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spk15: Stand by. Your program is about to begin. Good morning. My name is Brittany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Whitehorse Finance Second Quarter 2021 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joycen Thomas, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 4 p.m. Eastern Standard Time. The replay dial-in number is 402-220-2330. Please note, there is no passcode required. 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 telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your headset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Nick Russ of ProceqPartners.
spk12: Thank you, Brittany, and thank you, everyone, for joining us today to discuss Whitehorse Finance's second quarter 2021 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 related to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Before these forward-looking statements involve Known and unknown risks, 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 may refer to material from the Whitehorse Finance second quarter Q2 earnings presentation, which was posted on our website this morning. With that, allow me to introduce Whitehorse Finance's CEO, Stuart Erickson. Stuart, you may begin.
spk08: Thank you, Nick. Good afternoon, and thank you for joining us today. 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 second quarter results and market conditions, and then Joyce and Thomas, our Chief Financial Officer, will discuss our performance in more detail, after which we'll open the floor to questions. In the second quarter, core NII was $7 million, or 33.8 cents per share, slightly below our dividend of 35.5 cents. GAAP net investment income was 6.1 million, or 29.6 cents per share. NII was lower than last quarter as a result of lower fee income and accelerated interest depreciation which was higher in the prior quarter due to large volume of prepayment activity we saw in Q1. Also, as you know, asset balances were lower at the end of Q1 as a result of repayments that we got during that quarter. We achieved modest NAV accretion in the quarter, generating $15.42 of NAV per share, compared to $15.27 in Q1, This gain was driven by 4 million in mark-to-market gains that we recorded in our portfolio this quarter. When adjusting for special dividends paid in prior years, our pro forma Q2 NAV per share is highest since our December 2012 IPO. Our mark-to-market gains were highlighted by Honors Holdings at 0.7 million, Barbecue Buyer at 0.7 million, and LSGFG Holdings at 0.6 million. We also experienced a strong period for capital deployments, totaling 104 million, including originating eight new transactions. This investment activity enabled us to grow the portfolio by 9% from Q1. Gross deployments of 104 million were partially offset by repayments of 31 million. We attribute the modest Q2 repayment level to timing, as we're currently aware of a number of portfolio companies that are for sale And if they close before year-end, this will drive increased level of repayments. Of our eight new originations, seven were sponsor and one was non-sponsor, and the deals had an average leverage level of 4.05 times. Additionally, seven of these deals were first lien and one was second lien. At the end of the second quarter, 95% of our debt portfolio was first lien and 100% was senior securities. Sponsor loans comprise 68% of our portfolio compared to 65% in Q1. We continue to be pleased with the pace of capital deployment throughout the first half of 2021 as compared to prior years. And our weighted average effective yield on income producing debt investments of 9.5% was just slightly below the Q1 level of 9.6%. Now stepping back to bring our entire investment portfolio into focus, At the end of the second quarter, the fair value of our investment portfolio increased to $671 million compared to $617 million at the end of Q1. Non-accruals represented only 1.5% of our debt portfolio compared to 2.5% on a fair value basis at the end of Q1. This decrease was driven by Sure-Fit returning to accrual status in the quarter. Group OHEMA remains the only non-accrual as of June 30th We remain in restructuring negotiations with Group Bohemia and expect that this process will extend for many months. We continued to successfully utilize the JV, which generated income of $2.1 million in the quarter, which was at the same level as Q1. The JV's portfolio size was $210 million, with an average unlevered yield of 8.1% in Q21, which was slightly above the prior year period. we remain pleased with the income contributions from the JV and believe it supports higher returns for shareholders. If we use the current full capacity of the JV, we are likely to allocate an additional $25 million or more of equity into this program to continue to drive higher net interest income for WHF. As a result of the strong originations momentum, leverage at the end of Q2 was 1.14 times, within our targeted range of one to one and a quarter times. Looking ahead, our Q3 pipeline is very strong with 17 mandated deals. Eight of these deals are sponsor and split between new originations and add-ons. Of the balance, six deals are non-sponsor and they're non-sponsor new deals and three are non-sponsor add-ons. Given these mandates, We can confidently say the third quarter is on pace to produce the highest origination volume we have ever generated through our platform. This exceptional pipeline growth and these mandated deals are enabling the BDC to drive portfolio growth and ramp the JV, which will ultimately lead to higher income levels and greater coverage of our dividend. Given that we expect high repayment activity during the balance of the year, we may choose to operate at higher than our targeted one and a quarter times leverage ratio in order to prepare the portfolio for expected repayments. We have already had one repayment and refinancing in Q3. We expect some additional early repayments due to M&A and new financing events for a number of credits during the remainder of the year. This, of course, is subject to change given current market conditions. In closing, we're well positioned to continue executing our three-tiered sourcing approach and rigorous underwriting standards in the second half of the year. Our portfolio as a whole remains very high quality and healthy. Together with a strong pipeline of investment opportunities, we expect fee income to pick up in the second half, which should enable us to continue covering the dividend from core net interest income. That said, the increasing rates of COVID-19 infections and hospitalizations creates uncertainty and could impact both portfolio performance and the rate of new asset origination. HIG, with $45 billion of capital under management, empowers us to continue to benefit from the shared resources of a leader in the mid-market. This includes 63 deal professionals dedicated to direct lending, a 20-plus person business development team leveraging HIG Capital's proprietary prospect database, and sourcing at the HIG level by over 400 investment professionals overall. Our Whitehorse team spans 12 locations across North America, and includes non-gateway markets that face less deal sourcing competition than large investment centers like New York and Chicago. As a result, we believe our combined platform is poised to drive continued portfolio growth and ultimately higher returns to our shareholders across our established direct lending business. With that, I'll turn the call to Joyson, after which we'll take your questions. Go ahead, Joyson.
spk03: Thanks, Stuart, and thank you all for joining today's call. During the quarter, we recorded gap net investment income of $6.1 million, or 29.6 cents per share. This compares to $7.6 million, or 37 cents per share, in Q1 2021. Core NII was 33.8 cents per share after adjusting for a $0.9 million capital gains incentive fee accrual. Our investment in the JV continued to ramp up, increasing by $6.6 million after the effects of transferring four new deals and three add-ons that totaled $31.8 million in Q2. As of June 30th, we held 25 positions in the JV with an aggregate fair value of $209.5 million, compared to 22 positions at a fair value of $185.7 million in Q1. The investment in the JV continues to be accretive to the BDC's earnings as our return on investment in the JV at the end of Q2 was approaching 14%. Q2 fee income was approximately $0.3 million compared to $0.8 million in the prior quarter. The decline was largely due to higher prepayment fees collected during the first quarter. We reported an increase in net assets resulting from operations of $10.5 million. Our risk ratings during the quarter showed that 90% of our portfolio positions carried either a 1 or 2 rating compared to 84.3% in Q1. Turning to our balance sheet, we had cash resources of approximately $17.8 million as of June 30, 2021, including $7.4 million in restricted cash. At quarter end, we had approximately $46.5 million undrawn under our revolving credit facility. We also have the flexibility to increase the line to $350 million under our existing accordion feature. As of June 30, 2021, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 187.9%, which was above the minimum asset coverage ratio of 150%. Our Q2 net effective debt-to-equity ratio, after adjusting for cash on hand, was 1.08 times. Since the end of the quarter, we have completed an amendment in refinancing on our existing JPMorgan Bank credit facility. The impact will extend the non-qual period to November 22, push out the reinvestment period to November 2024, and reduce the applicable interest spread from 250 to 235 basis points, beginning in Q3 2021. We anticipate this will result in annual cost savings of approximately $0.4 million, assuming the line continues to be utilized at our historical levels. Next, I'd like to highlight our distributions. On May 10th, 2021, we declared distribution for the quarter ended June 30th, 2021 for 35.5 cents per share for a total distribution of $7.4 million to stockholders record as of June 18th. The dividend was paid on July 2nd, 2021 and marks the company's 35th consecutive quarterly distribution paid since our IPO in December 2012 with all distributions consistent at the rate of 35.5 cents per share per quarter. Finally, This morning, we announced that our board of directors declared a third quarter distribution of 35.5 cents per share to be payable on October 4th, 2021, to stockholders of record as of September 20th. 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.
spk02: With that, I'll now turn the call back over to the operator for your questions. Operator?
spk15: Thank you. At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one if you would like to ask a question. And we will take our first question from Bryce Rowe with Hofty Group. Your line is now open.
spk06: Thanks. Good afternoon. Appreciate you taking the question. Hi, Bryce. Hi, Stuart. Stuart, you noted that you're expecting possibly the highest ever originations, origination quarter here in the third quarter. I guess it could move into the fourth quarter as well. But looking back, it looks like $176 million was the best quarter for originations in to date. So if you could kind of help us, you know, help frame the pipeline relative to that. And then from a repayment perspective, I know it's hard to predict, but do you expect originations in the back half of this year to outpace repayment activity?
spk08: So our originations activity across our entire Whitehorse direct lending is higher than it's ever been, which is strange for Q3, because Q3 is normally the second slowest quarter after Q1. And that bodes well for Q4, absent disruptions in the economy or something else that we're not projecting. How much of that Origination activity ends up in the BDC, will come down to suitability for the BDC and allocation percentages, but it should be significant. I would say based on what we know right now, we will have significant net additions to the portfolio in Q3. And then we have a number of sale processes on companies. Again, we're not selling them. The owners are selling them, but we have our loans that will get repaid as a part of that. that'll probably hit in Q4. So, Bryce, what we're hoping to do is ramp up originations, potentially get the total leverage above 1.25 in Q3, preparing for what we expect to be more paydowns in Q4, and we're going to try to manage to about 1.25 times leverage with assets of around $700 million for year-end if we can get there. Okay. there are always repayments that pop up that we don't know about but the thing that's different right now is how many of those repayments are visible because we know that the companies that those loans are made to are either already in the market or are coming to market in q4 okay that's good uh good good detail um maybe one more for me and then i'll jump back in the queue but joyce and i noticed the dividend income
spk06: not related to the JV was a bit elevated here in the quarter. Can you speak to what drove that and maybe try to get an understanding for what that might be here going forward?
spk03: Yeah, outside of the JV's dividend, we did receive some dividend income primarily related to Oracle Holdings. As you know, that is an equity investment. As that investment continues to have some excess cash flows, again, from their perspective, the underlying portfolio company had made a dividend out to its equity owners, so we did recognize a dividend this quarter related to that.
spk06: Okay. And that's more episodic, or is it distributed to cover tax distribution or tax expense?
spk03: Yeah, that's a great question. The way I would look at it is I think – there, there is a, you know, a little bit of Canadian taxes at play there. Um, but we do, uh, envision, uh, you know, future income streams to come from the company prior to, to a realization. So what I'd say is that, uh, this isn't, um, kind of a one-off event. Okay.
spk02: Great.
spk03: Yeah.
spk08: Just to highlight our coal is doing well, generating cashflow and they're dividending that cashflow out as equity distributions. And, um, Ultimately, we will continue to operate that company until we deem it an appropriate market environment to sell into, which probably will be in the future. We don't know what the date would be.
spk05: Okay. Thanks a lot. Appreciate you taking the question. No problem, Bryce.
spk15: And we will take our next question from Robert Dunn with Raymond James.
spk17: Hi, guys. On the portfolio today and kind of the outlook, and thank you for all the color on that. I mean, right now, I guess what sponsor is about two-thirds now and non-sponsor about a third. Obviously, that has not been the kind of historic mix, and you gave some color on what the mandated deals are in Q3. But, I mean, would you expect, I guess, that to come – down over time? I mean, obviously non-sponsored deals take longer to structure, but I mean, any color on you, whether is that a quasi-permanent shift in the mix, sponsored, non-sponsored, or just a timing kind of issue in a really active market?
spk08: I would say that broadly, while it'll vary quarter to quarter in terms of new originations, our portfolio is is likely to stay about two-thirds sponsor and about one-third non-sponsor. The sponsor deals are harder to find, harder to underwrite. More frequently on the non-sponsor deals, the underwriting doesn't support the credit. And even though we get mandates, we don't close on the deals. That happened on a couple of non-sponsor deals last quarter, frankly. But we have a very healthy pipeline of non-sponsor deals in Q3, as I highlighted, I think, of our 17 deal opportunities that are mandated, I think nine of them are either new sponsor deals or, sorry, either new non-sponsor deals or non-sponsor add-ons. So in any given quarter, it could be anywhere from 90-10 to 50-50 where a sponsor makes up the larger number typically, but overall would expect the portfolio to remain similar to where it is now.
spk17: Got it. Got it. Thank you. Just to that point, I mean, you said – I mean, so you've got 17 mandated deals, roughly half sponsor. How – you said a couple of sponsor mandates kind of fell through last quarter.
spk07: Non-sponsor mandates fell through last quarter. Non-sponsor. Sorry.
spk17: Non-sponsor. Yeah. How confident are you – I mean, just looking at Q2, Q3, obviously, leverage going up and then leverage going back down again. I mean, what would you say your comfort level is on being at that 700 or so and one and a quarter turns at year end, given there are a lot of moving parts? You know, have you got higher confidence in originations than repayments, which are more difficult to predict, or vice versa?
spk08: Yeah. I have more confidence in Q3 because we're in the middle of it and we have the mandated deals and I can look at each of the deal names and sort of handicapped the likelihood of them getting done. And I think our asset balances are likely to rise or a total asset portfolio to 700 million or greater in Q3. And then in Q4, we don't yet have visibility into originations. There's only one deal mandated right now that would be a Q4 close. And we know a lot of deals are repaying in Q4. So we're going to need to let the portfolio of pipeline deals develop over the next six to eight weeks to have more insight into Q4. But all I can tell you historically, as I mentioned earlier, Q3 is the second slowest quarter. So with a Q3 this strong, absent something happening in the marketplace, we'd expect a similarly strong Q4 and that would bode very well for the JV and the core VDC portfolio balances and set us up to hopefully comfortably earn our dividend unless there are other things that go on that we don't know about yet.
spk17: Understood. I appreciate that. Thank you, Stuart. One housekeeping quick one, if I can. The tax expense this quarter was a little bit elevated. Was that related to the dividend income? You mentioned some Canadian tax considerations. And should we expect that tax to pop up if there's increased dividend income, or was it unrelated to that?
spk03: Robert, I think the way to think about it is, listen, with any year, we look at our taxable income, which takes into account all the book tax timing differences. Ultimately, distributions are going to be paid out of taxable earnings. So when you put all that in a blender effectively, we currently estimate the earnings of the BDC to be excess. in excess of our distributions, at a slightly higher run rate than where we were earlier in the year, or last year for that matter, based on not only kind of the investment income, but also some of the net gains that we're realizing this year. So as you're aware, year-to-date, we have a large realized gain from our agent gains realization, so that also came into play there.
spk16: Got it. Thank you.
spk15: And once again, that is star and one if you would like to ask a question. And we will pause for just a moment to allow any further questions to queue. And we'll take our next question from Starchase Sherbert Chen with B. Riley.
spk14: Hi, you guys.
spk13: Hi, Starchase.
spk14: Just a quick question. If you expect second half 21 repayments to remain elevated, how does this impact the fee income expectations?
spk08: There should be either more prepayment penalties or more fee sweeps associated with faster repayments, which all things being equal, will be accretive to NII. Okay. We saw that last quarter where fee suites and prepayment penalties helped us generate a NII number in excess of the dividend.
spk11: Okay, great. Thank you.
spk15: And we have no further questions on the line at this time. I will turn the call back over to management for any additional or closing remarks.
spk08: I appreciate everyone's time and attention today. As always, if there are questions that people would like to see addressed in future calls, please alert us prior to the call so we can add that into the prepared remarks. And with that, I hope everybody has a good afternoon. Thank you.
spk15: This does conclude today's program. Thank you for your participation. You may disconnect at any time. Thank you. Thank you. Thank you. you Good morning. My name is Brittany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Whitehorse Finance Second Quarter 2021 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyce Thomas, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 4 p.m. Eastern Standard Time. The replay dial-in number is Please note, there is no passcode required. 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 telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. we ask that you please pick up your headset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Nick Russ of Proceq Partners.
spk12: Thank you, Brittany, and thank you, everyone, for joining us today to discuss Whitehorse Finance's second quarter 2021 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 related to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Before these forward-looking statements involve Known and unknown risks and emergencies, 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 may refer to material from the Whitehorse Finance second quarter Q2 earnings presentation, which was posted on our website this morning. With that, allow me to introduce Whitehorse Finance's CEO, Stuart Erickson. Stuart, you may begin.
spk08: Thank you, Nick. Good afternoon, and thank you for joining us today. 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 second quarter results and market conditions, and then Joyce and Thomas, our Chief Financial Officer, will discuss our performance in more detail, after which we'll open the floor to questions. In the second quarter, core NII was $7 million, or 33.8 cents per share, slightly below our dividend of 35.5 cents. GAAP net investment income was 6.1 million, or 29.6 cents per share. NII was lower than last quarter as a result of lower fee income and accelerated interest depreciation which was higher in the prior quarter due to large volume of prepayment activity we saw in Q1. Also, as you know, asset balances were lower at the end of Q1 as a result of repayments that we got during that quarter. We achieved modest NAV accretion in the quarter, generating $15.42 of NAV per share, compared to $15.27 in Q1, This gain was driven by $4 million in mark-to-market gains that we recorded in our portfolio this quarter. When adjusting for special dividends paid in prior years, our pro forma Q2 NAV per share is highest since our December 2012 IPO. Our mark-to-market gains were highlighted by Honors Holdings at $0.7 million, BBQ Buyer at $0.7 million, and LSGFG Holdings at $0.6 million. We also experienced a strong period for capital deployments, totaling 104 million, including originating eight new transactions. This investment activity enabled us to grow the portfolio by 9% from Q1. Gross deployments of 104 million were partially offset by repayments of 31 million. We attribute the modest Q2 repayment level to timing, as we're currently aware of a number of portfolio companies that are for sale And if they close before year-end, this will drive increased level of repayments. Of our eight new originations, seven were sponsor and one was non-sponsor, and the deals had an average leverage level of 4.05 times. Additionally, seven of these deals were first lien and one was second lien. At the end of the second quarter, 95% of our debt portfolio was first lien and 100% was senior securities. Sponsor loans comprise 68% of our portfolio compared to 65% in Q1. We continue to be pleased with the pace of capital deployment throughout the first half of 2021 as compared to prior years. And our weighted average effective yield on income-producing debt investments of 9.5% was just slightly below the Q1 level of 9.6%. Now stepping back to bring our entire investment portfolio into focus, At the end of the second quarter, the fair value of our investment portfolio increased to $671 million compared to $617 million at the end of Q1. Non-accruals represented only 1.5% of our debt portfolio compared to 2.5% on a fair value basis at the end of Q1. This decrease was driven by Sure-Fit returning to accrual status in the quarter. Group OHEMA remains the only non-accrual as of June 30th We remain in restructuring negotiations with Group OHIMA and expect that this process will extend for many months. We continued to successfully utilize the JV, which generated income of $2.1 million in the quarter, which was at the same level as Q1. The JV's portfolio size was $210 million, with an average unlevered yield of 8.1% in Q21, which was slightly above the prior year period. We remain pleased with the income contributions from the JV and believe it supports higher returns for shareholders. If we use the current full capacity of the JV, we are likely to allocate an additional $25 million or more of equity into this program to continue to drive higher net interest income for WHF. As a result of the strong originations momentum, leverage at the end of Q2 was 1.14 times within our targeted range of one to one and a quarter times. Looking ahead, our Q3 pipeline is very strong with 17 mandated deals. Eight of these deals are sponsor and split between new originations and add-ons. Of the balance, six deals are non-sponsor and they're non-sponsor new deals and three are non-sponsor add-ons. Given these mandates, We can confidently say the third quarter is on pace to produce the highest origination volume we have ever generated through our platform. This exceptional pipeline growth and these mandated deals are enabling the BDC to drive portfolio growth and ramp the JV, which will ultimately lead to higher income levels and greater coverage of our dividend. Given that we expect high repayment activity during the balance of the year, we may choose to operate at higher than our targeted one and a quarter times leverage ratio in order to prepare the portfolio for expected repayments. We have already had one repayment and refinancing in Q3. We expect some additional early repayments due to M&A and new financing events for a number of credits during the remainder of the year. This, of course, is subject to change given current market conditions. In closing, we're well positioned to continue executing our three-tiered sourcing approach and rigorous underwriting standards in the second half of the year. Our portfolio as a whole remains very high quality and healthy. Together with a strong pipeline of investment opportunities, we expect fee income to pick up in the second half, which should enable us to continue covering the dividend from core net interest income. That said, the increasing rates of COVID-19 infections and hospitalizations creates uncertainty and could impact both portfolio performance and the rate of new asset origination. HIG, with $45 billion of capital under management, empowers us to continue to benefit from the shared resources of a leader in the mid-market. This includes 63 deal professionals dedicated to direct lending, a 20-plus person business development team leveraging HIG Capital's proprietary prospect database, and sourcing at the HIG level by over 400 investment professionals overall. Our Whitehorse team spans 12 locations across North America, and includes non-gateway markets that face less deal sourcing competition than large investment centers like New York and Chicago. As a result, we believe our combined platform is poised to drive continued portfolio growth and ultimately higher returns to our shareholders across our established direct lending business. With that, I'll turn the call to Joyson, after which we'll take your questions. Go ahead, Joyson.
spk03: Thanks, Stuart, and thank you all for joining today's call. During the quarter, we recorded gap net investment income of $6.1 million, or 29.6 cents per share. This compares to $7.6 million, or 37 cents per share, in Q1 2021. Core NII was 33.8 cents per share after adjusting for a $0.9 million capital gains incentive fee accrual. Our investment in the JV continued to ramp up, increasing by $6.6 million after the effects of transferring four new deals and three add-ons that totaled $31.8 million in Q2. As of June 30th, we held 25 positions in the JV with an aggregate fair value of $209.5 million compared to 22 positions at a fair value of $185.7 million in Q1. The investment in the JV continues to be accretive to the BDC's earnings as our return on investment in the JV at the end of Q2 was approaching 14%. Q2 fee income was approximately $0.3 million compared to $0.8 million in the prior quarter. The decline was largely due to higher prepayment fees collected during the first quarter. We reported an increase in net assets resulting from operations of $10.5 million. Our risk ratings during the quarter showed that 90% of our portfolio positions carried either a 1 or 2 rating compared to 84.3% in Q1. Turning to our balance sheet, we had cash resources of approximately $17.8 million as of June 30, 2021, including $7.4 million in restricted cash. At quarter end, we had approximately $46.5 million undrawn under our revolving credit facility. We also had the flexibility to increase the line to $350 million under our existing accordion feature. As of June 30, 2021, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 187.9%, which was above the minimum asset coverage ratio of 150%. Our Q2 net effective debt-to-equity ratio, after adjusting for cash on hand, was 1.08 times. Since the end of the quarter, we have completed an amendment in refinancing on our existing JPMorgan Bank credit facility. The impact will extend the non-call period to November 22, push out the reinvestment period to November 2024, and reduce the applicable interest spread from 250 to 235 basis points, beginning in Q3 2021. We anticipate this will result in annual cost savings of approximately $0.4 million, assuming the line continues to be utilized at our historical levels. Next, I'd like to highlight our distributions. On May 10th, 2021, we declared distribution for the quarter ended June 30th, 2021 of 35.5 cents per share for a total distribution of $7.4 million to stockholders record as of June 18th. The dividend was paid on July 2nd, 2021 and marks the company's 35th consecutive quarterly distribution paid since our IPO in December 2012 with all distributions consistent at the rate of 35.5 cents per share per quarter. Finally, This morning, we announced that our board of directors declared a third quarter distribution of 35.5 cents per share to be payable on October 4th, 2021, to stockholders of record as of September 20th. 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.
spk02: With that, I'll now turn the call back over to the operator for your questions. Operator?
spk15: Thank you. At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one if you would like to ask a question. And we will take our first question from Bryce Rowe with Hofty Group. Your line is now open.
spk06: Thanks. Good afternoon. Appreciate you taking the question. Hi, Bryce. Hi, Stuart. Stuart, you noted that you're expecting possibly the highest ever originations, origination quarter here in the third quarter. I guess it could move into the fourth quarter as well, but looking back, it looks like $176 million was the best quarter for originations to date. So if you could kind of help us, you know, help frame the pipeline relative to that. And then from a repayment perspective, I know it's hard to predict, but do you expect originations in the back half of this year to outpace repayment activity?
spk08: So our originations activity across our entire Whitehorse direct lending is higher than it's ever been, which is strange for Q3, because Q3 is normally the second slowest quarter after Q1. And that bodes well for Q4, absent disruptions in the economy or something else that we're not projecting. How much of that Origination activity ends up in the BDC, will come down to suitability for the BDC and allocation percentages, but it should be significant. I would say based on what we know right now, we will have significant net additions to the portfolio in Q3. And then we have a number of sale processes on companies. Again, we're not selling them. The owners are selling them, but we have our loans that will get repaid as a part of that. that'll probably get in Q4. So, Bryce, what we're hoping to do is ramp up originations, potentially get the total leverage above 1.25 in Q3, preparing for what we expect to be more paydowns in Q4, and we're going to try to manage to about 1.25 times leverage with assets of around $700 million for year-end if we can get there. Okay. There are always repayments that pop up that we don't know about. But the thing that's different right now is how many of those repayments are visible because we know that the companies that those loans are made to are either already in the market or are coming to market in Q4.
spk06: That's good. Good detail. Maybe one more for me and then I'll jump back in the queue. But, Joyce, I noticed the dividend income not related to the JV was a bit elevated here in the quarter. Can you speak to what drove that and maybe try to get an understanding for what that might be here going forward?
spk03: Yeah, outside of the JV's dividend, we did receive some dividend income primarily related to ARCA holdings. As you know, that is an equity investment. as that investment continues to have some excess cash flows. Again, from their perspective, the underlying portfolio company had made a dividend out to its equity owners, so we did recognize a dividend this quarter related to that.
spk06: Okay. And that's more episodic, or is it distributed to cover tax distribution or tax expense?
spk03: Yeah, that's a great question. The way I would look at it is I think – there, there is a, you know, a little bit of Canadian taxes at play there. Um, but we do, uh, envision, uh, you know, future income streams to come from the company prior to, to a realization. So what I'd say is that, uh, this isn't, um, kind of a one-off event. Okay.
spk02: Great.
spk03: Yeah.
spk08: Just to highlight our coal is doing well, generating cashflow and they're dividending that cashflow out as equity distributions. And, um, Ultimately, we will continue to operate that company until we deem it an appropriate market environment to sell into, which probably will be in the future. We don't know what the date would be.
spk05: Okay. Thanks a lot. Appreciate you taking the question. No problem, Bryce.
spk15: And we will take our next question from Robert Dunn with Raymond James.
spk17: Hi, guys. On the portfolio today and kind of the outlook, and thank you for all the color on that. I mean, right now, I guess what sponsor is about two-thirds now and non-sponsor about a third. Obviously, that has not been the kind of historic mix, and you gave some color on what the mandated deals are in Q3. But, I mean, would you expect, I guess, that to come – down over time? I mean, obviously non-sponsored deals take longer to structure, but I mean, any color on you, whether is that a quasi-permanent shift in the mix, sponsored, non-sponsored, or just a timing kind of issue in a really active market?
spk08: I would say that broadly, while it'll vary quarter to quarter in terms of new originations, our portfolio is is likely to stay about two-thirds sponsor and about one-third non-sponsor. The sponsor deals are harder to find, harder to underwrite. More frequently on the non-sponsor deals, the underwriting doesn't support the credit. And even though we get mandates, we don't close on the deals. That happened on a couple of non-sponsor deals last quarter, frankly. But we have a very healthy pipeline of non-sponsor deals in Q3, as I highlighted, I think, of our 17 deal opportunities that are mandated, I think nine of them are either new non-sponsor deals or non-sponsor add-ons. So in any given quarter, it could be anywhere from 90-10 to 50-50, where a sponsor makes up the larger number typically, but overall would expect the portfolio to remain similar to where it is now.
spk17: Got it. Got it. Thank you. Just to that point, I mean, you said, I mean, so you've got 17 mandated deals, roughly half sponsor. How, as you said, a couple of sponsor mandates kind of fell through last quarter.
spk07: Non-sponsor mandates fell through last quarter.
spk17: Non-sponsor, sorry. Non-sponsor, yeah. How confident are you I mean, just looking at Q2, Q3, obviously, leverage going up and then leverage going back down again. I mean, what would you say your comfort level is on being at that 700 or so and one and a quarter turns at year end, given there are a lot of moving parts? You know, have you got higher confidence in originations than repayments, which are more difficult to predict, or vice versa?
spk08: Yeah. I have more confidence in Q3 because we're in the middle of it and we have the mandated deals and I can look at each of the deal names and sort of handicapped the likelihood of them getting done. And I think our asset balances are likely to rise or a total asset portfolio to 700 million or greater in Q3. And then in Q4, we don't yet have visibility into originations. There's only one deal mandated right now that would be a Q4 close. And we know a lot of deals are repaying in Q4. So we're going to need to let the portfolio of pipeline deals develop over the next six to eight weeks to have more insight into Q4. But all I can tell you historically, as I mentioned earlier, Q3 is the second slowest quarter. So with a Q3 this strong, Absent something happening in the marketplace, we'd expect a similarly strong Q4, and that would bode very well for the JV and the core VDC portfolio balances and set us up to hopefully comfortably earn our dividend unless there are other things that go on that we don't know about yet.
spk17: Understood. I appreciate that. Thank you. So one housekeeping quick one, if I can. The tax expenses quarter was a little bit elevated. Was that related to the dividend income? You mentioned some Canadian tax considerations. I mean, was it was and should we expect that excise tax to or that tax, not just to pop up if if there's increased dividend income or was it unrelated to that?
spk03: Robert, I think the way to think about it is, listen, with any year, we look at our taxable income, which takes into account all the booked tax timing differences. Ultimately, distributions are going to be paid out of taxable earnings. So when you put all that in a blender effectively, we currently estimate the earnings of the BDC to be excess. in excess of our distributions, at a slightly higher run rate than where we were earlier in the year, or last year for that matter, based on not only kind of the investment income, but also some of the net gains that we're realizing this year. So as you're aware, year-to-date, we have a large realized gain from our age-to-age realization, so that also came into play there.
spk16: Got it. Thank you.
spk15: And once again, that is star and one if you would like to ask a question. And we will pause for just a moment to allow any further questions to queue. And we'll take our next question from Starchase Sherbert Chen with B. Riley.
spk14: Hi, you guys.
spk13: Hi, Starchase.
spk14: Just a quick question. If you expect second half 21 repayments to remain elevated, how does this impact the fee income expectations?
spk08: There should be either more prepayment penalties or more fee sweeps associated with faster repayments, which all things being equal, will be accretive to NII. We saw that last quarter where fee suites and prepayment penalties helped us generate a NII number in excess of the dividend.
spk11: Okay, great. Thank you.
spk15: And we have no further questions on the line at this time. I will turn the call back over to management for any additional or closing remarks.
spk08: I appreciate everyone's time and attention today as always if there are questions that people would like to see addressed in future calls please alert us prior to the call so we can add that into the prepared remarks and with that I hope everybody has a good afternoon thank you this does conclude today's program thank you for your
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