WhiteHorse Finance, Inc.

Good afternoon. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to the Whitehorse Finance Fourth Quarter 2020 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 5 p.m. Eastern Time. The replay dial-in number is 404-537-3406, and the PIN number is 1860839. 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 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star zero. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Sean Silva of Proceq Partners.

Thank you, Laurie, and thank you, everyone, for joining us today to discuss Whitehorse Finance's fourth quarter 2020 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 could 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 will refer them to the Whitehorse Finance Force Quarter 2020 earnings presentation, which was posted to our website this morning. With that, allow me to introduce Whitehorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Sean. Good afternoon, and thank you for joining us today. I hope you and your families continue to be safe and healthy. as we navigate these unprecedented times. As you're aware, we issued our press release this morning prior to market open, and I hope you've had a chance to review our results, which are also available on our website. I'm going to start by addressing our fourth quarter results and market conditions. Then Joyce and Thomas, our chief financial officer, will discuss our performance in more detail. Afterwards, we will open the floor for questions. 2020 was a year unlike any other, but our business remained resilient and we finished the year stronger than ever. You heard me on last quarter's call say that we were seeing the strongest pipeline in our history, and I'm pleased to share that our team converted on those opportunities. Our fourth quarter origination volume set a new company record with more than 160 million in gross deployments, allowing us to reach our targeted leverage level for the BDC. I'm also pleased to share positive financial performance updates, including core net interest income, which was $34.8 after adjusting for a $0.3 million capital gains incentive fee accrual, and GAAP net invested income for the quarter was $6.9 million, or $0.33 and a half cents a share. NAV was $15.23 at December 31, 2020. which excluding a 12 and a half cent special dividend, NAV would have increased to 1535, an improvement of four cents compared to Q3. Our quarterly record for gross deployments included 16 deals totaling 159 million and five add-ons totaling three and a half million, which was partially offset by repayments totaling 39.1 million. Our weighted average effective yield on income producing investments remained flat at 9.9%. And as I just shared, we reached our target leverage during the quarter of one and a quarter times. Our performance this quarter was driven by three factors. First, we benefited from a gradually recovering environment where average leverage was conservative, but pricing was higher than pre-COVID levels. Second, we made a deliberate effort to reach our target leverage level of one and a quarter times with premium price deals while maintaining our historical underwriting standards. And third, we continue to effectively use our JV to position the BDC to deliver improved earnings. On this third point, we transferred four new deals and one add-on into our JV during Q4, totaling $32.4 million. At quarter end, our JV held 20 positions with an aggregate fair value of $174.6 million. In Q1, the JV has continued to expand, as certain deals closed in Q4 have been contributed to the JV from the BDC. Based on the growth of the portfolio and the diversification of assets, the advance rate under the JV's revolving credit facility has continued to improve. As a result, the yield on the BDC's investment in the JV produced an average annualized return above 15% in Q4, which compares favorably with the underwritten levels on a fully ramped basis due to declines in LIBOR over the last 18 months and its favorable impact on the borrowing costs of the JV. Regarding credit quality, our portfolio is generally improving, but our COVID-affected accounts, which are a small piece of our portfolio, will continue to be impacted until COVID is resolved. However, once conditions normalize on our COVID-impacted positions, there is the potential for significant potential for significant recovery on these assets. Turning now to our investment portfolio. At the end of the fourth quarter, the fair value of our investment portfolio increased to 691 million compared to 595 million at the end of Q3. This was driven by our record setting 162 million in gross deployments. The average debt leverage of the new deals we added was 3.9 times EBITDA. Repayments of $39.1 million partially offset the gross deployments. Fee income of $400,000 was slightly lower than the $700,000 we recorded last quarter. And as discussed on prior calls, fee income for the BDC varies from quarter to quarter based on amendment and prepayment fees. Non-accruals continue to show strong improvement representing just 1.8% of our debt portfolio This compares to 3.3% in Q3 and 7.4% in Q2. The sale of AG Kings was consummated during Q1 and this transaction is thus not reflected in our Q4 results. At the end of the fourth quarter, Kings accounted for 1.2% of our non-accruals at fair value and 1.3% at cost. On a pro forma basis, If you were to account for the exit of AG King's last out term loan position, our Q4 non-accruals would be reduced to only 0.6% of the debt portfolio at fair value. Lastly, in Q4, 96% of our debt portfolio loans were senior secured first lien and 58% of our portfolio was comprised of sponsor loans as compared to 94% and 52% in Q3 respectively. Looking ahead, our robust Q4 momentum has carried over into Q1, into the pipeline, which is stronger than it was at the same time last year. We currently have 11 mandated deals in our pipeline, eight of which are new originations and three are add-ons. Of the eight new originations in our pipeline, six are sponsor and two are non-sponsor. Within our three add-ons, two are sponsor and one is non-sponsor. As always, there can be no assurance that any of these mandated deals will close. A potential offset to this strong origination activity is that we have identified that over the next four quarters, we may experience a higher level of repayment than our portfolio's historical average. We're monitoring a number of these loans which have an increased likelihood of repayment. However, the good news is that our pipeline inflow is strong, and knowing that we have repayments coming, we will seek to prudently invest more capital, potentially operating at higher leverage than one and a quarter times on a temporary basis so that we can maintain the earnings power of the BDC. This potential higher leverage is purely anticipatory and does not change our long-term leverage target. Further, if increased repayment activity does materialize, we would expect a higher level of prepayment fees that will boost fee income and net interest income. As we look to deploy capital, I'll note that the broadly syndicated loan market is incredibly aggressive right now and unattractive to us. The on-the-run sponsor market is almost back to pre-COVID levels in terms of pricing and leverage and is moderately attractive. On the other hand, the non-sponsor and off-the-run sponsor businesses which we focus on remain above pre-COVID levels with pricing 50 to 75 basis points higher and leverage between a quarter turn to a half a turn lower, as evidenced by our Q4 statistics. Before turning the call to Joyce, I'll provide a few company updates. First, as was publicly reported, in December, funds affiliated with the HIG Capital agreed to sell their collective ownership interests in Whitehorse Finance to HIG Bayside Loan Opportunity Fund IV, another LP affiliated with and managed by HIG Capital. This share transfer was executed because the legacy Bayside funds were reaching the end of their terms. Since Q1 of 2019, the funds affiliated with HIG Capital, Whitehorse Finance's largest shareholder, have sold over half of their position in Whitehorse Finance to the public markets, reducing their holdings from 51.25% of shares outstanding to 23.67% as of December 31st, 2020. While the share transfer does not preclude the fund from selling additional shares of Whitehorse Finance into the public markets in the future, there is no timing pressure to do so as this new fund has at least three to five years of remaining life. Second, I hope that our results in my commentary illustrate our commitment to seeking to cover our dividend on an ongoing basis. We're encouraged by our record-setting finish to the year as our three-tiered sourcing infrastructure was built for cyclicality and market downturns has flourished. We've heard our investors and analysts loud and clear that dividend coverage is critical. We believe that reaching our target leverage of one and a quarter times is an important milestone in achieving this goal. Additionally, we have declared special dividends at the end of both 2019 and 2020 And if fee income leads to earnings above the dividend level at the end of 2021, the Board of the BDC will continue whether another special dividend is warranted. We are entering 2021 with strong momentum. NII was strong and NAV adjusted for the special dividend increased. Robust new deal flow showed strong pricing and reasonable leverage. And almost our entire portfolio is first lien, which is rare for BDCs with a dividend yield as high as ours. We've increased asset deployment up to our target leverage, which will help us earn our dividend on a quarterly basis. Q4 was a record-breaking quarter for Originations, and while we cannot guarantee the pipeline activity, Q1 so far is shaping up to be our first best quarter ever. Despite this record activity, we have not sacrificed on credit quality, non-accruals are down, and our mix of sponsor and non-sponsor assets is still balanced. We have delivered these results amidst the year, with unprecedented challenges, speaks to our commitment to navigating this cycle and continuing to perform for our shareholders. We are pleased to be providing these types of updates to you. We look forward to continuing our dialogue and answering any questions. I'll turn the call now to Joycen, after which we will take your questions.