WhiteHorse Finance, Inc.

In Q2, total repayments and sales were 71.7 million, primarily driven by our complete, by four complete realizations and one partial realization. Repayments are elevated for two reasons. There are a series of counts where performance was challenged and we asked the borrowers to refinance us out in this borrower-friendly market and they've done that. This amounted to roughly 80% of our repayments in Q2. We don't expect to see many more refinancings in this category. There may be a couple of credits that we want to exit though. And then there are some other accounts with a much lower interest rate environment and the more aggressive credit environment has led borrowers to be able to push up leverage and push down price. On some of those deals, we've just felt the resulting transactions are too aggressive and we're letting these go. We expect that the borrower-friendly market combined with eventually declining base rates will likely lead to a continued flow of refinancings into the latter part of the year, especially as call protection on the deal steps down or expires. We expect refinancings to remain heavy through the balance of the year. Thus far in Q3, there have been no full repayments or sales though. With that in mind, I'll now step back to bring our entire investment portfolio into focus. After the effects of net repayments and the STRSJV transfers as well as 1.5 million in net mark to market decreases, 0.2 million of realized losses and 0.8 million of accretion, the fair value of our investment portfolio was 660 million at the end of Q2. This compares to our portfolio's fair value of 697.9 million at the end of the previous quarter. The weighted average effective yield on our income producing debt investments was .8% at the end of Q2, a 40 basis point improvement compared to .4% in the second quarter of 2023 and up slightly from .7% in the first quarter of 2024. We continue to utilize the STRSJV successfully. The JV generated investment income to the BDC of approximately 3.9 million in Q2 compared to 4.8 million in Q1. As of June 30th, the fair value of the JV's portfolio was 324.8 million and the portfolio had an average unleveraged yield of .3% compared to .4% in Q1. 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. Traditionally, transitioning to the BDC's portfolio more broadly, there were some markdowns in the portfolio during Q2. Most notably, there was a $2.2 million markdown to our investment in Honors Holdings, which was placed on non-accrual status in the middle of the quarter, resulting in a decrease of approximately 125,000 of interest compared to expectations at the start of the quarter. Honors was a company that was heavily impacted by COVID. After that, a private equity firm contributed additional equity to Honors to help it navigate the pandemic and to further execute on its growth strategy in the face of a weak market. However, the company has been experiencing weaker customer trends in recent quarters. Now we're taking action to position the company for remediation and we're working with both the franchisor and of the concept and the current owners of the company. We expect to improve and resolve that investment over the next 12 to 24 months. Honors meaningfully contributed to the increase in non-accrual investments, which totaled .2% of the total debt portfolio at fair value compared with .3% at Q1, excluding investments in the STRS-JV. In regard to American Crafts and ArcServe, we continue to execute turnaround plans to maximize the value of both of these companies working alongside our restructuring resources and private equity resources. We remain optimistic that we would seek exits on those in 18 to 30 months. We otherwise see balanced activity in terms of credit performance across the portfolio generally and remain overall pleased with the health and relative stability of our debt portfolio with cashflow coverages holding up in a high interest rate environment. Turning to the broader lending market, there continues to be a supply-demand imbalance in favor of borrowers. As a result, market conditions across all of the sponsor segments remain very aggressive. In the upper mid-cap and large-cap markets, we're seeing leverage of anywhere between five to seven and a half times. We also see lenders putting pick leverage on companies for an additional one to two turns beyond that five to seven and a half times. Pick leverage occurs in the market from time to time, but we are generally avoiding it. Pricing in the upper mid-cap and large-cap markets is so for 450 to so for 500, with an original issue discounted between 98 and 99. We have been avoiding doing any deals in the upper mid-cap and large-cap markets due to the aggressive natures of these deals. The mid-market is one step less aggressive. We are seeing leverage typically between four and a half times and six times. Pricing in the mid-market is so for 500 to so for 550, for the most part, with OID also between 98 to 99. The lower mid-cap market is again one step less aggressive, with leverage generally running four to five times, and pricing in the lower mid-cap market ranging from so for 500 to so for 600, with an OID typically of 98 to 98 and a half. The non-sponsor market has not moved much at all, with leverage remaining at two and a half to four and a half times, and pricing in the range of 600 to 800 over so for, with an OID of 98 or lower. Given the relative attractiveness of the non-sponsor market, we are focusing heavily on originating deals in the non-sponsor sector. We are seeing more evidence of competitors accepting heavily adjusted EBITDAs as they are trying to win new volume in a market that is short of assets. We've seen bankers bringing out many refinancings on troubled credits, where they're trying to adjust the capital structure, often on highly adjusted EBITDA. Many of those deals that have come in front of us, we think are negative cash flow deals. We don't believe many of the adjustments, and we think the leverage is too heavy, and we're turning down all of those deals. In the current market environment, we are taking a cautious stance and focused on transactions that have positive free cash flow, limited cyclicality and strong owners behind them. The on the run sponsor market is clearly more aggressive than the off the run sponsor market, and also more aggressive than the non-sponsor market. As a result, we are spending most of our time focused on the off the run sponsor market and the non-sponsor market. With respect to the broader economy, we are seeing signs of weakening that is showing up in lower consumer demand, and in some sectors, lower demand in the business to business segment. Given the gradual slowdown in the economy, we do believe that the Fed will begin to reduce interest rates in the fourth quarter of 2024. Following net repayment activity in Q2, the BDC balance sheet is approximately 60 million of capacity for new assets. The JV has approximately 30 million of capacity, supplementing the BDC's existing capacity. Deals that are priced to show for plus 600 and above, will generally put on the BDC's balance sheet, and deals priced below this level will generally go into the STRS joint venture. While volume is lighter than we'd expect it to be in all market segments, we're actively working on six new mandated deals split evenly between sponsor and non-sponsor. While there can be no assurance that any of these deals will close, all of these mandates would fit into the BDC, or our JV should be elected to transact. Subsequent to quarter end, we have closed three new originations, totaling approximately 18 million, with several more pending. Of the new originations, two are expected to be transferred to the JV during the third quarter. So far, there have been no asset transfers to the JV in the third quarter. Our pipeline is still running about 180 deals, but the portion of the pipeline that we call active pipeline is lower than it would normally be this time of year. In addition, our three tier sourcing architecture continues to provide the BDC with differentiated capabilities. We derive significant advantages from the shared resources and affiliation with HIG, who is a leader in the mid-market and lower mid-market. Whitehorse has approximately 23 origination professionals located in 11 regional markets across North America. The strength of this origination's pipeline enables us to be conservative in our deal selection. Based on current market terms and conditions, we are taking a very cautious stance and focused on doing deals that have positive free cash flow, limited cyclicality, and strong owners. Despite continued concerns regarding economic softening, we believe we are well positioned to continue to source attractive opportunities and navigate economic challenges through our strong origination's capabilities and rigorous underwriting standards. With that, I'll turn the call over to Joyson for additional details and a review of our portfolio composition. Joyson.

Thanks, Dord, and thanks everyone for joining today's call. During the quarter, we recorded GAAP net investment income and Core NII of $9.3 million, or 40 cents per share. This compares with Q1 GAAP NII and Core NII of 10.8 million, or 46.5 cents per share, and our previously declared quarterly distribution of 38.5 cents per share. Q2 fee income was lower quarter over quarter at $0.4 million compared with 0.6 million from the prior quarter. Q2 amounts were primarily comprised of approximately 0.3 million of amendment fees. For the quarter, we reported a net increase in net assets resulting from operations of $7.8 million. Our risk ratings during the quarter showed that .4% of our portfolio positions carried either a one or two rating, slightly lower than the .6% report in the prior quarter. As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to such initial expectations, and a two rating indicates the company is performing according to such initial expectations. Regarding the GAAP specifically, we continue to grow our investment. As Stuart mentioned earlier, in the second quarter, we transferred four new deals and four add-ons to the SRS JV totally $22 million in exchange for cash proceeds of the same amount. As of June 30th, 2024, the JV's portfolio helped position in 38 portfolio companies with an aggregate fair value of 324.8 million compared to 34 portfolio companies at a fair value of 309.4 million as of March 31st, 2024. The investment in the JV continues to be accreted to the BDC's earnings, generate a mid-teens return on equity. During Q2, income recognized for our JV investment aggregated to 3.9 million during the quarter, as compared with approximately 4.8 million in Q1. As a reminder, as it is reported in the prior call, in Q1, there was an elevated amount of income recognized from a JV investment, largely attributable to non-occurring events that had occurred in the JV's portfolio during Q1. As we have noted in the 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 JV's investment portfolio. Third, turning to our balance sheet, we had cash resources of approximately $21.8 million at the end of Q2, including 8.9 million restricted cash and approximately 167 million of undrawn capacity available under a revolving credit facility. As of June 30th, 2024, the company's asset coverage ratio for borrowed amounts as defined by the 1940 act was 186.2%, which was above the minimum asset coverage ratio of 150%. Our Q2 net effective debt to equity ratio, after adjusting for cash on hand, was 1.09 times, compared with 1.19 times from the prior quarter. Before I conclude and open up the call to questions, I'd again like to highlight the distributions. This morning, we announced that our board declared a third quarter distribution of 38.5 cents per share, which is consistent with the prior quarter. The upcoming distribution, the 48th consecutive quarterly distribution, payments or IPO in December 2012, with all distributions at or above a rate of 35.5 cents per share per quarter, will be payable on October 2nd, 2024, to stockholders in record as of September 18th, 2024. As we said previously, we will continue to evaluate a 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. Operator?

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, if you would like to signal for a question, it is star one, and to remove yourself, it is star two. We will pause for just a moment to assemble the question queue. We'll go first with Bryce Rowe from B. Riley. Please go ahead. Thanks a bunch. Good morning.

Good morning, Bryce. Hey, Stuart, I really appreciate some of the market commentary and your cautious approach. I think it's probably one of the more cautious kind of messages that I've heard throughout the earnings season. Wanted to ask kind of about the flows in and out of the BDC from an investment perspective. Leverage is coming down. It sounds like that cautious approach could lead to a more kind of muted activity as we think about the second half of this year and into next. Can you talk about kind of where you're comfortable with leverage in terms of how low leverage could go on the balance sheet? Do you think you can maintain here or a good chance that it continues to move lower?

Bryce, we're lucky to have a HIG supplement with origination capability that when the on the run markets get really aggressive like they are right now, we can scroll down into the off the run markets and non-sponsor markets and find deals that we feel are a better risk return. When the markets were very favorable, we completely filled up the BDC and for a period of time, the BDC had no capacity and we were doing deals that couldn't go into the BDC. As I highlighted, we now have about 60 million of availability on the BDC balance sheet, which given the average allocation would be about six deals of incremental capacity plus an incremental two to three deals in the JV. Q3 is a decent but relatively slow quarter so far, but in general, we tend to see Q4 as a stronger quarter and even in a very slow M&A year like 2023, Q4 had volume that was about double of what Q3 was. So I don't expect that we're gonna use up the unused capacity in Q3, but we are hopeful that we will put most of the unused capacity to work in Q4 if we see a normal upswing in economic activity with the expectation of interest rate cuts in Q4 and many private equity firms being pressured by LPs to have realizations and bankers telling us that their pipelines are reasonably robust. We're hoping that after the August slowdown in September, October, we'll see robust M&A flow and be able to use up some of that capacity.

Okay, that's helpful. And then in terms of repayments, appreciate the commentary around repayment activity in the quarter, can you help us kind of handicap if there are more portfolio companies in that quote unquote leave category or ask to leave category and then maybe on the flip side, help us understand or maybe handicap that other category you mentioned of companies coming to refinance and you all don't wanna participate because the terms are not up to your standards.

Yeah, in general at the moment, there's only one company I can think of that I would put in the desired exit category. And so that category is gonna slow down because I think we had three of them in the last quarter where we had the opportunity to stay with the credits but we wanted to exit because of performance issues that our credit teams felt warranted a termination of the relationship. So as it regards to refinancing, in 2022 and 2023, we were adamant about getting strong call protection and we got call protection on our deals that was generally two years on the sponsored deals and three to four years on the non-sponsored deals. To the extent that that call protection is starting to roll off, especially on the 2022 deals, we are seeing people come back and look to do refinancings. In many cases, based on the strength of the market, those refinancings include dividends as well. And so where borrowers are taking up leverage, taking down equity in the company and taking down price, we're only sticking with the stronger non-cyclical borrowers and there are several transactions that have gone on where we just felt that the underlying leverage and price made it imprudent to stick with the borrowers. There's no way to know how much of that we will see in the balance of Q3 and Q4, but there's no doubt in my mind with interest rates or interest spreads as low as they are right now that there will be continued refinancing pressure. If the credits are okay, we will adjust the pricing on those deals to the current market, which in many cases will take pricing from 600 to 650 down to pricing the 500 to 550. But the thing that will make us exit is if the performance of the borrower combined with the leverage that they're trying to put on the borrower leaves us questioning the stability of that credit in the ongoing period, especially because we have a view that the economy really is softening. We're not necessarily predicting a recession, but we are predicting into 2025 a weaker economy and we think it's imprudent to overly leverage companies into a weaker economy and we're making our decisions on that basis.

Good stuff. Two quick ones for you, Joyson. Do you have an estimated UTI balance as of the end of June? And then did I hear that there was an interest reversal in the quarter?

In relation to your second question, Bryce, the $125,000 was not recognized in Q2. It wasn't necessarily a reversal of an accrual from the prior quarter, but when we put the honors holding position on non-accrual in Q2, essentially we did recognize an additional 125,000 that we would have as compared to Q1.

And then do you have a UTI balance or estimate for us?

I don't have the UTI balance handy for me right now. Let me see if I can just pull that up. I think it's about 32 million. Actually, I just pulled it up, 32 million.

Okay, awesome. Thank you, guys.

As a reminder, ladies and gentlemen, it is star one. If you would like to signal for a question, again, star one. We'll go next to Sean Paul Adams with Raymond James. Please go ahead.

Hey, guys. Good morning. On the portfolio risk ratings, it seems like the uptick in risk ratings four and five was likely due to the new non-accrual. Am I correct in that?

Yes, I believe that is the case. Okay,

so, but in aggregate over the last six months, there has been a somewhat large shift in ratings just downward within the portfolio. At the beginning of January, risk ratings one were somewhere around 18%. Now they're sitting around 12.8. So it just seems like there's a somewhat large waterfall effect going downward within the portfolio. And it looks like you guys are really paying large attention to the new deals on the market and really focusing on credit quality and leverage. What kind of aspects are you guys thinking about in regards to your existing portfolio companies? And is there any isolated sectors that are really experiencing the largest material weaknesses?

Yes, Sean Paul, in regard to the ones, what generally happens with credits that are overperforming is the companies get sold or the companies get refinanced. So there's a natural effect that ones tend to go away. And that happens in all market, but especially true in a strong market environment. That said, as I indicated in my prepared statements, we are seeing a slowdown in the economy as recently has been indicated by data that's been released into the marketplace and has led to some equity gyrations recently. We are spending a significant amount of time focused on existing portfolio. Most of our existing portfolio accounts are comfortably paying their interest burden and their debt burden. But we do have a number of situations that are not related to the general economy like honors holdings, where it is a company specific issue that has led to the weakness in the performance. And actually it's a fairly recent issue as well. The company was only levered about three and a half times about a year ago, and the company has experienced weakness over the past 12 months. We have a five person restructuring team that gets involved in all the deals that need covenant waivers. And that restructuring team includes private equity professional who on owned accounts helps us put the right management teams in place, helps us come up with growth strategies for the company and helps us cut costs. And on ArcServe and American Crafts in particular, which are both owned assets, we are working with that restructuring team and with our private equity expertise to execute turnarounds that we hope will take hold and allow us to get strong exits in 18 to 30 months. So there is a lot of attention being paid to portfolio. And in today's market where we think competitors are being overly aggressive, we are committed to trying to not add any marginal credits to our portfolio.

Okay, thank you so much. And I believe you remarked earlier in the call that Honors Holdings probably had a timeline of 12 to 24 months of a resolution process. And I believe you also mentioned, ArcServe would probably be around an 18 to 30 month timeline as well? Yes. Okay, okay, that's perfect. I just needed to clarify that. Thank you so much for the call.

No problem, thank you.

And ladies and gentlemen, as there are no further questions in queue at this time, that will conclude our question and answer session and the White Horse Finance Second Quarter 2024 earnings call. Thank you for your participation. You may disconnect your line at this time and have a wonderful day.