Daily News: July 17, 2017

Oaktree to Assume Management of Fifth Street Finance and FSFR


Oaktree Capital Group signed an asset purchase agreement to become the new investment adviser to Fifth Street Finance (FSC) and Fifth Street Senior Floating Rate.

Oaktree will pay $320 million in cash to Fifth Street Management (FSM) upon the close of the transaction. The parties expect the transaction to be completed in Q4/17.

“We are excited about the opportunity to serve as the investment adviser for FSC and FSFR,” said Jay Wintrob, CEO of Oaktree. “These BDCs are a clear strategic fit with Oaktree’s direct lending expertise, and the completion of this transaction will create a BDC platform with scale that leverages our deep credit expertise, loan origination capabilities and underwriting skills. Importantly, Oaktree has the investment experience and acumen to manage these portfolios effectively and to pursue new investment opportunities to maximize value for BDC investors over time.”

Oaktree portfolio manager Edgar Lee is expected to serve as CEO of both BDCs, which together have approximately $2.5 billion of assets under management across first lien, second lien, unitranche and mezzanine credits. Following the transaction, FSC will change its name to Oaktree Specialty Lending and will trade under the ticker symbol OCSL. FSFR will change its name to Oaktree Strategic Income, and will trade under the ticker symbol OCSI.

“Oaktree has a foundation built on deep expertise in credit and we have significant experience investing across market cycles. We will seek to apply our rigorous credit underwriting process for the benefit of the shareholders of the BDCs by helping stabilize and improve the performance of both BDC portfolios as well as leverage our broad, global credit platform to source quality investments,” Lee said.

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

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

Bank of America Merrill Lynch is serving as financial advisor, and Simpson Thacher & Bartlett is serving as legal advisor to Oaktree.