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spk02: Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the White Horse Finance fourth quarter and full year 2021 earnings conference call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyce and Thomas, Chief Financial Officer. Today's call is being recorded and will be made available for replay beginning at 5 p.m. Eastern Time. The replay dial-in number is 402- 220-4942. No passcode is 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 handset to allow 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 Robert Brinberg of Rose & Company. Please go ahead.
spk03: Thank you, operator, and thank you, everyone, for joining us today to discuss Whitehorse Finance's fourth quarter 2021 earnings results. Before we begin, I'd 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 may refer to material from the Whitehorse Finance fourth quarter 2021 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.
spk07: Thank you, Rob, and good afternoon. Thank you all 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 from the period ended December 31st, 2021, which can also be found on our website. On today's call, I'll begin by addressing our fourth quarter and full year results. and current market conditions as well. Joyce and Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which we will open the floor for questions. We are pleased to report strong results for the fourth quarter and the full year. In 2021, Core NII totaled $1.40 and a half per share, which increased by 12.5% from 2020's Core NII of $1.24.9 per share. These financial results reflect the strong quarter and annual originations with $483.2 million in gross deployments for the year and $199 million for the fourth quarter alone. GAAP net investing income in Q4 was $7.5 million, or 33.1 cents per share. Core NII was $7.3 million, or 32.2 cents per share. This compares with Q3 core NII of $7.8 million, or 37.2 cents per share. This is after adjusting for capital gains, incentive fee reversal, and the accelerated amortization of deferred issuance costs from the retirement of our $35 million baby bond issuance. In addition, given strength of originations and outlook for deployments, this past quarter we completed a secondary offering of shares. We issued 2.2 million shares at an average price of 1581, generating approximately 33.7 million in new proceeds. Importantly, we issued these shares at our then NAV per share, taking into account issuance costs that were covered by our management company. Through the fourth quarter and into Q1, we were able to quickly deploy these proceeds, which minimized the drag on earnings per share. To support the offering, Whitehorse Advisors contributed 28 cents per issued share to subsidize underwriting fees for this offering. NAV per share at the end of Q4 was 1510, representing a decrease of 36 cents from Q3. This decline was primarily due to markdowns on our investments in PlayMonster and GroupOHIMA and due to the special dividend payment to shareholders of 13.5 cents. NAV per share was also impacted as a result of the delay in deploying capital from our follow-on offering during Q4. I note this quarter's distribution was the company's 37th consecutive quarterly distribution paid since our IPO in 2012, with all distributions consistent at the rate of 35.5 cents per share per quarter. Furthermore, our NAV per share remains above our IPO price, I think this points to the strength of our platform and deal sourcing capabilities, as well as our historically conservative approach to deal structuring. Q4 was a record-setting period with capital deployments totaling 199.2 million. Of gross capital deployments, 181.3 million went into 18 new originations made during the quarter, and the remaining 17.9 million funded add-ons to existing portfolio investments. Gross deployments were partially offset by repayments of $35 million, primarily driven by four realizations. The result was $164.2 million of net deployments. We financed this $164.2 million of net deployments from new debt issuance and equity issuance of $65 million and $33.2 million, respectively. Our record-setting deployment, however, outpaced our fundraising, and as a result, the company's effective leverage increased to 1.31 times. Some of this increase in leverage was due to several repayments that were delayed. We expect these delayed repayments are likely to occur throughout the duration of fiscal year 2022, which would cause our leverage levels to be reduced. As I mentioned earlier, given the strong net deployments, I'm happy to report that the proceeds of our follow-on share offering were fully deployed between the closing of the offering and the end of the quarter. Needless to say, we continue to be pleased with the pace of capital deployment. Of the 18 new originations, 12 were sponsor and six were non-sponsor with an average leverage level of only four times. I would note that all of these deals except for one were first lien transactions. At the end of Q4, more than 95% of our debt portfolio was first lien and 100% was senior securities. We do continue to look to add second lien loans to balance our portfolio, but we only found one in Q4 that met our conservative risk parameters. Given the shortage of second lien loans that meet our risk standards, our portfolio is now approximately 5% second lien loans, as opposed to our target level of closer to 15%. So long as our portfolio remains overly concentrated in first lien loans, which have lower risk and also lower returns in second lien loans, we will consider operating the BDC at a slightly higher target leverage level of up to 1.35 times in order to help the BDC consistently earn its 35.5-cent dividend on a quarterly basis. Now, stepping back to bring our entire investment portfolio into focus, our investment portfolio achieved an increase in fair value, reaching $819 million at the end of Q4. an increase from $687 million at the end of Q3. The weighted average effective yield on income-producing debt investments was 9.1 percent, slightly below the Q3 level of 9.3 percent. Non-accruals represented 1.3 percent of our debt portfolio unchanged from Q3. Group OHIMA remains on non-accrual status, and PlayMonster was placed on non-accrual status in Q4. Non-accruals as a percentage of our debt portfolio at fair value were stable due to the growth in our overall portfolio size. As we indicated during our prior earnings call, we marked down the value of Group Ohima to 42% of par in Q4. As with previous quarter, we expect this investment to be on non-accrual until restructuring negotiations with the company conclude. And based on new data since year end, we expect the Group Ohima asset to be marked down again in Q1. We marked PlayMonster down to 65% of par, and in the first quarter, lenders took control of that company. As it regards supply chain disruptions and rising labor costs thus far, the vast majority of our portfolio companies have mitigated the impact of these issues and have generally been able to pass cost increases through to their customers, keeping revenues high and keeping EBITDA stable to increasing. Our portfolios are all well insulated from rising interest rate environment with reasonable debt levels and reasonable leverage levels. Holistically, our portfolio would benefit from a rising environment, rising rate environment, as 99.6% of our portfolio is comprised of floating rate debt investments. We continue to successfully utilize our joint venture, which generated investment income to the BDC of approximately $2.2 million during the quarter, as compared with $1.8 million in Q3. During the fourth quarter, we transferred $35.1 million investments to the STRS-JB, including three new deals, one add-on, and the remaining portion of another deal, in exchange for cash of $31.7 million, as well as $3.4 million in-kind contribution to the JV. The fair market value of the JV's portfolio was $259.5 million as of December 31st. The JV's portfolio had an average unleveraged yield of 7.9% at the end of Q4 compared to its Q3 21 average yield of 8% at a portfolio size of $239 million. The JV's portfolio is currently comprised solely of first lien senior secured loans. We remain pleased with the income contribution from the JV. The JV has produced an average annual return on equity in the low teens. We believe the JV supports higher returns for shareholders and is particularly relevant given the current market backdrop. We closed an incremental $25 million commitment to the JV in Q1, which translates into approximately $62.5 million of additional investment capacity for the JV. As a result, our economic interest in the JV increased to 66.7% from 60%. This additional capacity should allow for greater scale and diversification of the JV's portfolio and increases our exposure to a highly accretive earning stream. In the meantime, the market remains quite busy, and our pipeline for future deal flow is at an all-time high. The sourcing process is still competitive, particularly for on-the-run sponsor deals where pricing, leverage, and documentation terms have returned to pre-COVID levels. While we expect our origination activity levels to remain high, we generally have a cautious approach and continue to underwrite to conservative downside scenarios. Documentation terms and EBITDA adjustments in the off-the-run sponsor market, which are private equity firms with sizes under a billion dollars, are less aggressive than they are in the on-the-run sponsor market. We continue to have significant off-the-run sourcing advantages due to our physical presence in 12 regional markets. Consistent with prior quarters, there is less competition for non-sponsor deals and where we continue to source attractively priced transactions at attractive leverage profiles. Whitehorse has differentiated sourcing capabilities through our three-tier architecture. We continue to derive significant advantages from the shared resources and affiliation with HIG, which is a leader in mid-market investing. The Whitehorse platform now includes 64 deal professionals dedicated to direct lending, and HIG gives us access to a 20-plus person business development team leveraging HIG's proprietary prospect database, which includes over 20,000 names of CEOs, CFOs, deal brokers, attorneys, accountants, and wealth managers. We obtained additional sourcing at the HIG level from our relationship with more than 400 investment professionals at HIG, and our sourcing drives a high-quality pipeline in markets with less competition for mandates. Thus far in Q1, we have closed eight deals and are working on seven new mandates, including add-ons with targeted closings in Q1 and Q2. Five of the eight closed deals are sponsor deals, and five of the mandates are sponsor split between new originations and add-ons. At this stage, it is likely that we will complete a record number of transactions in Q1. This exceptional pipeline growth and these mandated deals are enabling the BDC to drive portfolio growth and grow the JV, which will ultimately lead to higher income and greater coverage for our dividend. I know, however, that some of these deals that are in pipeline may not make it into our portfolio in the BDC, as we continue to manage our leverage level to the new target of 1.35 times or below, again, assuming that second lien loans remain at a very low concentration in the portfolio. In closing, we are well positioned to continue to execute our three-tier sourcing strategy, and rigorous underwriting standards are maintained in the new year and beyond. Our portfolio as a whole remains very high quality and healthy. We are very optimistic about 2022. And while we remain cautious about cyclical industries, the lingering effects of the pandemic, and the war in Europe, as well as the competitive state of the credit market, we believe we have built a very strong team and a solid sourcing and underwriting process. Further, the additional capital we raised late last year, the incremental contribution to the JV, and the full effective earnings from the deployments in Q4 provide a strong tailwind for our financial performance in Q1 of 2022 and the balance of 2022. With that, I'll turn the call to Joycen for additional performance details and a review of our portfolio composition.
spk04: Joycen? Thanks, Stuart, and thank you, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income of $7.5 million, or 33.1 cents per share. This compares to $7.6 million, or 36.6 cents per share, in the third quarter. Core NII was 32.2 cents per share after adjusting for the $0.7 million net impact of accelerated amortization of deferred debt issuance costs associated with the retirement of our $35 million baby bonds, as well as a $0.9 million capital gains incentive fee reversal. Q4 fee income was $0.3 million compared with $1.2 million in the prior quarter. The decrease was due to reduced prepayment and amendment activities during the current quarter. To that end, I'd like to highlight that a number of the anticipated repayments that were expected to occur in Q4 were pushed into 2022. So we expect to see fee income and accelerated OID accretion from these prepayments over the first half of 2022. We reported a net increase in net assets resulting from operations of $3.1 million. Our risk ratings during the quarter showed that 90.1% of our portfolio positions carried either a 1 or 2 rating as compared to 88.9% in Q3. Regarding the JV specifically, we continued to grow our investment. As mentioned earlier, we transferred three new deals, one add-on transaction, and the remaining portion of one previously transferred deal, which aggregated to approximately $35.1 million in exchange for a net investment in the JV of $3.4 million, as well as cash proceeds of approximately $31.7 million. As of 12-31, the JV's portfolio held positions in 28 portfolio companies with an aggregate fair value of $259.5 million compared to 27 portfolio companies at a fair value of $239 million in Q3. The investment in the JV continues to be accreted to the BDC's earnings. We expect the yield on our investment in the JV may fluctuate period over period as a result of the timing of additional capital invested, the changes in asset yields in the underlying portfolio, as well as the overall performance of the JV's investment portfolio. Turning to our balance sheet, we had cash resources of approximately $22.5 million as of 12-31, including $10.3 million in restricted cash. At quarter end, we had approximately $43.4 million undrawn under a revolving credit facility. As mentioned during last quarter's earnings call, I'd like to note that on October 4th, 2021, the terms of the credit facility were amended to, among other things, allow us to temporarily upsize the credit facility by $50 million, which allowed the BDC to borrow up to $335 million for a three-month period beginning on October 4, 2021. Subsequent to quarter end, this was again amended to permanently upsize the credit facility by $25 million to $310 million in total, and to extend the previously agreed $25 million temporary upsize through April 4th. This provides a significant flexibility to better account for timing differences between anticipated prepayments and originations. As of December 31, 2021, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 172.6%, which was above the minimum asset coverage ratio of 150%. Our Q4 net effective debt-to-equity ratio, after adjusting for cash on hand, was 1.31 times as compared with 1.14 times from the prior quarter. Turning to capital raising activities during the quarter. During Q4, we successfully completed a primary offering of 2.2 million common shares at a public offering price of $15.81 per share, resulting in net proceeds of approximately $33.7 million. As Stuart has mentioned, these proceeds were quickly deployed to new investments, which speaks to the breadth and quality of our pipeline. In November, Whitehorse Finance announced the closing of a registered public offering of 75 million 4% notes due 2026, which resulted in net proceeds of approximately $73.5 billion. A portion of the offering proceeds were used to redeem our $35 million 6.5% notes that were due 2025. Shortly thereafter, in December, we sold 25 million of 4.25% notes due 2028, in a private placement offering to a qualified institutional buyer. Before I conclude and open up the quality questions, I'd like to highlight distributions. On November 9th, 2021, we declared a distribution for the quarter ended December 31st, 2021 of 35 and a half cents per share to stockholders of record as of December 20th. The dividend was paid on January 4th, 2022. In addition to our quarterly distribution, we elected to declare a special distribution 13.5 cents per share for stockholders of record as of October 29th, 2021, as we continue to monitor spillback income and manage the excise tax. The distribution was paid on December 10th, 2021. Inclusive of this special distribution, total distributions paid in 2021 were $1.55.5 per share. Finally, this morning, we announced that our board declared a first quarter distribution of 35.5 cents per share to be payable on April 4, 2022, to stockholders of record as of March 25, 2022. This will mark the company's 38th 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. 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 back over to the operator for your questions. Operator?
spk02: And at this time, if you would like to ask a question, please press star 1 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 1. And we will take our first question from Mickey Schlein with Leidenberg. Please go ahead.
spk08: Stuart, can you give us some sense of how your borrowers' revenues and margins are trending, and how do you feel about their ability to service their debt, given all the headwinds we're confronting, including the potential for rate increases?
spk07: Mickey, it's a great question. As you know, in certain parts of the leveraged finance market, People are making loans that are regularly at 6.5 to 8 times leverage on an EBITDA basis and 10 to 12 times leverage on a cash flow basis. That is not our strategy. As I mentioned earlier, our average originations this quarter were at 4 times EBITDA. When you do that on a cash flow basis... More typically our originations are at about five or five and a half times cashflow, which leads to very strong debt service coverage levels on the companies that we finance and leaves room for interest rates to move up very considerably before it would put pressure on the ability of our companies to service debt. In general, what we're seeing in our portfolio, And I've heard from evaluation services, they're seeing this across the market. The vast majority of companies that are experiencing supply chain cost increases and labor cost increases are successfully pushing those through to their business and consumer customers. And revenues are generally growing in the majority of our portfolio. And EBITDA levels are either being maintained or increasing. So general portfolio performance is strong. And even on the COVID-affected accounts, with the exception of Group Ohima, which still remains quite bad, but all the other COVID-affected accounts are improving either gently or in some cases very significantly.
spk08: Thank you, Stuart. That's a helpful explanation. If I could just follow up on I know that you tend not to invest in cyclical companies, which is common in the BDC sector, but within the portfolio companies that you've invested in, do they have any outside risks in terms of their cost inputs to either the sanctions that are developing in Europe or to commodity prices in general that we should be aware of?
spk07: We do have companies that have inputs that are linked to oil. And those companies are obviously seeing and will probably continue to see increased price pressure. But again, we have seen with, I would say, literally every company in the portfolio that cost increases have been able to be pushed through. There seems to be an acceptance across the market that increased costs are requiring pass-throughs. And of course, we're all reading about that and hearing about that every day in terms of the inflation rate in the country. We definitely see that going on in our portfolio. And it's not only gone on in prior months, but we have a number of portfolio companies that are doing price increases right now in March and April. And the feedback we're getting is that their customers, which include places like you know, Walmart and Whole Foods are accepting those price increases, understanding the nature of the pressures that are being put on companies.
spk08: Thank you, Stuart. I appreciate that explanation. Just one last housekeeping question maybe for Joyce. Can you give us a sense of where your undistributed taxable income ended for the year net of the special distribution you made?
spk04: Mickey, pro forma for the regular distribution that was paid in January of 2022, undistributed income is approximately about $29.5 million.
spk08: $29.5 million. Thank you, Joyce. And I have a couple more questions, but I'll hop in the queue to give someone else a chance to ask questions. Thank you.
spk07: All right, Mickey. Happy to answer more as well.
spk08: Thank you.
spk02: And we'll take our next question from Bryce Rowe with Hovde. Please go ahead.
spk06: Thanks for taking the question, and good afternoon. Hi, Bryce. How are you doing today? I'm good, Stuart. I think a lot to talk about here, a lot to digest. Wanted to maybe start with trying to size out the deal activity you've seen here in the first quarter, both closings and mandates, and then what that looks like relative to the repayment activity that kind of spilled over into the first quarter?
spk07: Yeah, in Q3 and Q4, we were alerted by a large number of borrowers that they intended to repay. Most of those repayments were from intended sales of company. A lot of those sales have not consummated yet. Some of them are going to consummate here in Q1. Some of them are expected to consummate in Q2 or Q3. Some of them have been pushed out until later in the year. So we are not getting the repayments that we had been told to expect back in Q3 and Q4 of last year. And at the same time, our business volumes have been exceptionally strong. Whitehorse is a consolidated entity. We had a record Q4 as evidenced by the record performance for the BDC in the addition of assets. And then on top of that, while this is not necessarily true across the whole market, we are also experiencing a record Q1, where at the Whitehorse Direct Lending Unit, we are likely to close 75% to 100% more volumes that we closed in Q1 of 2021, 2020, or 2019 for that matter. The volumes are so strong that given where we are on the leverage of the BDC, there is not room in the BDC to put all of those assets in. And so we are targeting only higher yielding assets for the BDC in support of trying to consistently earn the dividend. If we saw a surge of repayments, we currently have plenty of origination volume to replace those. And so long, as I mentioned in the prepared remarks, so long as we are not doing many second lien loans and the second lien concentration stays well under the 15% target, we will operate the BDC at slightly higher leverage of about 1.35 times as opposed to the prior target of 1.25 times. And needless to say, that larger asset balance and those more assets will generate more income that will help us cover the dividend on a more reliable basis.
spk06: Sure. Understood that. Maybe a couple follow-ups to To those comments, you said higher yielding. What exactly does that kind of mean? And then another follow-up is you've obviously increased the commitment to the JV. That's something that you've talked about in the past. Curious how quickly you might take down that $25 million into the JV now that you've got such a strong pipeline.
spk07: Bryce, our existing pipeline has deals that are mandated that are supposed to close, although there never can be assurance that deals will close, that would consume all of that incremental $25 million of allocation to the JV. So, based on projections and subject to the caveat that sometimes deals don't close as planned, if mandated deals close as planned, all of that JV capacity would will be utilized either by the end of Q1 or early in Q2. And to your other question, at this very moment, based on the limited capacity in the BDC, I don't have any new deals in my pipeline that I'm planning on putting on the balance sheet of the BDC unless the yield on that asset is at least LIBOR 7. And I have several assets that are yields in excess of LIBOR 7 that I am targeting to put into the BDC. So, it's a very high-class situation to be able to build the portfolio of the BDC with senior secured first lien assets that are yielding LIBOR 700 and above.
spk06: Yep, it certainly is. I think I'll jump back into the queue and maybe come back with a follow-up or two, but I'll give somebody else a chance. Thanks, Stuart. Thanks, Bryce.
spk02: And we will take our next question from Sarkis Sherbet-Yong with B-Rally Securities. Please go ahead.
spk05: Hi, Sarkis. Hi. Thank you for taking the question here. Just want to kind of come back again to the new leverage target. Clearly, you know, with the a higher concentration of the first lien, you could kind of do this, right? And as I kind of look at the balance sheet now, can you reconcile that against, you know, this deal activity you're seeing? It sounds like you're going to be very choosy, and then it sounds like, you know, based on the level of repayments or prepayments that come back in, you'll just, you know, redeploy and keep the – let's call it the investment portfolio – kind of in this zip code, but maybe towards higher yielding assets. Is that the right framework?
spk07: At the moment, based on the current pipeline of mandated deals, your assessment is exactly right. We should have no problem operating the BDC at about 1.35 times leverage. In fact, I would say, based on the current pipeline, which includes some repayments that are supposed to come in, at the moment, Our leverage today is actually a little higher, and we're expecting several repayments before the end of the quarter. But we are currently in a situation where the originations activity across our both sponsor and non-sponsor side are very strong. We are finding good high-yielding assets for the JV and good even higher-yielding assets for the BDC balance sheet. And we will do our very best as we operate in the balance of Q1 and Q2 to optimize the risk return of the BDC portfolio.
spk05: Great. That's super helpful. And then just shifting gears here a bit, I think if I look at the 4Q interest expense line, a bit higher than what I was anticipating. Is that because the debt extinguishment cost was inside there or should I be thinking about it in a different place?
spk04: Sarcus, that is correct. The accelerated amortization from those debt issuance costs would be on the interest expense line.
spk07: Okay. Can you call that out? Can we share what that cost was, Joyston, just so people can calculate that in? Yeah, thank you.
spk04: Yeah, the gross amount is approximately $800,000, $0.8 million. As I mentioned before, the net impact, net of the incentive fee benefit was $0.7 million. That adjusted out to core and II.
spk07: And on a per share basis, Joyce, that's about what, three and a half cents a share?
spk04: Somewhere between three and a half and four, yep.
spk05: Okay. Fantastic. That's all for me. I'll hop back in the queue. Thank you, Sarkis.
spk02: And once again, as a reminder to ask a question, that is star and one on your touchtone phone. Again, that's star one for any more questions. And we will take our next question from Melissa Waddell with J.P. Morgan, please go ahead. Your line is open.
spk01: Good morning. I appreciate you taking my questions today. Good morning.
spk00: Good afternoon, actually.
spk01: Morning. Oh, afternoon. One of the comments you made about the delay in repayment activity or sort of getting pushed into the first half of this year, I was hoping you could share a little bit more context around that. What's driving those delays? Is there any reason for concern? Or are companies sort of clinging to capital a little bit more closely given the increased uncertainty in the environment? Anything you can share with us would be. helpful.
spk07: Thank you. Yes, there's nothing bad and nothing concerning. I would say that what I've heard from some private equity firms or even some non-private equity firm sellers is that the bankers who were representing them told them that they could get certain valuations on their assets. And in some cases, those valuations came through at lower levels leading the equity players to not want to sell. So either that or they're delaying the sale until later in 2022. So none of those exits that have not yet happened are related to problem assets. All of the companies are performing. It relates primarily to the desired equity gains of the sellers of the company, and they're just holding on. And in some cases, you know, we have one credit where there was a planned sale in Q4. A strategic company is buying that credit. They're going through a regulatory approval, and the regulatory approval has just taken longer than anticipated. So not a problem. And the company, that one in particular, which is related to infrastructure spending, continues to do phenomenally well. So, we do expect to see most of those repayments occur at some point during 2022. And I think we have, even sitting there today, two or three more repayments that we're expecting during the month of March.
spk01: Got it. I appreciate that context. Interesting, we've heard from some other BDC managers, you know, in this earnings season that, speaking exactly to that point where there's a discrepancy between public and private market valuations and that might hold up some deals, but that we've heard managers speak two different directions on that. One could be that it could slow originations activity. The other possible thesis is that it could drive demand for growth capital from the private debt market. in sort of a tailwind to origination. So given the holdup on some of the deal activity that you're talking about, I'm curious, what's the tone of the conversations that you're having with your portfolio company? Are they looking for growth capital at this point? And understood that you're constrained within the BDC on new issuance, but context would be interesting. Thank you.
spk07: Yeah, our portfolio companies on the whole are doing very well and are in growth mode. We have a number of companies that continue to do add-on acquisitions or organic greenfield expansions. So with the exception of the asset, again, the best way to get a sense of how the portfolio is doing is to look at our marks on the assets. We've always tried to have very realistic marks Historically, from anything that's marked down, you see it sometimes move up and sometimes move down on new quarters information. I'd say the only asset we've had that's been a steady march downward, and it will continue to be a steady march downward in the next quarter, is Group Ohima. Group Ohima, I'll remind you, is the second largest hospital chain in Puerto Rico. And the combination of COVID, and other secular issues going on in Puerto Rico have caused the performance of Group Ohima to suffer significantly. We're working very hard to resolve that, but it just has not been trending in the right direction. But with the exception of Group Ohima and that trend line, the balance of the portfolio, again, even the COVID-affected accounts with Omicron seeming to be past us, The flash results for February are generally positive, and in some cases, they're very positive.
spk01: That's really interesting. Thanks so much for the context.
spk07: No problem.
spk02: We'll take our next question from Robert Dodd with Raymond James. Please go ahead. Your line is open.
spk09: Thank you. Good morning from my time zone.
spk02: Thank you.
spk09: A follow-up on Cuckoo Pokemon, and then more of an origination question. On Cuckoo Pokemon, you just mentioned that It is trending in the wrong direction. Can you give us any incremental – is that the financials of Group Ohima are trending in the wrong direction or the negotiations on the workout are trending in the wrong direction?
spk07: I would say the Group Ohima situation, financial performance has continued to be very negative. and the negative financial performance has led to the ongoing markdowns. We have been employing a number of different strategies using resources that we have at HIG to optimize the outcome. Last quarter, based on our mark, we had a number of different outcomes that were both above and below where our mark was. A number of those options that were above our mark have not played out based on the financial performance of the company. And that's why our expectation, we don't know yet because we're, you know, it's a week by week situation, Robert. But our best estimation is at the end of this quarter, there will be a further markdown on that asset. And I'd be comfortable giving you an estimated range. I think that markdown will probably be to 20 or 30 cents compared to the 42 cents that it's marked at currently. I appreciate that, Colin. That's really helpful.
spk09: The other question, I mean, you know, the general trend this quarter has been a lot of BDCs and private credit participants saying, you know, slow down in Q1 and, you know, maybe it should, you know, starting to rebuild as we go through this year. That clearly doesn't seem to be the case with you where, you know, up significantly versus even a pre-COVID Q1 trend. Can you give us – I mean, what is it about – is there a difference in mix of the channels that you're getting those opportunities coming through now? I mean, is the sourcing different for, say, Q1 versus what it was in Q4, which was also a very strong quarter? I mean, it just seems you're – you know, outperforming in terms of volume that you're seeing, Q1, what the rest of the industry is seeing? Any telling you on why you think that is?
spk07: All I can tell you is that we have representatives in 12 regional offices across North America. And so we don't rely on the New York and Chicago banks to bring us volume. We generate our own volume. And so what I've heard from some of the other players in the industry is that Q1 has slowed down a lot from Q4, and most people are experiencing what I guess they'd refer to as a normal Q1. That has not been the case for us. Our regional origination network, including both private equity and non-private equity deals, has been exceptionally strong, frankly, surprisingly strong. We didn't predict or budget that we'd be operating this heavily. And my team, which is up to the mid-60s number of people, is operating at almost 100% capacity in Q1. And I can't remember in my 35-year career ever being so busy, relatively speaking, in a Q1. We're being still equally selective on the deals we're doing. We're turning down anything that we think is too cyclical. or too highly levered, and we're also turning down deals where we think others are being too aggressive on price. But as a result, the portfolio of deals that we're closing are modest leverage, consistent with the history of what you've seen with our BDC, and the pricing is generally strong. My biggest frustration, to be honest with you, I wish I had more capacity because there are deals that I would have liked to have put into the BDC where the BDC just can't take them unless I was going to operate at even higher leverage. And we don't want to take the leverage up from what we're indicating to the market. So again, we're focusing on the higher yielding deals. I would say the deals going into the JV, which historically is focused on deals priced 550 to 650. I would say right now the JV deals will probably be all 600 and above, and anything going on the balance sheet of the BDC is likely to be at LIBOR 700 or above. Thank you. Thanks a lot. Yeah, appreciate it. No problem.
spk02: We'll take a follow-up from Mickey Shalane with Leidenberg. Please go ahead.
spk08: Stuart, just to follow up on your frustration about leverage at the BDC, With the stock trading above NAV, are you open to raising some common equity at these prices and unleashing some capacity?
spk07: We always consider what we think is right for the BDC shareholders. At the moment, we have not been willing to do that. The BDC has been trading above NAV fairly consistently. Depending on what we see as opportunities, In the future, we could consider it. But so far, we have chosen not to go down that path. And instead, we're optimizing the portfolio with these higher yielding assets. And again, our desire, can't promise it'll happen because you never know, but our desire is to build a very strong first lien portfolio with yields on the assets that allow us to comfortably cover our dividend on a reliable basis quarter to quarter. You know, as you heard earlier, you know, we had an impact of about three and a half or four cents a share on the write-off of the bond fees. But absent that, you know, the earnings per share would have been higher. So we're optimistic. Again, no promises, but we're optimistic at the moment, sitting where we are right now, about earnings capacity in 2022.
spk08: Okay, I understand. In terms of the cadence of your portfolio investments and exits in the fourth quarter, when I look at the trajectory of your interest income versus the growth in the debt portfolio, it seems that your net investments were very much skewed to the end of the year. Is that correct, or am I missing something?
spk07: Yeah, yeah, we had – it's very normal in Q4 – that a lot of the deals close in December. And that's been true my whole 35-year career. So, yes, a lot of the assets that happened to. And then we had a couple of things that were supposed to close in Q4 that did roll over into Q1. I understand.
spk08: My last question, to what extent understanding that many of your notes are unsecured notes or private Can you give us a sense of which ones of them are callable at this point in time or in the near future?
spk07: Joyce, do you have a commentary on that?
spk04: Mickey, right now, as of the end of or as of, you know, Q1 2022, we don't have any that are callable. As you know, we do have some that roll off in 2023. And so we'll look at that probably in the back half of this year.
spk08: So those 2023s, which were the ones I was thinking about, do they have a call feature or has it got a makeover?
spk04: They do, right. And so maybe just to clarify my response, you know, as I'm sure you can appreciate, some of these come with call features that would require prepayments premiums to be paid. So from that end, you know, there are certain ones that technically could be redeemed with a pre-payment premium, right? And so from that aspect, I think that's where we would look at that maybe later on this year. And right now, that's not a focus.
spk08: Fair enough. Thank you for that. Yes, it does. Those are all my follow-up questions. I appreciate your time.
spk02: And we'll take another follow-up from Bryce Rowe with Hovde. Please go ahead. Your line is open.
spk06: Thanks a lot. Wanted to just maybe ask a question about asset sensitivity, both at the BDC and at the JV. Stuart or Joyce, can you give us a feel for what the weighted average floor is within the BDC's debt portfolio and then how the JV's asset sensitivity is? might look relative to the BDC? Are the floors similar within the JV?
spk07: The LIBOR floors or SOFR floors across our portfolio are fairly consistently at 1%. There are a couple of deals with floors that are a little bit lower, 75 basis points. I think we have floors on either all of our assets or virtually all of our assets. and that is consistent with our current pipeline as well. We are not adding any deals in Q1 that don't have LIBOR or SOFR floors.
spk06: Okay, that's great, Stuart. And then one more for me. The move to not accrual for play months, are there any reversal of interest in the fourth quarter tied to that?
spk04: There was none.
spk06: Okay. That's it for me. Appreciate the time. Great.
spk02: And there are no further questions. Any other questions? No, I apologize. There are no further questions at this time. I'll turn the call back over to the speakers for any closing remarks.
spk07: As always, we seek to have transparency in what we share with the market. If between this call and the next call there's any topics that any of our analysts or shareholders would like us to address, please do let us know, and we'll do our very best to be responsive. I thank everybody for their time.
spk02: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
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