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spk00: Your program is about to begin. If you need assistance during today's program, please press star zero. Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Whitehorse Finance First Quarter 2024 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 a replay is available through a webcast in the investor relations section of our website at whitehorsefinance.com. 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 touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. If you should require operator assistance again, you may press star 0. It is now my pleasure to turn the call over to Robert Brindberg of Rosen Company.
spk02: Please go ahead. Thank you, Mike, and thank you, everyone, for joining us today to discuss Whitehorse Finance's first quarter 2024 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 first quarter 2024 earnings presentation, which was posted to our website this morning. With that, allow me to introduce Whitehorse Finance's CEO, Stuart Jensen. Stuart, you may begin.
spk05: Thank you, Rob. Good morning. And thank you for all of you for joining today. As you're aware, we issued our earnings this morning prior to market open. And I hope you've had a chance to review our results for the period ended March 31st, 2024, 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 continued strong performance for the first quarter of 2024. Q4 GAAP net investment income in core NII was 10.8 million, or 46.5 cents per share, which more than covered our quarterly base dividend of 38.5 cents per share. This represents a slight increase from Q4 GAAP and core NII of 10.6 million, or 45.6 cents per share. NAV per share at the end of Q1 was 13.50, representing a 1% decrease from the prior quarter, NAV per share was negatively impacted by net markdowns on our portfolio totaling $5.2 million, the majority of which related to a markdown in equity warrants in Seagate Corporation, which I will discuss shortly. The NAV decrease was partially offset by the excess of core NII over our quarterly dividend. Turning to portfolio activity in Q1, gross capital deployments totaled $55 million, with $44.7 million funding five new originations and the remaining 10.3 million funding add-ons to existing investments as activity remained reasonably strong. In addition to the add-ons, there were 0.8 million in net fundings made for revolver commitments. Of our five new originations in Q1, two were sponsor deals and three were non-sponsor deals with an average leverage of approximately three and a half times that to EBITDA. All of these deals were first lien loans, with an average spread of 730 basis points and an average all-in rate of 12.6%. I note that both of these statistics are attractive from a historical and current market perspective. During the quarter, the BDC transferred two of these new deals and one existing investment to the Ohio STRS-JV, totaling $8.5 million. At the end of Q1, 99% of our debt portfolio was first lien, senior, secured, And our portfolio mix was approximately two-thirds sponsor and one-third non-sponsor, which is consistent with the prior quarter. In Q1, total repayments and sales were 43.4 million, primarily driven by five complete realizations and one partial realization. We expect repayment activity to remain relatively high, particularly for credits that are more than two years old, where call protection has expired or is more limited. In some cases, deals will be repriced and we will evaluate risk and return on a case-by-case basis to determine whether we want to follow credits into the current more aggressive market environment. Thus far in Q2, we've had 115, sorry, we've had 15 million in full repayments and sales. With repayments and JV transfers mostly offsetting our deployment activity, the company's net effective leverage increased slightly to 1.19 times and remains below the lower end of our target leverage range. So long as our portfolio remains heavily concentrated in first lien loans, which have lower risks 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 net repayments and STRS-JV transfers, as well as 0.8 million in net mark-to-market increases and 6.1 million of realized losses, the fair value of our investment portfolio was 697.9 million at the end of Q1. This compares to our portfolio fair value of 696.2 million at the end of the previous quarter. The weighted average effective yield on our income-producing debt investments was 13.7% as of the end of Q1, unchanged from the end of last year. We continue to utilize the STRS-JV successfully. The JV generated investment income to the BDC of approximately $4.8 million in Q1, up from $4.2 million in Q4. As of March 31st, the fair value of the JV's portfolio was $309.4 million, and at the end of Q1, the JV's portfolio had an average unlevered yield of 12.4%, consistent with Q4. 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 returns for our shareholders. Transitioning to the BDC's portfolio more broadly, there are some markdowns in the portfolio during Q1, most notably there was a $3.5 million markdown to our equity investment in Seagate Corporation. We exited the Seagate loan several years ago, and due to covenant defaults at the time, we were granted warrants equal to at least 17% of the company. I should note that we had no cash basis in these warrants. In any event, Seagate went out of business in Q1, and we therefore marked the warrants down to zero. There were some other modest markdowns in three other credits, including in New Cycle Solutions, also known as Navigup, which was placed on non-accrual in the quarter. Markdowns were more than offset by reversals of aggregate prior unrealized losses upon the realization in Crown Brands' second lien investment and the restructuring of Atlas Purchaser, which is also known as Aspect Software. We resolved the Crown Brands loan in Q1 by selling it back to the sponsor who was running the company. Although the loan was sold at a discount, we were able to sell it at a price that it was a premium to where the loan had been valued at the end of Q4. We also participated in a restructuring of our position in Atlas Purchaser, also known as Aspect Software, which resulted in a portion of the investment to incur a realized loss. New cycle was the only credit moved to non-accrual during the quarter. And at the end of Q1, investments on non-accrual total 1.3% of our debt portfolio at fair value compared with 2.5% at the end of Q4. Naviga is in a sale process and values for the company have unexpectedly come in at a modest discount to the value of the debt. We have therefore marked the asset to a level that we think is consistent with where the company will be sold. American Crafts and ArcServe remain on non-accrual status. You may recall that we have a control position in American Crafts, and we along with other lenders took control of ArcServe earlier in Q1. We are continuing to work with our restructuring resources and our private equity resources to turn those companies around and maximize value. The trends we're seeing in both these accounts are positive relative to where they were one quarter ago. Across the portfolio generally, we see balanced activity in terms of credit performance, and remain overall pleased with the health and relative stability of our debt portfolio. The cyclical accounts are continuing to be surprisingly strong, and the accounts that are having trouble are either facing the consumer market or have idiosyncratic problems that we have discussed in the past. As always, we remain vigilant in monitoring our portfolio of companies. We have not seen demand weakness in other sectors, including general industrial, B2B, healthcare, TMT or financial services. Additionally, our portfolio includes mostly non-cyclical or like cyclical borrowers. We hold no direct exposure to oil and gas, auto, new home construction, or restaurants. The vast majority of our deals have strong covenant protection, and we are finding that in most cases, the private equity firms we partner with are supporting their credits with new cash or contingent equity as needed. Turning to the broader lending market, Lenders have gotten significantly more aggressive in terms of credit, documents, and price, a continuation of the trend that we saw emerging in Q4. As Q1 progressed, we saw a modest increase in M&A activity coming out of the sponsor market and the non-sponsor market. Despite that modest increase, there is still a significant supply-demand imbalance in favor of borrowers since direct lending shops that are coming off of poor volume numbers in 2022 and 2023 are trying to make sure they hit their budgets and again are willing to be more aggressive to make that happen. We've definitely seen a shift all the way from broadly syndicated market into upper mid market and also the mid market and lower mid market. The degradation of the market has been most severe in the sponsor market where leverage is up half a turn to a turn and loan to value is now 55 to 65%. More middle market deals are being done with no financial covenants, and pricing has come down 100 to 150 basis points from last quarter. This decline came suddenly, and we have not seen a reversal of that in Q2. The upper mid-market has seen prices decline to where deals are now priced at SOFR 450 to SOFR 525. The mid-market and lower mid-market are pricing deals more in the range of SOFR 500 to SOFR 575. The shift in the non-sponsor market has thankfully been less dramatic. Credits are still at three to four and a half times leverage and pricing has come down by only about 50 basis points. What we have seen over time is that the non-sponsor market is less volatile than the sponsor market because there's less competition and it's harder for lenders to access the non-sponsor market. As I alluded to earlier, the deals that we did in 2022 and 2023 for the most part still have call protection And we're doing a good job of holding on to prices we captured in those years when the markets were much more favorable to lenders with pricing typically at 650 to 750 on both sponsor and non-sponsor deals. In the current market environment, we're being very cautious in our deal sourcing with on-the-run sponsors, and our focus remains on the off-the-run sponsor market and non-sponsor business where market terms remain comparatively more attractive. Because of our ability to access the off-the-run sponsor market and non-sponsor market, we are still commanding higher prices than what you see in the upper mid-market or mid-market in general. With respect to the broader economy, recent data indicates that inflation will continue at a higher level than what the Fed is targeting. We agree with the current thinking that there will be somewhere between zero to two rate cuts in the balance of the year, probably happening later in the year. As a result, we expect slower economic growth through 2024 into 2025. The year started out slowly in terms of pipeline, which is normal from the beginning of the year, but we did enter the year with a decent backlog of deals, most of which were non-sponsor. Our pipeline is ground as we move through the first half of the year due in part to our sourcing model, which allows us to source deals in corners of the market where there's less competition, including the off-the-run sponsor market and the non-sponsor market. Our three-tier sourcing architecture continues to provide the BDC with differentiated capabilities, and we continue to derive significant advantages from the shared resources and affiliation with HIG, who is a leader in mid-market and lower mid-market. Whitehorse has approximately 22 origination professionals located in 11 regional markets across North America. The strength of the origination pipeline enables us to be conservative in our deal selection. Following repayment activity in Q1, the BDC balance sheet has approximately $40 million of capacity for new assets at our target leverage range. The JV has approximately $50 million of capacity, supplementing the BDC's existing capacity. With the move in the markets, deals that are priced below SOFR 600 are targeted for the JV. Those priced at 600 or above are largely targeted for the BDC balance sheet. We're actively working on 11 new mandates and add-on acquisitions. Of the new platform mandates, the majority are non-sponsored deals. While there can be no assurance that any of these deals will close, all of these mandates could fit within the BDC or our JV should we elect to transact. Subsequent to quarter end, we have closed two new originations and three add-ons to existing portfolio companies with several more pending. Of the new originations, one investment was transferred to the JV during the second quarter. We also transferred two add-on investments to the JV in the second quarter. In short, activity continues to pick up, and we remain cautiously optimistic that the market will remain conducive to Whitehorse. Despite sustained concerns of economic softening, we believe we are well positioned to continue to source attractive opportunities, navigate economic challenges due to our rigorous underwriting standards, and continue delivering to our shareholders. With that, I'll turn the call over to Joycen for additional performance details and a review of our portfolio composition. Joycen?
spk07: Thanks, Stuart, and thank you, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income in core NII of $10.8 million, or 46.5 cents per share. This compares with Q4 GAAP NII in core NII of 10.6 million. or 45.6 cents per share, and a previously declared quarterly distribution of 38.5 cents per share. Q1 fee income was unchanged quarter over quarter at 0.6 million. Q1 amounts were primarily comprised of $0.5 million of amendment fees, the majority of which came from an amendment fee from Telestream Holdings. For the quarter, we reported a net increase in net assets resulting from operations of $6 million. Our risk ratings during the quarter showed that 77.6% of our portfolio positions carried either a 1 or 2 rating, slightly lower than the 77.7% in the prior quarter. As a reminder, our 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a 2 rating indicates a company is performing according to such initial expectations. Regarding the JV specifically, we continue to grow our investments. As Stuart mentioned earlier, in the first quarter, we transferred two new deals and one existing investment totaling $8.5 million in exchange for cash proceeds with the same amount. Additionally, during the quarter, two existing portfolio company investments fully realized in the portfolio, and as a result, as of March 31, 2024, JV's portfolio held positions in 34 portfolio companies with an aggregate fair value of $309.4 million compared to 34 portfolio companies an aggregate fair value of $312.2 million as of December 31, 2023. Subsequent to the end of the first quarter, the company transferred three investments to the JV, including one new portfolio company. The investment in the JV continues to be accretive to the BDC's earnings, generating a mid-teens return on equity. During Q1, we did see an elevated amount of income recognized from our JV investment, which aggregated to $4.8 million during the quarter, as compared with approximately $4.3 million in Q4 of last year. The approximate $0.5 million increase, or 2.4 cents per share, is largely attributable to non-recurring events that occurred in the JV's portfolio. As we have noted in prior calls, the yield on our investment in the JV may fluctuate period over period as a result of a number of factors, including the timing and amount of additional capital investments, the changes in asset yields in the underlying portfolio, as well as the overall credit performance of the GAB's investment portfolio. Turning to our balance sheet, we had cash resources of approximately $20.9 million at the end of Q1, including $10.2 million in restricted cash and approximately $135 million of undrawn capacity available under a revolving credit facility. As of March 31, 2024, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 179.5%, which was above the minimum asset coverage ratio of 150%. Our Q1 net effective debt direct equity ratio, after adjusting for cash on hand, was 1.19 times, compared with 1.16 times from the prior quarter. Before I conclude and open up the call to questions, I'd again like to highlight our distributions. This morning, we announced that our board declared a second quarter distribution of 38.5 cents per share, which is consistent with the prior quarter. The upcoming distribution, the 47th consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at or above a rate of 35.5 cents per share per quarter, will be payable on July 2, 2024. The stock hold is a record as of June 18, 2024. 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 over to the operator for your questions. Operator?
spk00: Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad now. You may remove yourself from the queue at any time by pressing star 2. And once again, that is star and 1 if you'd like to ask a question. We'll pause for just a moment to allow questions to queue. And we do have our first question from Mickey Schlein with Leidenberg.
spk01: Yes, good morning, everyone. Just one quick question for me. With the movements in non-accruals this quarter, was there any impact on interest income in terms of recaptures or reversals of previous interest income?
spk05: Joyce, and I'll leave that for you.
spk07: Mickey, we did not reverse out any income accruals during the period. We just ceased from recognizing the additional accruals during Q1.
spk01: Okay, thank you, Joyce, and that's it for me this morning. Thank you, Mickey.
spk00: And we do have our next question from Bryce Rowe with B. Reilly.
spk06: Thanks, good morning.
spk05: Morning, Bryce.
spk06: Hey, Stuart, wanted to follow up on some of the prepared remarks. You talked about, you know, obviously spreads and pricing having come in, you know, more aggressive terms and conditions out there in the markets. And you did talk about, you know, evaluating whether you would follow some credits that were at least exploring some kind of refinance option. Curious, you know, what would kind of keep you in the credit and what kind of pricing deterioration, you know, would you see relative to what's on the books right now?
spk05: So to give you two examples, Bryce, we were in a company that had industrial cyclicality to it. and they got an offer to do the deal at higher leverage and 100 basis point lower price. We may have gotten there on the price, but the higher leverage in a cyclical left us uncomfortable, so we chose to exit that credit. As compared to a company we have in the business services sector where the free payment penalties have expired, the company has performed well. It has delevered over a turn since closing. In order to keep that asset, we're going to need to reduce pricing, I believe, from SOFR 625 or 650 down to SOFR 525. But because it's a strong performing asset, non-cyclical, low CapEx, we are going to follow that asset and accept the lower price. So it'll be primarily driven by credit concerns and how aggressive the market is getting. And in general, As I mentioned, the market is now a 500 to 575 market in the part of the market we cover, which is the mid-market and lower mid-market. And we will accept those prices because those are the market prices for credits that we think are strong and stable.
spk06: Okay. That's fair. And then maybe you could talk a little bit about I assume you've got a bit of a watch list within Whitehorse and it's reflected in the internal risk ratings. What are you seeing internally to move credits around within that internal risk rating system? Just trying to understand what the tail risk is within the portfolio and if it's growing if it's growing with this higher for longer environment?
spk05: Yeah, the average leverage on our deals is and has been modest. So the higher rate environment is not in and of itself causing us much concern. We do, as we've indicated in the ratings on the deals and the marks you see on the deals, have a number of credits that are underperforming to the original plan. That results in a mark of three or a rating of three. Some were concerned of losing principal amounts. Those are ratings of four. And as I mentioned in my prepared remarks, there is no broad trend other than consumer-facing companies being weaker. There's no broad trend that we're seeing in terms of reasons why companies are underperforming. In some cases, it's ArcServe. had a technology outage and lost customer data a couple years ago. And that has led to us taking over the company and trying to turn it around. Other credits that we're dealing with are dealing with idiosyncratic issues. We are not seeing broad economic weakness at this point. And we would tell you that the revenues for companies across the portfolio on average are up, partially due to inflation. but partially due to reasonably strong demand in the general business market.
spk06: Okay. That's helpful. Um, last one for me, you kind of made some comments around news cycle, um, going through a sale process and, you know, maybe seeing a lower valuation than would have been expected. Can you, can you talk about, you know, kind of how the puts and takes of that, um, in, in terms of how you, how you deal with that, you know, within your, within your portfolio and whether you opt to, to sell or keep it?
spk05: Um, thankfully, it's a very small investment. Yep. And the situation is to sponsor that on the company, put the company up for sale, got an offer that they're trying to transact on. But the offer is for less than the debt value. It's a club deal. We're a very small piece of the club, but it's a club deal, and there is no active market for that paper. So the best thing for us to do is just wait for the sale of the company and collect out what we can collect on that asset. That'll be, we think, similar to where the asset is marked. Okay.
spk06: That's it for me.
spk07: Bryce, one more thing on your... Bryce, I was going to just say one more thing on news cycle, and this also relates to Mickey's prior question on reversals. We did reverse out a small fee that was due at exit or maturity on news cycle for approximately $98,000, given our prognosis on what we expect to collect. Okay.
spk06: But that had already been accrued, Joyston? That's correct.
spk07: It had previously been accrued based on an amendment in November in an earlier period and reversed out during Q1. Okay. Got it. Thanks.
spk00: And we have our next question from Eric Zwick with Hupta Group.
spk03: Good morning. Just one question for me and maybe kind of a two-part question. Could you just remind me kind of the characteristics that you consider for transferring investments into the JV and The JV is at just over 15% of the total portfolio at fair value today. Where's your comfort range with the size of that relative to the total investment portfolio?
spk05: Answering the second part of your question first, we think the JV has now reached a size with the committed capital that is appropriate to the BDC. I don't think we'd increase the JV size again. We, depending on market conditions, reserve the higher-priced deals to remain on the BDC balance sheet, and the lower-priced deals go into the JV. At this point in time, as I indicated in the prepared remarks, deals that are priced 600 or higher, which would be considered a premium price in today's market, and the price we're getting on non-sponsored deals will typically go onto the BDC balance sheet. Deals that are priced under 600 we'll typically head to the JV.
spk03: Got it. Thank you. That's all for me today.
spk05: I appreciate it. Have a good day. Thank you.
spk00: And just a reminder, if you'd like to ask a question, that was star and one on your telephone keypad. And our next question comes from Sean Paul Adams with Raymond James.
spk04: Hi guys. Good morning.
spk05: Good morning.
spk04: It looks like the, uh, Average investment size in the portfolio has continued to go down quarter over quarter, which is it's been following the trend for the last couple of quarters, I think now averaging around $5 million. Earlier in the year, you mentioned that the new average allocation target would probably be closer to 8 to 10 million. Have you guys lowered that target allocation range going forward or are forecasted add-ons impacting that figure?
spk05: I think what's really going on is a lot of the non-sponsored deals we do are smaller deals. And so the BDC's allocation into those smaller deals is ultimately a smaller number. That is just a natural result of, again, the average size of the deals that we're closing. So I would say if we see a normal market environment, I would still expect the average size of an asset going into the BDC to be more in the $8 million to $10 million range.
spk04: Got it. Thank you.
spk00: And once more, that was star and one for any questions and or comments now. And again, that's star. I'd like to ask a question. And at this time, I'm currently showing no questions in the queue. I'll now turn the call back over to Stuart Aronson for closing remarks.
spk05: All right. Well, we continue to work hard to keep the portfolio as healthy as possible and to add good credits that will give the BDC stability going forward, regardless of market conditions. Appreciate everybody's time today. And as always, heading into next quarter's call, if anyone has topics they want us to address in the prepared remarks, please communicate with either Joyston or I in advance of those calls, and we will do our best to answer questions with complete transparency. Thank you very much, and have a good day.
spk00: This does conclude today's program. Thank you for your participation. You may now disconnect.
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