	%	$	1,893,046	100.00	%

The Company’s investments are generally in small and mid-sized companies in a variety of industries. At December 31, 2013 and September 30, 2013, the Company had no single investment that represented greater than 10% of the total investment portfolio at fair value. Income, consisting of interest, dividends, fees, other investment income and realization of gains or losses, can fluctuate upon repayment or sale of an investment and in any given year can be highly concentrated among several investments. For the three months ended December 31, 2013 and December 31, 2012, no individual investment produced income that exceeded 10% of investment income.

Note 4. Fee Income

The Company receives a variety of fees in the ordinary course of business including servicing, advisory, structuring and prepayments fees, which are classified as fee income and recognized as they are earned. The ending unearned fee income balances as of December 31, 2013 and September 30, 2013 were $4.8 million and $5.0 million, respectively.

As of December 31, 2013, the Company had structured $4.5 million in aggregate exit fees across six portfolio investments upon the future exit of those investments. Exit fees are fees which are payable upon the exit of a debt investment. These fees are to be paid

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan.

Note 5. Share Data

Effective January 2, 2008, the Partnership merged with and into the Company. At the time of the merger, all outstanding partnership interests in the Partnership were exchanged for 12,480,972 shares of common stock of the Company. An additional 26 fractional shares were payable to the stockholders in cash.

On June 17, 2008, the Company completed an initial public offering of 10,000,000 shares of its common stock at the offering price of $14.12 per share. The net proceeds totaled $129.5 million after deducting underwriting commissions of $9.9 million and offering costs of $1.8 million.

On April 20, 2010, at the Company’s 2010 Annual Meeting, the Company’s stockholders approved, among other things, amendments to the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock from 49,800,000 shares to 150,000,000 shares and to remove the Company’s authority to issue shares of Series A Preferred Stock.

On March 19, 2013, the Company amended its Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares.

The following table sets forth the computation of basic and diluted earnings per share, pursuant to ASC 260-10 Earnings per Share, for the three months ended December 31, 2013 and December 31, 2012:



	Three months ended December 31, 2013		Three months ended December 31, 2012
Earnings per common share — basic:
Net increase in net assets resulting from operations	$	33,706	$	17,843
Weighted average common shares outstanding — basic	139,126		94,889
Earnings per common share — basic	$	0.24	$	0.19
Earnings per common share — diluted:
Net increase in net assets resulting from operations, before adjustments	$	33,706	$	17,843
Adjustments for interest on convertible notes, base management fees and incentive fees	1,364		1,349
Net increase in net assets resulting from operations, as adjusted	35,070		19,192
Weighted average common shares outstanding — basic	139,126		94,889
Adjustments for dilutive effect of convertible notes	7,790		7,790
Weighted average common shares outstanding — diluted	146,916		102,679
Earnings per common share — diluted	$	0.24	$	0.19

The following table reflects the distributions per share that the Company has paid, including shares issued under the dividend reinvestment plan (“DRIP”), on its common stock from October 1, 2012 to December 31, 2013:

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Date Declared

Record Date

Payment Date

Amount

per Share

Cash

Distribution

DRIP Shares

Issued

DRIP Shares

Value

August 6, 2012

October 15, 2012

October 31, 2012

$ 0.0958

$ 8.2 million

51,754

$ 0.5 million

August 6, 2012

November 15, 2012

November 30, 2012

0.0958

8.2 million

53,335

0.5 million

August 6, 2012

December 14, 2012

December 28, 2012

0.0958

9.5 million

64,680

0.6 million

August 6, 2012

January 15, 2013

January 31, 2013

0.0958

9.5 million

61,782

0.6 million

August 6, 2012

February 15, 2013

February 28, 2013

0.0958

9.1 million

103,356

1.0 million

January 14, 2013

March 15, 2013

March 29, 2013

0.0958

9.1 million

100,802

1.1 million

January 14, 2013

April 15, 2013

April 30, 2013

0.0958

10.3 million

111,167

1.2 million

January 14, 2013

May 15, 2013

May 31, 2013

0.0958

10.3 million

127,152

1.3 million

May 6, 2013

June 14, 2013

June 28, 2013

0.0958

10.5 million

112,821

1.1 million

May 6, 2013

July 15, 2013

July 31, 2013

0.0958

10.2 million

130,944

1.3 million

May 6, 2013

August 15, 2013

August 30, 2013

0.0958

10.3 million

136,052

1.3 million

August 5, 2013

September 13, 2013

September 30, 2013

0.0958

10.3 million

135,027

1.3 million

August 5, 2013

October 15, 2013

October 31, 2013

0.0958

11.9 million

142,320

1.4 million

August 5, 2013

November 15, 2013

November 29, 2013

0.0958

12.0 million

145,063

(1)

1.4 million

November 21, 2013

December 13, 2013

December 30, 2013

0.05

6.3 million

69,291

(1)

0.6 million

__________

(1) Shares were purchased on the open market and distributed.

On November 21, 2013, the Company's Board of Directors terminated the Company's previous $50 million stock repurchase program and approved a new $100 million stock repurchase program. Any stock repurchases under this program would be made through the open market at times and in such amounts as the Company's management would deem appropriate, provided they are below the most recently published net asset value per share. Unless extended by the Company's Board of Directors, the stock repurchase program will expire on November 21, 2014 and may be limited or terminated at any time without prior notice.

In December 2013, the Company repurchased 45,104 shares at the weighted average price of $8.978 per share, resulting in $0.4 million of cash paid during the quarter ended December 31, 2013.

Note 6. Lines of Credit

Wells Fargo Facility

On November 16, 2009, Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary (“Funding”), and the Company entered into a Loan and Servicing Agreement (“Wells Agreement”), with respect to a revolving credit facility, as subsequently amended, (the “Wells Fargo facility”) with Wells Fargo, as successor to Wachovia Bank, National Association, Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time.

As of December 31, 2013, the Wells Fargo facility permitted up to $150 million of borrowings (subject to collateral requirements) with an accordion feature allowing for future expansion of the facility up to a total of $250 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-month) plus 2.50% per annum, with no LIBOR floor. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on April 23, 2014 and the maturity date of the facility is April 25, 2016.

The Wells Fargo facility provides for the issuance from time to time of letters of credit for the benefit of the Company's portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million.

In connection with the Wells Fargo facility, the Company concurrently entered into (i) a Purchase and Sale Agreement with Funding, pursuant to which the Company has sold and will continue to sell to Funding certain loan assets it has originated or acquired, or will originate or acquire and (ii) a Pledge Agreement with Wells Fargo, pursuant to which the Company pledged all of its equity interests in Funding as security for the payment of Funding’s obligations under the Wells Agreement and other documents entered into in connection with the Wells Fargo facility. Funding was formed for the sole purpose of entering into the Wells Fargo facility and has no other operations.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

The Wells Agreement and related agreements governing the Wells Fargo facility required both Funding and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of their businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities, including a prepayment penalty in certain cases. The Wells Fargo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding, and the failure by Funding or the Company to materially perform under the Wells Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the Wells Fargo facility.

The Wells Fargo facility is secured by all of the assets of Funding, and all of the Company’s equity interest in Funding. The Company uses the Wells Fargo facility to fund a portion of its loan origination activities and for general corporate purposes. Each loan origination under the facility is subject to the satisfaction of certain conditions. The Company cannot be assured that Funding will be able to borrow funds under the Wells Fargo facility at any particular time or at all. As of December 31, 2013, the Company had $50.1 million of borrowings outstanding under the Wells Fargo facility, which had a fair value of $50.1 million. The Company’s borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.749% for the three months ended December 31, 2013. For the three months ended December 31, 2013 and December 31, 2012, the Company recorded interest expense of $0.7 million and $0.8 million, respectively, related to the Wells Fargo facility.

ING Facility

On May 27, 2010, the Company entered into a secured syndicated revolving credit facility (as subsequently amended, the “ING facility”) pursuant to a Senior Secured Revolving Credit Agreement (“ING Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility allows the Company to request letters of credit from ING Capital LLC, as the issuing bank.

As of December 31, 2013, the ING facility permitted up to $605 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $800 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-, 2-, 3- or 6-month, at the Company's option) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on August 6, 2017 and the maturity date of the facility is August 6, 2018.

The ING facility is secured by substantially all of the Company’s assets, as well as the assets of the Company’s wholly-owned subsidiary, FSFC Holdings, Inc. ("Holdings"), and its indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC ("Fund of Funds"), subject to certain exclusions for, among other things, equity interests in the Company’s SBIC subsidiaries, and equity interests in Funding and Funding II (which is defined and discussed below) as further set forth in a Guarantee, Pledge and Security Agreement (“ING Security Agreement”) entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., ING Capital LLC, as collateral agent, and the Company. Fifth Street Fund of Funds LLC and FSFC Holdings, Inc. were formed to hold certain of the Company’s portfolio companies for tax purposes and have no other operations. None of the Company’s SBIC subsidiaries, Funding or Funding II is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that the Company may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.

Pursuant to the ING Security Agreement, Holdings and Fund of Funds guaranteed the obligations under the ING Security Agreement, including the Company’s obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, the Company pledged its entire equity interest in Holdings and Holdings pledged its entire equity interest in Fund of Funds to the collateral agent pursuant to the terms of the ING Security Agreement.

The ING Credit Agreement and related agreements governing the ING facility required Holdings, Fund of Funds and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of the Company’s businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by the Company to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the ING facility.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. The Company cannot be assured that it will be able to borrow funds under the ING facility at any particular time or at all.

As of December 31, 2013, the Company had $433.3 million of borrowings outstanding under the ING facility, which had a fair value of $433.3 million. The Company’s borrowings under the ING facility bore interest at a weighted average interest rate of 2.715% for the three months ended December 31, 2013. For the three months ended December 31, 2013 and December 31, 2012, the Company recorded interest expense of $2.8 million and $1.7 million, respectively, related to the ING facility.

Sumitomo Facility

On September 16, 2011, Fifth Street Funding II, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary (“Funding II”), entered into a Loan and Servicing Agreement (“Sumitomo Agreement”) with respect to a seven-year credit facility (“Sumitomo facility”) with Sumitomo Mitsui Banking Corporation (“SMBC”), an affiliate of Sumitomo Mitsui Financial Group, Inc., as administrative agent, and each of the lenders from time to time party thereto, in the amount of $200 million.

As of December 31, 2013, the Sumitomo facility permitted up to $125 million of borrowings (subject to collateral requirements), and borrowings under the facility bore interest at a rate of LIBOR (1-month) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on September 16, 2016 and the maturity date of the facility is September 16, 2020, with an option for a one-year extension.

In connection with the Sumitomo facility, the Company concurrently entered into a Purchase and Sale Agreement with Funding II, pursuant to which it has sold and will continue to sell to Funding II certain loan assets the Company has originated or acquired, or will originate or acquire.

The Sumitomo Agreement and related agreements governing the Sumitomo facility required both Funding II and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of its businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities, including a prepayment penalty in certain cases. The Sumitomo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding II, and the failure by Funding II or the Company to materially perform under the Sumitomo Agreement and related agreements governing the Sumitomo facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. Funding II was formed for the sole purpose of entering into the Sumitomo facility and has no other operations.

The Sumitomo facility is secured by all of the assets of Funding II. Each loan origination under the facility is subject to the satisfaction of certain conditions. There is no assurance that Funding II will be able to borrow funds under the Sumitomo facility at any particular time or at all. As of December 31, 2013, the Company had $80.9 million of borrowings outstanding under the Sumitomo facility, which had a fair value of $80.9 million. The Company’s borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.662% for the three months ended December 31, 2013. For the three months ended December 31, 2013 and December 31, 2012, the Company recorded interest expense of $0.5 million and $0.4 million, respectively, related to the Sumitomo facility.

As of December 31, 2013, except for assets that were funded through the Company’s SBIC subsidiaries, substantially all of the Company’s assets were pledged as collateral under the Wells Fargo facility, the ING facility or the Sumitomo facility. With respect to the assets funded through the Company’s SBIC subsidiaries, the SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders.

Total interest expense for the three months ended December 31, 2013 and December 31, 2012 was $10.2 million and $7.2 million, respectively.

Note 7. Interest and Dividend Income

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. In accordance with the Company’s policy, accrued interest is evaluated periodically for collectability. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. Distributions from portfolio companies are recorded as dividend income when the distribution is received.

The Company holds debt in its portfolio that contains PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company generally ceases accruing PIK interest if there is insufficient

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

value to support the accrual or if the Company does not expect the portfolio company to be able to pay all principal and interest due. The Company’s decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; the Company’s assessment of the portfolio company’s business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan; information obtained by the Company in connection with periodic formal update interviews with the portfolio company’s management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, the Company determines whether to cease accruing PIK interest on a loan or debt security. The Company’s determination to cease accruing PIK interest on a loan or debt security is generally made well before the Company’s full write-down of such loan or debt security.

Accumulated PIK interest activity for the three months ended December 31, 2013 and December 31, 2012 was as follows:



	Three months ended December 31, 2013			Three months ended December 31, 2012
PIK balance at beginning of period	$	23,934		$	18,431
Gross PIK interest accrued	5,613			4,145
PIK income reserves(1)	—			(424		)
PIK interest received in cash	(4,226		)	(313		)
Loan exits and other PIK adjustments	(421		)	(5,020		)
PIK balance at end of period	$	24,900		$	16,819

_____________

(1) PIK income is generally reserved for when a loan is placed on PIK non-accrual status.

As of December 31, 2013 and September 30, 2013, there were no investments on which the Company had stopped accruing cash and/or PIK interest and OID income. As of December 31, 2012, the Company had stopped accruing PIK interest on two investments.

The percentages of the Company’s debt investments at cost and fair value by accrual status as of December 31, 2013, September 30, 2013 and December 31, 2012 were as follows:



	December 31, 2013								September 30, 2013								December 31, 2012
	Cost		% of Debt Portfolio		Fair Value		% of Debt Portfolio		Cost		% of Debt Portfolio		Fair Value		% of Debt Portfolio		Cost		% of Debt Portfolio		Fair Value		% of Debt Portfolio
Accrual	$	2,249,767	100.00	%	$	2,261,742	100.00	%	$	1,779,201	100.00	%	$	1,793,463	100.00	%	$	1,503,811	98.79	%	$	1,521,923	99.93	%
PIK non-accrual	—		—		—		—		—		—		—		—		18,427		1.21		1,072		0.07
Cash non-accrual(1)	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	2,249,767	100.00	%	$	2,261,742	100.00	%	$	1,779,201	100.00	%	$	1,793,463	100.00	%	$	1,522,238	100.00	%	$	1,522,995	100.00	%

_____________

(1) Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.

The non-accrual status of the Company’s portfolio investments as of December 31, 2013, September 30, 2013 and December 31, 2012 was as follows:



	December 31, 2013	September 30, 2013	December 31, 2012
Coll Materials Group LLC (1)	—	—	PIK non-accrual
Trans-Trade, Inc. - Term Loan B (1)	—	—	PIK non-accrual

_____________

(1) The Company did not hold this investment at December 31, 2013 or September 30, 2013. See Note 9 for a discussion of the Company’s recent realization events.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Income non-accrual amounts for the three months ended December 31, 2013 and December 31, 2012 were as follows:



	Three months ended December 31, 2013		Three months ended December 31, 2012
Cash interest income	$	—	$	—
PIK interest income		—		424
OID income		—		—
Total	$	—	$	424

Note 8. Taxable/Distributable Income and Dividend Distributions

Taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, as investment gains and losses are not included in taxable income until they are realized; (2) origination and exit fees received in connection with investments in portfolio companies; (3) organizational and deferred offering costs; (4) recognition of interest income on certain loans; and (5) income or loss recognition on exited investments.

At September 30, 2013, the Company has net loss carryforwards of $107.4 million to offset net capital gains, to the extent provided by federal tax law. Of the capital loss carryforwards, $1.5 million will expire on September 30, 2017, $10.3 million will expire on September 30, 2019, and $95.6 million will not expire. During the year ended September 30, 2013, the Company realized capital losses from the sale of investments after October 31, 2012 and prior to year end (“post-October capital losses”) of $21.3 million, which for tax purposes are treated as arising on the first day of the following year.

Listed below is a reconciliation of “net increase in net assets resulting from operations” to taxable income for the three months ended December 31, 2013.



Net increase in net assets resulting from operations	$	33,706
Net unrealized depreciation on investments	5,718
Book/tax difference due to deferred loan fees	(1,282		)
Book/tax difference due to organizational and deferred offering costs	(22		)
Book/tax difference due to capital losses not recognized	(3,206		)
Other book/tax differences	(96		)
Taxable/Distributable Income (1)	$	34,818

______________

(1) The Company’s taxable income for the three months ended December 31, 2013 is an estimate and will not be finally determined until the Company files its tax return for the fiscal year ended September 30, 2014. Therefore, the final taxable income may be different than the estimate.

The Company uses the asset and liability method to account for its taxable subsidiaries’ income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences. The Company has recorded a deferred tax asset for the difference in the book and tax basis of certain equity investments and tax net operating losses held by its taxable subsidiaries of $1.4 million. However, this amount has been fully offset by a valuation allowance of $1.4 million, since it is more likely than not that these deferred tax assets will not be realized.

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was enacted, which changed various technical rules governing the tax treatment of RICs. The changes are generally effective for taxable years beginning after the date of enactment. Under the Act, the Company is permitted to carry forward any net capital losses, if any, incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment net loss carryforwards may be more likely to expire unused.

Distributions to stockholders are recorded on the record date. The Company is required to distribute annually to its stockholders at least 90% of its net taxable income and net realized short-term capital gains in excess of net realized long-term capital losses for each taxable year in order to be eligible for the tax benefits allowed to a RIC under Subchapter M of the Code.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

The Company anticipates paying out as a dividend all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors and is based on management’s estimate of the Company’s annual taxable income. The Company maintains an “opt out” dividend reinvestment plan for its stockholders.

For income tax purposes, the Company estimates that its distributions for the calendar year 2014 will be composed primarily of ordinary income, and will be reflected as such on the Form 1099-DIV for the calendar year 2014.

As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis. The Company did not incur a federal excise tax for calendar years 2011 and 2012 and does not expect to incur a federal excise tax for calendar year 2013.

Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments

Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with the Company’s determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.

Net unrealized appreciation or depreciation reflects the net change in the valuation of the portfolio pursuant to the Company’s valuation guidelines and the reclassification of any prior period unrealized appreciation or depreciation.

During the three months ended December 31, 2013, the Company recorded investment realization events, including the following:


•	In October and December 2013, the Company received payments of $3.2 million from Stackpole Powertrain International Holding, L.P. related to the sale of its equity investment. A realized gain of $2.2 million was recorded on this transaction;


•	In October 2013, the Company received a payment of $8.9 million from Harden Healthcare, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;

•

In October 2013, the Company received a payment of $4.0 million from Capital Equipment Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction. The Company also received an additional $0.9 million in connection with the sale of its common equity investment, realizing a gain of $0.6 million;


•	In November 2013, the Company received a payment of $10.0 million from IG Investments Holdings, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;


•	In November 2013, the Company received a payment of $15.7 million from CTM Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;


•	In December 2013, the Company received a payment of $0.4 million in connection with the exit of its debt investment in Saddleback Fence and Vinyl Products, Inc. A realized loss of $0.3 million was recorded on this transaction;


•	In December 2013, the Company received a payment of $7.2 million from Western Emulsions, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction; and


•	During the three months ended December 31, 2013, the Company received payments of $108.9 million in connection with sales of debt investments in the open market and recorded a net realized gain of $0.5 million.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

During the three months ended December 31, 2012, the Company recorded investment realization events, including the following:


•	In October 2012, the Company received a payment of $4.2 million from Rail Acquisition Corp. in full satisfaction of all obligations related to the revolving loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;


•	In October 2012, the Company received a payment of $5.4 million from Bojangles in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;


•	In October 2012, the Company received a payment of $21.9 million from Blue Coat Systems, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;


•	In October 2012, the Company received a payment of $9.9 million from Insight Pharmaceuticals LLC in full satisfaction of all obligations related to the first lien loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;


•	In November 2012, the Company received a payment of $8.5 million from SolutionSet, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction; and


•	During the three months ended December 31, 2012, the Company received payments of $33.7 million in connection with partial sales of debt investments in the open market and recorded a net realized gain of $0.6 million.

During the three months ended December 31, 2013, the Company recorded net unrealized depreciation of $5.7 million. This consisted of $2.7 million of net reclassifications to realized gains (resulting in unrealized depreciation), $1.8 million of net unrealized depreciation on debt investments and $1.2 million of net unrealized depreciation on equity investments. During the three months ended December 31, 2012, the Company recorded net unrealized depreciation of $9.3 million. This consisted of $13.1 million of net unrealized depreciation on debt investments and $0.8 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $4.6 million of net unrealized appreciation on equity investments.

Note 10. Concentration of Credit Risks

The Company places its cash in financial institutions and at times such balances may be in excess of the FDIC insured limit. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions and monitoring their financial stability.

Note 11. Related Party Transactions

The Company has entered into an investment advisory agreement with the Investment Adviser. Under the investment advisory agreement, the Company pays the Investment Adviser a fee for its services consisting of two components — a base management fee and an incentive fee.

Base management Fee

The base management fee is calculated at an annual rate of 2% of the Company’s gross assets, which includes any borrowings for investment purposes but excludes any cash and cash equivalents held at the end of each quarter. The base management fee is payable quarterly in arrears and the fee for any partial month or quarter is appropriately prorated.

For the three months ended December 31, 2013 and December 31, 2012, base management fees were $12.1 million and $8.0 million, respectively. At December 31, 2013, the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $12.1 million reflecting the unpaid portion of the base management fee payable to the Investment Adviser.

Incentive Fee

The incentive fee portion of the investment advisory agreement has two parts. The first part is calculated and payable quarterly in arrears based on the Company’s “Pre-Incentive Fee Net Investment Income” for the immediately preceding fiscal quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

fees or other fees that the Company receives from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the Company’s administration agreement with FSC, Inc., and any interest expense and dividends paid on any issued and outstanding indebtedness or preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding fiscal quarter, will be compared to a “hurdle rate” of 2% per quarter (8% annualized), subject to a “catch-up” provision measured as of the end of each fiscal quarter. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of its gross assets used to calculate the 2% base management fee. The operation of the incentive fee with respect to the Company’s Pre-Incentive Fee Net Investment Income for each quarter is as follows:


•	No incentive fee is payable to the Investment Adviser in any fiscal quarter in which the Company’s Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 2% (the “preferred return” or “hurdle”);

•

100% of the Company's Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser. The Company refers to this portion of its Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) as the “catch-up.” The “catch-up” provision is intended to provide the Investment Adviser with an incentive fee of 20% on all of the Company's Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when the Company's Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter; and


•	20% of the amount of the Company's Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser once the hurdle is reached and the catch-up is achieved (20% of all Pre-Incentive Fee Net Investment Income thereafter is allocated to the Investment Adviser).

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date) and equals 20% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

GAAP requires the Company to accrue for the theoretical capital gains incentive fee that would be payable after giving effect to the net realized and unrealized capital appreciation. It should be noted that a fee so calculated and accrued would not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. Amounts ultimately paid under the investment advisory agreement will be consistent with the formula reflected in the investment advisory agreement. The Company does not currently accrue for capital gains incentive fees due to the accumulated realized losses in the portfolio.

For the three months ended December 31, 2013 and December 31, 2012, incentive fees were $9.1 million and $6.6 million, respectively. At December 31, 2013, the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $9.1 million reflecting the unpaid portion of the incentive fee payable to the Investment Adviser.

Indemnification

The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, the Company’s Investment Adviser and its officers, managers, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Investment Adviser’s services under the investment advisory agreement or otherwise as the Company’s Investment Adviser.

Administration Agreement

The Company has also entered into an administration agreement with FSC, Inc. under which FSC, Inc. provides administrative services for the Company, including office facilities and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreement, FSC, Inc. also performs or oversees the performance of the Company’s required administrative services, which includes being responsible for the financial records which the Company is required to maintain and preparing reports to the Company’s stockholders and reports filed with the SEC. In addition, FSC, Inc. assists the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the Company’s tax returns and the

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

printing and dissemination of reports to the Company’s stockholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. For providing these services, facilities and personnel, the Company reimburses FSC, Inc. the allocable portion of overhead and other expenses incurred by FSC, Inc. in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief financial officer and chief compliance officer and their staffs. Such reimbursement is at cost with no profit to, or markup by, FSC, Inc. FSC, Inc. may also provide, on the Company’s behalf, managerial assistance to the Company’s portfolio companies. The administration agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.

For the three months ended December 31, 2013, the Company accrued administrative expenses of $1.7 million, including $0.8 million of general and administrative expenses which are due to FSC, Inc. At December 31, 2013, $2.1 million was included in Due to FSC, Inc. in the Consolidated Statement of Assets and Liabilities.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Note 12. Financial Highlights



	Three months ended December 31, 2013			Three months ended December 31, 2012
Net asset value at beginning of period	$	9.85		$	9.92
Net investment income	0.26			0.28
Net unrealized depreciation on investments	(0.04		)	(0.10		)
Net realized gains on investments	0.02			0.01
Distributions of ordinary income	(0.24		)	(0.29		)
Issuance of common stock	—			0.06
Net asset value at end of period	$	9.85		$	9.88
Per share market value at beginning of period	$	10.29		$	10.98
Per share market value at end of period	$	9.25		$	10.42
Total return(1)	(7.81		)%	(2.39		)%
Common shares outstanding at beginning of period	139,041			91,048
Common shares outstanding at end of period	139,138			105,943
Net assets at beginning of period	$	1,368,872		$	903,570
Net assets at end of period	$	1,369,968		$	1,046,879
Average net assets(2)	$	1,373,035		$	942,058
Ratio of net investment income to average net assets(3)	10.47		%	11.18		%
Ratio of total expenses to average net assets	10.15		%	10.62		%
Ratio of portfolio turnover to average investments at fair value	2.38		%	4.24		%
Weighted average outstanding debt(4)	$	829,393		$	483,709
Average debt per share	$	5.96		$	5.10

__________



(1)	Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company's dividend reinvestment plan. Total return is not annualized during interim periods.
(2)	Calculated based upon the weighted average net assets for the period.
(3)	Interim periods are annualized.
(4)	Calculated based upon the weighted average of loans payable for the period.

Note 13. Convertible Notes

On April 12, 2011, the Company issued $152 million unsecured convertible notes, including $2 million issued to Leonard M. Tannenbaum, the Company’s Chief Executive Officer. The Convertible Notes were issued pursuant to an Indenture, dated April 12, 2011 (the “Indenture”), between the Company and the Trustee.

The Convertible Notes mature on April 1, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Notes bear interest at a rate of 5.375% per annum payable semiannually in arrears on April 1 and October 1 of each year. The Convertible Notes are the Company’s unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries or financing vehicles.

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

of a monthly dividend of $0.1066 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. Based on the current conversion rate, the maximum number of shares of common stock that would be issued upon conversion of the $115 million convertible debt outstanding at December 31, 2013 is 7,790,273. If the Company delivers shares of common stock upon a conversion at the time that net asset value per share exceeds the conversion price in effect at such time, the Company’s stockholders may incur dilution. In addition, the Company’s stockholders will experience dilution in their ownership percentage of common stock upon the issuance of common stock in connection with the conversion of the Company’s convertible notes and any dividends paid on common stock will also be paid on shares issued in connection with such conversion after such issuance. The shares of common stock issued upon a conversion are not subject to registration rights.

The Company may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect of the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

The Indenture contains certain covenants, including covenants requiring the Company to provide financial information to the holders of the Convertible Notes, and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture.

For the three months ended December 31, 2013 and December 31, 2012, the Company recorded interest expense of $1.7 million and $1.7 million, respectively, related to the Convertible Notes.

The Company may repurchase the Convertible Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Convertible Notes repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Convertible Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the indenture. The Company did not repurchase Convertible Notes during the three months ended December 31, 2013 and December 31, 2012.

As of December 31, 2013, there were $115.0 million of Convertible Notes outstanding, which had a fair value of $122.6 million.

Note 14. Unsecured Notes

2024 Notes

On October 18, 2012, the Company issued $75.0 million in aggregate principal amount of its 5.875% unsecured notes due 2024 (the “2024 Notes”) for net proceeds of $72.5 million after deducting underwriting commissions of $2.2 million and offering costs of $0.3 million.

The 2024 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated October 18, 2012 (collectively, the “2024 Notes Indenture”), between the Company and the Trustee. The 2024 Notes are the Company’s unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries or financing vehicles.

Interest on the 2024 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 5.875% per annum. The 2024 Notes mature on October 30, 2024 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after October 30, 2017. The 2024 Notes are listed on the New York Stock Exchange under the trading symbol “FSCE” with a par value of $25.00 per share.

The 2024 Notes Indenture contains certain covenants, including covenants requiring the Company’s compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the 2024 Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2024 Notes Indenture. The Company may repurchase the 2024 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2024 Notes

Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any 2024 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2024 Notes Indenture. During the three months ended December 31, 2013 and December 31, 2012, the Company did not repurchase any of the 2024 Notes in the open market.

For the three months ended December 31, 2013 and December 31, 2012, the Company recorded interest expense of $1.2 million and $1.0 million, respectively, related to the 2024 Notes.

As of December 31, 2013, there were $75.0 million 2024 Notes outstanding, which had a fair value of $65.3 million.

2028 Notes

In April and May 2013, the Company issued $86.3 million in aggregate principal amount of its 6.125% unsecured notes due 2028 (the "2028 Notes") for net proceeds of $83.4 million after deducting underwriting commissions of $2.6 million and offering costs of $0.3 million. The proceeds included the underwriters’ full exercise of their overallotment option.

The 2028 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the second supplemental indenture, dated April 4, 2013 (collectively, the “2028 Notes Indenture”), between the Company and the Trustee. The 2028 Notes are the Company's unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the 2028 Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that it later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries or financing vehicles. Interest on the 2028 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per annum. The 2028 Notes mature on April 30, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or after April 30, 2018. The 2028 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FSCFL” with a par value of $25.00 per share.

The 2028 Notes Indenture contains certain covenants, including covenants requiring the Company's compliance with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the 2028 Notes and the Trustee if it ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2028 Notes Indenture. The Company may repurchase the 2028 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2028 Notes repurchased by the Company may, at its option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any 2028 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2028 Notes Indenture. During the three months ended December 31, 2013, the Company did not repurchase any of the 2028 Notes in the open market.

For the three months ended December 31, 2013, the Company recorded interest expense of $1.3 million related to the 2028 Notes.

As of December 31, 2013, there were $86.3 million of 2028 Notes outstanding, which had a fair value of $73.3 million.

Note 15. Subsequent Events

The Company’s management evaluated subsequent events through the date of issuance of the Consolidated Financial Statements. There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the Consolidated Financial Statements as of and for the three months ended December 31, 2013.

Schedule 12-14

Fifth Street Finance Corp.

Schedule of Investments in and Advances to Affiliates

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Three months ended December 31, 2013



Portfolio Company/Type of Investment(1)	Amount of Interest, Fees or Dividends Credited in Income(2)		Fair Value at October 1, 2013		Gross Additions(3)		Gross Reductions(4)			Fair Value at December 31, 2013
Control Investments
Traffic Solutions Holdings, Inc.
Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016	$	693	$	14,499	$	267	$	(131	)	$	14,635
LC Facility, 8.5% cash due 12/31/2016	86		—		2		(2		)	—
746,114 Series A Preferred Units	406		15,891		406		—			16,297
746,114 Common Stock Units	—		10,529		60		—			10,589
TransTrade Operators, Inc.
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016	511		13,524		513		(16		)	14,021
First Lien Revolver, 8% cash due 5/31/2016	1		—		—		—			—
596.67 Series A Common Units in TransTrade Holding LLC	—		—		—		—			—
3,033,333.33 Preferred Units in TransTrade Holding LLC	—		539		1,083		(937		)	685
HFG Holdings, LLC
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019	2,380		93,297		952		(62		)	94,187
860,000 Class A Units	—		22,346		436		—			22,782
First Star Aviation, LLC
First Lien Term Loan, 9% cash 3% PIK due 1/9/2018	1,012		19,211		15,100		(411		)	33,900
10,104,401 Common Units	—		5,264		5,793		—			11,057
Eagle Hospital Physicians, LLC
First Lien Term Loan A, 8% PIK due 8/1/2016	230		11,149		229		(34		)	11,344
First Lien Term Loan B, 8.1% PIK due 8/1/2016	63		3,050		63		(10		)	3,103
First Lien Revolver, 8% cash due 8/1/2016	12		—		936		(4		)	932
4,100,000 Class A Common Units	—		6,203		—		(40		)	6,163
Total Control Investments	$	5,394	$	215,502	$	25,840	$	(1,647	)	$	239,695
Affiliate Investments
Caregiver Services, Inc.
Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019	203		—		9,173		(158		)	9,015
1,080,399 shares of Series A Preferred Stock	—		3,256		313		—			3,569
AmBath/ReBath Holdings, Inc.
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016	77		3,272		25		(350		)	2,947
First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016	991		25,317		348		—			25,665
4,668,788 shares of Preferred Stock	—		87		429		—			516
Total Affiliate Investments	$	1,271	$	31,932	$	10,288	$	(508	)	$	41,712
Total Control & Affiliate Investments	$	6,665	$	247,434	$	36,128	$	(2,155	)	$	281,407

This schedule should be read in connection with the Company’s Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.

______________________


(1)	The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.


(2)	Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Non-Control/Non-Affiliate categories, respectively.

(3)

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on Investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category.

(4)

Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category.

Schedule 12-14

Fifth Street Finance Corp.

Schedule of Investments in and Advances to Affiliates

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

Three months ended December 31, 2012



Portfolio Company/Type of Investment(1)	Amount of Interest, Fees or Dividends Credited in Income(2)		Fair Value at October 1, 2012		Gross Additions(3)		Gross Reductions(4)			Fair Value at December 31, 2012
Control Investments
Coll Materials Group LLC
Second Lien Term Loan A, 12% cash due 11/1/2014	$	—	$	1,238	$	—	$	(1,238	)	$	—
Second Lien Term Loan B, 14% PIK due 11/1/2014	—		1,999		—		(927		)	1,072
50% interest in CD HOLDCO, LLC	—		—		—		—			—
Traffic Solutions Holdings, Inc.
First Lien Term Loan A, LIBOR+8.5% (1.25% floor) cash due 8/10/2015	447		15,023		119		(517		)	14,625
Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016	546		14,068		151		—			14,219
First Lien Revolver, LIBOR+8.5% (1.25% floor) cash due 8/10/2015	12		—		12		(12		)	—
LC Facility, 8.5% cash due 12/31/2016	85		—		2		(2		)	—
746,114 Series A Preferred Units	—		14,377		367		—			14,744
746,114 Common Stock Units	—		6,535		503		—			7,038
Total Control Investments	$	1,090	$	53,240	$	1,154	$	(2,696	)	$	51,698
Affiliate Investments
Caregiver Services, Inc.
1,080,399 shares of Series A Preferred Stock	—		2,924		83		—			3,007
AmBath/ReBath Holdings, Inc.
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016	114		4,268		26		(37		)	4,257
First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016	939		23,995		443		(203		)	24,235
4,668,788 shares of Preferred Stock	—		—		—		—			—
Total Affiliate Investments	$	1,053	$	31,187	$	552	$	(240	)	$	31,499
Total Control & Affiliate Investments	$	2,143	$	84,427	$	1,706	$	(2,936	)	$	83,197

______________________


(1)	The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.


(2)	Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Non-Control/Non-Affiliate categories, respectively.

(3)

(4)

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:


•	our future operating results and dividend projections;


•	our business prospects and the prospects of our portfolio companies;


•	the impact of the investments that we expect to make;


•	the ability of our portfolio companies to achieve their objectives;


•	our expected financings and investments;


•	the adequacy of our cash resources and working capital; and


•	the timing of cash flows, if any, from the operations of our portfolio companies.

In addition, words such as “anticipate,” “believe,” “expect,” “project”, “seek,” “plan,” “should,” “estimate” and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in our annual report on Form 10-K for the year ended September 30, 2013 and elsewhere in this quarterly report on Form 10-Q for the quarter ended December 31, 2013. Other factors that could cause actual results to differ materially include:


•	changes in the economy and the financial markets;


•	risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters;


•	future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies, SBICs or RICs; and


•	other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Except as otherwise specified, references to the “Company,” “we,” “us,” and “our” refer to Fifth Street Finance Corp.

All amounts are in thousands, except share and per share amounts, percentages and as otherwise indicated.

Overview

We are a specialty finance company that lends to and invests in small and mid-sized companies, primarily in connection with investments by private equity sponsors. Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our equity investments.

We were formed as a Delaware limited partnership (Fifth Street Mezzanine Partners III, L.P.) on February 15, 2007. Effective as of January 2, 2008, Fifth Street Mezzanine Partners III, L.P. merged with and into Fifth Street Finance Corp. At the time of the merger, all outstanding partnership interests in Fifth Street Mezzanine Partners III, L.P. were exchanged for 12,480,972 shares of common stock in Fifth Street Finance Corp.

On June 17, 2008, we completed an initial public offering of 10,000,000 shares of our common stock at the offering price of $14.12 per share. Our stock was listed on the New York Stock Exchange until November 28, 2011 when we transferred the listing to the NASDAQ Global Select Market, where it continues to trade under the symbol “FSC.”

Market Conditions

The global economy has experienced economic uncertainty in recent years. Economic uncertainty impacts our business in many ways, including changing spreads, structures and purchase multiples as well as the overall supply of investment capital. See "Risk Factors — Risks Relating to Economic Conditions" in our annual report on Form 10-K for the year ended September 30, 2013.

Despite the economic uncertainty, our deal pipeline remains robust, with high quality transactions backed by private equity sponsors in small to mid-sized companies. As always, we remain cautious in selecting new investment opportunities, and will only deploy capital in deals which we believe are consistent with our disciplined philosophy of pursuing superior risk-adjusted returns.

We expect to grow the investment portfolio by strategically investing in small and mid-sized companies when and where appropriate, as evidenced by our recent investment activities. Although we believe that we currently have sufficient capital available to fund investments, a prolonged period of market disruptions may cause us to reduce the volume of loans we originate and/or fund, which could have an adverse effect on our business, financial condition and results of operations. In this regard, because our common stock has at times traded at a price below our then current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.

Critical Accounting Policies

Basis of Presentation

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires management to make certain estimates and assumptions affecting amounts reported in the Consolidated Financial Statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

Investment Valuation

We are required to report our investments that are not publicly traded or for which current market values are not readily available at fair value. The fair value is deemed to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In accordance with authoritative accounting guidance, we perform detailed valuations of our debt and equity investments on an individual basis, using bond yield, market and income approaches as appropriate. In general, we utilize a bond yield method for the majority of our investments, as long as it is appropriate. If, in our judgment, the bond yield approach is not appropriate, we may use the market approach, income approach, or, in certain cases, an alternative methodology potentially including market quotations, asset liquidation model, expected recovery model or other alternative approaches.

Under the bond yield approach, we use bond yield models to determine the present value of the future cash flow streams of our debt investments. We review various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assess the information in the valuation process.

Under the market approach, we estimate the enterprise value of the portfolio companies in which we invest. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values from which we derive a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), cash flows, net income or revenues. We generally require portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

Under the income approach, we generally prepare and analyze discounted cash flow models based on our projections of the future free cash flows of the business.

Our Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:


•	The quarterly valuation process begins with each portfolio company or investment being initially valued by our finance department;


•	Preliminary valuations are then reviewed and discussed with principals of the investment adviser;


•	Separately, independent valuation firms are engaged by our Board of Directors to prepare preliminary valuations on a selected basis and submit the reports to us;


•	Our finance department compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;


•	Our finance department prepares a valuation report for the Audit Committee of our Board of Directors;


•	The Audit Committee of our Board of Directors is apprised of the preliminary valuations of the independent valuation firms;

Table of Contents


•	The Audit Committee of our Board of Directors reviews the preliminary valuations with the portfolio managers of the investment adviser, and our finance department responds and supplements the preliminary valuations to reflect any comments provided by the Audit Committee;


•	The Audit Committee of our Board of Directors makes a recommendation to the Board of Directors regarding the fair value of the investments in our portfolio; and


•	Our Board of Directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith.

The fair value of all of our investments at December 31, 2013, and September 30, 2013, was determined by our Board of Directors. Our Board of Directors has authorized the engagement of independent valuation firms to provide us with valuation assistance. We will continue to engage independent valuation firms to provide us with assistance regarding our determination of the fair value of selected portfolio securities each quarter; however, our Board of Directors is ultimately and solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process.

We intend to have a portion of the portfolio valued by an independent third party on a quarterly basis, with a substantial portion being valued over the course of each fiscal year. In certain cases, an independent valuation firm may perform a portfolio company valuation which is reviewed and, where appropriate, relied upon by our Board of Directors in determining the fair value of such investment.

The percentages of our portfolio, at fair value, valued by independent valuation firms each period during the current and two preceding fiscal years were as follows:



For the quarter ended September 30, 2011	91.2	%
For the quarter ended December 31, 2011	89.1	%
For the quarter ended March 31, 2012	87.3	%
For the quarter ended June 30, 2012	84.3	%
For the quarter ended September 30, 2012	79.6	%
For the quarter ended December 31, 2012	79.5	%
For the quarter ended March 31, 2013	73.8	%
For the quarter ended June 30, 2013	76.4	%
For the quarter ended September 30, 2013	86.5	%
For the quarter ended December 31, 2013	78.9	%

As of December 31, 2013 and September 30, 2013, approximately 96.8% and 91.3%, respectively, of our total assets represented investments in portfolio companies valued at fair value.

Revenue Recognition

Interest and Dividend Income

Interest income, adjusted for accretion of original issue discount, or OID, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Distributions from portfolio companies are recorded as dividend income when the distribution is received.

Fee Income

We receive a variety of fees in the ordinary course of business including servicing, advisory, structuring and prepayment fees, which are classified as fee income and recognized as they are earned.

We have also structured exit fees across certain of our portfolio investments to be received upon the future exit of those investments. Exit fees are payable upon the exit of a debt security. These fees are to be paid to us upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan. As of December 31, 2013, we had structured $4.5 million in aggregate exit fees across six portfolio investments upon the future exit of those investments.

Payment-in-Kind (PIK) Interest

Our loans typically contain contractual PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest

Table of Contents

involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; our assessment of the portfolio company’s business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan; information obtained by us in connection with periodic formal update interviews with the portfolio company’s management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, we determine whether to cease accruing PIK interest on a loan or debt security. Our determination to cease accruing PIK interest on a loan or debt security is generally made well before our full write-down of such loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest.

For a discussion of risks we are subject to as a result of our use of PIK interest in connection with our investments, see “Risk Factors — Risks Relating to Our Business and Structure — We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income,” “— We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive” and “— Our incentive fee may induce our investment adviser to make speculative investments” in our annual report on Form 10-K for the year ended September 30, 2013. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on our debt investments increases the recorded cost basis of these investments in our consolidated financial statements and, as a result, increases the cost basis of these investments for purposes of computing the capital gains incentive fee payable by us to our investment adviser.

To maintain our status as a RIC, PIK income must be paid out to our stockholders in the form of dividends even though we have not yet collected the cash and may never collect the cash relating to the PIK interest. Accumulated PIK interest was $24.9 million and represented 1.1% of the fair value of our portfolio of investments as of December 31, 2013 and $23.9 million or 1.3% as of September 30, 2013. The net increases in loan balances as a result of contractual PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.

Table of Contents

Portfolio Composition

Our investments principally consist of loans, purchased equity investments and equity grants in privately-held companies. Our loans are typically secured by a first, second or subordinated lien on the assets of the portfolio company and generally have terms of up to six years (but an expected average life of between three and four years). We are currently focusing our origination efforts on a prudent mix of senior secured and subordinated loans which we believe will provide superior risk-adjusted returns while maintaining adequate credit protection. The mix may change over time based on market conditions and management’s view of where the best risk adjusted returns are available.

A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables:



	December 31, 2013		September 30, 2013
Cost:
Senior secured debt	81.71	%	78.33	%
Subordinated debt	12.81		15.76
Collateralized Loan obligation ("CLO") debt	1.26		1.59
Purchased equity	3.82		3.86
Equity grants	0.18		0.23
Limited partnership interests	0.22		0.23
Total	100.00	%	100.00	%

Fair Value:
Senior secured debt	81.13	%	77.53	%
Subordinated debt	12.79		15.65
CLO debt	1.24		1.56
Purchased equity	4.39		4.74
Equity grants	0.24		0.30
Limited partnership interests	0.21		0.22
Total	100.00	%	100.00	%

Table of Contents

The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:



	December 31, 2013		September 30, 2013
Cost:
Healthcare services	16.64	%	14.35	%
Diversified support services	10.37		9.15
Education services	9.04		8.97
Advertising	7.85		8.28
Specialized finance	5.33		6.68
Internet software & services	4.97		5.87
IT consulting & other services	4.06		4.43
Leisure facilities	3.49		—
Oil & gas equipment services	3.25		4.06
Data processing & outsourced services	2.99		1.25
Healthcare equipment	2.98		3.79
Specialty stores	2.97		3.68
Human resources & employment services	2.75		3.49
Industrial machinery	2.47		0.91
Pharmaceuticals	2.19		2.77
Airlines	1.87		1.32
Apparel, accessories & luxury goods	1.84		1.53
Consumer electronics	1.56		—
Construction and engineering	1.41		1.75
Auto parts & equipment	1.37		1.78
Leisure products	1.34		2.54
Household products	1.26		1.60
Asset management & custody banks	1.26		1.59
Home improvement retail	1.22		1.54
Air freight and logistics	0.78		0.90
Research & consulting services	0.74		0.94
Other diversified financial services	0.71		2.25
Food distributors	0.68		0.99
Specialty chemicals	0.57		1.08
Security & alarm services	0.56		0.71
Healthcare technology	0.55		—
Application software	0.51		0.69
Multi-sector holdings	0.25		0.20
Environmental & facilities services	0.16		0.47
Thrift & mortgage finance	0.01		0.01
Construction materials	—		0.39
Building products	—		0.04
Total	100.00	%	100.00	%

Table of Contents



	December 31, 2013		September 30, 2013
Fair Value:
Healthcare services	16.74	%	14.47	%
Diversified support services	10.30		9.04
Education services	9.00		8.90
Advertising	7.75		8.18
Specialized finance	5.29		6.57
Internet software & services	5.10		6.03
IT consulting & other services	4.07		4.43
Leisure facilities	3.46		0.01
Oil & gas equipment services	3.22		4.04
Data processing & outsourced services	2.97		1.23
Healthcare equipment	2.96		3.74
Specialty stores	2.95		3.65
Human resources & employment services	2.74		3.45
Industrial machinery	2.47		0.96
Pharmaceuticals	2.24		2.79
Airlines	1.89		1.29
Apparel, accessories & luxury goods	1.76		1.46
Construction and engineering	1.75		2.16
Consumer electronics	1.55		0.00
Leisure products	1.42		2.64
Auto parts & equipment	1.38		1.90
Asset management & custody banks	1.24		1.56
Home improvement retail	1.23		1.51
Household products	1.23		1.55
Research & consulting services	0.75		0.95
Other diversified financial services	0.70		2.22
Food distributors	0.68		0.99
Air freight & logistics	0.62		0.74
Specialty chemicals	0.57		1.06
Security & alarm services	0.56		0.69
Healthcare technology	0.55		—
Application software	0.53		0.71
Multi-sector holdings	0.19		0.21
Environmental & facilities services	0.13		0.43
Thrift & mortgage finance	0.01		0.01
Construction materials	—		0.39
Building products	—		0.04
Total	100.00	%	100.00	%

Portfolio Asset Quality

We employ a ranking system to assess and monitor the credit risk of our investment portfolio. We rank all investments on a scale from 1 to 4. The system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loan, and other factors considered relevant to making a credit judgment. We have determined that there should be an individual ranking assigned to each tranche of securities in the same portfolio company where appropriate. This may arise when the perceived risk of loss on the investment varies significantly between tranches due to their respective seniority in the capital structure.


•	Investment Ranking 1 is used for investments that are performing above expectations and/or capital gains are expected.


•	Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain materially consistent with the potential risks at the time of the original or restructured investment. All new investments are initially ranked 2.


•	Investment Ranking 3 is used for investments that are performing below our expectations and for which risk has materially increased since the original or restructured investment. The portfolio company may be out of compliance with debt covenants and may require closer monitoring. To the extent that the underlying agreement has a PIK interest provision, investments with

Table of Contents

a ranking of 3 are generally those on which we are not accruing PIK interest.


•	Investment Ranking 4 is used for investments that are performing substantially below our expectations and for which risk has increased substantially since the original or restructured investment. Investments with a ranking of 4 are those for which some loss of principal is expected and are generally those on which we are not accruing cash interest.

The following table shows the distribution of our investments on the 1 to 4 investment ranking scale at fair value as of December 31, 2013 and September 30, 2013:



	December 31, 2013					September 30, 2013
Investment Ranking	Fair Value		% of Portfolio		Leverage Ratio	Fair Value		% of Portfolio		Leverage Ratio
1	$	118,070	4.97	%	2.65	$	122,769	6.49	%	2.67
2	2,258,642		95.03		4.86	1,770,277		93.51		4.70
3	—		—		—	—		—		—
4	—		—		—	—		—		—
Total	$	2,376,712	100.00	%	4.75	$	1,893,046	100.00	%	4.57

We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of December 31, 2013, we had modified the payment terms of our investments in 17 portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.

Loans and Debt Securities on Non-Accrual Status

As of December 31, 2013, there were no investments on which we had stopped accruing cash interest, PIK interest or OID income. As of December 31, 2012, we had stopped accruing PIK interest on two investments.

The percentages of our debt investments at cost and fair value by accrual status for the periods ended December 31, 2013, September 30, 2013 and December 31, 2012 were as follows:



	December 31, 2013								September 30, 2013								December 31, 2012
	Cost		% of Debt Portfolio		Fair Value		% of Debt Portfolio		Cost		% of Debt Portfolio		Fair Value		% of Debt Portfolio		Cost		% of Debt Portfolio		Fair Value		% of Debt Portfolio
Accrual	$	2,249,767	100.00	%	$	2,261,742	100.00	%	$	1,779,201	100.00	%	$	1,793,463	100.00	%	$	1,503,811	98.79	%	$	1,521,923	99.93	%
PIK non-accrual	—		—		—		—		—		—		—		—		18,427		1.21		1,072		0.07
Cash non-accrual(1)	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	2,249,767	100.00	%	$	2,261,742	100.00	%	$	1,779,201	100.00	%	$	1,793,463	100.00	%	$	1,522,238	100.00	%	$	1,522,995	100.00	%

________________


(1)	Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.

The non-accrual status of our portfolio investments as of December 31, 2013, September 30, 2013 and December 31, 2012 was as follows:



	December 31, 2013	September 30, 2013	December 31, 2012
Coll Materials Group LLC (1)	—	—	PIK non-accrual
Trans-Trade, Inc. - Term Loan B (1)	—	—	PIK non-accrual

________________


(1)	We did not hold this investment at December 31, 2013. See “— Discussion and Analysis of Results and Operations — Comparison of the three months ended December 31, 2013 and December 31, 2012 — Realized Gain (Loss) on Investments” for a discussion of our recent realization events.

Income non-accrual amounts for the three months ended December 31, 2013 and December 31, 2012 were as follows:



	Three months ended December 31, 2013		Three months ended December 31, 2012
Cash interest income	$	—	$	—
PIK interest income		—		424
OID income		—		—
Total	$	—	$	424

Discussion and Analysis of Results and Operations

Results of Operations

The principal measure of our financial performance is the net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and total expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment portfolio.

Comparison of the three months ended December 31, 2013 and December 31, 2012

Total Investment Income

Total investment income includes interest income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, administrative fees, unused fees, amendment fees, advisory fees, structuring fees, exit fees, prepayment fees and waiver fees. Other investment income consists primarily of dividend income received from certain of our equity investments.

Total investment income for the three months ended December 31, 2013 and December 31, 2012 was $71.3 million and $51.8 million, respectively. For the three months ended December 31, 2013, this amount primarily consisted of $54.1 million of interest income from portfolio investments (which included $5.6 million of PIK interest) and $17.1 million of fee income. For the three months ended December 31, 2012, this amount primarily consisted of $38.6 million of interest income from portfolio investments (which included $3.7 million of PIK interest) and $12.8 million of fee income.

The increase in our total investment income for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to a net increase of 15 debt investments in our portfolio and fee income related to investment activity, partially offset by amortization repayments received on our debt investments and a decrease in the weighted average yield of our debt investments from 12.0% to 10.9% during the year-over-year period.

Expenses

Expenses for the three months ended December 31, 2013 and December 31, 2012 were $35.1 million and $25.2 million, respectively. Expenses increased for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012 by $9.9 million. This was due primarily to increases in:


•	Base management fee, which was attributable to a 50.4% increase in the fair value of the investment portfolio due to an increase in net investment fundings in the year-over-year period;


•	Incentive fee, which was attributable to a 36.4% increase in pre-incentive fee net investment income for the year-over-year period; and


•	Interest expense, which was attributable to a 71.5% increase in the weighted average debt outstanding for the year-over-year period.

Gain on Extinguishment of Convertible Notes

During the three months ended December 31, 2013 and December 31, 2012, we did not repurchase any of our unsecured convertible notes (“Convertible Notes”) in the open market. In previous periods, we recognized a gain on repurchasing Convertible Notes at a discount. Because this net gain was included in the amount that must be distributed to our stockholders in order for us to maintain our RIC status and is classified as a component of net investment income in our Consolidated Statements of Operations, such net gain was included in “Pre-Incentive Fee Net Investment Income” for purposes of the payment of the income incentive fee to the investment adviser under our investment advisory agreement. Paying an incentive fee on this type of net gain is permissible under our investment advisory agreement, but because such a fee was not specifically detailed in the investment advisory agreement, we obtained the approval of our Board of Directors to pay such fees. This type of net gain, and corresponding income incentive fee, may occur again in the future. Any repurchase of our 2024 Notes or 2028 Notes (as each is defined below) at a discount will be treated in a similar manner.

Net Investment Income

As a result of the $19.5 million increase in total investment income and the $9.9 million increase in total expenses, net investment income for the three months ended December 31, 2013 reflected a $9.7 million, or 36.4%, increase compared to the three months ended December 31, 2012.

Table of Contents

Realized Gain (Loss) on Investments

Realized gain (loss) is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.

During the three months ended December 31, 2013, we recorded investment realization events, including the following:


•	In October and December 2013, we received payments of $3.2 million from Stackpole Powertrain International Holding, L.P. related to the sale of our equity investment. A realized gain of $2.2 million was recorded on this transaction;


•	In October 2013, we received a payment of $8.9 million from Harden Healthcare, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;


•	In October 2013, we received a payment of $4.0 million from Capital Equipment Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction. We also received an additional $0.9 million in connection with the sale of our common equity investment, realizing a gain of $0.6 million;


•	In November 2013, we received a payment of $10.0 million from IG Investments Holdings, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;


•	In November 2013, we received a payment of $15.7 million from CTM Group, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;


•	In December 2013, we received a payment of $0.4 million in connection with the exit of our debt investment in Saddleback Fence and Vinyl Products, Inc. A realized loss of $0.3 million was recorded on this transaction;


•	In December 2013, we received a payment of $7.2 million from Western Emulsions, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction; and


•	During the three months ended December 31, 2013, we received payments of $108.9 million in connection with sales of debt investments in the open market and recorded a net realized gain of $0.5 million.

During the three months ended December 31, 2012, we recorded investment realization events, including the following:


•	In October 2012, we received a payment of $4.2 million from Rail Acquisition Corp. in full satisfaction of all obligations related to the revolving loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;


•	In October 2012, we received a payment of $5.4 million from Bojangles in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;


•	In October 2012, we received a payment of $21.9 million from Blue Coat Systems, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;


•	In October 2012, we received a payment of $9.9 million from Insight Pharmaceuticals LLC in full satisfaction of all obligations related to the first lien loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;


•	In November 2012, we received a payment of $8.5 million from SolutionSet, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction; and


•	During the three months ended December 31, 2012, we received payments of $33.7 million in connection with partial sales of debt investments in the open market and recorded a net realized gain of $0.6 million.

Net Unrealized Appreciation (Depreciation) on Investments

Net unrealized appreciation or depreciation is the net change in the fair value of our investments during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Table of Contents

During the three months ended December 31, 2013, we recorded net unrealized depreciation of $5.7 million. This consisted of $2.7 million of net reclassifications to realized gains (resulting in unrealized depreciation), $1.8 million of net unrealized depreciation on debt investments and $1.2 million of net unrealized depreciation on equity investments. During the three months ended December 31, 2012, we recorded net unrealized depreciation of $9.3 million. This consisted of $13.1 million of net unrealized depreciation on debt investments and $0.8 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $4.6 million of net unrealized appreciation on equity investments.

Financial Condition, Liquidity and Capital Resources

Cash Flows

We have a number of alternatives available to fund the growth of our investment portfolio and our operations, including, but not limited to, raising equity, increasing debt and funding from operational cash flow. Additionally, we may reduce investment size by syndicating a portion of any given transaction. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate.

For the three months ended December 31, 2013, we experienced a net decrease in cash and cash equivalents of $104.8 million. During that period, we used $475.4 million of cash in operating activities, primarily for the funding of $650.1 million of investments and net revolvers, partially offset by $169.9 million of principal payments, PIK payments and sale proceeds received and $36.2 million of net investment income. During the same period, cash provided by financing activities was $370.7 million, primarily consisting of $29.0 million of net borrowings of SBA debentures and $376.2 million of net borrowings under our credit facilities, partially offset by $30.2 million of cash distributions paid and $1.4 million of deferred financing costs paid.

For the three months ended December 31, 2012, we experienced a net decrease in cash and cash equivalents of $37.0 million. During that period, we used $280.1 million of cash in operating activities, primarily for the funding of $398.8 million of investments and net revolvers, partially offset by $103.2 million of principal payments, PIK payments and sale proceeds received and $26.6 million of net investment income. During the same period, cash provided by financing activities was $243.1 million, primarily consisting of $151.7 million of net proceeds from the issuance of our common stock, $72.5 million of proceeds from the issuance of unsecured notes, $31.8 million of net borrowings under SBA debentures and $16.7 million of net borrowings under our credit facilities, partially offset by $25.9 million of cash distributions paid and $3.1 million of deferred financing costs paid.

As of December 31, 2013, we had $42.6 million in cash and cash equivalents, portfolio investments (at fair value) of $2.38 billion, $11.8 million of interest and fees receivable, $210.8 million of SBA debentures payable, $564.2 million of borrowings outstanding under our credit facilities, $115.0 million of Convertible Notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $239.9 million.

As of September 30, 2013, we had $147.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.89 billion, $10.4 million of interest and fees receivable, $181.8 million of SBA debentures payable, $188.0 million of borrowings outstanding under our credit facilities, $115.0 million of Convertible Notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $149.5 million.

Other Sources of Liquidity

We intend to continue to generate cash primarily from cash flows from operations, including interest earned, future borrowings and future offerings of securities. Our primary use of funds is investments in our targeted asset classes and cash distributions to holders of our common stock. We maintain a universal shelf registration statement that allows for the public offering and sale of our common stock, debt securities and warrants to purchase such securities. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. In the future, we may also securitize a portion of our investments in first and second lien senior loans or unsecured debt or other assets. To securitize loans, we would likely create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in the subsidiary.

Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings, including our dividend reinvestment plan, and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, because our common stock has at times traded at a price below our then-current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.

In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Internal Revenue Code. See “Regulated Investment Company Status and Distributions” below. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments

Table of Contents

in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.

As a business development company, under the 1940 Act, we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). This requirement limits the amount that we may borrow. As of December 31, 2013, we were in compliance with this requirement. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.

Table of Contents

Significant Capital Transactions That Have Occurred Since October 1, 2012

The following table reflects the dividend distributions per share that our Board of Directors has declared, including shares issued under our DRIP, on our common stock since October 1, 2012:

Date Declared

Record Date

Payment Date

Amount

per Share

Cash

Distribution

DRIP Shares

Issued

DRIP Shares

Value

January 14, 2013

March 15, 2013

March 29, 2013

$ 0.0958

$ 9.1 million

100,802

$ 1.1 million

January 14, 2013

April 15, 2013

April 30, 2013

0.0958

10.3 million

111,167

1.2 million

January 14, 2013

May 15, 2013

May 31, 2013

0.0958

10.3 million

127,152

1.3 million

May 6, 2013

June 14, 2013

June 28, 2013

0.0958

10.5 million

112,821

1.1 million

May 6, 2013

July 15, 2013

July 31, 2013

0.0958

10.2 million

130,944

1.3 million

May 6, 2013

August 15, 2013

August 30, 2013

0.0958

10.3 million

136,052

1.3 million

August 5, 2013

September 13, 2013

September 30, 2013

0.0958

10.3 million

135,027

1.3 million

August 5, 2013

October 15, 2013

October 31, 2013

0.0958

11.9 million

142,320

1.4 million

August 5, 2013

November 15, 2013

November 29, 2013

0.0958

12.0 million

145,063

(1)

1.4 million

November 21, 2013

December 13, 2013

December 30, 2013

0.05

6.3 million

69,291

(1)

0.6 million

November 21, 2013

January 15, 2014

January 31, 2014

0.0833

10.5 million

114,033

(1)

1.1 million

November 21, 2013

February 14, 2014

February 28, 2014

0.0833

November 21, 2013

March 14, 2014

March 31, 2014

0.0833

November 21, 2013

April 15, 2014

April 30, 2014

0.0833

November 21, 2013

May 15, 2014

May 30, 2014

0.0833

___________

(1) Shares were purchased on the open market and distributed.

The following table reflects share transactions that occurred from October 1, 2012 through December 31, 2013:



Date	Transaction	Shares	Public Offering Price	Gross Proceeds
December 7, 2012	Public offering(1)	14,725,000	10.68		157.3 million
April 2013	Public offering(1)	14,435,253	10.85		156.5 million
September 26, 2013	Public offering(1)	17,643,000	10.31		181.9 million

____________

(1) Includes the underwriters' partial exercise of their over-allotment option

Borrowings

SBIC Subsidiaries

Through wholly-owned subsidiaries, we sought and obtained two licenses from the SBA to operate SBIC subsidiaries. Specifically, on February 3, 2010, our wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. (“FSMP IV”), received a license, effective February 1, 2010, from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. On May 15, 2012, our wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. (“FSMP V”), received a license, effective May 10, 2012, from the SBA to operate as an SBIC. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.

The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

SBA regulations currently limit the amount that an SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million when they have at least $112.5 million in regulatory capital. As of December 31, 2013, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $123.4 million. These debentures bear interest at a weighted average interest rate of 3.567% (excluding the SBA annual charge), as follows:

Table of Contents



Rate Fix Date	Debenture Amount		Fixed Interest Rate	SBA Annual Charge
September 2010	$	73,000	0.032	0.285	%
March 2011	65,300		0.041	0.285	%
September 2011	11,700		0.029	0.285	%

As of December 31, 2013, FSMP V had $37.5 million in regulatory capital and $60.8 million in SBA-guaranteed debentures outstanding ($29.0 million of which do not yet have a locked interest rate), which had a fair value of $40.3 million. In March 2013, the SBA fixed the interest rate on the SBIC subsidiary’s $31.8 million of drawn leverage at an interest rate of 2.351% (excluding the SBA annual charge of 0.804%). As a result, the $181.8 million of rate locked SBA-guaranteed debentures held by our SBIC subsidiaries carry a weighted average interest rate of 3.355% as of December 31, 2013.

For the three months ended December 31, 2013 and December 31, 2012, we recorded interest expense of $1.9 million and $1.6 million, respectively, related to the SBA-guaranteed debentures of both subsidiaries.

We have received exemptive relief from the SEC to permit us to exclude the debt of our SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test by permitting us to borrow up to $225 million more than we would otherwise be able to absent the receipt of this exemptive relief.

Wells Fargo Facility

On November 16, 2009, we and Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote special purpose subsidiary (“Funding”), entered into a Loan and Servicing Agreement (“Wells Agreement”) with respect to a revolving credit facility (as subsequently amended, the “Wells Fargo facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), as successor to Wachovia Bank, National Association (“Wachovia”), Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time.

As of December 31, 2013, the Wells Fargo facility permitted up to $150 million of borrowings (subject to collateral requirements) with an accordion feature allowing for future expansion of the facility up to a total of $250 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-month) plus 2.50% per annum, with no LIBOR floor. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on April 23, 2014 and the maturity date of the facility is April 25, 2016.

The Wells Fargo facility provides for the issuance from time to time of letters of credit for the benefit of our portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million.

In connection with the Wells Fargo facility, we concurrently entered into (i) a Purchase and Sale Agreement with Funding, pursuant to which we have sold and will continue to sell to Funding certain loan assets we have originated or acquired, or will originate or acquire and (ii) a Pledge Agreement with Wells Fargo, pursuant to which we pledged all of our equity interests in Funding as security for the payment of Funding’s obligations under the Wells Agreement and other documents entered into in connection with the Wells Fargo facility. Funding was formed for the sole purpose of entering into the Wells Fargo facility and has no other operations.

The Wells Agreement and related agreements governing the Wells Fargo facility required both Funding and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities, including a prepayment penalty in certain cases. The Wells Fargo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding, and the failure by Funding or us to materially perform under the Wells Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.

The Wells Fargo facility is secured by all of the assets of Funding, and all of our equity interest in Funding. We use the Wells Fargo facility to fund a portion of our loan origination activities and for general corporate purposes. Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot be assured that Funding will be able to borrow funds under the Wells Fargo facility at any particular time or at all. As of December 31, 2013, we had $50.1 million of borrowings outstanding under the Wells Fargo facility, which had a fair value of $50.1 million. Our borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.749% for the three months ended December 31, 2013. For the three months ended December 31, 2013 and December 31, 2012, we recorded interest expense of $0.7 million and $0.8 million, respectively related to the Wells Fargo facility.

Table of Contents

ING Facility

On May 27, 2010, we entered into a secured syndicated revolving credit facility (as subsequently amended, the “ING facility”) pursuant to a Senior Secured Revolving Credit Agreement (“ING Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility allows us to request letters of credit from ING Capital LLC, as the issuing bank.

As of December 31, 2013, the ING facility permitted up to $605 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $800 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-, 2-, 3- or 6-month, at our option) plus 2.25% per annum, with no LIBOR floor, assuming we maintain our current credit rating. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on August 6, 2017 and the maturity date of the facility is August 6, 2018.

The ING facility is secured by substantially all of our assets, as well as the assets of our wholly-owned subsidiary, FSFC Holdings, Inc. ("Holdings"), and our indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC ("Fund of Funds"), subject to certain exclusions for, among other things, equity interests in any of our SBIC subsidiaries and equity interests in Funding and Fifth Street Funding II, LLC (which is defined and discussed below) as further set forth in a Guarantee, Pledge and Security Agreement (“ING Security Agreement”) entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., ING Capital LLC, as collateral agent, and us. None of our SBIC subsidiaries, Funding or Fifth Street Funding II, LLC is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that we may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.

Pursuant to the ING Security Agreement, Holdings and Fund of Funds guaranteed the obligations under the ING Security Agreement, including our obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, we pledged our entire equity interest in Holdings and Holdings pledged its entire equity interest in Fund of Funds to the collateral agent pursuant to the terms of the ING Security Agreement.

The ING Credit Agreement and related agreements governing the ING facility required Holdings, Fund of Funds and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by us to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.

Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. We cannot be assured that we will be able to borrow funds under the ING facility at any particular time or at all. As of December 31, 2013, we had $433.3 million of borrowings outstanding under the ING facility, which had a fair value of $433.3 million. Our borrowings under the ING facility bore interest at a weighted average interest rate of 2.715% for the three months ended December 31, 2013. For the three months ended December 31, 2013 and December 31, 2012, we recorded interest expense of $2.8 million and $1.7 million, respectively, related to the ING facility.

Sumitomo Facility

As of December 31, 2013, the Sumitomo facility permitted up to $125 million of borrowings (subject to collateral requirements), and borrowings under the facility bore interest at a rate of LIBOR (1-month) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on September 16, 2016, and the maturity date of the facility is September 16, 2020, with an option for a one-year extension.

In connection with the Sumitomo facility, we concurrently entered into a Purchase and Sale Agreement with Funding II, pursuant to which we will sell to Funding II certain loan assets we have originated or acquired, or will originate or acquire.

The Sumitomo Agreement and related agreements governing the Sumitomo facility required both Funding II and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities, including a prepayment penalty in certain cases. The Sumitomo facility agreements also include usual and customary default provisions such as the failure to make timely

Table of Contents

payments under the facility, a change in control of Funding II, and the failure by Funding II or us to materially perform under the Sumitomo Agreement and related agreements governing the Sumitomo facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations. Funding II was formed for the sole purpose of entering into the Sumitomo facility and has no other operations.

The Sumitomo facility is secured by all of the assets of Funding II. Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot be assured that Funding II will be able to borrow funds under the Sumitomo facility at any particular time or at all. As of December 31, 2013, we had $80.9 million of borrowings outstanding under the Sumitomo facility. Our borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.662% for the three months ended December 31, 2013. For the three months ended December 31, 2013, we recorded interest expense of $0.5 million and $0.4 million, respectively, related to the Sumitomo facility.

As of December 31, 2013, except for assets that were funded through our SBIC subsidiaries, substantially all of our assets were pledged as collateral under the Wells Fargo facility, ING facility or the Sumitomo facility. With respect to the assets funded through our SBIC subsidiaries, the SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over our stockholders.

The following table describes significant financial covenants with which we must comply under the Wells Fargo facility and ING facility on a quarterly basis. The Sumitomo facility does not require us to comply with significant financial covenants:



Facility	Financial Covenant	Description	Target Value	Reported Value (1)
Wells Fargo facility	Minimum shareholders’ equity (inclusive of affiliates)	Net assets shall not be less than $510 million plus 50% of the aggregate net proceeds of all sales of equity interests after February 25, 2011	$876 million	$1,369 million
	Minimum shareholders’ equity (exclusive of affiliates)	Net assets exclusive of affiliates other than Funding shall not be less than $250 million	$250 million	$1,037 million
	Asset coverage ratio	Asset coverage ratio shall not be less than 2.00:1	2.00:1	3.95:1
ING facility	Minimum shareholders’ equity	Net assets shall not be less than the greater of (a) 40% of total assets; and (b) $825 million plus 50% of the aggregate net proceeds of all sales of equity interests after August 6, 2013	$913 million	$1,369 million
	Asset coverage ratio	Asset coverage ratio shall not be less than 2.10:1	2.10:1	3.95:1
	Interest coverage ratio	Interest coverage ratio shall not be less than 2.50:1	2.50:1	4.68:1

___________

(1) As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Form 10-K for the year ended September 30, 2013. We were also in compliance with all financial covenants under these credit facilities based on the financial information contained in this Form 10-Q for the quarter ended December 31, 2013.

We and our SBIC subsidiaries are also subject to certain regulatory requirements relating to our borrowings. For a discussion of such requirements, see “Item 1. Business — Regulation — Business Development Company Regulations” and “— Small Business Investment Company Regulations” in our Annual Report on Form 10-K for the year ended September 30, 2013.

The following table reflects material credit facility and SBA debenture transactions that have occurred since October 1, 2009. Amounts available and drawn are as of December 31, 2013.

Table of Contents

Facility

Date

Transaction

Total

Facility

Amount

Upfront

fee Paid

Total Facility

Availability

Amount

Drawn

Remaining

Availability

Interest Rate

Wells Fargo facility

11/16/2009

Entered into credit facility

50 million

0.8 million

LIBOR + 4.00%

5/26/2010

Expanded credit facility

100 million

0.9 million

LIBOR + 3.50%

2/28/2011

Amended credit facility

100 million

0.4 million

LIBOR + 3.00%

11/30/2011

Amended credit facility

100 million

—

LIBOR + 2.75%

4/23/2012

Amended credit facility

150 million

1.2 million

LIBOR + 2.75%

6/20/2013

Amended credit facility

150 million

—

50 million

(1)

50 million

—

LIBOR (5) + 2.50%

ING facility

5/27/2010

Entered into credit facility

90 million

0.8 million

LIBOR + 3.50%

2/22/2011

Expanded credit facility

215 million

1.6 million

LIBOR + 3.50%

7/8/2011

Expanded credit facility

230 million

0.4 million

LIBOR + 3.00%/3.25%(2)

2/29/2012

Amended credit facility

230 million

1.5 million

LIBOR + 3.00%/3.25%(2)

11/30/2012

Amended credit facility

385 million

2.2 million

LIBOR + 2.75%( 3)

1/7/2013

Expanded credit facility

445 million

0.3 million

LIBOR + 2.75%( 3)

8/6/2013

Amended credit facility

480 million

1.8 million

LIBOR + 2.25%

10/22/2013

Expanded credit facility

605 million

0.7 million

605 million

433 million

172 million

LIBOR (6) + 2.25%

SBA

2/16/2010

Received capital commitment

75 million

0.8 million

9/21/2010

Received capital commitment

150 million

0.8 million

7/23/2012

Received capital commitment

225 million

0.8 million

225 million

211 million

14 million

3.355% (4)

Sumitomo facility

9/16/2011

Entered into credit facility

200 million

2.5 million

LIBOR + 2.25%

10/30/2013

Reduced credit facility

125 million

—

81 million

(1)

81 million

—

LIBOR (5) + 2.25%

_______________


(1)	Availability to increase upon our decision to further collateralize the facility


(2)	LIBOR plus 3.0% when the facility is drawn more than 35%. Otherwise, LIBOR plus 3.25%


(3)	Assuming we maintain our current credit rating


(4)	Weighted average interest rate of 3.355% on $181.8 million of rate locked debentures (excludes the SBA annual charge)


(5)	1-month


(6)	1-, 2-, 3- or 6-month, at our option

Convertible Notes

On April 12, 2011, we issued $152 million unsecured convertible notes (“Convertible Notes”), including $2 million issued to Leonard M. Tannenbaum, our Chief Executive Officer. The Convertible Notes were issued pursuant to an Indenture, dated April 12, 2011 (the “Indenture”), between us and Deutsche Bank Trust Company Americas, as trustee (the “Trustee”).

The Convertible Notes mature on April 1, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Notes bear interest at a rate of 5.375% per annum payable semiannually in arrears on April 1 and October 1 of each year. The Convertible Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles.

Prior to the close of business on the business day immediately preceding January 1, 2016, holders may convert their Convertible Notes only under certain circumstances set forth in the Indenture, such as during specified periods when our shares of common stock trade at more than 110% of the then applicable conversion price or the Convertible Notes trade at less than 98% of their conversion value. On or after January 1, 2016 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time. Upon conversion, we will deliver shares of our common stock. The conversion rate was initially, and currently is, 67.7415 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $14.76 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments, including for any cash dividends or distributions paid on shares of our common stock in excess of a monthly dividend of $0.1066 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. Based on the current conversion rate, the maximum number of shares of common stock that would be issued upon conversion of the $115.0 million Convertible Notes outstanding at December 31, 2013 is 7,790,273. If we deliver shares of common stock upon a conversion at the time our net asset value per share exceeds the conversion price in effect at such time, our stockholders may incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of our common stock upon our issuance of common stock in connection with the conversion of our Convertible Notes and any dividends paid on our common stock will also be paid on shares issued in connection with such conversion after such issuance. The shares of common stock issued upon a conversion are not subject to registration rights.

We may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect to us, holders of the Convertible Notes may require us to repurchase for cash all or part of

Table of Contents

their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

The Indenture contains certain covenants, including covenants requiring us to provide financial information to the holders of the Convertible Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. We may repurchase the Convertible Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Convertible Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any Convertible Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the Indenture. During the three months ended December 31, 2013 and December 31, 2012, we did not repurchase any of the Convertible Notes in the open market.

For the three months ended December 31, 2013 and December 31, 2012, we recorded interest expense of $1.7 million and $1.7 million, respectively, related to the Convertible Notes.

As of December 31, 2013, there were $115.0 million Convertible Notes outstanding, which had a fair value of $122.6 million.

2024 Notes

On October 18, 2012, we issued $75.0 million in aggregate principal amount of our 5.875% 2024 Notes for net proceeds of $72.5 million after deducting underwriting commissions of $2.2 million and offering costs of $0.3 million.

The 2024 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated October 18, 2012 (collectively, the “2024 Notes Indenture”), between us and the Trustee. The 2024 Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the 2024 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 5.875% per annum. The 2024 Notes mature on October 30, 2024 and may be redeemed in whole or in part at any time or from time to time at our option on or after October 30, 2017. The 2024 Notes are listed on the New York Stock Exchange under the trading symbol “FSCE” with a par value of $25.00 per share.

The 2024 Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 2024 Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2024 Notes Indenture. We may repurchase the 2024 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2024 Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any 2024 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2024 Notes Indenture. For the three months ended December 31, 2013 and December 31, 2012, we did not repurchase any of the 2024 Notes in the open market.

For the three months ended December 31, 2013 and December 31, 2012, we recorded interest expense of $1.2 million and $1.0 million, respectively, related to the 2024 Notes.

As of December 31, 2013, there were $75.0 million 2024 Notes outstanding, which had a fair value of $65.3 million.

2028 Notes

In April and May 2013, we issued $86.3 million in aggregate principal amount of our 6.125% unsecured notes due 2028 (the "2028 Notes") for net proceeds of $83.4 million after deducting underwriting commissions of $2.6 million and offering costs of $0.3 million. The proceeds included the underwriters’ full exercise of their overallotment option.

The 2028 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the second supplemental indenture, dated April 4, 2013 (collectively, the “2028 Notes Indenture”), between us and the Trustee. The 2028 Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 2028 Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the 2028 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per annum. The 2028 Notes mature on April 30, 2028

Table of Contents

and may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2018. The 2028 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FSCFL” with a par value of $25.00 per share.

The 2028 Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 2028 Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2028 Notes Indenture. We may repurchase the 2028 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2028 Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any 2028 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2028 Notes Indenture. During the three months ended December 31, 2013, we did not repurchase any of the 2028 Notes in the open market.

For the three months ended December 31, 2013, we recorded interest expense of $1.3 million related to the 2028 Notes.

As of December 31, 2013, there were $86.3 million of 2028 Notes outstanding, which had a fair value of $73.3 million.

Total interest expense for the three months ended December 31, 2013 and December 31, 2012 was $10.2 million and $7.2 million, respectively.

Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of December 31, 2013, our only off-balance sheet arrangements consisted of $239.9 million of unfunded commitments, which was comprised of $212.3 million to provide debt financing to certain of our portfolio companies and $27.6 million related to unfunded limited partnership interests. As of September 30, 2013, our only off-balance sheet arrangements consisted of $149.5 million, which was comprised of $126.8 million to provide debt financing to certain of our portfolio companies and $22.7 million related to unfunded limited partnership interests. Such commitments are subject to our portfolio companies’ satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in our Consolidated Statement of Assets and Liabilities and are not reflected on our Consolidated Statement of Assets and Liabilities.

A summary of the composition of unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of December 31, 2013 and September 30, 2013 is shown in the table below:



	December 31, 2013		September 30, 2013
Drugtest, Inc.	$	20,000	$	20,000
Snap Fitness Holdings, Inc.	20,000		—
BMC Software Finance, Inc.	15,000		—
RP Crown Parent, LLC	10,000		9,000
Deltek, Inc.	10,000		8,667
P2 Upstream Acquisition Co.	10,000		—
First Choice ER, LLC (1)	10,000		—
Pingora MSR Opportunity Fund I, LP (limited partnership interest)	9,792		9,792
InMotion Entertainment Group, LLC	9,335		—
Yeti Acquisition, LLC	7,500		7,500
ISG Services, LLC	6,000		6,000
Thing5, LLC	6,000		—
Med-Data, Incorporated	6,000		1,000
I Drive Safely, LLC	5,000		5,000
HealthEdge Software, Inc.	5,000		5,000
Adventure Interactive, Corp.	5,000		5,000
Reliance Communications, LLC	5,000		2,750
All Web Leads, Inc.	5,000		—
Discovery Practice Management, Inc.	4,989		—
First American Payment Systems, LP	4,767		5,000
Teaching Strategies, LLC	4,000		5,000
World 50, Inc.	4,000		4,000
Refac Optical Group	3,600		8,000
Enhanced Recovery Company LLC	3,500		3,500
Phoenix Brands Merger Sub LLC	3,429		3,429
Personable Holdings, Inc.	3,409		3,409
Charter Brokerage, LLC	2,933		4,000
OmniSYS Acquisition Corporation	2,500		—
CPASS Acquisition Company	2,250		2,500
Mansell Group, Inc.	2,000		2,000
Physicians Pharmacy Alliance, Inc.	2,000		2,000
Chicago Growth Partners III, LP (limited partnership interest)	2,000		2,000
Moelis Capital Partners Opportunity Fund I-B, LP (limited partnership interest)	2,000		—
Tailwind Capital Partners, LP (limited partnership interest)	2,000		—
Specialty Bakers, LLC	2,000		—
Beecken Petty O'Keefe Fund IV, LP (limited partnership interest)	1,789		2,000
SPC Partners V, LP (limited partnership interest)	1,723		—
Riverside Fund V, LP (limited partnership interest)	1,582		1,712
Olson + Co., Inc.	1,554		2,105
Sterling Capital Partners IV, LP (limited partnership interest)	1,540		1,528
CCCG, LLC	1,520		1,520
Miche Bag, LLC	1,500		1,500
2Checkout.com, Inc.	1,350		2,850
Milestone Partners IV, LP (limited partnership interest)	1,291		1,414
BMC Acquisition, Inc.	1,250		1,250
Ansira Partners, Inc.	1,190		1,190
Psilos Group Partners IV, LP (limited partnership interest)	1,000		1,000
Genoa Healthcare Holdings, LLC	1,000		1,000
Eagle Hospital Physicians, Inc.	933		1,867
HealthDrive Corporation	734		734
ACON Equity Partners III, LP (limited partnership interest)	664		671
Bunker Hill Capital II (QP), LP (limited partnership interest)	639		786
Riverlake Equity Partners II, LP (limited partnership interest)	564		638
Garretson Firm Resolution Group, Inc.	538		—
TransTrade Operators, Inc.	500		—



RCP Direct, LP (limited partnership interest)	359		524
Baird Capital Partners V, LP (limited partnership interest)	351		351
Riverside Fund IV, LP (limited partnership interest)	287		287
Total	$	239,862	$	149,474

________________

(1) In addition to its revolving commitment, we have extended a $175.0 million delayed draw term loan facility to First Choice ER, LLC. Specific amounts are made available to the borrower as certain financial requirements are satisfied. As of December 31, 2013, the total amount available to the borrower under this delayed draw facility was $17.0 million, and the facility was undrawn as of this date.

Contractual Obligations

The following table reflects information pertaining to our debt outstanding under the SBA debentures payable, the Wells Fargo facility, the ING facility, the Sumitomo facility, our Convertible Notes, our 2024 Notes and our 2028 Notes:




	Debt Outstanding as of September 30, 2013		Debt Outstanding as of December 31, 2013		Weighted average debt outstanding for the three months ended December 31, 2013		Maximum debt outstanding for the three months ended December 31, 2013
SBA debentures payable	$	181,750	$	210,750	$	190,413	$	210,750
Wells Fargo facility	20,000		50,071		41,680		55,072
ING facility	168,000		433,250		268,826		433,250
Sumitomo facility	—		80,907		52,224		83,500
Convertible Notes	115,000		115,000		115,000		115,000
2024 Notes	75,000		75,000		75,000		75,000
2028 Notes	86,250		86,250		86,250		86,250
Total debt	$	646,000	$	1,051,228	$	829,393	$	1,056,228

The following table reflects our contractual obligations arising from the SBA debentures payable, the Wells Fargo facility, the ING facility, the Sumitomo facility, our Convertible Notes, our 2024 Notes and our 2028 Notes:



	Payments due by period as of December 31, 2013
	Total		< 1 year		1-3 years		3-5 years		> 5 years
SBA debentures payable	$	210,750	$	—	$	—	$	—	$	210,750
Interest due on SBA debentures	55,666		7,078		14,376		14,356		19,856
Wells Fargo facility	50,071		—		50,071		—		—
Interest due on Wells Fargo facility	3,096		1,336		1,760		—		—
ING facility	433,250		—		—		433,250		—
Interest due on ING facility	48,520		10,560		21,120		16,840		—
Sumitomo facility	80,907		—		—		80,907		—
Interest due on Sumitomo facility	9,214		1,955		3,910		3,349		—
Convertible Notes	115,000		—		115,000		—		—
Interest due on Convertible Notes	13,921		6,181		7,740		—		—
2024 Notes	75,000		—		—		—		75,000
Interest due on 2024 Notes	47,757		4,406		8,813		8,813		25,725
2028 Notes	86,250		—		—		—		86,250
Interest due on 2028 Notes	75,754		5,283		10,566		10,566		49,339
Total	$	1,305,156	$	36,799	$	233,356	$	568,081	$	466,920

Regulated Investment Company Status and Dividends

We elected, effective as of January 2, 2008, to be treated as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). As a RIC, we are also subject to a federal excise tax, based on distribution requirements of our taxable income on a calendar year basis (e.g., calendar year 2013). We anticipate timely distribution of our taxable income in accordance with tax rules; however, we incurred a de minimis U.S. federal excise tax for calendar year 2010. We did not incur a federal excise tax for calendar years 2011 and 2012 and do not expect to incur a federal excise tax for the calendar year 2013. We may incur a federal excise tax in future years.

We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, we are partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to enable us to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. Also, the covenants under the Wells Fargo facility and Sumitomo facility could, under certain circumstances, restrict Funding and Funding II from making distributions to us and, as a result, hinder our ability to satisfy the distribution requirement. Similarly, the covenants contained in the ING facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividend distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in our credit facilities and debt instruments. If we do not distribute a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.

Related Party Transactions

We have entered into an investment advisory agreement with Fifth Street Management LLC, our investment adviser. Fifth Street Management LLC is controlled by Leonard M. Tannenbaum, its managing member and the chairman of our Board of Directors and our chief executive officer. Pursuant to the investment advisory agreement, fees payable to our investment adviser equal to (a) a base management fee of 2.0% of the value of our gross assets, which includes any borrowings for investment purposes and excludes cash and cash equivalents, and (b) an incentive fee based on our performance. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our “Pre-Incentive Fee Net Investment Income” for the immediately

preceding quarter, subject to a preferred return, or “hurdle,” and a “catch up” feature. The second part is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement) and equals 20% of our “Incentive Fee Capital Gains,” which equals our realized capital gains on a cumulative basis from inception through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. The investment advisory agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. During the three months ended December 31, 2013 and December 31, 2012, we incurred fees of $21.1 million and $14.7 million, respectively, under the investment advisory agreement.

Pursuant to the administration agreement with FSC, Inc., which is controlled by Mr. Tannenbaum, FSC, Inc. will furnish us with the facilities and administrative services necessary to conduct our day-to-day operations, including equipment, clerical, bookkeeping and recordkeeping services at such facilities. In addition, FSC, Inc. will assist us in connection with the determination and publishing of our net asset value, the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders. We will pay FSC, Inc. our allocable portion of overhead and other expenses incurred by it in performing its obligations under the administration agreement, including a portion of the rent and the compensation of our chief financial officer and chief compliance officer and their respective staffs. The administration agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. During the three months ended December 31, 2013 and December 31, 2012, we have incurred expenses of $1.7 million and $1.6 million, respectively, under the administration agreement.

We have also entered into a license agreement with Fifth Street Capital LLC pursuant to which Fifth Street Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name “Fifth Street.” Under this agreement, we will have a right to use the “Fifth Street” name, for so long as Fifth Street Management LLC or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the “Fifth Street” name. Fifth Street Capital LLC is controlled by Mr. Tannenbaum, its managing member.

Recent Developments

On January 1, 2014, we entered into an administration agreement with a new administrator, FSC CT, Inc., under substantially similar terms as our prior administration agreement with FSC, Inc. Similar to FSC, Inc., FSC CT, Inc. is controlled by Mr. Tannenbaum.

On January 30, 2014, we increased the borrowing capacity under our ING-led credit facility to $620 million from $605 million.

Recently Issued Accounting Standards

See Note 2 to the Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on the Consolidated Financial Statements.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent our debt investments include floating interest rates. In addition, our investments are carried at fair value as determined in good faith by our Board of Directors in accordance with the 1940 Act (See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investment Valuation”). Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments.

As of December 31, 2013, 72.1% of our debt investment portfolio (at fair value) and 72.2% of our debt investment portfolio (at cost) bore interest at floating rates. The composition of our floating rate debt investments by cash interest rate floor (excluding PIK) as of December 31, 2013 and September 30, 2013 was as follows:



	December 31, 2013				September 30, 2013
	Fair Value		% of Floating Rate Portfolio		Fair Value		% of Floating Rate Portfolio
Under 1%	$	136,852	8.39	%	$	115,659	9.57	%
1% to under 2%	1,410,504		86.44		1,007,366		83.35
2% to under 3%	48,438		2.97		48,649		4.03
3% and over	35,964		2.20		36,913		3.05
Total	$	1,631,758	100.00	%	$	1,208,587	100.00	%

Based on our Consolidated Statement of Assets and Liabilities as of December 31, 2013, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure.



Basis point increase( 1)	Interest income		Interest expense			Net increase (decrease)
500	$	63,500	$	(28,200	)	$	35,300
400	47,100		(22,600		)	24,500
300	30,600		(16,900		)	13,700
200	14,400		(11,300		)	3,100
100	1,500		(5,600		)	(4,100		)

__________


(1)	A decline in interest rates would not have a material impact on our Consolidated Financial Statements.

We regularly measure exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. The following table shows a comparison of the interest rate base for our interest-bearing cash and outstanding investments, at principal, and our outstanding borrowings as of December 31, 2013 and September 30, 2013:



	December 31, 2013				September 30, 2013
	Interest Bearing Cash and Investments		Borrowings		Interest Bearing Cash and Investments		Borrowings
Money market rate	$	42,600	$	—	$	147,359	$	—
Prime rate	18,599		—		2,886		$	—
LIBOR
1-month	61,267		564,228		57,604		188,000
3-month	1,548,636		29,000		1,143,068		—
Fixed rate	627,640		458,000		582,340		458,000
Total	$	2,298,742	$	1,051,228	$	1,933,257	$	646,000

Item 4. Controls and Procedures

All controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of

the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, in timely identifying, recording, processing, summarizing, and reporting any material information relating to us that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Currently, we are party to pending litigation but there are no material claims against us.

Item 1A. Risk Factors.

There have been no material changes during the three months ended December 31, 2013 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

While we did not engage in any sales of unregistered securities during the three months ended December 31, 2013, we issued a total of 142,320 shares of common stock under our dividend reinvestment plan (“DRIP”). This issuance was not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value of the shares of our common stock issued under our DRIP was approximately $1.4 million.

In December 2013, we repurchased 45,104 shares at a weighted average price of $8.978 per share under our stock repurchase program, resulting in $0.4 million of cash paid during the three months ended December 31, 2013. The following table outlines repurchases of our common stock during the quarter ended December 31, 2013:



Month	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
October 2013	—	—
November 2013	—	—
December 2013	45,104	$8.978	45,104	$99.6 million
Total	45,104	$8.978	45,104	$99.6 million

Item 6. Exhibits.




Exhibit Number		Description of Exhibit

10.1*		Administration Agreement by and between Fifth Street Finance Corp. and FSC CT, Inc. dated as of January 1, 2014.

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

_______________



*	Filed herewith

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




	FIFTH STREET FINANCE CORP.
Date: February 5, 2014
	By:	/s/ Leonard M. Tannenbaum
		Leonard M. Tannenbaum
		Chairman and Chief Executive Officer

Date: February 5, 2014	By:	/s/ Alexander C. Frank
		Alexander C. Frank
		Chief Financial Officer

EXHIBIT INDEX



Exhibit Number		Description of Exhibit

10.1*		Administration Agreement by and between Fifth Street Finance Corp. and FSC CT, Inc. dated as of January 1, 2014.

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

______________



*	Filed herewith