WhiteHorse Finance, Inc.

To all sites on hold, we appreciate your patience and ask that you continue to stand by. Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. 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 First Quarter 2023 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- No passcode is required. At this time, all participants have been placed in a listen only mode. 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, Shelby, and thank you, everyone, for joining us today to discuss Whitehorse Finance's first quarter 2023 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, it 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 Whitehorse Finance's first quarter earnings presentation, which was posted on our website this morning. With that, allow me to introduce Whitehorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Rob. 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 for the period ending March 31, 2023. which can also be found on our website. On today's call, I'll begin by addressing our first quarter results and current market conditions. Joyce and Thomas, our chief financial officer, will then discuss our performance in greater detail, after which we will open the floor for questions. I'm pleased to report strong performance for the first quarter of 2023. In Q1, GAAP net investment income and core NII was 10.7 million, or 46.1 cents per share, which more than covered our previously declared dividend of 35.5 cents per share. Regarding dividends and as previewed on our last earnings call, the management and the board of the BDC have closely examined whether an upward adjustment should be made to the regular dividend given the improved earnings power of the BDC portfolio resulting from an increase in spreads and base rates. In this regard, we are announcing several changes to our dividend structure to ensure that our shareholders benefit from our earnings momentum. I'm pleased to announce that our board is elected to increase our regular quarterly dividend, the 37 cents per share, up from 35.5 cents per share that we have paid consistently since our IPO. We believe that this increase in our regular dividend is both appropriate and sustainable given the increased earnings power of our portfolio. In addition, to ensure our shareholders consistently benefit from the earnings generated in excess of this regular dividend, we are introducing a new formula-based supplemental dividend. The supplemental dividend will be calculated as 50 percent of our NII in excess of our regular dividend rounded to the nearest cent and subject to certain measurement tests. Joyston will discuss the supplemental dividend framework in more detail later in the call and how that framework applies to our Q1 2023 financial results. NAV per share at the end of Q1 was $14.20, representing a 10-cent decrease from prior quarter. inclusive of the $0.07 per share special dividend that was declared in Q1. In addition to the impact of the special dividend, mark-to-market losses on our portfolio contributed to the decline in NAV per share. These mark-to-market losses, which totaled $3.5 million, were driven by company-specific performance in some of our consumer-facing portfolio companies, as well as some specific challenges certain portfolio companies are experiencing independent of economic conditions. Turning to our portfolio activity for the quarter, gross capital deployments in Q1 totaled $34.1 million. Of this amount, $18.8 million was funded into three new originations and the remaining $15.3 million funding add-ons to existing portfolio investments. In addition to these add-ons, we had $0.7 million in net fundings made under our existing revolver commitments. All three of our new originations in Q1 were sponsor deals. and had an average leverage of approximately 3.6 times. I note that all these deals were first lien loans with spreads of 675 or higher and had an average all-in rate of 12%. At the end of Q1, 96.8% of our debt portfolio was first lien and 100% was senior secured. In Q1, total repayments and sales were 19.3 million, primarily driven by one complete realization and two partial pay downs. Additionally, during the quarter, the company transferred three new deals and four add-ons to the STRS JV, totaling $25.9 million. Although originations continued to outpace repayments, the result of the JV transfer activity led the company's net effective leverage to decrease slightly, down to 1.23 times from 1.26 times at the end of Q4, and consistent with management's long-term target range. Subsequent to quarter end, There has been one full realization to date. We are pleased to announce that the turnaround process of our formerly troubled asset, our coal holding, has reached a profitable conclusion. We, alongside one other lender, took control of the operating company and have successfully managed that company to a sale transaction. In April of this year, we exited our investment with an approximate 1.2 times return on the original invested capital. This outcome demonstrates Whitehorse and HIG capital's ability to leverage our collective resources and expertise to turn around troubled investments with the objective of minimizing losses and capital preservation. 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 when they occur will likely allow Whitehorse to redeploy that capital into higher yielding investments. As I shared on prior calls, so long as our portfolio remains heavily concentrated in first lien loans, which have a lower risk profile than second lien loans, we expect to continue to run the BDC at up to 1.35 times leverage. With that in mind, I'll now step back to bring our entire investment portfolio into focus. After the effects of the STRS-JV asset transfers, as well as $3.5 million in net mark-to-market changes, the fair value of our investment portfolio was $749.2 million at the end of Q1. This is down marginally from $760.2 million at the end of Q4. The weighted average effective yield on our income-producing debt investments was 13.2% as of the end of Q1, an increase from the Q4 level of 12.6% that variance was primarily driven by an increase in the portfolio's base rate. Addressing the STRS-Ohio JV, We continue to successfully use the JV. The JV generated investment income to the BDC of approximately $4.2 million in Q1 as compared to $4 million in Q4. This increase was primarily driven by moderately higher base rates. As of March 31st, the fair value of the JV's portfolio was $308.9 million, and at the end of the Q1, the JV's portfolio had an average unleveraged yield of 11.8%. Comparatively, the average yield was 11.3 percent in Q4 and 7.86 percent in Q1 of 2022. The increase in unlevered yield is primarily due to the rising base rates. With the rise in base rates, the JV is currently producing an average annual return on equity in the mid-teens to the BDC. We believe Whitehorse's equity investment in the JV provides attractive return for shareholders. Given the JV's return on equity, We look forward to utilizing the recent new capital commitment as we seek to increase our exposure to a highly accretive earning stream. Transitioning to the BDC's portfolio more broadly, as mentioned earlier, there are some markdowns in the portfolio in Q1. I will elaborate on specific market dynamics shortly, but would note that as of the last quarter, we see credit pressure as most acute in consumer-facing companies. Nonetheless, 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 the consumer-facing borrowers and a couple of other credits, the vast majority of our portfolio is performing well. Notably, our investment in American Crafts and Sklar Holdings underwent restructuring during the quarter as both companies have consumer exposure and have been experiencing demand softness. These deals were non-sponsor-owned, and the owners did not have the liquidity to effectively manage the businesses through the downturn. As such, Whitehorse selected to provide both companies with the necessary liquidity in return for control equity positions in each company. Alongside restructuring professionals at HIG Capital and other private equity lender partners, we are working to strengthen the companies and manage through a weaker demand environment in order to position each company for a successful exit in the next two to four years. Additionally, as I previewed last quarter, our original remaining debt investment in PlayMonster was moved to non-accrual status at the beginning of Q1. This is our only asset on non-accrual, and the deal represents less than 1% of the BDC's portfolio at fair value. Whitehorse took control of the company during Q1 of 2022 after financial irregularities were uncovered. In response to toy demand being lower than usual this past holiday season, the BDC and the other senior lender have provided additional defensive funding to PlayMonster in order to help the company move past the current consumer demand softness and provide a bridge to the holiday season in 2023. We anticipate the PlayMonster turnaround process will take two to four years, and there can be no assurances that we will ultimately recover 100% of our invested capital. Turning to broader lending market, as mentioned last quarter, the back half of 2022 saw material correction in the direct lending markets as the combination of general economic weakness, significant inflation, and rising interest rates applied credit pressure on borrowers. While economic conditions in the first quarter of 2023 continue to test debt coverage, we remain happy with the performance and the quality of our portfolio companies. In general, we've observed an increase in borrower revenues which can be attributed to inflation. In about half our portfolio, companies have been able to maintain margins by successfully passing through increased costs. In the other half, there's been an uptick in leverage, which thus far has only had a modest impact on our typical borrowers' debt service coverage. We remain vigilant in monitoring our portfolio companies, and we have not seen the demand weakness in other sectors, including general industrial, B2B, healthcare, TMT, and financial services. 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 very little exposure to the construction sector. With the markets remaining disrupted by credit challenges, we have heard that several lenders are beginning to experience troubles in their portfolio driven by highly leveraged loans that were closed in the quarters prior to the rising interest rate environment. Meanwhile, Whitehorse, has consistently and deliberately chosen to deploy capital into deals with more conservative leverage terms and with premium pricing, and as such has built a portfolio that we believe is better equipped to withstand a potential economic downturn with high inflation. While there are still few lenders that appear to be slow at adjusting to the new market realities, the average lender is now pursuing credits with lower leverage profiles, and there continues to be less capital available in the marketplace than before the correction. The banking community that services the syndicated market of loans has thus remained highly conservative. And from a lending perspective, in our opinion, the overall terms in the private debt market are as good now as they have been since the Great Recession. In the mid to lower end of the market, which is our focus, loans are now being issued on more conservative credit terms with tighter documentation and covenants. And in addition to that increased pricing, However, this pricing change is more pronounced in the mid to upper mid markets than in the lower mid market. As we continue to focus on optimizing risk returns and navigate towards the market segments that offer the best rewards for investors during any period of time, the BDC has begun to divert more resources to the mid and upper mid market deals in order to take advantage of the most attractive risk-adjusted returns. Despite the exceptionally attractive market terms, We are being cautious in the face of a weakening economy. Given our expectations for a weak economy in the balance of 2023 and 2024, we want to ensure that the companies we invest in can weather the storm. We are also increasingly focused on cash flow coverage, on the risk that rates may continue to rise, although the forward curve indicates that rates will likely decline. The investments in our existing portfolio were underwritten at modest leverage levels, and generally we 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 remains at seasonally strong levels despite the market disruptions, and our three-tier sourcing architecture continues to provide the BDC differentiated sourcing capabilities. The overall pipeline is over 180 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 originations is the BDC's investing capacity. Our strategy and competitive advantages continue to result in momentum in our originations business. Thus far in the second quarter, the company is closed on two new deals, one of which will be transferred to the JV, as well as one add-on transaction that will also be transferred to the JV. We currently have visibility for several additional new deals, although there can be no assurance that any of these will close, nor that the BDC will have capacity for these deals. We anticipate utilizing the capacity provided by repayments when they occur to continue to rotate into higher yielding assets. Additionally, we expect to see growth in the JV portfolio as we draw down on our newly increased commitment to the joint venture. Both of the aforementioned factors should ultimately lead to higher income and greater coverage for our dividend. At the conclusion of the first quarter, we remain cautiously optimistic. Despite expectations of economic softening, we believe Whitehorse is well-positioned to continue executing on our three-tiered sourcing approach with 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. Joycen, go ahead.