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WhiteHorse Finance, Inc.
3/7/2025
Please stand by. Your program is about to begin. Good afternoon. My name is David, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Whitehorse Finance Fourth Quarter 2024 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, Joyce and 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 402-220-7204. No passcode will be 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 and 1 on your telephone keypad. You may remove yourself from the question queue by pressing star and two. It is now my pleasure to turn the floor over to Robert Brinberg of Rosen Company. Please go ahead.
Thank you, David, and thank you, everyone, for joining us today to discuss Whitehorse Finance's fourth quarter 2024 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, 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 fourth quarter 2024 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. 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 December 31st, 2024, which could also be found on our website. On today's call, I will begin by addressing our fourth quarter results and current market conditions as well. Royston Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which we will open the floor for questions. Our results for the fourth quarter of 2024 were disappointing, as our investment portfolio declined this quarter due to some net realized and unrealized losses, which impacted our financial performance. Q4 GAAP net investment income in core NII was $8 million, or $0.34 per share, compared with a quarterly distribution of $0.385 per share, and was slightly below the Q3 GAAP and core NII of $9.2 million, or 39.4% per share. NAV per share at the end of Q4 was $12.31, representing an approximate 3.6% decrease from the prior quarter, with approximately half of that decline attributable to our 24.5-cent special dividend. NAV per share was also impacted by net realized losses and net markdowns in our portfolio, totaling $4.9 million, the majority of which related to markdowns to American Crafts and to Aspect Software, which I'll discuss more shortly. Turning to our portfolio activity in Q4, we had gross capital deployments of 35.4 million, which was offset by total repayments and sales of 46.2 million, resulting in net repayments of 10.8 million. Gross capital deployments of 35.4 million consisted of six new originations, totaling $27.4 million, and the remaining $8 million used to fund various add-ons to existing investments. In addition to the BUB, there was $1.5 million in net fundings made on the revolver commitments. Of our six new originations in Q4, one was non-sponsored and five were sponsor deals, with the average leverage of approximately 4.4 times EBITDA. All of our Q4 deals were first lien loans with an average spread of 540 basis points and an average all-in rate of 9.8% compared to 10.7% in the third quarter of 2024. The decrease in the all-in rate was primarily due to a decline in the base rates of approximately 60 basis points. During the quarter, total repayments and sales were 46.2 million, primarily driven by full repayments in our positions and haircuttery, William Boschelli, Industrial Specialty Services and at SG, as well as sales of our remaining positions and draws love cup and hollander. William Boschelli, During the quarter the bbc transferred three new deals and two add ons to the strs jv at the end of to for the strs jv total portfolio at an aggregate fair value of 295 million. and an average effective yield on the JV's portfolio 11.1% compared to 11.7% in Q3. The decrease in the effective yield was primarily due to a decline in base rates of approximately 50 basis points. Leverage for the JV at the end of Q4 was 0.88 times compared to 0.97 times at the end of the prior quarter. We continue to utilize the STRS-JV successfully and believe that Whitehorse's equity investments in the JV continue to provide attractive returns for our shareholders. At the end of Q4, 98.4% of our debt portfolio was first lien, senior, and secured, and our portfolio mix was approximately two-thirds sponsor and one-third non-sponsor. After net realized and unrealized losses of 4.9 million, as well as one million of accretion, Total investments decreased 12.1 million from the prior quarter to 642.2 million. This compares to our portfolio's fair value of 654.3 million at the end of Q3. The weighted average effective yield on our income-producing debt investments decreased to 12.5% as of the end of Q4, compared to approximately 13.1% in the third quarter of 2024, and 13.7% in the fourth quarter of 2023. The weighted average effective yield on our overall portfolio also decreased to 10.2% as of the end of Q4 compared to approximately 10.6% at the end of Q3 and 12.4% in the fourth quarter of 2023. Most of this decrease was attributable to lower base rates. Transitioning to the BDC's portfolio, the challenges in this quarter generally do not relate to the overall economy, but rather are more company specific. We are working with experts within HIG to optimize the outcomes on the workout accounts. The balance of the portfolio is generally stable. During the quarter, we took a $2.6 million write down on American crafts, which was impacted by the second bankruptcy of Joanne's Fabric and Craft Stores. were in the process of liquidating the remaining pieces of that company. We also took a write-down of $2.2 million on Aspect Software and placed our third out and fourth out tranche investments in Aspect Software on non-accrual in the fourth quarter. As a result, non-accrual investments total 7.2% of the debt portfolio, compared with 6.5% of the debt portfolio at fair value in the third quarter. In regards to our non-accrual investments overall, We hope to have part of our investment in Telestream back on accrual status either by the end of Q1 or Q2. As a whole, our non-accrual investment in Telestream themselves represents 3.5% and 3.4% based on the fair value and the cost of the debt portfolio, prospectively. Turning to the lending market, additions across all of the sponsor segments remain very aggressive. Lenders have relaxed their underwriting standards in terms of fast-tracking the due diligence process and continue to accept EBITDA adjustments that we don't necessarily agree with based on our credit analysis. In terms of pricing, we've seen middle market price compress down to spreads of SOFR 450 to SOFR 525, and lower mid-market spreads move to approximately SOFR 475 to SOFR 600. Leverage multiples. and loan devalues have also continued to creep up. From our perspective, we believe there is excessive leverage on a lot of credits that have cyclicality, and we are not participating in those credits. There continues to be a more attractive backdrop in the non-sponsored market, where the market continues to support leverage of three to four and a half times, and pricing tends to be between SOPR 575 to SOPR 800. Diligent standards have also remained more consistent in this segment of the market in 2024 we did more non-sponsor lending than we have done in a typical year and we expect that to continue we are redoubling our efforts to focus on the non-sponsored market where there are better risk returns in many cases and much less competition than what we're seeing in the on-the-run sponsor market in the on-the-run sponsor market we see generally very aggressive terms and therefore we are focusing more in addition to the non-sponsor market on the off-the-run sponsor market, which are the smaller private equity firms. First quarter volume will be solid. That said, supply demand is generally out of balance with lenders stretching too far for both better and weaker credits. For example, on better credits, loans are being made where cash flow is not sufficient to service fixed charges due to the amount of leverage being employed and the level of adjustments to the EBITDA. More broadly, we think the economy is generally healthy, and some policies in the new administration seem to be favorable to middle market and lower mid-market American companies. That said, the lack of clarity about tariffs in regard to both levels and targets is creating uncertainty for borrowers who either source or sell products overseas. Given the potential for policies to be inflationary, We think the Federal Reserve is going to be cautious on the timing and extent of rate cuts. In general, we think economic performance across our portfolio will be stable with pressure on the economy coming from lower income consumers who have been compromised by inflation over the past several years. Subsequent to quarter end, the BDC has closed five new investments already this year and three add-ons to existing credits as well. totaling approximately $27.8 million, and we've had two repayments of approximately $13.8 million, including two full realizations. Two of the five new investments were transferred to the JV, and one new investment is expected to be transferred to the JV by quarter end. Following net repayment activity in Q4 and pro-forma for several transactions in early Q1 of 2025, The BDC balance sheet has approximately 40 million of capacity for new assets. The JV also has approximately 40 million of capacity, supplementing the BDC's existing capacity. Given the decline in market pricing, we continue to expect repayment activity to be high in 2025. While volume is wider than we'd like it to be in all market segments, our pipeline is still solid at about 170 deals. We currently have seven new mandates and are working on three add-ons to existing deals. While there can be no assurances that any of these deals will close, all of these credits would fit into the BDC or RJV should we elect to transact. With that, I'll turn the call over to Joycen for additional performance details and a review of our portfolio composition. Joycen?
Thank you, Stuart, and thank you, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income in core NII of $8 million, or 34.3 cents per share. This compares with Q3 GAAP NII in core NII of 9.2 million, or 39.4 cents per share, as well as our previously declared quarterly distribution of 38.5 cents per share. Fee income of 0.9 million in Q4 was higher compared with Q3 due to non-recurring fee income. For the quarter, we reported a net increase in net assets resulting from operations of 3.9 million. Our risk ratings during the quarter showed that approximately 72.5% of our portfolio positions either carried a one or two rating, slightly lower than the 75.1% reported in the prior quarter. As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a two rating indicates a company is performing according to such initial expectations. Quarter over quarter, our five rated positions increased from approximately 0.5% to 1.3% as a result of our remaining investments in American Crafts, as well as our third out and fourth out tranches in Aspect Software being downgraded to a five. Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier, in the fourth quarter, we transferred three new deals and two add-ons to the Estuary House JV, totaling 13.7 million. As of December 31st, 2024, the JV's portfolio held positions in 38 portfolio companies with an aggregate fair value of $295 million, compared to 38 portfolio companies at a fair value of approximately $309 million as of September 30th, 2024. The investment in the JV continues to be accreted to the BDC's earnings, generating . 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 JV's investment portfolio. Turning to our balance sheet, we had cash resources of approximately $27.8 million at the end of Q4. including 15.4 million in restricted cash and approximately 173 million of undrawn capacity available under a revolving credit facility subsequent to year end in january of this year we amended the terminal revolving credit facility with jp morgan to among other things reduce the applicable spread over the reference rate on borrowings to 225 basis points from 250 basis points as well as to extend the reinvestment period and scheduled maturity date to January 28, 250 basis points, as well as to extend the reinvestment period and scheduled maturity date to January 28, January 2028, and January 2030, respectively. As of December 31, 2024, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 180.4%, which was above the minimum asset coverage ratio of 150%. Our Q4 net effect to equity ratio after adjusting for cash on hand was approximately 1.15 times compared with 1.13 times in the prior quarter. Before I conclude and open up the call to questions, I'd like to again highlight our distributions. This morning, we announced that our board declared a first quarter distribution of 38.5 cents per share, which is consistent with the prior quarter. In assessing distributions, we will also consider our taxable income relative to amounts that we have distributed during the year when settling our overall dividend. A current estimate of undistributed taxable income, sometimes referred to as our spillover, as of the end of Q4 2024, after factoring our 24.5 cents per share dividend, is approximately 28.4 million. We continue to believe that having a healthy level of spillover income is best beneficial to the long-term stability of our base dividend. We will continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations. The upcoming regular distribution, the 50th 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 April 4th, 2025. The stockholders record as of March 21st, 2025. 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 back over to the operator for your questions. Operator?
Thank you. At this time, if you'd like to ask a question, please press the star and 1 on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing star and 2. We'll take our first question from Mickey Schlian with Leidenberg. Please go ahead. Your line is open.
Yes, good afternoon, Stuart and Joyce. Stuart, I appreciate your insight into terms available in the markets. And clearly, you know, it's not just spreads, but also structures that are important. But according to what I've read, spreads had more or less stabilized in the fourth quarter. And I was curious whether you think there's scope for them to widen as risk perception perhaps increases given all the uncertainties that we're seeing in the market.
Hey, Mickey. Good afternoon. The answer to your question or actually to confirm what you said, yes, we did see spreads stable in Q4 to Q3. So far, spreads at the beginning of 2025 are also more or less stable. I think if there was a better supply and demand balance in the marketplace, then the increased volatility that we're seeing both in the stock market and the geopolitical environment would or could lead to increased pricing. But the M&A markets really have not picked up much at all. And the anchors, though they've said that there's a pipeline of deals coming, have been saying that for the better part of two years, and it really has not proven to be true so far. So while I acknowledge that there's more uncertainty in the market, including recently some uncertainty as to whether The economy is potentially going to hit a recession. We have not seen any upward pressure on spreads, and that includes data right through this morning on deals that we were talking about. So I think, firstly, there needs to be a larger economic disruption that would make people nervous, like happened in 2022. Or there would need to be a resumption of M&A flow that creates a better balance in the market between capital that is available and the demand for that capital.
Very insightful, Stuart. I appreciate that. And those are all my questions this afternoon. Thank you for your time. Thank you, Mickey.
We'll take our next question from Sean Paul Adams with Raymond James. Please go ahead. Your line is open.
Hey, guys. Good afternoon. When evaluating the meaningful uptick in the non-accruals this quarter and kind of comparing it to the backdrop of the tariff impact along with this higher for longer base rate environment, it seems like there's going to be consistent downward pressure on credit quality. What's kind of the strategy for mitigating this over the next few quarters?
Good afternoon and good question. We have sought to make sure that our investing is personally, which keeps us away from some of the pressures on the non-accrual side that might otherwise be there. Although, as we shared, the non-accrual numbers that we have posted at this moment are too high. And we are working hard to remediate those. Where Telestream in particular is a deal that still has solid EBITDA. And as we resolve the restructuring of that company, part of that company's debt will be put back on accrual, which will help to moderate our non-accrual numbers. We see a lot of risk in the economy. where tariffs are the most obvious risk item, where there's a lot of uncertainty. No one is able to know which countries are going to be subjected to tariffs or how large those tariffs will be. And even the news that we have in the market on any given day, as we've seen, it can change literally within 24 hours. So what we've been doing is an extensive analysis of our portfolio. and which credits do have tariff risk, not just China, but also, of course, Mexico and Canada, and in addition to that, the EU and other countries. One benefit of the mid-market and lower mid-market where we focus is that fewer of our companies have international exposure than you might see in larger cap companies with more international operations. So we are trying to be particularly careful about tariff risk because it's just at the moment impossible to underwrite. And we're also being very careful on debt service coverages to make sure that the companies we're financing can not only tolerate SOFR staying at current levels, but if the administration's policies prove to be inflationary, There is, of course, a risk that the Fed could raise rates again, and we don't want to be in transactions where there wouldn't be enough cash flow to service the debt. So we are avoiding cyclicals, making sure debt service coverages are reasonable on the new deals that we're doing. In many cases, as I highlighted in my prepared remarks, that means that some of the companies that are good companies that are just being structured with too much debt right now, we're staying away from because we have run analyses of actual cash flow as opposed to adjusted EBITDA, but actual EBITDA to debt service charges. And we are seeing that there are deals getting done in the market right now where we think the net cash flows are insufficient to meet the fixed charges of the companies that are borrowing the money.
Got it. Thank you. I appreciate the color, and that seems like a really reasonable approach. Thank you.
And as a reminder, if you'd like to ask a question, please press the star and 1 keys on your telephone keypad. Click our next question from Melissa Whittle with JP Morgan. Please go ahead. Your line is open.
Good afternoon. Appreciate you taking my questions today. First thing I want to touch on is, you know, we're trying to work through, you know, the very rapid decline in base rates during the fourth quarter, but also account for the fact that there's typically a lag, maybe about by a quarter on average, in terms of how that flows through to income statements for BDCs. So when you look at sort of 4Q NII, I'm curious how much of that quarter over quarter decline was a function of base rates versus credit or anything else? And then how much more of that resetting of base rates do you expect to flow into the first quarter of this year?
Jason, I'll pass that to you.
Hey, Melissa. So as we had mentioned before, quarter over quarter, the effective yield on the income producing assets went from 13.1% to 12.5. That was largely based on lower base rates with a slight decrease in spreads as well for the average. So when we calculate the effective yield, it's obviously as of the end of the quarter. So on a quarter to quarter basis, I think that's where you have to see that when we're calculating, it's based on kind of that effective amounts as of the end of each quarter. But it was largely due to a reduction in base rates.
Okay. I might try to rephrase my question a little bit. I apologize if I was unclear. I'm wondering, do you have a rough estimate as to how much the portfolio has repriced to you know, sort of prevalent base rate levels, or is there another sort of leg down, a portion of the portfolio that will reset in the first quarter?
Well, a good majority of the portfolio does reset on a quarterly basis. We do have some that reset monthly. I don't have the information handy right now. Let me see if I can come back to you while on this call with that breakdown.
Okay. Fair enough. I appreciate that. The other thing I wanted to clarify around the comments about expecting elevated repayments this year, combining that with sort of what sounds like a very cautious outlook on terms and sort of the risk in the market right now, and also the slow deal environment. Would it be fair to say that this could be a year of a little bit more deleveraging, similar to what we saw in 24?
Deleveraging of the BDC?
Yes, yes.
Our goal is to operate at the target leverage level and um you know last year we were largely successful at offsetting repayments with new volume flow um while we are cautious on new volume flow uh we do have a very large originations force we do have an ability to tap into all the market sectors the on the run sponsor the off the run sponsor and the non-sponsor and as i indicated in the prepared remarks we really are redoubling our efforts on the non-sponsor side because that market is less competitive it's much more labor intensive but it is less competitive and we're hoping that we will be able to keep the ddc fully invested in 2025 but again our ability to do that is based on finding the new deals, the due diligence on those deals proving out such that we actually willing to invest the money, which is all a long way of saying, no, I would not expect the leveraging unless the supply demand imbalance is so great that we can't originate enough to offset the repayments. But our current Q1 performance, as shared with you in the earlier remarks, has been or so far is sufficient to offset the repayments.
Okay. I appreciate that. And then I might sneak one last question in here. I think I'm at the end of the queue. When it comes to the dividend, I definitely take your points in the prepared remarks about evaluating that each quarter. You know, I also appreciate the information you provided around the spillover income. By our math, that looks like a little over $1.20 a share. When you have that amount of cushion in terms of spillover, I'm wondering if it makes you more reluctant to adjust the dividend in, you know, this sort of spread environment. Thank you.
So, again, good question. We are actively looking at the earning power of the BDC based on the assets that are on accrual, and obviously the increase in assets on non-accrual puts pressure on the earning capacity of the BDC. At the moment, the BDC is not fully invested. We have $40 million of availability for assets on the balance sheet, another $40 million in the JV. And we are running models and sharing with our board the results of those models in terms of earnings per share and our ability to sustain the dividend. So the board will be actively evaluating our payout level based on that information. And we will update the market and all our analysts as soon as any decision on that is rendered. But at the moment, based on the data that we had last quarter, the board did decide to keep the dividend at the current rate of 38.5 cents. And there is no change to that at the moment.
Once again, if you would like to ask a question, please press the star and one keys on your telephone keypad. We can pause for another moment to allow any further questions to queue. And there are no further questions on the line at this time.
All right. Thank you, operator. Thank you, everyone, for your time. And we will do our very best to invest intelligently in this market environment and continue to deliver returns on the BDC. Thank you, and have a good day and a good weekend. Oh, sorry. Joyce?
Yeah, I was just going to get back to Melissa on her question on the breakdown of the portfolio. So it's roughly split 50-50 between debt instruments resetting on a monthly basis versus debt instruments resetting on a quarterly basis. So approximately 49% is monthly resets and about 51% is three-month resets.
Thank you, Joyce. I think that concludes the call. Thank you very much.
Absolutely. Again, thank you for your participation. This does conclude today's program. You may now disconnect.