WhiteHorse Finance Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 13, 2025

There are 6 speakers on the call.

Operator

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 WhiteHorse Finance First Quarter twenty twenty five Earnings Conference Call. Our hosts for today's conference are Stuart Aronson, Chief Executive Officer and Joyson Thomas, Chief Financial Officer. Today's call is being recorded and I will be made available for replay beginning at five p.

Operator

M. Eastern Time. The replay dial in number is (402) 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.

Operator

It is now my pleasure to turn the floor over to Robert Byrneberg of Rose and Company. Please go ahead.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's first quarter twenty twenty five 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. 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 twenty twenty five earnings presentation, which was posted to our website yesterday afternoon.

Speaker 1

With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Speaker 2

Thank you, Rob. Good afternoon, and thank you, everyone, for joining us today. As you're aware, we issued our earnings yesterday after market close, and I hope you've had a chance to review our results for the period ended 03/31/2025, 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. Gersten Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which we will open the floor for questions.

Speaker 2

Our results for the first quarter of twenty twenty five 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 $6,800,000 or $0.02 $94 per share compared with a quarterly distribution of $0.03 $85 per share and was below Q4 GAAP and core NII of $8,000,000 or $0.03 $43 per share. NAV per share at the end of Q1 was $12.11 representing an approximate 1.6% decrease from the prior quarter. NAV per share was impacted by net realized losses and net markdowns in our portfolio totaling $2,600,000 Turning to our portfolio activity in Q1, we had gross capital deployments of $45,500,000 which was partially offset by total repayments and sales of $19,400,000 resulting in net deployments of $26,100,000 Gross capital deployments consisted of seven new originations totaling $40,800,000 with the remaining 4,700,000.0 used to fund six add ons to existing investments. In addition, there was $600,000 of net fundings made on revolver commitments.

Speaker 2

Of our seven new originations in Q1, '1 was non sponsor and six were sponsor deals with an average leverage of only approximately four point zero times EBITDA. All of our Q1 deals were first lien loans with an average spread of five thirty five basis points and an average all in rate of 9.7% compared with 9.8% in the fourth quarter of twenty twenty four. Total repayments and sales were $19,400,000 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, '90 '9 point '3 percent of our debt portfolio was first lien, senior secured, and our portfolio mix was approximately twothree sponsor and onethree non sponsor. During the quarter, the BDC transferred three new deals and one existing investment to the STRS JV.

Speaker 2

At the end of Q1, the STRS JV portfolio had an aggregate fair value of $310,200,000 and an average effective yield on the JV's portfolio of 10.8% compared to 11.1 in Q4. Leverage for the JV at the end of Q4 was 0.98x compared with 0.88x at the end of the prior quarter. We continue to successfully utilize the STRS JV and believe WhiteHorse 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 $8,800,000 from the prior quarter to $651,000,000 This compares to our portfolio's fair value of $642,200,000 at the end of Q4. The weighted average effective yield on our income producing debt investments decreased to 12.1% at the end of Q1 compared to 12.5% in the fourth quarter of twenty twenty four.

Speaker 2

The weighted average effective yield of our overall portfolio also decreased to 9.6 as of the end of Q1 compared to approximately 10.2% 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 nonconsumer facing borrowers, but we are not seeing signs of a 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.

Speaker 2

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 U. S. 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.

Speaker 2

But given that many of the tariffs were put on hold for at least ninety days and various tariff negotiations are currently ongoing, we continue to actively monitor the situation. During the quarter, we took write downs of $1,000,000 primarily driven by write downs in MSI Information Services, ABB 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 nonaccrual in the quarter. We're actively working with the owner of that company to see if they will support the company with additional capital.

Speaker 2

If they do not, we will prepare to either sell or operate the company. Nonaccrual investments totaled 8.8% of the debt portfolio compared with 7.2% of the debt portfolio at fair value in the prior quarter. Due to the nonaccrual 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 nonaccrual list, leveraging the expertise of our first five person dedicated restructuring team. It has taken longer than we anticipated to get Telestream off of nonaccrual, but we do hope to get it off nonaccrual this quarter.

Speaker 2

Our nonaccrual investment in Telestream currently represents 3.53.3% of our portfolio based on the fair value and cost of debt portfolio, respectively. Other deals on nonaccrual other than MSI are likely to remain that white way for some period of time. Turning to the lending market. Tariffs, along with the risk of recession, have impacted conditions. In particular, the M and A market has slowed down dramatically as sellers do not want to sell into a negative sentiment.

Speaker 2

The broadly syndicated market has also backed up significantly, but with recent improvements in the tariff situation, maybe 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 few weeks, most or all of that premium has gone away. We've seen middle market pricing is currently still for $4.75 to so for $5.25, and lower mid market spreads are approximately so for 500 to so for $5.75. We are also seeing more discipline in credit behavior in the market with lenders being particularly careful about companies with tariff risk and cyclicality.

Speaker 2

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 on the run and off the run sponsor markets. We added a thirteenth coverage region in Q1 with new capabilities in Nashville, Tennessee, which will help with non sponsor and off the run sponsor origination. Subsequent to quarter end, the BDC has closed one new investment of $15,100,000 and has had repayments of approximately $16,000,000 including one full realization. There were two existing investments fully transferred to the JV totaling $11,100,000 Following net deployments activity in Q1 and pro form a for several transactions that have closed or that we expect to close in Q2 of twenty twenty five, the BDC balance sheet has very little capacity for new assets. That said, the JV has approximately $35,000,000 of capacity, supplementing the BDC's, existing capacity.

Speaker 2

Our overall sourcing is at normal levels despite the mute muted m and a activity as we are seeing a significant amount of deal flow relating to restructuring of deals that were done in 2019, '20 '20, and 2021, where companies are over levered and bringing in PIK junior debt or PIK 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 a 75 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.

Speaker 2

Our five mandates are three sponsor deals and two non sponsor 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. Joyson?

Speaker 3

Thanks, Stuart, and thank you, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income and core NII of $6,800,000,000 or $0.02 $94 per share. This compares with Q4 GAAP NII and core NII of $8,000,000 or $0.03 $43 per share, as well as our previously declared quarterly distribution of $0.03 $85 per share. Fee income of approximately $500,000 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 $4,300,000 Our risk ratings during the quarter showed that approximately 74.1% of our portfolio positions either carried a one or two rating, slightly higher than the 72.5% reported in the prior quarter.

Speaker 3

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, we downgraded our investments in MSI from a three to a four rating. Additionally, our five rated position slightly decreased from 1.3% 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.

Speaker 3

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 STR's JV totaling $17,000,000 As of 03/31/2025, the JV's portfolio held positions in 41 portfolio companies with an aggregate fair value of $310,200,000 compared with 38 portfolio companies at an aggregate fair value of $295,000,000 as of 12/31/2024. The investments in the JV continues to be accretive 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 $3,700,000 a slight decline from $4,000,000 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.

Speaker 3

Turning to our balance sheet. We had cash resources of approximately $19,600,000 at the end of Q1, including $8,200,000 in restricted cash and approximately $165,000,000 of undrawn capacity available under our revolving credit facility. As of 03/31/2025, 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 continue to monitor the debt capital markets and recent offerings in both the retail and institutional space as well as recent securitization transactions.

Speaker 3

And we may explore opportunities to either optimize or refinance our 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 close, we announced that our Board declared a first quarter distribution of $0.03 $85 per share, which is consistent with the prior quarter. The upcoming regular distribution, the fifty first consecutive quarterly distribution paid since our IPO in December 2012 with all distributions at or above a rate of $0.03 $55 per share per quarter will be payable on 07/03/2025 to stockholders of record as of 06/19/2025. As we've 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.

Speaker 3

And with that, I'll now turn the call back over to the operator for your questions. Operator?

Operator

Thank you. While that queue builds, we'll take our first question from Melissa Wedel with JPMorgan. Please go ahead.

Speaker 4

Good afternoon. Thanks for taking my questions today.

Speaker 5

Yes.

Speaker 4

Wanted to start and 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 2

Yes. We we 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 May, which gives us a month of cushion vis 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 have long term upside in our ownership of the company.

Speaker 4

Okay. I appreciate the context on that one. Given the way the investments listed on the statement of investments as of March 31 and based on the rate listed there as well, it looks like in 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 2

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 we'd 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 Got it.

Speaker 2

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 for $9.75.

Speaker 4

Right. Okay. Thank you so much for the context.

Speaker 2

No problem.

Speaker 4

Thank you.

Operator

We'll take our next question from Robert Dodd with Raymond James. Please go ahead.

Speaker 5

Hi, guys. I apologize for the background noise. On the dividend, could you give us an update And if I recall correctly, I mean, basically, that spillover effectively mandate near maintenance of the covered base. So when you talk about reviewing the dividend in in the near term, can you give us any color?

Speaker 5

I mean, obviously, you could lower that then distribute spillover some other way or or what's the thought process on on where that might shake out for for 2025? Obviously, if the spillover gets dealt with this year, then 2026 is different.

Speaker 2

Robert Can you start with the spillover? Yeah.

Speaker 3

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 $28,400,000 And I think the way to think about it is currently right now with

Speaker 2

a

Speaker 3

$0.03 $85 per share dividend run rate that equates to approximately $8,950,000 of distributions being currently distributed. I would also just highlight maybe the dividend shortfall for Q1, meaning the $0.02 $94 per share NII versus the $0.03 $85 per share current dividend, which equates to about a $2,100,000 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 2

Yes. We 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 cost, 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.

Speaker 2

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 vis 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 in asset 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 shareholder sorry, with our board.

Speaker 5

Got it. Thank you. And then just one more, if I can. I mean, what are you seeing, and again, I apologize for the back numbers, in kind of the market in terms of bid ask spread between buyers and sellers? I mean, in in in a period of it it looked early in the year that we might see more activity.

Speaker 5

I'm not talking about generally market, but just don't use you guys at this point. But then, you know, additional volatility sometimes, you know, it pulls back the bid, but the ask doesn't necessarily move as quickly. I mean, what what are your thoughts on on how that might play out in terms of volatility between what buy I mean, what buyers are willing to pay, but maybe the sellers are more sticky on on their asking prices?

Speaker 2

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 fine binder finding buyers are being very careful and conservative. And so in those cases, buyers and sellers are not necessarily reaching agreement.

Speaker 2

And then ever since the announcements on Liberation Day, the M and 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 and a activity that was scheduled for the balance of the year. Many of those deals have been put on the shelf for the moment, for more clarity in the market to 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 and A activity is going to remain muted for the next sixty to ninety days. And then if M and A does start to pick up in Q3, there's typically a four to twelve week delay between the time the M and A activity picks up and any financing activity gets going.

Speaker 2

So even though our pipeline on the strength of our 25 originators and 13 local markets is reasonably strong, we have a 75 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 and a transactions with new money equity coming in as being, you know, typically the highest quality of deals. And so we think closure rates are gonna be slower. And, therefore, when you look from q two into q three, we expect a relative quiet period in terms of new deal closure. Q two 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 q three.

Speaker 5

Thank you for that color. Thanks a lot.

Speaker 2

No problem, Robert. Thank you.

Operator

We'll go next again to Melissa Wedel with JPMorgan.

Speaker 4

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. Melissa,

Speaker 2

when the markets got unsettled about a month ago and spreads moved up, we saw repayment activity forward repayment activity slow down. The marks, as I indicated in the prepared remarks, have largely recovered, and spreads are back to where they were a couple of 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. On 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.

Speaker 2

But it's too early to indicate now what will happen over the course of the balance of the second quarter into q three and q four. I will tell you that right now, the visible repayment pipeline that we have is pretty light. So I 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.

Speaker 2

So we're not we're not seeing really heightened repayment activity at the moment.

Speaker 4

Thank you.

Operator

As there are no further questions at this time, that will conclude our question and answer session and the WhiteHorse Finance first quarter twenty twenty five earnings call. You may now disconnect.

Speaker 1

Thank you.

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Key Takeaways

  • First quarter results were below expectations with GAAP and core net investment income of $6.8 million ( $0.0294 per share), under the $0.0385 distribution, and NAV per share fell 1.6% to $12.11 due to net realized and unrealized losses.
  • Active deployment continued with $45.5 million gross investments ($26.1 million net) including seven new first-lien loans at a 9.7% average all-in rate, boosting total investments to $651 million.
  • STRS JV remains a key lever as $17 million of assets were transferred in Q1 to the JV, which now holds $310.2 million at a 10.8% yield and contributes mid-teens ROE accreting to WhiteHorse.
  • Credit challenges increased nonaccruals rose to 8.8% of the debt portfolio driven by write-downs at MSI, ABB Optical and American Crafts, while a Telestream restructuring is expected to return most debt to accrual soon.
  • Market conditions and pipeline saw direct lending spreads revert to mid-50s, M&A slowed by tariff and recession concerns, and a 75-deal pipeline but limited BDC capacity with JV capacity of ~$35 million.
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Earnings Conference Call
WhiteHorse Finance Q1 2025
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