WhiteHorse Finance, Inc.

Good afternoon. My name is Shelby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Whitehorse Finance Third Quarter 2022 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 4 o'clock p.m. Eastern Time. The replay dial-in number is 402-220-2655. 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 you wish to remove yourself from the queue, Press star 2. It is now my pleasure to turn the floor over to Robert Brimberg of Rosen Company. Please go ahead.

Thank you, Operator. And thank you, everyone, for joining us today to discuss Whitehorse Finance's third quarter 2022 earnings results. Before we begin, I would like to remind everyone that certain statements, which are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that can cause actual results to differ materially from those expressed or implied by these forward-looking statements. Whitehorse Finance assumes no obligation or responsibility to update any forward-looking statements. Today's speakers may refer to material from the Whitehorse Finance third quarter 2022 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, Robert, and good afternoon, and thank you all for joining 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 for the period ending September 30th, 2022, which can also be found on our website. On today's call, I will begin by addressing our third quarter results and the current market conditions. Then Joyce and Thomas, our chief financial officer, will discuss our performance in greater detail, after which we will open the call for questions. This afternoon, I'm pleased to report solid third quarter performance for 2022. Q3 gap NII was $9.8 million, or $0.42 a share. Core NII, after adjusting for a $1.1 million capital gain incentive fee reversal, was approximately $8.6 million, or $0.372 per share, and more than covered our quarterly dividend of $0.355 per share. NAV per share at the end of the Q3 was 1476, representing a 19 cent decrease from prior quarter. This decline was primarily the result of mark to market reductions rather than any actual losses on investment. The marks on our portfolio reflect market pricing that is adjusted due to disruptions in the debt markets. Turning to our portfolio activity for the quarter, Gross capital deployments in Q3 totaled $39.5 million. Of this amount, $26.1 million was funded into three new originations, and the remaining $13.4 million was funded into seven add-ons to existing portfolio investments. In addition to the add-ons, there was $0.6 million in net fundings made on revolver commitments. During Q3, total repayments and sales were $36.3 million, primarily driven by three complete realizations, These largely offset the BDC's origination activity, leading to net deployments of 3.8 million for the quarter. With originations slightly outpacing repayments, net effective leverage increased to 1.22 times at the end of Q3, as compared with 1.18 times at the end of Q2. At this level, at this leverage level, we remain slightly below our target range of 125 to 135, As I shared on the last call, so long as our portfolio remains heavily concentrated in first lien loans, which have lower risk but also lower returns than second lien loans, we expect to continue to run the BDC at up to 1.35 times leverage in order to help the BDC earn its 35.5 cent dividend each quarter. Oh, and we have consistently distributed that dividend since our IPO. Regarding the three realizations, we earned 16.3 million, including interest and fees, which generated an aggregated IRR of 12.1% on the 48.1 million of aggregate capital invested into these first lien deals. This attractive return for senior secured loans demonstrates the power of our sourcing model in the lower mid-market, confirms our diligent and conservative selection process, and highlights our ability to negotiate tight covenants, and strong call protections. Third quarter realizations included Mills Fleet, Mills Fleet Farm, Nelson Worldwide, and Maxi Transfers Blocker Corp. Following these repayments, the BDC had nearly 35 million of investment capacity. Thus far in the fourth quarter, there have been three fuller realizations. Fourth quarter realizations included 30 million in proceeds from three portfolio companies, And these realizations generated $1.7 million in prepayment penalties. Given the change in marketplace pricing, which I will discuss shortly, we believe that repayment of historical investments may allow Whitehorse to redeploy capital into higher yielding investments. Of our three new originations in Q3, all were sponsored deals with an average leverage of 4.3 times. which is relatively modest when compared to other lenders in the marketplace. I note that all these deals were first lien loans and had an average expected all-in rate of 9.4% with an effective yield of 12%, which was higher than the Q2 portfolio average. At the end of Q3, 96.8% of our portfolio was first lien and 100% was senior secured. With that in mind, I'll now step back to bring our entire investment portfolio into focus. After $7.5 million in net mark to market decreases, $0.2 million in realized gains, and $1 million of accretion, the fair value of our investment portfolio was $764.6 million at the end of the third quarter, down marginally from $766.5 million at the end of Q2. The weighted average effective yield on our investments was 11.4% as of the end of the third quarter, which reflects 150 basis point increase from Q2 level of 9.9%. The increase was primarily driven by a rise in the portfolio's base rate as a result of rising LIBOR and SOFR rates. Transitioning to the STRS-Ohio joint venture, we continue to utilize our JV successfully. The joint venture generated investment income to the BDC of approximately $3.8 million in Q3, as compared with $3 million in Q2. This increase was driven by higher interest and dividend income from the JV in Q3. As of September 30th, the fair market value of the JV's portfolio was $280.9 million, and at the end of Q3, the JV's portfolio had an average unlevered yield of 10.1%, above Q2's average of 8.7%. The increase in unlevered yield is primarily due again to rising base rates of LIBOR and SOFR. The JV produces annual average annual return on equity in the low teams to the BDC. We believe Whitehorse's equity investment in the JV provides attractive return for shareholders and is particularly relevant given the current market backdrop. Given the JV's return on equity, we are considering adding an additional commitment to $15 million to the JV as we seek to increase our exposure to this highly accretive earning stream. Returning to the BDC's portfolio, I'm pleased to report that we continue to have no investments on non-accrual status. We had some markdowns in the portfolio, as I mentioned earlier, but on average, the portfolio was stable despite continued broad market volatility in Q3. Our well-diversified portfolio is weathering an economy experiencing a number of negative factors, including rising interest rates, rising raw material prices, and rising labor costs. Across the portfolio revenues are up, but we are seeing margin degradation on a couple of borrowers due to cost pressures. While some of our borrowers are experiencing a slowdown in consumer demand, which has led to increases in leverage, our portfolio remains mostly represented by non-cyclical or light cyclical borrowers as we hold no direct exposure to oil and gas, auto, or restaurants, and very little exposure in construction sector. Since we generally serve the lower mid-market, we've been able to build a portfolio with conservative leverage profile. By keeping our portfolio leverage low, our portfolio companies are better able to cover their debt service in this rising interest rate environment. Thus far, rising interest rates have had only a modest impact on debt service coverage for our portfolio companies. While the portfolio is holding up very well, we are keeping a careful eye on demand characteristics, especially in the consumer sector. The modest leverage to which we underwrite our loans, coupled with the fact that almost 100% of our debt portfolio is comprised of floating rate investments, has allowed our portfolio to benefit from a rising interest rate environment. We continue to monitor our portfolio company's ability to service our debt, and with three-month LIBOR and SOFR contracts having reset at the end of September, we anticipate continued organic earnings accretion through year-end. By contrast, lenders with higher-levered portfolio companies may experience a higher percentage of their borrowers facing much tighter debt service as interest rates continue to increase. The market remains disrupted, with lenders concerned about economic softness domestically and abroad. The credit market has largely reset to levels that one would expect to see in a downturn. Deals for cyclical companies are no longer being underwritten at aggressive leverage levels, and pricing for non-cyclical assets have also seen an upward adjustment. Within this environment, the broadly syndicated market remains effectively shut for new issues. Nonetheless, there are residual credits that were underwritten and are being leaked out at significant discounts. We believe some of these provide attractive opportunities for making investments of larger non-cyclical or marginally cyclical businesses. We diligently review these loans for suitability and with our deal flow pipeline at a record high, remain highly selective and opportunistic about which credits we pursue. Across the mid to lower end of the market, the segments we are most focused on In addition to rising prices, loans are being written to more conservative credit terms with tighter documentation and tighter covenants. Our primary lower mid-market is still competitive with pricing more variable than the mid to upper mid-market. While the risk return is as good as I have seen really since 2015, we are approaching the environment with increased scrutiny and remain focused on credits with compelling risk return characteristics. We're being cautious in the face of a weakening economy. Our base case assumptions are that we will see recessionary conditions in 2023 and 2024. And we want to ensure that the companies we invest in can weather the storm. In our existing portfolio, as I mentioned earlier, our investments are well positioned as they were underwritten at low leverage levels and can generally withstand even another 200 basis points of rate increases. Broadly speaking, we have already underwritten to an extreme downside scenario. Our pipeline activity remains high, and we have been selectively taking advantage of market conditions. Whitehorse maintains its differentiated sourcing capabilities through our three-tiered architecture. The overall pipeline has increased to approximately 200 deals for the first time in the BDC's history, and we continue to derive significant advantages from the shared resources and affiliation with HIG who is a leader in the mid-market. The strength of the pipeline enables us to be meticulous in our deal selection, and the current primary limiting factor for Originations is the BDC's investing capacity. As such, and as I mentioned earlier, we are considering increasing our investment in the SDRSJP by $15 million. Our strategy and competitive advantages continue to result in momentum in our Originations business. Thus far in Q4, the company has closed five new deals, and add-on transactions and currently has visibility for 10 additional mandated new deals and add-on transactions. Although there can be no assurance that any of these deals will close, nor can there be assurance that the BDC will have capacity for these deals. We anticipate utilizing the capacity provided by the repayments to continue to rotate into higher yielding assets that combined with portfolio growth and the potential for increasing our investment in the JV should ultimately lead to higher income and greater coverage of our dividend. At the conclusion of the third quarter, we are cautiously optimistic for the first quarter and new year. While we remain concerned about cyclical industries and various economic headwinds, we believe we have built a very strong team and a solid sourcing and underwriting process. With that, I'll turn the call over to Joycen for additional performance details and a review of our portfolio top position.