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November 20, 2007
Steven B. Boehm, Esq.
Sutherland Asbill & Brennan, LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004
Re: Fifth Street Finance Corp.
File Nos. 333-146743 and 814-752
Dear Mr. Boehm:
We have reviewed the registration statement on Form N-2 for
Fifth Street Finance Corp. ("Fund") filed with the Commission on
October 16, 2007. We have the following comments.
Prospectus
Cover
Please clarify in the footnote to the pricing table that the
common shareholders, not "we," will pay the fees and expenses
disclosed therein.
Please include a sales load column in the pricing table. See
Item 1.1.g. of Form N-2.
Please confirm that the underwriters will not receive any
commissions paid by others or receive any other consideration for
their services. See Instruction 2 to Item 1.1.g. of Form N-2.
Please disclose that an investment in the Fund presents a
heightened risk of total loss of investment and make prominent the
disclosure that the Fund is subject to special risks. See Item
1.1.j. of Form N-2.
What would be the Fund`s current net asset value, assuming
consummation of the merger described? Will the merger be
effective
before or after the Fund`s initial public offering?
Please clarify that the Fund has not yet made the election to
be
treated as a business development company.
Table of Contents
Please delete the last sentence of the paragraph immediately
following the table of contents, or disclose that the Fund will
update the disclosure for material changes.
Summary
What amount of the offering proceeds will be used to make
new
investments? For what purposes will the rest of the offering
proceeds be used?
Please disclose prominently in this section that the Fund`s
board may change its operating policies and strategies without
prior
notice or stockholder approval. Please provide specific examples
of
potential changes.
The disclosure references the performance of Fifth Street
Mezzanine Partners III ("Mezzanine Partners"), an unregistered
predecessor of the Fund, from February, 2007 to the present.
Please
delete this disclosure, as extrapolating annualized returns from
such
a limited time period is too speculative. Alternatively, please
conform it to the requirements of MassMutual Institutional Funds
(pub. avail. Sept. 28, 1995).
Please clarify how the shares the limited partners of
Mezzanine
Partners will receive will be valued: will the public offering
price
equal the value, or will the value be a function of the public
offering price? Also, will any other parties affiliated with
Mezzanine Partners receive shares of the Fund? If so, please
identify the parties, the consideration given, and the amount and
value of shares to be received.
Does the Fund intend to use leverage during its first year of
operations? If so, please indicate that the Fund will leverage,
and
provide the appropriate disclosure.
Please disclose the percentage amount of the adviser`s
income
fee in the section of the Summary that discusses investment
advisory
fees.
Please clarify that the Fifth Street Finance website
referenced
in the disclosure is still under construction.
The Offering
Please add to the disclosure the information required by
Section
101 (e) of Reg. S-K.
Fees and Expenses
Please ensure that the Example reflects all "Stockholder
transaction expenses" and "Total annual expenses" included in the
fee
table.
Given that the fee table contains a line item for interest
payments on borrowed funds, and note 6 to the fee table discusses
leverage, why does the Example assume no leverage?
Please delete the last word from the line item "Dividend
reinvestment plan expenses," and insert the word "fees." Also,
please consolidate the line items "Base management fee" and
"Incentive fees payable under our investment advisory agreement"
into
one line item titled "Management fees." See Item 3 of Form N-2.
The disclosure is unclear whether "Fifth Street" will pay
certain expenses, or they will actually be borne by shareholders.
Please distinguish more clearly between expenses borne by Fund
shareholders and those borne by other parties.
Please include in the fee table the costs of registering the
Rule 144 restricted stock referenced elsewhere in the prospectus.
Please also disclose in the prospectus the dilutive effect of the
restricted stock.
Please confirm that the management fee disclosed in the fee
table is a gross fee, i.e., absent waivers and reductions; and
accurately reflects the costs to common shareholders of the Fund.
Please disclose the incentive fee in the footnotes to the
fee
table. Also, please advise the staff what the incentive fee would
have been for the period ended October 31, 2007.
Please disclose, in footnote 6 to the fee table, the extent
to
which the Fund expects to leverage. Also, if the Fund will
leverage,
disclose the additional cost to the common shareholder in the body
of
the fee table.
Risk Factors
The first item of disclosure in this section claims the Fund
commenced operations in February, 2007, when, in fact, the Fund
did
not operate as a business development company at that time.
Accordingly, the disclosure is misleading and must be revised.
Please advise the staff supplementally the maximum number of
investments the Fund would consider "a limited number."
Please identify the entity which will assist the board in
determining the fair value of the Fund`s investments. Please also
disclose any conflicts of interest attendant with the fair
valuation
process.
Please explain to the staff when an "accrued interest" would
be
written off as uncollectible, and therefore not subject to the
performance fee. Also, does the application of the performance
fee
to accrued interest create a conflict of interest for the adviser,
i.e., an incentive to purchase steeply discounted notes and zero
coupon notes?
Please clarify that the Fund may only make rights offerings
at
less than net asset value subject to shareholder approval.
The disclosure claims the Fund will not be subject to the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") until the completion
of
this offering, although the Fund became subject to Sarbanes-Oxley
upon filing a registration statement under the Securities Act of
1933
or registering shares under Section 12 of the Securities Exchange
Act
of 1934. Please correct the disclosure.
Will the Fund include return of capital in its
distributions?
If so, please disclose prominently, and include disclosure of the
effects of return of capital distributions.
Will the Fund engage in hedging? What percentage of the
Fund`s
assets will be used for hedging activities? Please provide a more
detailed description of the risks associated with the hedging
techniques the Fund intends to use.
Please disclose the amount of advance written notice (e.g.,
60
days) the Fund will give shareholders of any change in its
investment
objective, operating policies or strategies. Please clarify that
the
Fund cannot elect to change its status as a business development
company without shareholder approval.
Will the adviser allocate limited investment opportunities
among
the Fund and other investment vehicles? If so, please disclose
this
conflict of interest.
Since the Fund may securitize its loans, please disclose how
it
will do so: e.g., will the Fund establish a subsidiary for the
purpose; will there be recourse back to the Fund? Please disclose
the risks associated with the Fund`s choice.
Capitalization
Please update all financial disclosure to October 31, 2007,
or
November 30, 2007, if possible.
Special Note Regarding Forward-Looking Statements
This section attempts to limit liability for forward-looking
statements. Statements relating to investment companies
(including
business development companies) and statements made in connection
with initial public offerings are excluded from the safe harbor
for
forward-looking statements. See Section 27A (b) (2) (B) & (D)
of the Securities Act of 1933. Please revise the disclosure
accordingly.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
The disclosure in this section indicates that Mr. Toll, an
interested director of the Fund, receives a fee of 1% per annum
from
the Fund in return for his guarantee of a loan to the Fund.
Please
explain to the staff why you believe this transaction is
permissible
absent an order pursuant to Section 57 of the Investment Company
Act
of 1940 (the "Act"). Also, should Mr. Toll be required to satisfy
the Fund`s indebtedness, would he have recourse against the Fund?
If
so, does the Fund`s obligation to reimburse constitute a senior
security?
Please explain to the staff in detail the nature of the
Fund`s
off-balance sheet arrangements and why you believe the
arrangements
may be kept off the balance sheet. Also, how do the arrangements
comply with the requirements of Sections 18 and 61 of the Act?
Managerial Assistance to Portfolio Companies
This paragraph states that the Fund or another person or
entity
will provide managerial assistance on behalf of the Fund to
portfolio
companies that request assistance. Please disclose the identities
of
all potential providers of managerial assistance to portfolio
companies. Please inform us in your response letter whether the
Fund
or portfolio companies will pay for managerial assistance provided
to
portfolio companies.
Determination of Net Asset Value and Valuation Process
The disclosure indicates that the adviser will determine the
net
asset value of the
Fund`s investment portfolio each quarter. Is this sufficient to
meet
NASDAQ Global Markets requirements?
The disclosure indicates that the general partner of Fifth
Street Mezzanine
Partners III, L.P. performed the fair value calculation of the
Fund`s
holdings. Please disclose prominently this conflict of interest
and
its affiliated risks. Also, please attach the fairness opinion as
an
exhibit to the registration statement. Additionally, please
disclose
the identity of the independent valuation firm that participated
in
the fair value analysis of the Fund`s holdings.
Why will the Fund`s board engage an independent valuation
firm
to provide assistance with respect to "at least 80%" of the Fund`s
portfolio? Why not 100%?
Investment Advisory Agreement
Please include a heading to precede the discussion of the
second
part of the incentive fee commencing on page 63 of the prospectus.
Dividend Reinvestment Plan
The third paragraph states that the dividend reinvestment
plan
will use primarily newly issued shares to implement the plan and
that
these shares will be issued at the market price per share.
Sections
23(b) and 63 of the Act provide that closed-end funds may not
issue
shares below net asset value, except in certain limited
circumstances. Please explain to us how the Fund will issue
shares
to stockholders if the market price is below the Fund`s net asset
value.
General
We note that portions of the filing are incomplete. We may
have
additional comments on such portions when you complete them in a
pre-
effective amendment, on disclosures made in response to this
letter,
on information supplied supplementally, or on exhibits added in
any
pre-effective amendments. Please note that comments we give in
one
section apply to other sections in the filing that contain the
same
or similar disclosure.
Please advise us if you have submitted or expect to submit
an
exemptive application or no-action request in connection with your
registration statement.
Response to this letter should be in the form of a pre-
effective amendment filed pursuant to Rule 472 under the
Securities
Act. Where no change will be made in the filing in response to a
comment, please indicate this fact in a supplemental letter and
briefly state the basis for your position.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the Fund and its management are in
possession of all facts relating to the Fund`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the Fund requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the Fund from its full responsibility for the adequacy and
accuracy of the disclosure in the filing; and
* the Fund may not assert this action as defense in any proceeding
initiated by the Commission or any person under the federal
securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Investment Management in connection with our review of
your filing or in response to our comments on your filing.
Any questions you may have regarding the filing or this
letter
may be directed to me at 202.551.6965.
Sincerely,
Vincent J. Di Stefano
Senior Counsel
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