The past 12 months have been nothing but trouble for Fifth Street Finance (NASDAQ: FSC). Its dividend was slashed twice and now sits at $0.06 per share. In February, Fitch slashed its credit rating from investment grade to junk.

But its new management team, installed last September, is starting to reallocate its investments for better returns. It could add lift to the companys recurring earnings, but is it enough to get Fifth Street Finance back on track?

Ringing the registers
Fifth Street recently announced the sale of one of its biggest portfolio companies, Healthcare Finance Group. Its an attractive company that makes asset-backed loans to healthcare companies. Former Fifth Street Finance CEO Leonard Tannenbaum once described it as a top-flight financier, noting on a conference call that it never lost money on a single one of its senior loans in a 15-year period.

Super-safe lending doesnt drive the returns Fifth Street Finance needs on its investment portfolio, however. In the 2014 fiscal year, Fifth Street Finance reported just under $10 million in interest income on its investment in the firm, which it valued at $128.7 million at the end of its fiscal 2014 year. That equates to a current yield of roughly 7.7%. Add in HFGs net income of $3.15 million for the fiscal year, and Fifth Street earned just 10.2% on its total investment before management and incentive fees.

While the return may be attractive in a vacuum, HFG caused some pains that arent necessarily quantifiable. When Fitch downgraded Fifth Street Finances credit rating in February, it cited the companys high leverage, pointing to HFG by name. HFG was levered at nearly 4:1 in September, well above the 1:1 leverage that business development companies like Fifth Street can have on their own balance sheet. In addition, the companys returns are lower than they appear, as they are further reduced by 2-and-20 style management and incentive fees that Fifth Street Finance pays to its manager.

In search of better yields
Fifth Street didnt disclose the transaction price, but it most recently valued its HFG investments at $118.1 million as of March. Given that deals often take months to arrange and close, its likely that its valuation in March reflects the price it expected to receive from its sale.

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