Q1 2020 Earnings Call

[noise]. Good afternoon. My name is Thea they will be your conference operator today at this time I would like to welcome everyone to the Whitehorse Finance first quarter Twentytwenty earnings Conference call. Our hosts for today's call or Stuart Aronson, Chief Executive Officer enjoys in Thomas Chief Financial Officer, today's call is being recorded.

And we'll be available for replay beginning at 530 PM Eastern time [laughter]. The replay dial in number is four as you all 45373 406 and the pin number is five to 58636 at this time all participants have been placed and I listen only mode and the four will be open for your question.

Following the presentation, if he would like to ask a question at that time. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the Q by pressing the pound key if you should require operator assistance. Please press star zero, we ask that you. Please pick up your handset to allow optimum.

Optimal sound quality. It has now my pleasure to turn the floor over to Sean syllable opposing partners. Please go ahead Sir.

Thank you for you and thank you for everyone to everyone for joining us today to discuss Whitehorse finances first quarter 2020 earnings results.

Before we begin.

I would like to remind everyone that certain statements, which are not based on historical facts made during this call, including any statements relating to financial guidance, maybe deemed forward looking statements within the meeting of the private Securities Litigation Reform Act was 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.

Where's financed assumes no obligation or responsibility to update any forward looking statements.

Today's speakers may refer to material from the Whitehorse Finance first quarter 2020, <unk> earnings presentation, which was supposed to 12 website. This morning.

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With that allow me to introduce Whitehorse finances, CEO Stuart Aronson Stuart you may begin.

Thank you Sean.

Good afternoon, and thank you for joining US today, Let me first let me say I hope you in your families are safe and healthy as we navigate these unprecedented times all the Whitehorse finance team has been working remotely for several months now with no interruptions to business continuity.

As you're aware, we issued a press release this morning prior to market open.

Hope you've had a chance to review our results, which are also available on our website.

I'm going to start by addressing our positioning relative to our liquidity and our portfolio risk followed by our Q1 results in more detail and then provide an update on current market conditions.

After which joy symbol address our operating performance and financial results. We'll then open the lines for questions.

Over the past four years, we've maintained a discipline and conservative credit culture to position the portfolio for market downturns.

We consistently underwrote all are deals to withstand the downside case that was similar to the great recession.

However for certain about credits directly impacted by the pandemic and social distancing.

It appears at the current economic environment will end up being worse than our downside case.

Thankfully so far this appears to impact only a small percentage of all portfolio.

And our April shareholder letter, we identified the actions we've taken in building our portfolio to prepare for a downturn in the credit environment and they do bear repeating so I'll briefly summarize.

First diversification of our underwriting strategy to where no new asset comprises more than 3% at cost of the total target portfolio with the BDC.

Second focus on first lien credits, which comprise almost 90% of our debt portfolio, we second lien exposure to only noncyclical credits.

Third directly sourcing offsets that allow us to avoid the aggressive credit terms seen in the broadly syndicated market.

For a focus on lower Midmarket and Midmarket non syndicated loans, which historically have more volatile price marks than large cap syndicated market.

Sorry, less volatile price marks in the large cap syndicated market.

And yes, diligent management of our liquidity position by operating well below or maximum advance rate.

Let me expand upon that last point given its importance in today's environment.

We shared with the market that we have significant cushion on her senior secured leverage facility with JP Morgan.

And for us to be out in compliance with our maximum advance rate limit, which would trigger or margin call. The average marking our assets. The currently collateralized her G.P.M. facility as of the ended April we'd have to fall all the way down to about 66% and Paul.

I'll also note that several financial entities, including many bdcs, we're disadvantage by having significant significant amounts of undrawn obligations in the form of revolvers two portfolio companies and many of those facilities were drawn down during the last two months subsequently, creating liquidity squeeze is for those.

Anders.

Whitehorse is actively minimized revolver commitment as part of the structuring process.

Led to a manageable exposure.

Funded commitments entering entering the covert 19 disruption.

At the end of Q4 or unfunded revolver commitments totaled only $2.6 million and at the end of Q1. This amount was $1.3 million.

Well, we have significant liquidity and we believe we've positioned the company to navigate mortgage chalks. There does remain uncertainty as to the extent depth and length of the club at 19 impact.

In our Investor presentation, we share an estimate as to the level of impacted cobot 19 on our portfolio and as you can see accounts were trying to highlight were very high impact our estimated to represent only 6.3% of the portfolio.

That said, we also estimated 41.2% of the portfolio is expected to have moderate impact and as a result management is taking a very defensive view a BDC liquidity.

And we only expect to add a few assets to the BDC portfolio in Q2.

I would like to highlight that with each week, we get new data on corporate 19 impact on the economy.

So what is likely that the estimates we are provided on covered 19 impact on our portfolio will be adjusted overtime.

I'll now turn to our Q1 results.

Whitehorse fourth quarter of 2019 saw record centric setting originations as we capitalized on market dislocations.

Q1 saw slower deal flow due to normal Q1 slowdown and also to the emergence of business shutdowns and social distancing policies that resulted from covert 19 of the ended the quarter.

GAAP net investment income for the first quarter was 6.6 6.1 million.

Were 29.7 cents per share compared to 7.7 million were 37.5% centsper share in Q4.

Q1 core net income was five and a half million were 26.7 cents per share compared to 7.9 million were 38.5 cents per share in Q4.

It was lower income levels were largely a result of a decrease in amendment waiver an amendment fees in Q1.

As compared to prior quarters.

As well as an increase in non accruals.

And Navy in Q1 was 13 86 per share compared to 15 23 years should do in Q4, a decrease of approximately 9%.

The decrease can primarily be attributed to the marketplace volatility seen during the quarter as well as the direct in parts of Covance 19 on some of our portfolio companies.

Overtime, we expect.

<unk> decreased marks related to marketplace changes will be recovered as these assets repaid at par.

Overall, we've been pleased with the relative performance of our investments our team and our private equity partners and business owners.

We have found that so far most business owners are taking actions to ensure their companies have the ability to get through the volatile economic period, we're experiencing.

That said, we placed two investments on non accrual this quarter and now have three investments in our portfolios that are on non accrual basis.

In terms of broader performance out of 48 borrowers across our portfolio.

44 made their scheduled interest payments for Q1 were three of those four where the assets that we have on non accrual.

Well, we maintained our quarterly dividend of 35, and a half sense for the first quarter as I've shared we were unable to cover that dividend with core earnings this quarter.

Our intent continues to be either earned our dividend on an annual basis.

However, these unprecedented market conditions could impact future quarterly distributions, which we may temporarily align with our core earnings as we focus on cash allocation strategy and on keeping strong liquidity cushion and having capital protect our borrowers during the period of covered by team.

During the first quarter, we sourced for new deals and one add on transaction totaling 26.8 million of the four new deals three were known sponsor all were first lien and had modest initial leverage.

This activity was partially offset by 16.9 million in total repayments and sales.

Led by a partial pay down of seven and a half million on our second lien loan to Oasis legal finance.

Our weighted average effective yield on income producing investments decreased from 10.4% in Q4 to 9.9% in Q1. The decrease was primarily driven by a drop in the base rate of 50 basis points.

During the quarter, we also transferred for deals and there were a JV totaling 28.5 million at the end of Q1 wife horses total investment than the JV was approximately 42.1 million and Ajay. These portfolio had 14 total issuers with an aggregate fair value of 123 million.

At the end of Q1, the fair value the portfolio decreased to 557.1 million compared to 589.7 million at the end of Q4, primarily driven by mark to market losses.

The marks at the ended the quarter on our corporate 19 impacted assets reflected all the information we had on those assets at that time, which in many cases included owner and management insights into the expected performance of these borrowers in Q2 and for the rest of 2020.

Some of the spread shred some of the spread driven adjustments for Q1 appear to have been mitigated. So far in Q2 based on moves in the market. One of the few broadly syndicated loans. We have you think sword, which is currently quoted around 91st the market. The ended the quarter of 85.

Much of our markdowns resulted purely from changes in market prices and most loans that are mark in the low to high Ninetys, our strong credits where the final recovery on the asset is expected to be part.

That said there are also assets, which were marked down due to moderate to high covert 19 impact impacted companies are generally marked at 19 below and while we expect many of these loans to have improved performance with par recovery as the cobot 19 set were seeds. There were some that may be permanently impacted the result.

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These marks impacted gross leverage which increased to 1.4 times at the end of Q1 compared to 0.97 times at the end of Q4.

As disclosed in early April we anticipate the highest pressure on three credits in the fitness and leisure and events industries given the current shutdowns.

The two credits and the fitness leisure sector were forced to close all their studios and fitness clubs. So at this time the clubs are scheduled to start reopening soon.

One of these fitness companies was unable to make its interest payment at the ended the quarter, Although we were able to execute a forbearance agreement subject. So subsequent to quarter end, we have placed this credit about non accrual.

We continue to have frequent discussions with the owner and we'll update you on this credit next quarter.

We have one additional troubled credits in the event related space, which is held in the JV. However, the owner has already provided significant additional liquidity in the form of new equity and as a result, we don't expect any permanent tissues on this credit.

Beyond those three we have a restaurant franchise or it has been experiencing cash flow strain, which has a significant takeout and delivery business, which is insulating it more than others in the space.

In many situation, where there's high impact the company's owners are actively providing the necessary liquidity to get through these difficult times and in all of those situations, we're working constructively and cooperatively cooperatively with them.

My time at GE I managed a very large credit book through the great recession, and Whitehorse, we operate on a philosophy that as long as the owners of the business are supportive we will be supported to them as well.

To that extent, we are in some cases, reducing the debt related cash burden on companies through deferrals of principal and or deferrals of interest.

In terms of assets that are placed on non accrual that decision is based on there'd be material risk that the interest on those assets will not be collected in the future.

With the addition of two credits to non accrual the nonaccrual percentage of assets at Whitehorse Finance has risen to 3.7% at fair value.

We are working hard to resolve each of these situations and get all or a portion of these assets repaid or back on accrual status as soon as possible.

To that end despite the nonaccrual status for AG Kings. The company has experienced significant tailwinds from club at 19 as people are doing more shopping and grocery stores and that has helped kings cashflow position.

So while we are marketing the asset at 50 cents on the dollar we do see improved sales and financials. As a result of these tailwinds and hope to have the constructed resolution of this workout situation later in 2020.

In addition to the support we in the owners of our portfolio companies have provided a number of portfolio companies have applied and received release relief under the cares Act.

Good day 14 of our portfolio companies many of which are non sponsor round if applied for or received an aggregate $50 million and PPP loans, most of which are forgivable.

Our portfolio had a fair value averaging debt investment size of 9.3 billion with only three of our portfolio companies rising above our target investment size range afford a $20 million.

89.3% of our debt before portfolio is first lien with only three second lien loans.

Two of these loans on a formula basis against the liquidation value of a diversified pooled litigation receivables and we don't expect they will see any significant impact from the current disruptions from coated.

The third second lien loan Seagate has a very modest leverage level and very little senior debt ahead of it.

As of the ended the quarter, 49.4% of our portfolio sponsor backed and the rest of our loans or non sponsor backed.

Turning now to our market outlook based on Cobot 19 impact there's been a correction in the debt markets with the most significant changes occurring and what had been the very for all the sponsor markets.

In general, we're seeing debt levels down half a turn to return and the EBITDA being used to calculate that levels is more realistic with fewer adjustments and add backs that we were seeing in the pre closing period.

Deal terms are also tighter with more deals have been covenants and overall documentary turned to be more conservative.

Pricing is creased increased 100 to 250 basis points with the level of increase often tied to the complexity of the credit and the level of exposure to covert 19 risk.

Because the non sponsor market had never gotten as aggressive as a sponsor market there have not been he many they're not have had not been as many changes in this sector.

Our non sponsor loans are still generally in the range of two and a half to four times EBITDA.

But pricing has increased about 100 basis points on average based on what we're seeing so far in the marketplace.

Well the terms and pricing of deals in the market has improved a lot the amount of deal flow has fallen.

Our weekly pipeline is down 40% to 50% from club prequalified levels, which we believe is less of a decrease than many firms have experienced in the market.

We believe this lower decrease is due to the large number of direct originators, we have in 12 markets across North America.

We're taking a very conservative view towards adding new assets into the BDC any assets added will be done with an evaluation of resulting liquidity.

These would be expected repayments on other accounts.

At the moment, we have to mandated deal is expected to be added to the BDC portfolio. In Q2, one will go into the JV and the other priced at LIBOR E 50 will go into the BD balance BDC balance sheet.

Both of these deals are first lien and it levered at less than four times in both of these deals are less than 50% loan to value that said there can be no assurance that either of these mandated deals will close.

For most of our credits in Q1, the financial impact of covert 19 on a reported covenant basis was very limited and we expect to see much more impact on financial performance across the portfolio. When Q2 financials are reported in August of 2020.

In several situations, where they'll be covenant violations, <unk> or where interest being paid in kind there were likely to be fees associated with these actions, but should enhance long term value to our investors. In addition, we will expect will be very limited voluntary repayments of existing loans, while the debt markets in the economy.

Our income impacted by quoted 19 and its after effects.

Over the past four years at Whitehorse Finance management has sought to position the BDC to exhibit as much stability as possible through an economic decline. We've attempted to avoid deeply cyclical sectors and have only made loans, where we believe a repeat of the great recession would allow us to recover 100% of our loans we have.

Focus on moderate leverage first lien lending.

And if not originated a new second lien loan and over two years. We also have taken a conservative position on our liquidity, making sure that we have a top tier leverage partner and managing a significant cushion on our borrowing base.

We understand this is a very challenging time for our shareholders and our employees with an unprecedented level of uncertainty I want to reassure you that we are fully operational and working hard to maximize the performance of the Whitehorse finance portfolio.

We always had been committed to providing you with complete transparency and that will continue.

Before I turn the call over to Joyce and I do want to quickly note that in aggregate insiders bought 167925 shares during the quarter as we continue to believe in the strength of our platform. Despite the recent disruptions with that I'll now turn the call over to Joyce and to go of our financials.

Thank you Stewart and thank you all for joining today's call.

During the first quarter, we reported a GAAP net investment income of $6.1 million or 29.7 cents per share. This compares to $7.7 million or 37.5 cents per share in the prior quarter.

Core and I was 5.5 million for the quarter or 26.7 cents per share after adjusting for zero point $6 million reversal, the capital gains incentive fee accrual.

This compares to 7.9 million worth 38.5 cents per share in Q4.

We reported net unrealized losses in our portfolio of 20.2 million, primarily driven by markdowns on high positions. We also had a decrease in the fair value were Svrs JV investment a $4 million due to underline markdowns in its portfolio.

Fee income during the quarter was zero point, Threemillion, which reflects the lower volume of nonrecurring fee activity from waivers amendments as well as prepayments. This compares to fee income of 2.1 million during Q4.

The income can vary meaningfully by quarter.

After considering our net realized and unrealized losses, we reported a net decrease in net assets, resulting from operations of approximately $21 million as of March 31st 2020, net asset value was approximately 284.7 million for $13.86 per share, which compares to 313 million or $15 in 23 cents per share.

Yeah as reported in prior quarter.

Primarily driven by the markdowns in our portfolio during the first quarter.

As it pertains to our portfolio investment activity nearly 67.5% of a portfolio carries I'd or two or one risk rating on a scale of one to five or an asset rated or two is performing according to our initial expectations and NASA ready to one has performed better such that the risk of loss has been reduced relative to those initial expectations.

Turning to our balance sheet, we had cash resources approximately $28.1 million as of March 31st 2020, including 11.6 million unrestricted cash and approximately 19.1 million of Undrawn capacity under our revolving credit facility, excluding the 100 million dollar accordion under the revolver.

We continue to closely monitor asset coverage ratio and feel comfortable with our leverage as of March 31st 2020.

The company's asset coverage ratio from BARDA mounts as defined by the 1940 Act was 196.2% at the end first quarter, well above our requirement under the statute of 150% or.

Our net effective debt to equity ratio after adjusting for cash on hand was 0.94 times as of the ended the quarter.

Next I'd like to highlight our quarterly distribution.

On March 17th we declared a distribution for the quarter ended March 30, Onest 2000, 2035, and a half centsper share for total distribution at some point 3 million to stockholders of record as of March 27 2020.

The distribution was paid to stockholders on April Threerd 2020.

This marks the company's 30th consecutive quarterly distribution since our IPO in December 2012, with all distributions at the rate of 35, and a half pence per share per quarter.

I'll now turn the call over to the operator for your questions operator.

At this time I would like to remind everyone that if he would like to ask a question to press star one on your telephone keypad now again that star one for any questions over the phone line, we'll pause for just a moment to compile documenting roster.

The first question will come from Mickey Schleien with Ladenburg. Please go ahead.

Yes, good afternoon, Steward and choice and hope you will.

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Stuart could you give us a sense of the portfolios average the borrower average EBITDA and the trends than you saw that figure in the first quarter.

I can only estimate it and Mickey Hello, I hope, you're doing well and staying safe.

The average EBITDA that we have had across our portfolio over the last couple of years has been about $25 million, a and not ignores a few outliers that we have where we bought a broadly syndicated.

Credit at a discount like sinks or.

We did not see.

Any material change in average EBITDA at the ended Q1, Mickey because the cobot impact really was only for the last couple of weeks ER and so even for companies that are impacted or the impact was muted by the fact that it was only over a couple of.

Leaks, but as I've shared a when we did our marks on the assets at the end of the quarter. We did have visibility into what was going to go on based on the projections of owners and management for Q2, and many companies are going to see.

Significant changes in EBITDA in Q2 companies with high impact like the fitness companies in the if that company have have largely seen revenues go away.

And there for those companies are a into cash lead situation and we're working with the owners to give those companies liquidity to get through the air pocket of coated but then the companies that are moderately impacted.

Our companies, where a portion of their sales have been knocked out due to coated a that could be the restaurant franchise or that I referred to where a number of their locations are close or that could be the medical services companies, which are impacted by the fact that elective procedure.

Juries have been terminated for what is most of Q2.

So.

We do believe that the vast majority of the moderately impacted companies that we'll see a Q2 impact we'll see a lift back a spring back and earnings in Q3 in Q4, but the thing that we don't know yet and no. One knows yet is how long the cobot impact.

Oh, we'll sustain and the economy and what the cobot impact will be after the reopening that is apparently getting underway and much of the country.

Yes, certainly agree with that sentiments tour and in terms of supporting your borrowers liquidity.

I think you mentioned about half the portfolio sponsored and half is not so the.

With respect to the.

The portion that sponsored.

How are those.

Relation how are those sponsors behaving, particularly stored since a lot of them have had dry powder for a long time and.

Some of those funds are getting kind of long in the to send them interested to understanding of how much incentive do they have.

To continue to inject liquidity into borrowers.

Late in the cycle over the life with those port of those funds.

Mickey our experience so far has been.

Really good.

Wherever or company is expected to come back from the coding crisis and have value. The private equity firms have been willing to either already inject equity or they are actively negotiating to inject equity.

It's only in a situation where the private equity firm that believes that the impact of coded is going to basically think their equity that they won't inject new equity to protect themselves and so far or that is a very small minority.

The situations where facing into so the news has been positive on virtually every account that is needing liquidity front its owner.

That's good to hear just a couple us.

A question Stewart.

Were there any reversals of interest income in the quarter for the non accruals in other words to reverse some interested you accrued in Q1.

In prior quarters in Q1 for the non accruals.

So it doesn't make yeah, hi, Mickey that was not the case. So we do not have any reversal of previously accrued interest seized accruing during the quarter during the quarter, Okay, and lastly sort of.

Just.

More difficult question, but.

The stock is obviously had this long term overhang issue from the pre IPO shares and I'm sure. Those Lps are interested in and liquidity just like everybody else, but.

Pre pre covert there was a sense it will maybe that could be solved this year.

Interested in understanding how.

HHG in base side is thinking about dealing with that in the environment that we're in other words is that just like off the table now and and we'll deal with his later or any thoughts on that regard would be really hopeful.

Yeah sure I can tell you that the bayside shareholders.

At this time based on the current trading levels.

Do not feel that it makes sense to further lighten up.

The accounts that those shares are held in our still open invalid and current accounts.

And they are able to keep the shares a for a longer period of time or even though all things being equal a if the shares were trading at a better level. They make they may seek to further resolved or the the.

Overhang of of the shares.

And their position, but for the moment Mickey.

Until the shares are trading.

Much closer to any be I would be surprised to find the bayside shareholders, a wanting to sell and get liquidity.

But of course caveat that when they can always change their mind.

So all I can share with you is they're thinking at the current con.

I appreciate that and I understand that's it for me. This afternoon. Appreciate your time and I hope everyone mother's day safe and healthy. Thank you.

Thank you.

The next question will come from campaigns with B. Riley FBR. Please go ahead.

Hey, Good afternoon, Stewart hope, you're doing well and appreciate all the disclosure in the prepared remarks, but my friend and you can just maybe touch on the use of capital little bit more I know you made it clear that you are intended to be prudent with new investment going forward and that repayment activity likely to.

A little bit later, but do you anticipate cash flow will be used to de lever or just kind of held on the balance sheet to that its readily dispensable to support existing portfolio companies.

We're going to continue to monitor the situation with coated.

We're running all sorts of projections as to what could happen and we want to make sure that in our worst downside projection that we do not yet to a situation, where we would trigger margin call and the need to sell assets into a disruptive marketplace. So first.

And foremost we want to make sure we preserve value for the shareholders. If in our downside cases that we run.

And we look at you know weekly or biweekly.

We have room to selectively add assets.

As cash flows come in then that is exactly what we will do a the assets that were adding in this market environment are more attractive than anything we've seen since 2011.

Since really before the BDC was formed and where possible and were prudent we want to take advantage of the market conditions to put these really good senior secured assets on the books, but we will only do so so long as in a downside scenario.

Our worst downside scenario, we do not believe we're putting at risk the liquidity of the BDC.

To avoid that type of downside for shareholders.

Mhm.

Got it okay. So yeah, clearly still looking to play a little bit offense here, where it makes sense.

And I know you deem color around.

What's expected to close on the origination side, so far in the second quarter, you'll be able to comment on just on the repayment side, if youve seen anything come through since quarter end or expect anything to add to repay before the inogen.

We have one borrower with a significant position whose name I'm not willing to disclose who has your alerted us if they're going to repay us in the next 30 days.

Given market conditions, and the fact that any given week anything can happen, we're not relying on that going on but we have gotten will notice from someone that that would occur. So it's possible that we will see a significant repayment.

In Q2 on at least one account.

Okay. That's that's helpful.

And then on the JP Morgan credit facility and I apologize I haven't looked due to the credit agreement recently, but what the flexibility JP Morgan have to.

Change haircuts.

In or spreads.

You know if conditions deteriorate and just curious if they have given any indication that that could be on the table.

Well the terms of our agreement or walked in and were recently revised to be.

More favorable to us with higher advance rates are lower spread the key issue is that JP Morgan has the ability to mark the assets and we disagree with their marks who compelling to those mark earned a work with a third party too.

Cool Mark we all agree on a practical reality is where we're so far inside of.

The in advance rates that are the limits to our facility, but even if we don't agree with JP Morgan on any given mark it's not worth arguing about at this point, because we're nowhere near our advance rate limits.

But what we will do and what we plan to do you mean.

[noise] go forward situation and the economy.

Leads to more pressure on the marks and we start to have any level of concern that JP Morgan marks our inappropriate we will trigger our rights to use a third party to get too and valuation that is a reasonable valuation.

At the moment.

Again, we are very far away.

From any of the limits that we have you know we were running the BBC at about a 50% advance rate, even though our facility allowed for a 60% advance rate.

And.

That cushion.

Allows us to be able to still play some offsets or even given what's gone on in the marketplace.

Got it that's helpful. And then just one more for me and you know I know, it's a board decision, but just thinking.

Thinking about the dividend in the context for your preference for liquidity and an earnings power kind of falling well below the dividend. This quarter. Just curious if you will record you know if you intend to recommend a reduction in the dividend to the board and when do you anticipate that dividend could be declared.

So we need to evaluate the core earnings power of the BBC.

Based on what is going on each quarter.

As you've seen waiver fees amendment fees and prepayment penalties were very low this quarter a pipe, but we don't know what they're going to be for Q2, yet. So we don't yet know what the core earnings for Q2 will be.

That said I've tried to be proactive in communicating.

The core earnings are significantly different than the dividend level or we may recommend to the board that the dividend.

For Q2, or Q3 being reduced temporarily from the 35 and a half cent normal dividends level.

And that would be focused on preserving liquidity and making sure. We're not doing anything that risks long term value to the shareholders.

The other thing I'll mention we have and rollover profit.

From our Rcs game.

It makes it such that if we don't pay.

A full dividend, we can trigger tax liability and so our decision on what to do viz. A viz. A dividend is partially driven by the court ruling and liquidity and then partially driven by the tax liability that would be triggered by paying a lower dividend. So we're trying to take all.

Korean things into account in terms of making that decision.

Right that was actually mean kind of part to my questions.

Thanks for that comment and I, just you know I guess just to somewhat summarize that'll make it sounds like where are you set the second quarter dividend will be.

Largely reflection of I've kind of near term earnings power by you could maybe so a dividend and you're not necessarily taking.

A long term outlook with where you would maybe position in the second quarter than you could maybe look to right size and again, whether that's up or down as you know as conditions improve or deteriorate that the right way to think about it.

Yes, we will take into account.

All the data, we have including whether we take a significant repayment to look at cash and liquidity.

And then try to optimize.

Based on the actual results in Q2.

And you know understand where we're in the midst of it. So there's nothing specific I can share, but I did mention on my prepared remarks that in Q2 in Q3, we are likely to see covenant default.

And requests for interest deferrals and those situations normally are accompanied by either increases in rate for fees and so it would not be unexpected.

That there would be higher fee income in Q2 or Q3, then there was in Q1 again too early to know for certain.

But directionally speaking.

Waiver fees and amendment fees have historically topped up our income and giving us more earnings in each quarter.

Right right. Good. Thanks for the reminder, there on that all right. That's it for me. Thanks Stuart I appreciate it thank you Tim.

The next question will come from Bryce Rowe with National Securities. Please go ahead.

Thanks, Good afternoon.

Hi gross.

Hi, Stewart I was Oh I was curious number one you obviously talked about broad market versus company specific impact within.

The unrealized losses for the quarter and perhaps perhaps you could you could quantify that have gone through the.

Well the investments and you can see where where those assets that are marked below 90, and those that are above the 90. So would you direct me to that or do you have the kind of a specific number to share in terms of what was more broad market and what was more company specific in terms of the a and b per share compression.

Price I tried to give as much as like could in the prepared remarks there.

Indicating that the most part the assets that are marked in the low to high Ninetys are things that are impacted by a price moves in the marketplace and that for the most part the cobot impacted accounts.

Our marked at at below 90.

Yeah, Okay, even if there, but even I'm even in a covert affected account a part of the markdown is the increase in rates in the marketplace.

Right. So you know if something is marked at 80 than a part of that Mark was the credit deterioration and a part of that Mark was the price deterioration.

Okay, that's fair.

Obviously your your your debt portfolio is is 100% floating rate and we've seen LIBOR or come down pretty dramatically from from the end of March I was wondering what percentage of the debt portfolio is tied to one month LIBOR and what percentage is tied to threed.

Month, so we might have a better idea of how the portfolio or the yield will be impacted here.

And in the second quarter and beyond.

Borrowers normally have the ability to choose between one month and three month LIBOR, but more importantly, we have LIBOR floors of one to one of the half percent on virtually every deal in the portfolio in fact, Joyce and can't confirm it for me, but I think there may only be one or two deals and the entire portfolio.

Hello.

They don't have LIBOR floor. So we're protected you know from downside at this point on LIBOR or given the so both one month for three months are well below 100 basis points.

There are three positions that have easier person I've worked for all others as Stuart mentioned or more so that show.

The average weighted average floors is just above 10%.

Okay all right.

Thank all my other question. So I had one free joined can you give or Stuart you talked you mentioned that the spillover.

But you have that you're carrying right now can you can you quantify what that what that dollar amount is for us.

Yeah, if it's approximately.

17 million as a 331.

17 once again.

Yes.

Okay. Thanks, that's all I had I appreciate it.

The next question will come from Rick Shane with JP Morgan. Please go ahead.

Thanks really two questions.

First following up on Mickey's discussion related to sponsors.

You know, we're kind of looking at us sponsors between the buffer during the short term sort of transition from the liquidity phase we went through in the beginning of this to the ultimate credit disposition, which will play out over the next several years I'm curious when you look at your portfolio do you see having.

In a lower percentage of sponsors in there is an advantage or disadvantage.

It's a great question.

I would say well what we had seen.

Whether by.

Walkers skill I guess I'd really say it was luck.

The majority of the more heavily impacted companies.

From cold there have been sponsored companies and the sponsors or is I've already indicated a generally being very supportive of those companies.

The non sponsor loans were done at lower LTV.

And lower leverage levels.

And because none of the non sponsor loans are in highly impacted or very highly impacted category.

Those.

Loans.

Easily sustained losses of EBITDA of 30, 40, or 50% and they can continue to perform.

So at the moment, we have not seen any negative bias from the fact that.

Our portfolio is non sponsor loans and again in fact, just just out of happenstance those loans on average have been less cobot effective than the sponsor logs.

Okay. That's that's great color and I'm not going to give you our time for being Lucky a there are a lot of people, who would say that I'm lucky too so I I.

Not going to criticized for for that.

One question related to the spillover dividend so.

Given the timing does that set a minimum threshold what you need to distribute by September Thirtyth should we look at that when we consider the distribution, adding another factor that actually could cause you to distribute more than you would necessary.

Early choose tail.

Jason.

Yeah, I think the way to look at it and similar to what Stuart had mentioned before is that can play one of the factors inter over evaluation on the dividends quarter over quarter I'm, So definitely taxes going to play a play a role on that right, but I think it is one of the factors, but not diesel factor in determining that.

Understood, but so what timeframe should we look at that 17 million is meeting to be distributed by without triggering acts that okay fair enough.

Yes, understood now Ah so right. The DVD distribution you need to be cleared by 10 15 of the current year right and paid out prior to 12 31.

Okay.

It is that 17 million I'm with you know okay. Thank you very much.

The next question will come from Robert Dodd with Raymond James. Please go ahead.

Hi, guys I'm not to hop on too much on I'm, not seeing but on the dividend I mean I realize again. This is a four decision but would there be concentration of.

Of the Jews sing the regular so to speak and then topping that out with a supplemental special distribution towards the end of the tax you how many.

Try to use its scenario at being contemplated that and then obviously the other question is if you. If you don't distributor that it's cool attacks on it what would the pace at the corporate tax the and how much timing does to does that play into issues about managing liquidity.

Over say the next six months.

Robert So far the only conversation with the board on the dividend.

Was whether we paid the full dividend this quarter, which we decided to do.

Under discussion around liquidity insensitivity for the coming quarter or two quarters.

There has not been any discussion around.

Changing the permanent level of the dividend or or you know, having it be some lower level plus a supplemental.

I would say.

Our goal is to as efficiently as possible resolved the non accruals and continue to look at the core earning power of the BDC and as long as that core earning power allows us to feel like we can earned 35 and a half sensor more on an annual basis.

Keep the current dividend in place and again, if we're able to play some authentics in this current market environment, where pricing is up quite significantly.

That would support a higher core earnings because the BDC and we wouldn't again very much like to be able to keep the according to that into 35 and ourselves.

Got it.

And I think amongst the guy who wants to Joyce and the second part of your question. I think is joining you had Robert I apologize I have to go back in check in terms of the actual specific date that PD corporate taxes do I have absolutely no. That's easy excise tax amounts in any particular year would be do with the define an extension.

In the subsequent year, but I have to go back on this one piece for you.

Okay. Appreciate that I mean, just to that point in terms of core earnings again, so I can't on.

The JV I mean this quarter, if I'm right is about 140000, a dividend control entities.

That.

That seems relatively low today compared to the amount of capital you've got to best isn't that will be screw up and ramp up phase how long.

And your target.

Return on invested capital for that because I think the presentation says is 13 to 15, it's a much how how big does the asset base to be well how far away timeline do you think you off of generating that kind of.

The turned on invested capital on the in that Youve put it in because obviously that would also grow called an accident BDC as well.

The the key to getting the returns off of the junior capital in the JV is ramping up the diversity. So we get the full benefit of the leverage line there and we are actively moving in that direction and will hopefully have a constructive update on that our next.

Quarter.

We're not particularly worried about whether we get to the 75 million of deployment.

On the JV, we're more focused on getting to appropriate.

Diversity and maximizing the benefit of the credit line. There. So that we can generate those 13% to 15% returns or higher based on the fact that pricing in the marketplace has increased and that means some of the JV assets could have increased pricing as well.

Got it got to appreciate that on just a couple more if I can you can always come bill on the JP Morgan facility with the accordion feature the hundred one.

What's the time, they necessary to invoke that and has there been any contemplation of of expanding that facility to today.

We will if we want to but it's unlikely that will need to with the cash we have them with the outstanding under that facility at the end of the quarter being about 220, I wouldn't see us adding enough assets to need to increase that facility.

So we have available if we want it we could get it turned on and about probably two weeks, but but again very unlikely based on the current situation that we'd add enough assets.

In the current market environment to want to implement that trigger.

Got it caught it and then if I can one one both wondered why did that I think it was a careful to Mickey you. You mentioned you obviously some of the businesses all are having a substantial impact and you mentioned.

Yeah, I I come I I Oh.

It doesn't bring exact you're not works now, but what would be the conditions under which you would feel the need to oversee take the keys that potentially increases.

The liquidity needs. Some you to the portfolio company, if you become the equity as well as the lender.

So on those stressed portfolios I mean.

If you were to take those a couple of companies over do you have to liquidity to support.

Can actually taking that relatively aggressive.

So let me start by saying, we deeply and strongly do not want to take over companies. We are not a vulture lender. We are not alone to own shop, a we are a poor performing lender that wants to support the owners be they sponsor owners are non sponsor owners.

That said, we completely have the capability of taking companies over.

And if someone doesn't deal with us in good faith.

Then we will take companies over.

And that is sort of always the.

Silent threat that hangs over any negotiation with any sponsor or non sponsor owner a in regard to their supporting their company.

We will only take over a company.

If someone is dealing with us in what we perceive to be a either bad faith or the owner has simply given up and and hands us the keys and then we have an enormous amount of resources.

Within the over 700 people at HRG to be able to understand and manage the turnaround of any type of distressed situation.

We have never had to take a company over before and I can tell you with a complete clarity and honesty right. Now there is no situation in the portfolio at the moment, where I envision that we will need to take over the company that could change it could change in a week, but at this moment based on all the negotiations on all the workouts that.

We are doing none of them would appear that they're moving towards us having to take the keys.

Got it I appreciate that thank you.

The final question is from Greg Mason with Aries management. Please go ahead.

[laughter] great. Good afternoon Stewart glad to hear that you are doing well unsafe wanted to follow up on Robert Dodd question. There on the accordion feature on the JP Morgan facility is that exercisable at your sole discretion or do you have to bring in other lenders are good JP morgans.

Approval for that I know you might not have need for it now, but just thinking about liquidity options for you is that an option completely kind of at your discretion and disposal.

They had credit if approved the facility, including the accordion, but they need to approved our request for the accordion increase we have confirmed with JP Morgan as of quite recently that if we wanted it it was still avail. It is still available to us but again.

We don't see going in that direction.

You know that said if you.

If I hear consistently from shareholders and analysts the people want us to play more aggressively and not play defense that that's a direction, we could pivot and if we pivoted in that direction. We could you know trigger 35 million dollar accordion increase.

And.

A book more assets as they come available, but for the moment based on all the feedback we have within the firm and from external players.

We've gotten the best advice that we should play very conservatively and again, we do have room to place among offense and if we get that repayment that someone is indicated they're gonna give us that would be replacing a pre covert acid with the post covert asset and Ah that that could also be oh.

Good credit event for us.

Yep, Great and I didn't mean that to say you should be playing offense I just want to know your liquidity available.

If you have to put up more capital to towards companies. You know that you have that available. So could you I knew this will be in the Q. When it's filed but could you outline the stirs JV I'm kind of where are you guys are from your equity Ohio's equity and the leverage that's being used on the facility.

Right now I see hundred 23 million of total assets, but curious of the makeup of that capitalization right now.

Choice in do you have not able to share.

I just getting one second apologize.

Well like you're looking up that Stuart you can my final question touching a little bit on some of the previous questions about the you know the non sponsored we've been hearing a lot of Bdcs talk about sponsors are willing to put up capital you know Fortunately you don't.

Have any issues it sounds like with the non sponsor right now, but you know if this is prolonged and their does need to be capital put in from the non sponsored how.

How easily is that capital available in the non sponsored deals that you're in what is their ability to support the companies.

So it's a great question and the answer is that it varies a very widely.

In the case of our jail, Brian a the family that owns the company I believe has over $1 billion of Ah of worse and they could support the company easily.

And then other situations the owners or have much less available capital a we are always prepared especially on our non sponsored companies to provide me with liquidity where appropriate, but we often will get.

Equity upside associated with doing that and so.

If we provide additional liquidity.

That that gets a commensurate.

Upside in the future or to the deployment of capital I can also tell you that across all of the accounts.

That we're negotiating with right now.

There is only.

One account that I can think of nope, maybe two accounts where in return for.

A new capital coming in.

Where we are agreeing to fund additional capital so in terms of having enough room to play defense with the BDC we have.

Plenty of room based on anything we're seeing right now and leaving plenty of room for things to change. So you know again, that's a part of the liquidity and defensive strategy that that we're playing at the moment.

But there are very few situations.

Where the owners of these companies are not.

Solving the liquidity problem and then frankly in the non sponsored book I cannot think of a single situation right. Now we're a company has a liquidity situation that we're meeting to weigh into do anything on.

All right that's great that doesn't for all my questions. If you have the JV input that'd be great if not have a great day.

Yes, Greg so and just to clarify I'm sure you already realized this so the investment in the JV is structured data in the form of both sub notes and and pure equity investment.

So at 331, the total amount of sub notes on the JV is approximately 60.9 million and then we have approximate will more than a $15 million of equity.

In the JV.

That's combined with Sdrs as partners.

And then we have 60% of <unk> and they have 40% alone.

Got it right Jason.

That's correct.

Alright, Thank you guys I appreciate it.

No problem.

There no further questions at this time I would like to turn the conference back over to management for any closing comment.

I hope everybody sees.

Safe and secure and we will continue to run the BDC conservatively.

Do our best to maximize dividend payout in dividend stability and give you as much transparency as possible.

We tried to do that with the letter a prior to this call and then have tried in this call a to be transparent and proactive about the information. We're sharing with you could give you a sense of how much stability. The BDC has hopefully giving investors competence to.

Industrial those long term.

That's all.

Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.

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