Q2 2020 WhiteHorse Finance Inc Earnings Call
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Good morning, My name is Lisa and I will be your conference operator today at this time I would like to welcome everyone to the Whitehorse Finance second quarter 2020 earnings Conference call.
Our host for today's call, our Stuart Aronson, Chief Executive Officer enjoys and Thomas Chief Financial Officer.
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It is now my pleasure to trying to for over two shots silver approach like partners.
Thank you Lisa and thank you everyone for joining us today to discuss Whitehorse finances second 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 related to financial guidance, maybe 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 certain important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements.
Of course finance assumes no obligation or responsibility to update any forward looking statements.
Today's speakers me referred materials from the Whitehorse Finance second quarter 2020, <unk> earnings presentation, which was close to two our website. This morning.
With that allow me to introduce Whitehorse finance feel Stuart Aronson Stuart you may begin.
Thank you Sean.
Good afternoon, and thank you for joining us today I Hope you and your families continue to be safe and healthy as we navigate these unprecedented village.
As you're aware, we issued a press release this morning prior to market open I 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 results relative to market conditions. Jason will then discuss your performance in more detail.
After which we will open the lines for questions.
We're pleased to report the second quarter results demonstrated strong rebound from the lows experienced in mid March.
First I would like to share that any de increased materially to 14 61 for share.
Paired to 13 86 per share in Q1.
This 5.4% increase resulted from several factors increased marks on assets, resulting from price improvements on the market.
Credit improvements on cobot 19 impacted loans.
Our work with our borrowers and sponsors and an opportunistic secondary market purchase.
Second we have dramatically improved liquidity in the BDC with approximately $75 million of available capital under our unsecured credit wind as of today.
Including 400 million dollar according facility accordion facility.
This materially lowers downside risk relative to the prior quarter should market volatility return, while providing the opportunity to take advantage of more attracted turns in the marketplace, which include lower leverage and higher prices on loans.
During the quarter there were no adjustment items to court and I only so we will so we are reporting second quarter GAAP net investment income of $5.2 million or 25, and a half centsper share.
This compares to first quarter gap and I have 6.1 million or 29.7 cents per share in first quarter core and <unk>, five and a half million or 26.7 cents per share.
The high level. This quarter resulted from a combination of lower asset balances driven by repayments interest rate declines lower amendment and prepayment penalties compared to our historical trends.
And the income impacted assets that are on non accrual.
Despite our increase in any d., we would've liked to it seems stronger net investment income.
And our Investor presentation, we shared an estimate of the level of cobot 19 risk exposure across our portfolio.
When we produced these reports we take into account the most recent data on each company, including feedback from management about real time performance and their best projections to what will occur going forward.
Had a strong portfolio focus since cold, but yet you speak to management teams have impacted borrowers as frequently as every week.
As you can see in the presentation accounts, which are classified as either very high or high exposure collectively represent approximately 7% of our portfolio.
Which we believe is manageable considering the extreme disruption across the economy.
I'm pleased to share that across our portfolio companies that were impacted by corporate 19 received consistent support from sponsors and private owners through equity injections and cost containment measures.
We're working with owners of these companies do insured equity injections of liquidity are sufficient to bridge the companys into 2021.
During the quarter, we entered into three new positions in three add ons totaling 39.4 billion in gross deployments.
Of our three new positions, which totaled 33 point Sixmillion two were non sponsor.
All portfolio additions during the quarter were first lien and our weighted average effective yield on income producing investments for Q2 was 9.6% compared to 9.9% during Q1.
Total repayments in sales were 36.6 million, including 24.8 million dollar pay down on Seagate, which was our largest and oldest active love.
This pay down meaningfully enhances our liquidity reduces second lien portfolio concentration and improves our credit quality.
As I've shared we've made tremendous progress in improving our liquidity and outstanding borrowings or JP Morgan facility has a maximum borrowing limit of 250 billion.
With an additional 100 million dollar accordion feature and a minimum borrowing amount of 175 million.
At the end of the first quarter, we had outstanding balance of 230 million through $231 million.
He ended the second quarter, our outstanding balance decreased to 192 million and as of today. Our outstanding balance has reached the minimum borrowing amount of 175 million.
It's influx of liquidity.
Combined with our disciplined approach sourcing will allow us to rebuild our pipeline and take advantage of the better deals now available the marketplace.
The deals we pursue will be to companies that are not distressed have local that 19 and show low to moderate cyclicality risk as we believe there is a high risk of recession in 2021.
At the end of the second quarter, the fair value of a portfolio decreased to 547.4 million compared to 557.1 billion at Q1.
Gross deployments of 39.4 million were fully offset by a transfer of 30 point 36 point Sixmillion it assets to our JV. In addition to the 36.6 million of repayments themselves.
However, we also recorded 17.8 million in mark to market gains during the quarter.
Which meaningfully improved on a b.
During the quarter, we reached an agreement to restructure one of our credits and the fitness industry, which was an area. We had identified in prior quarters as high risk.
Well all involved lenders will encounter a partial and hopefully temporary loss on their debt positions. The owner is injected material new equity into the company.
We are placing the restructured loan back on accrual in Q3, we received equity as a part of the restructuring, creating an opportunity for performance based upside over time as the cobot 19 issue is resolved.
Second as good as has been publicly disclosed we restructured our debt position for a credit in the financial services space and have taken ownership of its operating subsidiary pending regulatory approval.
The loan has been marked at 80 cents.
As the investment it's expected to convert into new equity ownership after quarter end, we'll have the possibility for upside based on the forms the firm's future performance and that term is performing very very well right now in the midst of called <unk>.
A third any de benefited from improvements in the situation on our non accrual account AG kings.
As you would expect one outcome from corporate 19 is stronger demand for groceries, which has been the case. It AG Kings and we also added to this position in a secondary trade a temporary really affecting our reported non accrual levels.
We do have one small new account on non accrual, which was marked down from 93 cents to 81.
We're in active dialogue with the sponsor on this credit as the borrower works to improve its current situation.
In total the nonaccrual percentage of assets at Whr will be 3.3% after giving effect to the aforementioned restructured credit going back on accrual and excluding the effect of our secondary markets market purchase at King's during the quarter.
We have had ongoing success and improving portfolio diversification in our portfolio had a fair value average debt investment size of $8.8 million within our debt portfolio, 93.8% of our investments are now first lien driven by the Seagate repayment.
Good 0.7% of our portfolio is sponsor backed.
[noise] leverage decreased 2.86 times during the second quarter compared to 1.4 times at the end of Q1.
As we focused on improving liquidity during the quarter.
Having accomplish that goal, we are often lead position to deploy capital into high quality loans as market conditions had big done improving.
Thus far in Q3, we have seven deals mandated as well as to potential add ons all of what your first lien opportunities and all of which will be priced at post covert levels and all of these deals are first lien.
[noise] unfunded commitments at quarter end were $2.4 billion.
In terms of the macro outlook during April and May we saw very limited competition in our key markets as pricing search significantly but deal activity was very muted as most M&A activity was canceled or delayed.
Those trends reversed in June and July there's a number of competitors we entered the market.
Pricing has now moderated to levels that are 75 to 150 basis points higher than precautions levels and deal activity at least for US is recovered to about 80% to 90% or prequaled at levels.
In general our opinion as the deals were working on now are more attractive in terms of risk return because what we've seen since 2012 to 2013 vintages.
Now many called been impacted companies are raising money to enhance liquidity, but we've not participated in those to stressed or distressed financings, nor do we plan to.
Our focus is financing opportunities for those companies that have little cobot impact and low to moderate cyclicality with the goal of keeping our portfolios stable and consistent as possible.
Regarding portfolio performance, because the lower leverage and lower Ltvs on average our non sponsored portfolio is performed better than our sponsor portfolio as evidenced by the marks on the non sponsored deals versus the sponsored deals.
All five of our highest cobot impacted loans are run by PE firms and thankfully all those P.E. owners have been supportive so far.
In summary, well and I I for the quarter was below our goal and AG is materially improved and liquidity is strong our goal is to carefully deploy capital on the improved market terms and positioned Whitehorse finance to be able to earn its dividend done accordingly basis.
I'll now turn the call to Joyce and for more detail on our financials.
Thanks, Stuart and thank you all for joining today's call.
During the second quarter, We report recorded GAAP net investment income of $5.2 million or 25, and a half centsper share.
You are no adjustment items to Q2 core and I. So these results compared to Q1, GAAP Eni of $6.1 million for 29.7 cents per share and Q1 core and I, a 5.5 million or 26.7 cents per share.
During the quarter, we recorded net unrealized gains in our portfolio of 17.8 million, primarily driven by markups and four positions if we our investment in the Sdrs JV.
Our investment in the Crs JV increased by $6.8 million of which 5.7 million can be attributed to new positions and 1.1 million resulted from unrealized appreciation.
For the BDC fee income during the quarter was 0.5 million, which while lower than historical trends was approximately 200000 higher than the prior quarter.
After considering our net realized and unrealized gains we reported a net increase in net assets, resulting from operations are approximately $22.8 million.
As of June Thirtyth 2020, net asset value was approximately 300.2 million or $14.61 per share, which compares to 284.7 million or $13. An 86 cents per share in Q1, primarily driven by the mark ups and the opportunistic secondary purchase referenced earlier.
As it pertains to our portfolio and investment activity nearly 64.2% of a portfolio carries either or two or one risk rating on a scale of one to five were NASA rated two is performing according to our initial expectations and asset return. One has performed better section at the risk of loss has been reduced relative to those initial X.
Citations.
Turning to the balance sheet.
We had cash resources of approximately $20.9 million as of June 30 to 2020, including 18.6 million unrestricted cash and approximately 57.8 million of Undrawn capacity under our revolving credit facility, excluding the 100 million accordion under the revolver.
As of June Thirtyth 2020, the company's asset coverage ratio for Bard amounts as defined by the 1940 Act was 216.7% at the ended the second quarter well above our requirement under the statute of 150%.
Our net effective debt to equity ratio after adjusting for cash on hand, This 0.79 times as of the ended the quarter.
Next I'd like to highlight on quarterly distribution.
On June 2nd we declared a distribution for the quarter ended June Thirtyth, 2020, or 35, and a half cents per share for a total distribution of $7.3 million to stockholders of record as of June 19, 2020 distribution was paid to stockholders on July 3rd 20 Duane.
This marks the company's 30 onest consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at the rate of 35, and a half centsper share per quarter.
Finally, this morning, you announced that are board declared a third quarter distribution of 35, an AFE centsper share to be payable on October 2nd to stockholders of record as of September 21st consistent with what we've said in prior quarters. We will continue to evaluate our quarterly distribution both in the near and medium term based on the core earnings powerful portfolio.
In addition to other relevant factors that may warrant consideration.
I'll now turn the call over to the operator for your questions.
At this time I would like to remind everyone. If you'd like to ask a question. Please press star and the number one on your telephone keypad.
Your first question comes from the minus Mickey Schleien Ladenburg.
Oh, yes, good morning, everyone.
Stuart with respect to fee income it was.
Weaker than I had expected.
It looks like weaker than the consensus.
I think a lot of us we're expecting amendment fees given.
The covert pandemic to sort of buoy that line.
And I think in your prepared remarks, you mentioned that deal volume is close to pre covert levels can you give us a sense whether fee income can regress back to sort of historical call. It 2 million a quarter or should we expect it to remain suppressed sort of at these levels for for some time.
So Mickey good day, and a great questions.
We went through a number of significant motto modifications or during the quarter.
Oh, we were very focused on maximizing the equity injections to stabilize the credits as much as possible.
Pose for cobot impacted credits.
Posh is showing.
In general we focused on pricing increases on the deal more than we focused on amendment fees. So we did get pricing increases in five of the eight major modifications we did.
And we are working on some other modifications with more price increases, but the waiver and amendment Hughes were low and on the loan that repaid Seagate. It was a very old loans are there were no prepayment penalties on that.
In general.
Oh waiver, an amendment fees or will be collected.
I don't expect a lot of prepayments between now and year end on accounts, a and those prepayment penalties or typically a source of significant income for us. So.
I think fee income.
We'll be a consistent but not at the peak levels that we saw for several quarters for last year.
It's an offset to that.
As you mentioned deal volume is strong.
And pricing on the deals that we are closing all of them being first lien deals or a much higher than we were getting pretty close I would.
And as we deploy more capital.
These higher returns or that should set us up to a move towards a sustainably higher and I already number.
With a goal once again of being at about one in the quarter times leverage. So we're we're fairly far from that gold the moment.
But with the pipeline and seven mandated deals into out on.
We should be able to move significantly into right direction during this quarter.
That's very helpful Stewart and in terms of deal terms. Your comments are certainly consistent with what we're hearing across the space, but you know obviously LIBOR is much lower than it was a few quarters ago. So there's continued pressure portfolio yield and.
And I suspect there was also demand for good deals, which could limit or upside and those credits as well so to help offset potential pressure on the portfolio yield what is the outlook for your company to tap into the investment grade debt market to help.
Producer cost of capital, particularly since you're part of such a large credit platform in the first please.
Oh at the moment, the most attractive capital from a pricing perspective.
He is our secured credit line at LIBOR to 50.
While we do have an investment grade rating on our unsecured debt.
Unsecured debt prices in the marketplace right now all while the absolute levels aren't bad.
The spread to treasuries is very high and so we continue to monitor or the opportunity to diversify our funding base into more unsecured Nicky candidly, we're going to wait until market conditions are such that we can add that unsecured debt at an attractive spread.
And until that time are most likely to rely on our secured credit line, where we're candidly we have.
Tons of untapped liquidity and if we needed to.
We could trigger a additional borrowing capacity under the accordion line, we've confirmed that with JP Morgan very recently that they would increase the accordion and they would do so at a price that is at the moment much more attractive than unsecured borrower or would be.
Okay I understand a one last question for me maybe for choice and.
Could you update us on the amount of undistributed taxable income and in particular, the deadline to distribute whatever that amount is.
Yes, Hi, Mickey.
So if you recall from last quarters earnings call I believe we had mentioned that the understated amount was approximately 17 million at that point in time, taking into account de distribution that we had just paid in July that number is now under 10 million.
And does not factor and obviously this upcoming distribution that we will make.
Okay and is.
What's the timeframe for.
Under requirements for you to distribute the undistributed taxable income.
Their distribution requirements are just at the end of year, obviously in terms of any declaration there is a timeframe and in Q4, but the actual distribution just needs to be made before the fourth quarter. Okay. I understand those are all my questions at the moment I. Appreciate your time. Thank you.
Thanks Mickey.
Your next question comes from the line of Tim Hayes with B. Riley.
Hi, Jim Hey.
Hey, Steward good afternoon, I hope you're doing well my first question here, just I want to kind of piggyback on Mickey's question here about earnings power and just in the context of dividends you know it but went into the board's decision to maintain the dividend here and you know I know you mentioned that.
At the deal pipelines picking up and spreads are better today than what you were seeing several months ago, but it seems like it's going to take some time for you to grow the portfolio an increase your leverage.
Yeah in a prudent manner, one getting or and I back up to a level, it's consistent with where the dividend is so just wondering again like how what went into his board decision. It there's kind of a timeline that the board has in mind that they'd they'd like to see you get back to a level commensurate with.
With the dividend or you know anything else any other context, you can provide around that.
Sure the starting point Tim.
Is whether or not we feel we have the resources to be able to earn the dividend on an ongoing basis.
In Q1, there were a huge number of questions.
About what was going on in the economy, and what would go on and the economy.
And candidly there was at the time, a lack of clarity not only as to what and I would look like but what the value of the portfolio would be and therefore this the sustainability of earnings power the BDC.
With the increase in any V.
In the quarter or looking at the amount of money, we have to deploy and looking at pricing in the marketplace, a we see a path.
That is available to us to be able to invest in a manner that we can consistently earn the dividend.
And that was what led the board in part to make the decision to pay a full dividend. Despite the fact that the and I was lower.
And then the second pieces.
Thank you made reference our tax taxable income situation is such a that if we did not distribute this money.
We would be subject to a significant income taxes, which would be a inefficient for our shareholders. So it's the combination of the tax situation and the fact that we believe that we are in as a physician to redeploy into.
A mix of mostly first lien, but maybe some second lien assets and to be able to earn the dividend or as we reinvest now obviously in Q3 three.
We're in the process of doing that reinvestment.
So it'll be into Q4 in Q1 before we see a that improvement in the <unk>.
<unk> that's helpful. Thanks, Stuart and I guess, just on that last point there. The Q3 investment activity. So far I think you said that was off first lien if I if I remember correctly.
Could you maybe just give us would you be able to size, maybe how much wider spreads are on these deals versus what you were doing you know earlier in the first quarter. On these are all sponsored deals are non sponsored deals in any other characteristics you might be able to share.
Of the a seven mandated deals.
About half of all three of them are non sponsor for them or sponsor.
And most of the deals carry spreads that range from seven to 5900.
So if you if you think about where pricing was pretty cold it.
Which was much more sort of between six and 700. There is a clear premium price also you know. Please note. We now have 20 originations professionals and 12 cities across North America, who are directly originating business. So we're not beholden to.
The large banks or even the midsize banks, who were syndicating assets in order to find flow a weird directly originating flow and even though there are more people back in the market who are actively originating deals.
There are still a number of competitors, who have severely impaired portfolios, who are out of the market and so a lot of the crazy behavior that we had seen a pre coated.
In terms of people lending off of adjusted adjusted adjusted Synergized EBITDA.
ER has gone away.
And we're seeing a in general.
Tighter documents tighter covenants and lower leverage leverage on average is down half a turn to return.
Which is why was able to say that overall the deals that we are working on and trying to close or as attractive as anything that I've seen since the 2012 or 2013 vintage.
Got it that's that's good color I appreciate that Stuart.
And then maybe just on the new credit that was added to non accrual the sure that home products. Yeah. There's some other home goods stores out there that seemingly it performed well through this crisis. Just wondering if you can give us an update there if that's a sponsored credit and.
Any other I know you're limited in what you could say since a private company, but just any other I'm kind of tidbits you can share would be helpful.
It isn't sponsored credit.
And the sponsor or has injected equity into the credit.
But the venues, which are largely brick and mortar that the company sells through have had called an impact and the cobot impact or frankly has gotten.
A more severe not less severe.
And we are working with the sponsor to figure out how to best address that it is a small position.
But you know based on how the company is doing right now we felt it was prudent to take it on non accrual as at the end of the quarter.
Okay got it that's it for me Thanks again for taking my questions.
Your next question comes on the line of Chris Kotowski with Oppenheimer.
Yeah good afternoon.
When I look at high when I look at the AG Kings position I see the cost went up about 4.9 million and the and the car went up 13 in the quarter. So that tells me you.
But the physician at around 37% of a par I am I doing my math right there.
I can't begin the numbers are out but.
I really can't comment or won't comment on exactly where we bought a other than it was a situation where we felt there was.
Significant value to our shareholders in executing the secondary market trade, a and so and so we did and as that account moves to a resolution.
Based on the fact that is I've already shared grocery stores across the country across the world.
Our doing much much better in the face of coated.
I'm, hoping that we will oh demonstrate to our investor base, if that was a wife secondary trade, even though it temporarily increases our reported non accrual. So it's a catch 22 will be made that trade we knew that the optic would be not great for some period of time.
Time, but we believe that that is a value enhancing moved for our shareholders.
Okay, and then Youre right I Didnt catch it quite when you start first started talking about your non accruals and I think I assume that was lift brands that you were talking about it you said that I mean, I guess that that's credit looks like it's been restructured I mean, it looks like your your cost and it went from you know.
Okay.
10, plus million to eight plus is that the one where you said that you thought there was a resolution after the quarter or I'm not I'm not sure I caught I got here, what you said.
There is a resolution the owner of that company is injected a very significant equity check into the company.
And the restructured debt goes back on accrual as is the beginning of Q3.
So in Q2, it was still on non accrual because we were doing the work out but as of the beginning of Q3.
That that will go back on accrual or restructured debt will go back on accrual and that will improve our non accrual number going forward.
Okay perfect.
And then and that was lift right I mean, I'm I'm right on that right.
Yes.
Yes, Okay, alright, that's it for me thank you.
No problem thanks, Chris.
Your next question comes on the line, Rick Shane with JP Morgan.
Hi, this melissa on for Rick today.
Couple of questions for you all hi around the originations definitely hear your point about and you deal in Nam old in this quarter.
On a with a fair amount of then skewed I it sounds like new portfolio company can you talk about how your due diligence process has evolved in this environment when it's much harder to do you on site due diligence.
Absolutely.
[laughter], it's a great question.
You know it was very unclear when cobot hit.
How the business would operate with everyone being remote.
And what we have found the what I've heard from my peers across the industry is the is that people have been amazed at how well technology.
Has resolved issues of an inability to travel and to be with folks.
We executed the restructuring of lift brands, which normally would have involved.
Many in person meetings or through resumed.
And we have been doing our management meetings and even plant tours.
By use of video technology.
And while I certainly miss the ability to.
Physically be with management teams and our team does as well.
We have found that it works.
Quite well to use modern technology to.
Substitute for in person meetings and discussions.
And while things are slower.
There there is certainly a pacing that has been different especially during the cold period.
We give a recently seen a very significant surge in our deal flow in fact, it's at the bottom of the coded period, we were down about 40 or 50% and at the moment. The most recent we post quarter end you know maybe were down 10%.
And deals are happening.
There are a number of theories as to why transactions are suddenly popping back up on the radar screen.
Some of them have to do with the election and the potential for higher taxes next year.
But the good news is that those deals are.
Consistently being done on terms that are.
Much easier to get comfortable with than what we were seeing in 2018 and 29 team.
Got it thank you for that.
And my follow up question is around the issue of sponsored versus non sponsored deal.
I think until recent history the idea as.
The benefit.
Going along faster path was that it was easy energens and a lot of cases.
And given the environment that we're in now and what you've seen on some of the modifications that you've talked about youve seen equities or.
Does that change your thinking about what makes an attractive investment right now whether it sponsored versus not.
It doesn't I will tell you that a lot of people who engage in the sponsor business exclusively.
Point to the non sponsor business and say that its riskier.
And yet I wanted to make a point in my prepared remarks, and then I'll follow up on that point that if you do the non sponsored business properly.
It is done at very low leverage multiples much lower than sponsor at lower LTV with tighter documents and and tighter covenants and as a result, as we've hit a very significant economic correction.
If you go through our accounts, you'll see that the average marked on the non sponsor deals is better than the average mark on the sponsor deals.
And so while it's great that sponsors inject equity and support their companies that's needed because the the structure on the sponsor deals is more aggressive to start with.
And Directionally speaking when you do a sponsor deal if you lose 30 40, 50% of your EBITDA.
You need an equity injection when you do a non sponsored deal the leverage is so low that even if you lose 30 or 40 or 50% of your EBITDA a in many cases, you're you're still okay.
So.
We think and I think that.
Both markets are potentially very attractive, but I think it's really noteworthy that are non sponsor loan book has held up so solidly during this call that period.
That's very helpful. Thank you guys.
Your next question comes from them on the property back with Raymond James.
Hi, guys on first a few questions as it was AG kings and you've talked about a couple of the so the issues that occurred during the quarter away. You you did the the secondary market purchase a fair value to cost on the season.
No 120%. So if you collected that Mark I think people will be pretty happy with the secondary patches provided that happens in the not too distant future. Obviously, it's a 20 million numbers fair value investment that's no producing income right now last quarter, you talked about a potential resolution maybe this year.
Can you give us any more color on that and what impact if any that did having into expectations. For example, if that your dividend catching up maybe to.
That's a and I are catching up to the dividend.
Late this year, maybe early next year.
Our activities on all the count are in a highly delicate moment, which prevents me from providing any detail on it.
But I can say that we of course, we're in possession of.
A lot of knowledge about the situation and about the performance of the company that allowed us to make what we believe was a well informed decision about that secondary purchase.
And we would never have added to a non accrual account unless we believed that that was a smart thing to do for investors and hopefully before too long it will become evident.
Ah that that was a good decision.
Got it got to appreciate that.
Always delicate situation on the JV, either the target Oh I see a.
12 to 15 said, we've talked about it in prior quarters about how to get them it needed more scale more diversification in the portfolio.
To optimize the luckett structure within that facility how that can be utilized obviously, it's grown where would you.
Say that stands now in terms of the diversification within that JV portfolio necessary to to fully utilize the credits and its severity structure with it.
We've made great progress there is more diversity, we are using our leverage in that structure.
There is still another tick of leverage that you will be able to access as we continue to improve the diversity in that portfolio.
But we remain.
Confident that we will be able to generate the returns that were projected and in fact.
With.
Higher priced deals available to go into the JV now.
And with a very competitive leverage price I think our leverage prices LIBOR to 55.
Or we could easily end up at the high end of the range in terms of the economics at the JV, assuming we hit the original projected leverage.
Got it got to I appreciate that and then just one more on on the dividend.
Obviously heading into you know and you can certainly expect it to catch.
Earnings up to the dividend level, but in the prior quarters, you've talked about being temporary up temporary alignment this year not really feasible given the spillover rules the going into 2021.
Once the full distributions and they this year, it's still a the heading into next year is obviously going to be.
But clearly you know on won't be.
Having quite the influence on putter, Oh, a determining all directing where the dividend comes out. So can you give us any kind of about whether whether that was taking into account as well and should we is there any.
No reason to think that once we kind of tip opens up new still altogether. So to speak that's all the did he admitted into view.
Hi, any material risk of change.
So Robert.
And I shared with the market the.
Risk of realigning the dividend it was twice at moments in time.
When there was a massive amounts of uncertainty about the future.
We did our best to Mark our assets realistically at the end of Q1.
But Q2 was a huge question mark.
Obviously, the stock market things, if there's no issue at all but.
No we were working through.
A significant reality of impact on a bunch of quoted impacted names.
And the the risk of recession in 2021, but the best data that we have now.
Says that our Navy is 14 61.
And if you.
Maker projection that we resolved or non accrual accounts and that we invest our available capital.
Current market returns depending on what your model generates a there is every ability of the BDC to get to a position where it earns its dividend.
So.
We certainly feel.
Better I mean, just evidenced by the NPV, we feel much better about our ability to get back into a position of earning the dividend now than we did three months ago with the caveat that there's still uncertainty as it regards coated and the second wave and a recession and 2021 and two.
Many too and so we've kept the language in our comments.
But.
Oh things clearly better now than they were three months ago in terms of credit quality and in terms of liquidity.
I appreciate that cavity. Thank you.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the mine Bryce Rowe with National Securities.
Thanks, Good afternoon.
Right.
I wanted to start your comments about the direct origination network and the boots on the ground so to speak and I've kind of gone back and looked it and it's interesting to see that you've been adding adding some folks maybe a couple of folks in that function over the last Stephen just six months so.
I'm just kind of what did you want it to get a feel for what.
What you're doing two out to attract those folks and no.
How how you're going about adding and where what market, you're you're you're looking to add.
Add people and thanks.
Sure we have added in both the non sponsor local market.
And also in the sponsored market.
And our goal is to not have to rely on a major financial institutions to deliver us.
Deal flow, we want to find our own deal flow and we have now found consistently for years that directly originating away from the competition allows us to command higher fees lower leverage and and just better overall price.
We're up to 20 originators in 12 markets across North America. Our most recent addition.
Is a a principal higher focused on the sponsors space a one of the reasons, we're increasing our focus on the sponsored space.
Is because of the on the run sponsors who we really haven't done a ton with over the past couple of years.
Our now doing deals on terms that are much more realistic.
And much more balanced in terms of risk reward.
And so.
We have seen a significant increase.
In a access to the sponsor market.
Driven by the fact that White course direct lending as an overall organization can now delivered 200 million dollar commitments and hold positions as high as 150 million, which allows us to be a real solutions provider.
In the mid market lower mid market.
And that benefits very significantly the BDC that takes its pro rata share of each one of those deals, but it's because of that increase flow that we've been able to increased diversity significantly.
I've shared with the market that the typical asset we put in.
<unk> is five to 20 million in fact, it's really been more like five to 15 million on most so over the last three or four years, you've seen the BDC or get a much more diversified portfolio and then shift from about 40 or 45% second lien to now being 94% personally.
Now that said there is almost too much first lien and the portfolio right now I'd I'd like to find a good couple of second lien loans.
But as much as we pointed we have not yet found those down to the portfolio.
Okay wanted to ask about maybe another topic and similar to like or maybe inline with what you're just talking about their second lien versus first lien say, if you've clearly shifted away from that second lien exposure.
And we've seen the portfolio yield come down with that shift and with the with the moves lower in rate. So now that we're we're at a portfolio yield weighted average yield of 9.6%.
Does it feel like you know, we've we've reached a point of stability.
And especially with you know with pricing post coded being you know as high as it is.
They're going to be two things that are gonna bias yield upward.
Oh, one is that on accounts that have had covenant defaults.
Even if liquidity has been injected all we've increased price Oh, all the deals.
Actually thought five of the eight so far has that increased price all eight of the eight that we notified had new equity injected. So first you're going to see existing deals or start to have higher yield and then in the current market environment. All the deals that were adding in our all higher price by 75 do onto.
And 50 basis points.
Than than they would have been pretty cold it.
In addition, we're getting LIBOR floors on all the deals we do.
So while LIBOR is hovering around 25 basis points or we have very few accounts in our portfolio that don't have LIBOR core protection, so LIBOR or whether it's at 50 25 or or zero.
We'll have very little impact on our portfolio.
I will also say that below ly bore.
It does have a side benefit.
Vis-a-vis our live work floors, where our leverage line does not have a LIBOR floor. So we are borrowing at LIBOR, plus 250, which is about 2.75%.
And and they deal that would be priced at LIBOR 750 has a lot works or 1%. So we're getting eat 50, so we're going to get.
Extra play out of that leverage.
And then as we bring our leverage back above one times as I think you all recall, we've lowered our fees on assets beyond one times leverage. So when you look at the earnings power of what can be generated.
By booking assets in today's environment.
It is quite significant in terms of what gets generated down to the bottom line.
Yep Okay.
Thanks for those comments Stewart appreciate it.
No problem for us.
Your next question comes on line of Andrew system, what system investments.
Hi, guys.
I appreciate your comments on the.
Non sponsor book relative to the sponsor book and also appreciate the opportunistic or non accrual purchase.
I apologize if I, if I missed it but could you provide a further breakdown on the risk rating buckets and just clarify that those are.
Forward looking readings as opposed to just backward historical.
We we do a risk rating on each asset based on everything we know at the end of the corridor.
If we have information looking forward that would cause it to be worse than it has been historically, we take that into account in in assigning the risk rating.
Joyce and do you happen to have handy the breakdown of the risk ratings.
We do.
And just as it no to what Stuart just said right. So I. Obviously this is as a six dirty and so it takes into account the performance subsequent to do you do original underwriting as you had mentioned.
So as a 630, we had 12.7 million of the portfolio rated a one.
338.7 million redo the too.
Hundred 60.7 million ready to three.
14 million created a four and the 21.3 million rented a five.
And as we said in her prepared remarks.
In the aggregate, 64.2% of the portfolio is either two or one.
Okay. Thanks very much.
Your next question comes from the line of Tim Hayes with B. Riley.
[noise] you just a couple of quick follow ups Stuart I think you threw out a couple of data point that they're just the unfunded commitments and the non accruals as a percentage of the portfolio ex the new.
EG Kings investment and the.
Lift brands being removed from non accrual as well.
Oh, no question being what Tim.
Oh, sorry, I'm, just looking to confirm a couple of data points you threw out there I think you mentioned the unfunded commitments I think it was 2.4 million bench wanted to confirm that and then the other a data point was just what you just the pro forma non accrual as a percentage of the portfolio.
Yeah. The I believe the pro forma non accrual if you adjust for lift and you would just for Kings was 3.3% is that right choice.
That's correct if you factor out the just secondary purchase of Kings, 3.3% and then the unfunded commitments 2.4 million of which only 1.1 million relates to revolvers.
Got it okay. Thanks.
So you know we've had an ongoing focus that predates.
The cold the situation.
That unfunded revolvers or a oh.
Risky liability during a downturn and as you saw in the public market. Several people got caught with those revolver fundings. So we have actively sought to minimize both the size of the revolver is on our exposure to them banks are are much better situated to provide bose and.
And in as many cases as possible, we either don't have revolvers, and our deals where we outsource archs or outsourcers revolvers buybacks.
And at this time there are no further questions I would now I just trying to call back over to management for closing remarks.
Thank you are really simply put we are going to do our very best to reinvest in a series of assets that we have both mandated and in pipeline.
During Q3 in Q4, I would like to be seem to be operating at approximately.
One of the quarter times leverage.
And Ah I invite or any of our shareholders are analysts are to run the math based on current market conditions, a to assess what that should allow us to do we can't project what will happen in the in coming months.
But certainly based on current market conditions, a we're seeing a really steady flow of very attractive person deals and I hadn't tiered yet, but I will share we're getting good prepayment penalties on those deals. So if we book them now and if they go away next year, which is always a risk.
We will get real get paid a nice fees on the exit for those deals given that we have provided liquidity to companies during a a more volatile moment in the economy.
If other questions arise please send them group and we look forward to talk into next quarter.
This concludes today's conference you may now disconnect.
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