5/13/2025

speaker
Margo
Conference Operator

Please stand by, your program is about to begin. If you need audio assistance during today's program, please press star zero. Good afternoon, my name is Margo and I'll be your conference operator today. At this time, I'd like to welcome everyone to the White Horse Finance First Quarter 2025 earnings conference call. Our hosts for today's conference are Stuart Aaronson, Chief Executive Officer, and Joyce and Thomas, Chief Financial Officer. Today's call is being recorded and I will be made available for replay beginning at 5 p.m. Eastern time. The replay dial-in number is -220-0464. No passcode is required. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at this time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, press the pound key. It is now my pleasure to turn the floor over to Robert Brinberg of Rose & Company. Please go ahead.

speaker
Robert Brinberg
Representative, Rose & Company

Thank you, operator, and thank you everyone for joining us today to discuss White Horse Finance's First Quarter 2025 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 could cause actual results to differ materially from those expressed or implied by these forward-looking statements. White Horse Finance assumes an obligation or responsibility to update any forward-looking statements. Today's speakers may refer to material from the White Horse Finance First Quarter 2025 earnings presentation, which was posted to our website yesterday afternoon. With that, allow me to introduce White Horse Finance's CEO, Stuart Aronson. Stuart, you may begin.

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

Thank you, Rob. Good afternoon, and thank you everyone for joining us today. As you're aware, we issued our earnings yesterday after market closed, and I hope you've had a chance to review our results. The period ended March 31st, 2025, which can also be found on our website. On today's call, I will begin by addressing our first quarter results and current market conditions. Joyce St. 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 first quarter of 2025 were disappointing as our investment portfolio declined this quarter due to net realized and unrealized losses, which impacted our financial performance. Q1 GAAP net investment income and core NII was 6.8 million, or 29.4 cents per share, and paired with a quarterly distribution of 38 and a half cents per share, and was below Q4 GAAP and core NII of 8 million, or 34.3 cents per share. NAV per share at the end of Q1 was $12.11, representing an approximate .6% decrease from the prior quarter. NAV per share was impacted by net realized losses and net markdowns in our portfolio totaling $2.6 million. Turning to our portfolio activity in Q1, we had gross capital deployments of 45 and a half million, which was partially offset by total repayments and sales of 19.4 million, resulting in net deployments of 26.1 million. Gross capital deployments consisted of seven new originations, totaling 40.8 million, with the remaining 4.7 used to fund six add-ons to existing investments. In addition, there was 600,000 of net fundings made on revolver commitments. Of our seven new originations in Q1, one was non-sponsor and six were sponsor deals, with an average leverage of only approximately 4.0 times EBITDA. All of our Q1 deals were first-line loans, with an average spread of 535 basis points and an average all-in rate of .7% compared with .8% in the fourth quarter of 2024. Total repayments and sales were 19.4 million, primarily driven by complete realizations in our positions in platform companies and Eversana and a partial sale of our position in ThermoDisc. At the end of Q1, .3% of our debt portfolio was first-line, senior secured, and our portfolio mix was approximately two-thirds sponsor and one-third non-sponsor. During the quarter, the BDC transferred three new deals and one existing investment to the STRSJV. At the end of Q1, the STRSJV portfolio had an aggregate fair value of 310.2 million and an average effective yield on the JV's portfolio of .8% compared to .1% in Q4. Leverage for the JV at the end of Q4 was 0.98 times compared with 0.88 times at the end of the prior quarter. We continue to successfully utilize the STRSJV and believe white horse equity investment in the JV continues to provide attractive returns for our shareholders. After net deployment, JV transfers and net realized and unrealized losses, total investments increased by 8.8 million from the prior quarter to $651 million. This compares to our portfolio's fair value of 642.2 million at the end of Q4. The weighted average effective yield on our income producing debt investments decreased to .1% at the end of Q1 compared to .5% in the fourth quarter of 2024. The weighted average effective yield of our overall portfolio also decreased to .6% as of the end of Q1 compared to approximately .2% at the end of Q4. 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. In general, in the portfolio, we continue to see relative softness from consumers, but relative stability in our non-consumer facing borrowers. So we are not seeing signs of recession yet in our portfolio. We did an analysis of our portfolio before liberation day to assess the impact of tariffs on imports from Canada, Mexico, and China. That analysis indicated that less than 10% of our portfolio has either high or moderately high tariff risk, which is largely due to the fact that we are focused on the middle market and lower middle market, where companies are more inclined to be operating in the US and have limited international risk. We also focus more on service companies that are generally not exposed to tariff risk. After new tariffs were announced, we began to expand our tariff risk analysis for all other countries that might have larger tariffs. But given that many of the tariffs were put on hold for at least 90 days, and various tariff negotiations are currently ongoing, we continue to actively monitor the situation. During the quarter, we took write downs of $1 million, primarily driven by write downs in MSI Information Services, ABV Optical Group, and American Crafts. I'm pleased to say the American Crafts situation has now been fully resolved, eliminating any further downside from that investment. MSI was placed on non-accrual in the quarter. We're actively working with the owner of that company to see if they will support the company with additional capital. If they do not, we will prepare to either sell or operate the company. Non-accrual investments totaled .8% of the debt portfolio compared with .2% of the debt portfolio at fair value in the prior quarter. Due to the non-accrual levels, the earnings power of the BDC is compromised compared to where it was a year ago. We are actively working on getting deals off the non-accrual list, leveraging the expertise of our first five-person dedicated restructuring team. It has taken longer than we anticipated to get Telestream off of non-accrual, but we do hope to get it off non-accrual this quarter. Our non-accrual investment in Telestream currently represents .5% and .3% of our portfolio based on the fair value and cost of debt portfolio, respectively. Other deals on non-accrual, other than MSI, are likely to remain that white way for some period of time. In terms of the lending market, tariffs, along with the risk of recession, have impacted conditions. In particular, the M&A market has slowed down dramatically if sellers do not want to sell into a negative sentiment. The broadly syndicated market is also backed up significantly, but with recent improvements in the tariff situation may be opening up for some borrowers. As a result of the increased volatility in the markets, there was a 25 to 50 basis point increase in the price in the direct lending market, but over the last three weeks, most or all of that premium has gone away. We've seen middle market pricing is currently SOFR 475 to SOFR 525, and lower mid-market spreads are approximately SOFR 500 to SOFR 575. We are also seeing more discipline and credit behavior in the market, with lenders being particularly careful about companies with tariff risk and cyclicality. We do continue to focus significant resources on the non-sponsor market, where there are better risk returns in many cases, and much less competition than what we're seeing in the -the-run and -the-run sponsor markets. We added a 13th coverage region in Q1 with new capabilities in Nashville, Tennessee, which will help with non-sponsor and -the-run sponsor origination. Subsequent to quarter end, the BDC has closed one new investment of 15.1 million, and has had repayments of approximately 16 million, including one full realization. There were two existing investments fully transferred to the JV, totaling 11.1 million. Following net deployments, activity in Q1, and pro forma for several transactions that have closed, or that we expect to close in Q2 of 2025, the BDC balance sheet has very little capacity for new assets. That said, the JV has approximately 35 million of capacity supplementing the BDC's existing capacity. Our overall sourcing is at normal levels, despite the muted M&A activity, as we are seeing a significant amount of deal flow relating to restructuring of deals that were done in 2019, 2020, and 2021, where companies are over levered in bringing in PIC Junior debt, or PIC Preferred Equity to fix the capital structure. That said, as you can imagine, the quality of what we're seeing is lower than it was a year ago, so we do think fewer deals are going to convert to closure. However, in some cases, we are finding interesting opportunities. Our pipeline is about 175 deals, which is slightly below the typical range for this time of year. We currently have five new mandates, and are working on three add-ons to existing deals. Our five mandates are three sponsored deals and two non-sponsored deals. While there can be no assurance that any of these deals will close, all of those credits would fit into the BDC if it has room, or our JV should be elected to transact. With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition.

speaker
Joyce St. Thomas
Chief Financial Officer, White Horse Finance

Joyson? Thanks, Stuart, and thank you everyone for joining today's call. During the quarter, we recorded gap net investment income, and core NII of $6.8 million, or 29.4 cents per share. This compares with Q4 gap NII and core NII of 8 million, or 34.3 cents per share, as well as our previously declared quarterly distribution of 38.5 cents per share. Fee income of approximately $0.5 million in Q1 was primarily due to a prepayment fee earned upon the full repayment in platform companies. For the quarter, we reported a net increase in net assets resulting from operations of $4.3 million. Our risk ratings during the quarter showed that approximately .1% of our portfolio positions either carried a one or two rating, slightly higher than the .5% 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's performing according to such initial expectations. Quarter over quarter, we downgraded our investments in MSI from a three to a four rating. Additionally, our five rated positions slightly decreased from .3% to 1.2%. As Stuart mentioned earlier, American Crafts, a five rated position, which was written down to zero and part of our non-accruals as of the end of the first quarter, has now been resolved. We expect these positions to be removed from our non-accruals and portfolio listing in the second quarter, although not with the outcome we had expected. Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier, in the first quarter, we transferred three new deals and one existing investment to the STRSJV, totaling $17 million. As of March 31st, 2025, the JV's portfolio held positions in 41 portfolio companies with an aggregate fair value of 310.2 million, compared with 38 portfolio companies at an aggregate fair value of 295 million as of December 31st, 2024. The investments in the JV continues to be creative in the BDC's earnings, excuse me, to the BDC's earnings, generating a mid-teens return on equity. During Q1, income recognized from a JV investment aggregated to $3.7 million, a slight decline from 4 million in Q4. 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 19.6 million at the end of Q1, including 8.2 million in restricted cash and approximately 165 million of undrawn capacity available under a robbing credit facility. As of March 31st, 2025, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 act, was 177.2%, which was above the minimum asset coverage ratio of 150%. Our Q1 net effective debt to equity ratio, after adjusting for cash on hand, was approximately 1.23 times, compared with 1.15 times from the prior quarter. We continued to monitor the debt capital markets and recent offerings in both the retail and institutional space, as well as recent securitization transactions, and we may explore opportunities to either optimize or refinance your capital structure as and when they present themselves and depending on market conditions. Before I conclude and open up the call to questions, I'd again like to highlight our distributions. Yesterday, after market closed, we announced that our board declared a first quarter distribution of 38.5 cents per share, which is consistent with the prior quarter. The upcoming regular distribution, the 51st 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 3rd, 2025, to stockholders' record as of June 19th, 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. And with that, I'll now turn the call back over to the operator for your questions. Operator?

speaker
Margo
Conference Operator

Thank you. At this time, if you'd like to ask a question, please press the star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one for a question. While that view builds, we'll take our first question from Melissa Weedle with JPMorgan. Please go ahead.

speaker
Melissa Weedle
Analyst, JPMorgan

Good afternoon. Thanks for taking my questions today. Wanted to start and make sure I'm understanding what you laid out for us in terms of Telestream and returning that back to accrual status that sounded like potentially a near term effect. Is that, or a near term development? Is that fair to say?

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

Yes, we've made progress. We thought we would have a restructuring completed on Telestream last quarter, but the situation did stretch out. We now hope to get the restructuring done by the end of May, which gives us a month of cushion -a-vis another month before the end of the quarter. And we would plan to convert a large portion of the existing debt back into cash paying debt that would go on accrual. And any amount that was not cash paid debt would be converted to equity where we'd have long-term upside in our ownership of the company.

speaker
Melissa Weedle
Analyst, JPMorgan

Okay, I appreciate the context on that one. Given the way the investments listed on the statement of investments as of March 31st, and based on the rate listed there as well, it looks like

speaker
spk00

in

speaker
Melissa Weedle
Analyst, JPMorgan

a full pay quarter at the current fair value, that could mean a couple cents per share in terms of incremental NII just by returning to accrual status. Are we thinking about that the right way?

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

Again, part of the debt would return to accrual status. We're still working on how much of it would return. And the rate on the debt would be set, given that would be reducing the amount of debt on the company, the rate on the debt would be set at a more market rate to today's market. Again, that number has not been confirmed yet. So it certainly will be accretive, but it will not be accretive as it would have been had the rate stayed. I think it's so far 975.

speaker
Melissa Weedle
Analyst, JPMorgan

Right, okay. Thank you so much for the context.

speaker
Margo
Conference Operator

No problem. Thank you, and as a reminder, ladies and gentlemen, that is star one for a question. We'll pause for a moment. We'll take our next question from Robert Dodd with Raymond James. Please go ahead.

speaker
Robert Dodd
Analyst, Raymond James

Hi guys, I apologize for the background noise. On the dividend, could you give us an update on spillover? If I recall correctly, I mean, basically doesn't that spillover mandate, effectively mandate near maintenance of the current base. So when you talk about reviewing the dividend in the near term, can you give us any color? I mean, obviously you could lower that and then distribute spillover some other way, or what's the thought process on where that might shake out for 2025, obviously, if the spillover gets dealt with this year, then 2026 is different.

speaker
Joyce St. Thomas
Chief Financial Officer, White Horse Finance

Robert, can we

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

start with the spillover?

speaker
Joyce St. Thomas
Chief Financial Officer, White Horse Finance

Yeah. Yeah, absolutely, Robert. So as of the end of last year, and as we had mentioned in last quarter's earnings call, the spillover income was approximately 28.4 million. And I think the way to think about it is currently right now, with the 38 and a half cent per year dividend run rate, that equates to approximately $8.95 million of distributions being currently distributed. I would also just highlight maybe the dividend shortfall for Q1, meaning the 29.4 cents per share, NII versus the 38 and a half cent per share current dividend, which equates to about a $2.1 million shortfall. So hopefully that helps in maybe framing the discussion. And Stuart, I don't know if you wanna touch on maybe just thoughts with the board and our discussions around the dividend.

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

Yes. We have some upside in our earnings from the continued deployment of balance sheet assets, which are planned with the mandated deals, but not certain, because we're not sure those deals will close. We also pick up some income from the JV. We see an opportunity that we may take advantage of to lower our borrowing costs, which would also be accretive to the dividend. And as we discussed, there's the likelihood that Telestream comes partially back onto accrual, and MSI, fingers crossed, will potentially come back on accrual, which would all help the earnings stream of the BDC. That said, as I said in my prepared remarks, there are a number of accounts that will not be coming back on accrual in the near term. And so the board is evaluating all of these things I just mentioned -a-vis what the distribution rate is to come up with a view on what the proper dividend is, whether it's the current 38 and a half cent or some different level. And we are waiting for more of this information to play out to have a clearer picture of the core earnings stream of the BDC before making any decisions on the dividend. But we've had active conversation with our board.

speaker
Robert Dodd
Analyst, Raymond James

Got it, thank you. And then just one more, if I can. I mean, what are you seeing, and again, I apologize to the back members, in kind of the market in terms of bid-ask spread between buyers and sellers. I mean, in a period of, it looked early in the year that we might see more activity. And I'm talking about generally market, not just so I guess you guys at this point. But then additional volatility sometimes, it pulls back the bid, but the ask doesn't necessarily move as quickly. I mean, what are your thoughts on how that might play out in terms of volatility between what buyers are willing to pay, but maybe the sellers are more sticky on their asking prices?

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

Robert, what we're seeing right now is for companies that are in the market that are good companies that don't have significant tariff risk or recession risk, those companies are trading at very high multiples. There's a lot of capital, unused capital sitting in the private equity community. And there is a strong motivation for private equity firms to get that capital deployed. So if you have a good company to sell, we are seeing good prices on those and buyers and sellers are meeting in the middle. That said, there are a lot of companies that have recession risk involved in their operations and or tariff risk. And we're finding buyers are being very careful and conservative. And so in those cases, buyers and sellers are not necessarily reaching agreement. And then ever since the announcements on liberation day, the M&A market has backed up a lot. We are led to understand from the bankers that we talked to that there was a pretty solid pipeline of M&A activity that was scheduled for the balance of the year. Many of those deals have been put on the shelf for the moment, waiting for more clarity in the market to come out based on the tariff negotiations and the announcements of underlying economic activity in the economy. Based on that, we largely expect that M&A activity is gonna remain muted for the next 60 to 90 days. And then if M&A does start to pick up in Q3, there's typically a four to 12 week delay between the time the M&A activity picks up and any financing activity gets going. So even though our pipeline on the strength of our 25 originators and 13 local markets is reasonably strong, we have 175 deals in pipeline, which is more or less normal for this time of year. The quality of the deals is not as high as we've seen in the past. And we think of new M&A transactions with new money equity coming in as being typically the highest quality of deals. And so we think closure rates are gonna be slower. And therefore, when you look from Q2 into Q3, we expect a relative quiet period in terms of new deal closure. Q2 so far is shaping up to be a solid quarter with the one deal closed and five deals mandated and three more add-ons. But we are cautious as to the environment for deals to close in Q3.

speaker
Robert Dodd
Analyst, Raymond James

Thank you for that, Tella. Thanks so much.

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

No problem, Robert. Thank you.

speaker
Margo
Conference Operator

As a reminder, that is star one for a question. We'll go next again to Melissa Waitle with JP Morgan.

speaker
Melissa Weedle
Analyst, JPMorgan

Hi, thanks. One quick follow-up. I know that last quarter you talked about anticipating some elevated repayment activity this year. Wondering how you're thinking about that now and whether those expectations have moderated.

speaker
Stuart Aronson
Chief Executive Officer, White Horse Finance

Melissa, when the markets got unsettled about a month ago and spreads moved up, we saw repayment activity, forward repayment activity slow down. The markets, as I indicated in the prepared remarks, have largely recovered and spreads are back to where they were a couple months ago. So we do think that there will be a decent amount of refinancing activity in the second half of the year as prepayment penalties on higher rate deals expire. In the case of credits that we like, we will try to keep those credits at the current market pricing. And in the case of credits that we think do not deserve the lower pricing, we will let those credits go. But it's too early to indicate now what will happen over the course of the balance of the second quarter into Q3 and Q4. I will tell you that right now, the visible repayment pipeline that we have is pretty light. So I can think of a couple companies that are potentially coming out for sale over either now or over the next couple of months. And if those sales transact, they will result in repayment activity. But that's only two or three of the companies in portfolio. So we're not seeing really heightened repayment activity at the moment.

speaker
Melissa Weedle
Analyst, JPMorgan

Thank

speaker
Margo
Conference Operator

you. If there are no further questions at this time, that will conclude our question and answer session and the White Horse Finance First Quarter 2025 earnings call. You may now disconnect.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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