WhiteHorse Finance, Inc.

Hi, everyone. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the Whitehorse Finance fourth quarter and four-year 2022 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 made available for replay beginning at 4 p.m. Eastern Time. The replay dial-in number is 402-220-6071. 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, please press star 2. It is now my pleasure to turn the floor over to Jacob Moeller of Rose & Company. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining us today to discuss Whitehorse Finances' fourth 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 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 2022 earnings presentation, which was posted to our website this morning. With that, allow me to introduce Whitehorse Finances CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Jacob. Good afternoon, and 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 for the period ended December 31st, 2022, 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 the current market conditions Then Joyce and Thomas, our Chief Financial Officer, will discuss our performance in greater detail, after which we'll open the floor for questions. This afternoon, we are pleased to report strong results for the first quarter and for the full year of 2022. In 2022, core net interest income totaled $35.5 million, or $1.52.6 per share, representing a 19% increase from 2021's core NII of $29.7 million, or $1.40.5 per share. Full-year core NII exceeded regular shareholder distributions by 10.6 cents per share or $2.5 million. These results demonstrate the continued strength of Whitehorse's lending platform and strong origination activity highlighted by $221 million in gross deployments for the year. In Q4, Gap net investment income in core NII was 11.1 million, or 47.6 cents per share, which more than covered our quarterly dividend of 35.5 cents per share. This marked our highest quarterly NII since the company's IPO. Assuming no unforeseen factors emerge, as long as base rates continue to be in excess of 4%, we expect the earnings power of the BDC's current portfolio to exceed our current dividend level. NAV per share at the end of Q4 was $14.30, representing a 46-cent decrease from the prior quarter after accounting for the 5-cent per share special dividend that was paid in Q4. This decline was largely the result of market pricing during the quarter that led to Whitehorse marking performing assets primarily due to valuation factors. Two of our portfolio companies were marked down due to performance, as I will discuss shortly. Turning to our portfolio activity for the quarter, gross capital deployments in Q4 totaled $49.8 million. Of this amount, $42.1 million was funded into six new originations and the remaining $7.7 million was funded into six add-ons to existing portfolio accounts. In addition to the add-ons, there was $4 million in net fundings made for revolver commitments. Of our six new originations in Q4, Three were sponsor deals and three were non-sponsor deals with an average leverage of approximately four times. I note that all these deals were first lien loans and had an average expected all-in rate of 12% and an effective yield of almost 13%, which was higher than the Q3 portfolio average. At the end of Q4, 96.8% of our portfolio was first lien and 100% of our debt portfolio was senior secured. During Q4, total repayments and sales were $40.7 million, primarily driven by three complete realizations. These largely offset the BDC's originations activity, leading to net deployments of $13.1 million for the quarter. In addition, one deal was transferred to the STRS Ohio JV in exchange for $8 million of cash. With originations slightly outpacing repayments, net effective leverage increased to 1.26 times at the end of Q4, as compared to 1.22 times at the end of Q3. At this leverage level, we remain at the low end of our target leverage range of 1.25 to 1.35 times. As I shared on prior calls, so long as our portfolio remains heavily concentrated in first lien loans, which have lower risk than second lien loans, we expect to continue to run the BDC at up to 1.35 times leverage. Regarding the three complete realizations, We earned $2.6 million from interest and prepayment fees and $1.6 million realized gain on the sale of warrants, which generated an aggregate IRR of 18.8% on the $38.1 million of aggregate capital invested in these deals. This attractive return for senior secured loans demonstrates the power of our sourcing model in the lower and mid markets. Fourth quarter realizations included Escalon services, CHS therapy, and AccessUSA shipping. In the first quarter, there's only been one full realization to date, and we anticipate repayment activity to remain relatively low through the first half of 2023. Given the change in marketplace pricing, which I'll discuss shortly, we believe that repayments of historical investments will likely allow Whitehorse to redeploy that capital into higher yielding investments. With that in mind, I'll now step back to bring our entire investment portfolio into focus. After 13.3 million in net mark-to-market decreases, 1.6 million in realized gains, 1.6 million of accretion, and the effects of the STRS-JV asset transfers, the fair value of our investment portfolio was 760.2 million at the end of Q4. This is down marginally from 764.6 million at the end of Q3. The weighted average effective yield on our debt investments was 12.6% as of the end of Q4, which reflects an increase from Q3 level of 11.4%. The increase was primarily driven by a rise in the portfolio's base rate. Addressing the STRS-Ohio joint venture, we continue to utilize our JV successfully. The JV generated investment income to the BDC of approximately $4 million in Q4 as compared with $3.8 million in Q3. This increase was driven by modestly higher interest and dividend income from the JV and Q4. During the quarter, the company transferred one new deal, Max Solutions Inc., into the STRS-JV. As of December 31st, the fair market value of the JV's portfolio was $284.3 million, and at the end of Q4, the JV's portfolio had an average unleveraged yield of 11.3 percent, above Q3's average yield of 10.1 percent. The increase in unlevered yield is primarily due to rising base rates. Additionally, as announced on February 6th, we together with STRS Ohio have increased our capital commitments to the JV by $25 million. The increased commitment comprised of an incremental 15 million investment from Whitehorse Finance and an incremental 10 million investment from STRS Ohio brings total capital commitments to the JV to 175 million. The JV produces Average annual return on equity in the low to mid teens to the BDC. We believe Whitehorse's equity investments in the JV provides attractive return for shareholders. Given the JV's return on equity, we look forward to utilizing the new capital commitment as we seek to increase our exposure to highly accretive and conservative earning streams. Transitioning to the BDC's portfolio more broadly, as mentioned earlier, there are some markdowns in the portfolio as a result of the continued broad market price increases in Q4. I will elaborate on specific market dynamics shortly, but would note that we see credit pressures as most acute in consumer-facing companies. This is partly because many retailers overstocked inventory during the worst of the supply chain disruptions and are now seeking to reduce those inventory levels materially. The vast majority of our deals have strong covenant protection, And we are finding that private equity owners are behaving very well and supporting their credits with new cash or contingent equity as needed. Other than consumer facing borrowers, the majority of our portfolio is performing well. Notably, our investment in Play Monster Inc. was marked down 2.7 million during the quarter and remains a troubled asset. Our team is working hand in hand with experts in private equity as well as external advisors to turn the company around for sale and we anticipate that process will take two to three years. Given new information since quarter end, we expect to move the original senior debt for PlayMonster to non-accrual status beginning in Q1. It is worth noting, however, that even with PlayMonster on non-accrual, less than 1% of the BDC's portfolio at fair value would be on non-accrual status. In the second half of 2022, the general direct lending markets experienced a material correction stemming from a combination of economic weakness, significant inflation, and rising interest rates. Despite these pressures, we are comfortable with the performance and quality of our borrowers. In general, we have observed an increase in borrow revenues, which can be attributed in part to inflationary pressures and higher prices. In about half our portfolio, companies have been able to maintain margins and successfully pass through increased costs with price increases. In the other half, there's been an uptick in leverage But thus far, this has only had a modest impact on our typical borrower's death service coverage. While the portfolio is holding up well, we are keeping a careful eye on demand characteristics, especially in the consumer sector, although our exposure to consumer-facing companies represents less than 50% of our portfolio based on fair value. In most of our consumer-facing accounts, we've seen evidence of demand weakness. However, this has not appeared in other areas, including general industrial, B2B, healthcare, TMT, and financial services, which have all been surprisingly strong. Additionally, 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 a very small exposure in the construction sector. While many borrowers have been dealing with inflationary pressures, in our portfolio, those pressures appear to be moderating, evidenced by lower transportation costs, and a stabilization of labor costs. Regarding rising interest rates, we have always underwritten deals with the expectation that interest rates are going to rise, and we have avoided deals with excessive leverage. During much of 2022, a number of lower mid-market lenders failed to adjust to the move in the broader market and continued to do deals on aggressive terms and surprisingly low price. Through the fourth quarter, we saw these players finally correct to the market. However, we understand that many lenders who underwrote at six times or more leverage are now having issues with their portfolio company's ability to service debt. Meanwhile, Whitehorse has consistently and deliberately chosen to deploy capital into deals with more conservative terms and with premium pricing, and as such, has built a portfolio that we believe is better equipped than many to withstand a potential economic downturn. The credit market is largely reset to levels one would expect to see in a downturn, Deals for cyclical companies are no longer being underwritten at aggressive leverage levels, and pricing, even for non-cyclical assets, have seen an upward adjustment. In the mid to lower end of the market, which is our main focus, loans are now being issued on more conservative credit terms with tighter documentation and covenants in addition to increasing prices. From a lending perspective, the current market environment offers exceptionally attractive terms. Nonetheless, we are being cautious in the face of a weakening economy and remain focused on credits with compelling risk-return characteristics. Our base case assumption is that we will see recessionary conditions in upcoming years, and we want to ensure that the companies we invest in can weather that storm. The investments in our existing portfolio were underwritten at modest leverage levels and generally are well positioned to withstand even another 100 basis points of rate increases. Whitehorse is equipped to take advantage of these lender-friendly market conditions as our pipeline activity levels remain high and our three-tier sourcing architecture continues to provide the BDC differentiated capabilities. The overall pipeline is over 150 deals, 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 conservative in our deal selection And the current primary limiting factor for origination is the BDC's investing capacity. Our strategy and competitive advantages continue to result in momentum in our originations business. Thus far in the first quarter, the company has closed three new deals, two of which will be transferred to the JV, as well as four add-on transactions. We currently have visibility for several additional new deals, although there can be no assurance that any of these deals will close. nor that the BDC will have capacity to fund any of these deals. We anticipate utilizing the capacity provided by 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 for our dividend. Regarding dividends, and as announced this morning, in addition to our normal quarterly distribution of 35.5 cents per share, our board has declared a special distribution of 7 cents per share for the quarter ended December 31st, 2022. We will continue to assess future special distributions based on the company's earnings levels and the interest rate environment. The management and board of the BDC will also examine the ongoing improved earning power of the BDC portfolio given increases in spreads and base rates to assess whether there should be an increase in the core dividend from 35.5 cents per share. I should have more detail to share on this topic by the next earnings call. As we start the new year, we remain cautiously optimistic. Despite expectations of economic softening, we believe Whitehorse is well positioned to continue executing on our three-tiered sourcing approach and rigorous underwriting standards in the new year and beyond. With that, I'll turn the call over to Joycen for additional performance details and a review of our portfolio composition. Joyson, go ahead.