Q1 2024 WhiteHorse Finance Inc Earnings Call

Participants

Robert Brinberg; IR; Rose & Co. Capital Advisors, LLC

Stuart Aronson; Chief Executive Officer, Director; WhiteHorse Finance Inc

Joyson Thomas; Chief Financial Officer; WhiteHorse Finance Inc

Mickey Schleien; Analyst; Ladenburg Thalmann & Co Inc

Bryce Rowe; Analyst; B Riley Securities Inc

Erik Zwick; Analyst; Hovde Group LLC

Sean-Paul Adams; Analyst; Raymond James Financial, Inc.

Presentation

Operator

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance First Quarter 2024 earnings conference call. Our host for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer.
Today's call is being recorded, and a replay is available through a webcast in the Investor Relations section of our website at WhiteHorse Finance.com. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touchtone phone. If at any point your question has been answered. You may remove yourself from the queue by pressing star two. If you should require Operator assistance again, you may press star zero. It is now my pleasure to turn the call over to Robert Greenberg of Rosen & Co. Please go ahead.

Robert Brinberg

Thank you, Mike, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's First Quarter 2024 earnings results.
Before we begin, I would like to remind everyone that certain statements which are not based on historical facts made during this call, including any statements relating to financial guidance may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Because these forward-looking statements involve known and unknown risks and uncertainties these are important factors that can cause actual results to differ materially from those expressed or implied by these forward-looking statements. Whitehorse Finance assumes no obligation or responsibility to update any forward-looking statements.
Today's speakers may refer to material from the WhiteHorse Finance First Quarter 2024 earnings presentation, which was posted to our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Spence, and Stuart, you may begin.

Stuart Aronson

Thank you, Rob. Good morning and thank you for all all of you for joining today. As you're aware, we issued our earnings this morning prior to market open, and I hope you've had a chance to review our results for the period ended March 31, 2024, which can also be found on our website.
On today's call, I'll begin by addressing our first quarter results and current market conditions. Joyson Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which we will open the floor for questions.
I'm pleased to report continued strong performance for the first quarter of 2020. For Q4, GAAP net investment income and core NII was $10.8 million or $0.465 per share, which more than covered our quarterly base dividend of $0.385 per share, which represents a slight increase from Q4 GAAP and core ENI of $10.6 million or $0.456 per share, NAV per share at the end of Q1 was 1350, representing a 1% decrease from the prior quarter.
Nav per share was negatively impacted by net markdowns on our portfolio totaling $5.2 million. The majority of which related to a markdown in equity warrants in Seagate Corporation, which I will discuss shortly. The NAV decrease was partially offset by the excess of core NI over our quarterly dividend Turning to portfolio activity. In Q1, gross capital deployments totaled $55 million with $44.7 million, funding, five new originations and the remaining $10.3 million funding add-ons to existing investments as activity remained reasonably strong.
In addition to the add-ons, there were $0.8 million in net fundings made for revolver commitments of our five new originations in Q1 two were sponsor deals and three were nonsponsor deals with an average leverage of approximately 3.5 times debt to EBITDA.
All of these deals were first lien loans with an average spread of 730 basis points and an average all-in rate of 12.6%. I note that both of these statistics are attractive from a historical and current market perspective during the quarter, the BDC trend through two of these new deals and one IG's existing investment to the Ohio STRS. JV totaling $8.5 million.
At the end of Q1, 99% of our debt portfolio was first lien senior secured and our portfolio mix was approximately two thirds sponsor and one-third nonsponsor, which is consistent with the prior quarter. In Q1, total repayments and sales were $43.4 million, primarily driven by five complete realizations and one partial realization, we expect repayment activity to remain relatively high, particularly for credits that are more than two years old or call protection has expired or is more limited in some cases, deals will be repriced and we will evaluate risk and return on a case-by-case basis to determine whether we want to follow credits into the current more aggressive market environment thus far in '22.
In Q2, we have had 115 sorry, we've had $15 million in full repayments and sales repayments and JTV. transfers, mostly offsetting our deployment activity the company's net effective leverage increased slightly to 1.19 times and remains below the lower end of our target leverage range.
So long as our portfolio remains heavily concentrated in first-lien loans, which have lower risk than second lien loans. We expect to continue to run the BDC at up to 1.35 times leverage. With that in mind, on a step back to bring our entire investment portfolio into focus after the effects of net repayments and STRSJV. transfers as well as $0.8 million in net mark to market increases and $6.1 million of realized losses.
The fair value of our investment portfolio was $697.9 million at the end of Q1. This compares to our portfolio of fair value of $696.2 million at the end of the previous quarter. The weighted average effective yield on our income-producing debt investments was 13.7% as of the end of Q1, unchanged from the end of last year.
We continue to utilize the STRSJB. successfully, the JV generated investment income to the BDC of approximately $4.8 million in Q1, up from $4.2 million in Q4. As of March 31, the fair value of the JV's portfolio was $309.4 million. And at the end of Q1, the JV's portfolio had an average unlevered yield of 12.4%. Consistent with Q4.
The JV is currently producing an average annual return on equity in the mid 10s to the BDC. We believe white horses equity investment in the JV provides attractive returns for our shareholders.
Transitioning to the BDC's portfolio more broadly, there were some markdowns in the portfolio. During Q1, no slowed most notably, there was a $3.5 million mark down to our equity investment in Seagate Corporation. We exited the Seagate loan several years ago and due to covenant defaults at the time we were granted warrants equal to at least 17% of the company.
I should note that we had no cash basis and these warrants in any event, Seagate went out of business in Q1, and we therefore, Mark the warrants down to zero. There were some other modest markdowns in three other credits, including a new cycle solutions, also known as Navigo which was placed on nonaccrual in the quarter. Markdowns were more than offset by reversals of aggregate prior unrealized losses upon the realization in Crown brand, second lien investment and the restructuring of Atlas purchaser, which is also known as aspect software.
We resolve the Crown brands loan in Q1 by selling it back to the sponsor who is running the Company, although the loan was sold at a discount. We were able to sell it at a price that it was a premium to where the loan had been valued at the end of Q4. We also participated in a restructuring of our position and Atlas purchaser, also known as aspect software, which resulted in a portion of the test, resulted in a portion of the investment to incur a realized loss new cycle was the only credit moved to nonaccrual during the quarter.
And at the end of Q1, investments on nonaccrual totaled 1.3% of our debt portfolio at fair value compared with 2%, 2.5% at the end of Q4. Navigo is in a sale process and values for the company of unexpected they come in at a modest discount to the value of the debt.
We have, therefore, Mark the asset to a level that we think is consistent with where the company will be sold. American craft and art serve remain on nonaccrual status. You may recall that we have a control position in American Crafts, but we, along with other lenders, took control of Archer earlier in Q1, we are continuing to work with our restructuring resources and our private equity resources to turn those companies around and maximize value.
The trends we're seeing in both these accounts are positive relative to where they were one quarter ago across the portfolio. Generally, we see balanced activity in terms of credit performance and remain overall pleased with the health and relative stability of our debt portfolio, cyclical accounts are continuing to be surprisingly strong and the accounts that are having trouble are there are either facing the consumer market or have idiosyncratic problems that we have discussed in the past.
As always, we remain vigilant in monitoring our portfolio of companies we have and we have not seen demand weakness in other sectors including general industrial, B2B, health care, TMT or financial services. Additionally, our portfolio includes mostly non-cyclical or like cyclical borrowers. We hold no direct exposure to oil and gas auto new home construction or restaurants.
The vast majority of our deals have strong covenant protection. And we are finding that in most cases, the private equity firms who partner with us supporting their credits with new cash or contingent equity is needed.
Turning to the broader lending market, lenders have gotten significantly more aggressive in terms of credit documents and price. A continuation of the trend that we saw emerging in Q4. As Q1 progressed, we saw a modest increase in M&A activity coming out of the sponsor market and the nonsponsor market. Despite that modest increase, there's still a significant supply demand imbalance in favor of borrowers since directing lending shops that are coming off of core volume numbers in 2022 and 2023 are trying to make sure they hit their budgets and again, are willing to be more aggressive to make that happen.
We've definitely seen a shift all the way from broadly syndicated market into upper mid-market and also the mid-market lower mid-market. The degradation of the market has been most severe in the sponsor market where leverage is up half a turn to a turn and loan to value is now 55% to 65%. More middle market deals are being done with no financial covenants and pricing has come down 100 basis points to 150 basis points from last quarter.
This decline came suddenly and we have not seen a reversal of that in Q2. The upper mid market has seen prices decline to where deals are now priced at, so for $450 to sell for $525. The mid-market, lower mid-market are pricing deals more in the range of so for $500 to sell for $575. The shift in the nonsponsor market has thankfully been less dramatic. Credits are still at 3 times to 4.5 times leverage and pricing has come down by only about 50 basis points.
What we have seen over time is that the nonsponsor market is less volatile than the sponsor market because there's less competition and it's harder for lenders to access the nonsponsor market. As I alluded to earlier, the deals that we did in 2022 and 2023 for the most part still have call protection and we're doing a good job of holding onto prices.
We captured in those years when the markets were much more favorable to lenders with pricing typically at $650 to $750 on both sponsor and non-sponsor deals. In the current market environment, we were being very cautious in our deal. Sourcing was on-the-run sponsors and our focus remains on the off-the-run sponsor market and non-sponsor business or market terms remained comparatively more attractive because of our ability to access the Opteron sponsor market and nonsponsor market, we are still commanding higher prices than what you see in the upper mid-market or mid market in general.
With respect to the broader economy, recent data indicates that inflation will continue at a higher level than what the Fed is targeting. We agree with the current thinking that there will be somewhere between zero to two rate cuts in the balance of the year, probably happening later in the year as a result, we expect slower economic growth through 2024 and 2025.
The year started out slowly in terms of pipeline, which is normal for the beginning of the year. But we did enter the year with a decent backlog of deals, most of which were nonsponsor. Our pipeline has grown as we move through the first half of the year due in part to our sourcing model, which allows us to source deals in corners of the market where there's less competition, including the Opteron sponsor market and the nonsponsor market.
Our three-tier sourcing architecture continues to provide the BDC with differentiated capabilities, and we continue to derive significant advantages from the shared resources and affiliation with HIG, who is a leader in mid-market and lower mid-market. Whitehorse has approximately 22 origination professionals located in 11 regional markets across North America.
The strength of the origination pipeline enables us to be conservative on our deal selection following repayment activity in Q1, the BDC balance sheet has approximately $40 million of capacity for new assets that are targeted target leverage range. The JV has approximately $50 million of capacity supplementing the BDC's existing capacity with the move in the markets, deals that are priced below.
So for $600 are targeted for the JV, those price to $600 or above are largely targeted from the BDC balance sheet for actively working on 11 new mandates and add-on acquisitions of the new platform mandates. The majority are nonsponsor deals. While there can be no assurance that any of these deals will close. All of these mandates could fit within the BDC or our JV, should we elect to transact subsequent to quarter end?
We have closed two new originations and three add-ons to existing portfolio companies with several more pending of the new originations. One investment was transferred to the JV during the second quarter. We also transferred two add-on investments to the JV in the second quarter.
In short, activity continues to pick up, and we remain cautiously optimistic that the market will remain conducive to Whitehorse despite sustained concerns of economic softening. We believe we are well positioned to continue to source attractive opportunities, navigate economic challenges due to our rigorous underwriting standards and continue delivering to our shareholders. With that, I'll turn the call over to Jason for additional performance details and a review of our portfolio composition. Joyson?

Joyson Thomas

Thanks, Stuart, and thank you, everyone, for joining today's call. During the quarter, we recorded GAAP net net investment income and core NII of $10.8 million or $0.465 per share. This compares with Q4 GAAP NII and core NII of $10.6 million or $0.456 per share, and our previously declared quarterly distribution of $0.385 per share due one.
Fee income was unchanged quarter over quarter at $0.6 million. Q1 amounts were primarily comprised of $0.5 million of amendment fees, the majority of which came from an amendment fee from Telus remotely. For the quarter we reported we reported our net increase in net assets resulting from operations of $6 million.
Our risk ratings during the quarter showed that 77.6% of our portfolio positions carried either a one or two rating, slightly lower than the 77.7% in the prior quarter. As a reminder, our one rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and some rating indicates the Company's performing according to such initial expectations. Regarding the JV specifically, we continue to grow our investment.
As Stuart mentioned earlier, in the first quarter, we transferred two new deals at one existing investment totaling $8.5 million in equity in exchange for cash proceeds of the same amount. Additionally, during the quarter, two existing portfolio company investments fully realized in the portfolio and as a result, as of March 31, 2024, JV JV's portfolio held positions at 34 portfolio companies with an aggregate fair value of $309.4 million compared to 34 portfolio companies had an aggregate fair value of $312.2 million as of December 31, 2023.
Subsequent to the end of the first quarter, the Company transferred three investments to the JV, including one new portfolio company. The investment in the JV continues to be accretive to the BDC's earnings, generating a mid 10s return on equity during Q1, we did see an elevated amount of income recognized from our JV investments, which aggregated to $4.8 million during the quarter as compared with approximately $4.3 million in Q4 last year.
The approximate $0.5 million increase or $0.024 per share is largely attributable to nonrecurring events that occurred in the JV's portfolio. As we have noted in prior calls, the yield on our investment in the JV may fluctuate period-over-period as a result of a number of factors, including the timing and amount of additional capital investments, the changes in asset yields in the underlying portfolio as well as the overall credit performance of the JV's investment portfolio.
Turning to our balance sheet, we had cash resources of approximately $20.9 million at the end of Q1, including $10.2 million in restricted cash and approximately $135 million of undrawn capacity available under our revolving credit facility.
As of March 31, 2024, the company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 179.5%, which was above the minimum asset coverage ratio of 150%. Our Q1 net effective debt to equity ratio after adjusting for cash on hand was 1.19 times compared with 1.16 times for the prior quarter.
Before I conclude and open up the call to questions, I'd again like to highlight our distributions this morning, we announced that our Board declared a second quarter distribution of $0.385 per share, which is consistent with the prior quarter.
The upcoming distribution, the 47 consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at or above a rate of $0.355 per share per quarter will be payable on July second, 2024 to stockholders of record as of June 18, 2024. Actually, as we said previously, we will continue to evaluate our quarterly distribution both in the near and medium term based on the core earnings power of our portfolio in addition to other relevant factors that may warrant consideration.
With that, I'll now turn the call over to the operator for your questions. Operator?

Question and Answer Session

Operator

Thank you.
At this time, if you would like to ask a question, please press the star and one on your telephone keypad. Now you may remove yourself from the queue at any time by pressing star two. And once again, that is star and one if you'd like to ask a question pause for just a moment to allow questions to queue.
And we do have our first question from Mickey Schleien with Ladenburg.

Mickey Schleien

Yes, good morning, everyone. Just one quick question from me. With the movements in non-accruals this quarter. Was there any impact on interest income in terms of recaptures or reversals of previous interest income?

Stuart Aronson

Joyson, I'll leave that for you for making.

Joyson Thomas

We did not reverse out any income accruals during the period. We just ceased from recognizing any additional accruals during Q1.

Mickey Schleien

Okay.
Thank you, choice, and that's it for me this morning. Thank you.

Joyson Thomas

Mickey.

Operator

And we do have our next question from Bryce Rowe with B. Riley.

Bryce Rowe

I think tomorrow morning, Bryce And Stuart, I wanted to follow up on some of the prepared remarks you talked about obviously spreads and pricing having come in more aggressive terms and conditions out there in the market.
And you did talk about, you know, evaluating whether you would follow follow some credits that were at least exploring some kind of refinance option.
I'm curious what would kind of keep you in the credit and what kind of pricing deterioration would you see relative to what's on the books right now.

Stuart Aronson

So to give you two examples, price, we were in a company that had industrial cyclicality to it and they got an offer to do the deal at higher leverage and a 100 basis points lower price we may have gotten there on the price, but the higher leverage in a cyclical left us uncomfortable. So we chose to exit that credit as compared to a company we have in the business services sector where the prepayment penalties have expired.
The Company has performed well. It has delevered over returns since closing, in order to keep that asset, we're going to need to reduce pricing, I believe from so for $625 or six, $650 down to so for five $525. But because it's a strong performing asset, noncyclical, low CapEx, we are going to follow that asset and accept the lower price.
So it will be primarily driven by credit concerns and how aggressive the market is getting. And in general, as I mentioned, the market is now a $500 to $575 market part of the market we cover, which is the mid-market lower mid-market, and we will accept those prices because those are the market prices for credits that we think are strong and stable.

Bryce Rowe

Okay.
That's fair. And then maybe you could talk a little bit about and I assume you've got a bit of a watch list, um, within within White Horse, and it's reflected in the internal risk ratings on know, what do you what are you seeing internally to move credits around within within that internal risk rating system? I'm just trying to kind of understand what the kind of what the tail risk is within the portfolio?
And if it's growing, if it's growing with this higher for longer environment?

Stuart Aronson

Yes, the average leverage on our deals is is and has been modest. So the higher rate environment is not in and of itself causing us much concern. We do, as we've indicated in the ratings on the deals and the marks you see on the deals have a number of credits that are underperforming to the original plan that results in a mark of three or a rating of three, some where we're concerned of losing principal amounts. Those are ratings of four.
And as I mentioned in my prepared remarks, there is no broad trend other than consumer facing companies being weaker there's no broad trend that we're seeing in terms of reasons why companies are underperforming. In some cases, it's our ARC serve had a technology outage and lost customer data. A couple of years ago.
And that has led to us taking over the company and trying to turn it around. Our other credits that we're dealing with are dealing with the idiosyncratic issues we are not seeing broad economic weakness at this point. And we would tell you that the revenues for companies across the portfolio on average are up partially due to inflation, but partially due to reasonably strong demand in the general business market.

Bryce Rowe

Okay, that's helpful.
And last one for me. You kind of made some comments around the cycle going through a sale process and maybe seeing a lower valuation than would have been expected.
Can you can you talk about kind of how the puts and takes of that in terms of how you how you deal with that within your within your portfolio and whether you have to sell or keep us on?

Stuart Aronson

Thankfully, it's a very small investment step and on the situation is the sponsor, their the company, put the company up for sale, got an offer that they're trying to transact on, but the offers for less than the debt value, it's a club deal where a very small piece of the club, but it's a club deal and there is no active market for that paper. So the best thing for us to do is just wait for the sale of the Company and collect out what we can collect on that asset. That will be, we think, similar to where the asset is Marked.
And then from a personalized one more thing on you have Brian, I was going to just say one more thing on news cycle, and this also relates to Mickey's prior question on reversals. We did reverse out a small fee that was due at exit or maturity on new cycle of approximately $98,000, given our prognosis on what we expect to collect.

Bryce Rowe

Okay.
But that had already been accrued Joyson versus not?

Stuart Aronson

That's correct. It had previously been accrued based on an amendment brought in in an earlier period and reversed out during Q1.

Bryce Rowe

Okay.
Got it.
Thanks.

Operator

And we have our next question from Erik Zwick with Hubzu.

Erik Zwick

Good morning. Just one question for me and maybe kind of a two-part question. Could you just remind me kind of the characteristics that you consider offer transferring investment into the JV and the JV that just over 15% of the total portfolio at fair value today, what is your comfort range with the size of that relative to the total investment portfolio?

Stuart Aronson

On answering the second part of your question first, we think the JV is now reached a size with the committed capital that is appropriate to the BDC. I don't think we'd increase the JV size again. And we, depending on market conditions reserved the higher price deals to remain on the BDC balance sheet and the lower price deals go into the JV.
At this point in time, as I indicated in the prepared remarks, deals that are priced $600 or higher, which would be considered a premium price in today's market. And the price we're getting on non-sponsored deals will typically go on to the BDC balance sheet deals that are priced under $600. We'll typically head to the JV.

Erik Zwick

Got it.
Thank you.
That's all for me today.
I appreciate it and have a good day.

Stuart Aronson

Thank you.

Operator

And just a reminder, if you'd like to ask a question that was star and one on your telephone keypad.
And our next question comes from Sean Paul Adams with Raymond James.

Sean-Paul Adams

Hi, guys.
Good morning, two more.
And it looks like the average investment size in the portfolio has continued to go down quarter over quarter, which is it's been following the trend for the last couple of quarters, I think now averaging around $5 million early in the year, you mentioned that the new average allocation target would probably be closer to $8million to $10 million. Have you guys lowered that target allocation range going forward or you are forecasted add-ons impacting that figure on?

Stuart Aronson

I think what's really going on is a lot of the non-sponsored deals we do are smaller deals from sort of the BDC's allocation into those smaller deals is ultimately a smaller number on that is just a natural result of, again, the average size of the deals that we're closing.
So I would say is if we see a normal market environment, I would still expect the average size of an asset going into the BDC, it'll be more in the $8 million to $10 million range.

Sean-Paul Adams

Got it. Thank you.

Operator

And once more that was star and one for any questions and or comments now and get that start, I'd like to ask a question. And at this time, I'm currently showing no questions in the queue. I'll now turn the call back over to Steve Stuart Aaronson for closing remarks.

Stuart Aronson

All right. Well, we continue to work hard to keep the portfolio as healthy as possible and to add good credits that will give the BDC stability going forward. Regardless of market conditions on.
I appreciate everybody's time today and as always, heading into our next quarter's call, if anyone has topics they want us to address in the prepared remarks, please communicate with either Jason or I in advance of those calls. And we will do our best to answer questions with a complete transparency. Thank you very much and have a good day.

Operator

This does conclude today's program. Thank you for your participation. You may now disconnect.