Q4 2020 WhiteHorse Finance Inc Earnings Call
Good afternoon, My name is Lori and I'll be your conference operator today at this time I would like to welcome everyone to the Whitehorse Finance fourth quarter, 2020 earnings Conference call.
Our hosts for today's call are Stuart Aronson, Chief Executive Officer enjoys some Thomas Chief Financial Officer, today's call is being recorded and will be available for replay beginning at five P. M Eastern time.
Replay dial in number is 404537 and three 406 and the pin number is 186 0839.
At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation. If you 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 queue by pressing the pound key if you should re.
Acquire operator assistance. Please press star zero, and we ask that you. Please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Sean Silva of Prosek partners.
Thank you Lori and thank you everyone for joining us today to discuss Whitehorse finances fourth 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 may be deemed forward looking statements.
Private Securities Litigation Reform Act of 1995.
Because these forward looking statements involve known and unknown risks and uncertainties. These are important factors and it could cause actual results to differ materially from those expressed or implied by these forward looking statements.
What's worse finance assumes no obligation or responsibility update any forward looking statements.
Today's speakers and you referred to and from the West where screen, it's fourth quarter 2020 earnings presentation, which was posted to our website. This morning.
With that allow me to introduce Whitehorse finance and 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 times.
As Youre aware, we issued our press release this morning prior to market open and 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 fourth quarter results and market conditions than Joyce and Thomas Our Chief Financial Officer will discuss our performance in more detail after which we will open the floor for questions.
2020 was a year unlike any other but our business remained resilient and we finished the year stronger than ever.
You heard me on last quarter's call say that we were seeing the strongest pipeline and our history and I'm pleased to share that our team converted on those opportunities our fourth quarter origination volume set a new company record with more than $160 million and gross deployments, allowing us to reach our targeted leverage level for the BDC.
I'm also pleased to share our positive financial performance updates, including core net interest income which was $34 eight.
After adjusting for 0.3 million dollar capital gains incentive fee accrual and GAAP net investment income for the quarter was $6 9 million or <unk> 33, and a half cents a share.
And a V was $15 23 at December 31, 2020, which excluding a 12 and a half cent special dividend and a V would've increased to 15, and 35 and improvement of <unk> compared to Q3.
Our quarterly record for gross deployments included 16 deals totaling $159 million and five add ons totaling three and a half million, which was partially offset by repayments totaling $39 1 million.
Our weighted average effective yield on income producing investments remained flat at nine 9%.
And as I, just shared we reached our target leverage during the quarter of one and a quarter times.
Our performance this quarter was driven by three factors first we benefited from a gradually recovering environment, where average leverage was conservative but pricing was higher than pre COVID-19 levels.
Second we made a deliberate effort to reach our target leverage level of one and a quarter times with premium price deals, while maintaining our historical underwriting standards.
And third we continue to effectively use our JV to position the BDC to deliver improved earnings.
On this third point, we transferred four new deals and one add on into our JV during Q4 totaling $32 4 million at quarter and our JV held 20 positions with an aggregate fair value of $174 $6 million.
In Q1, the JV has continued to expand as certain deals closed in Q4, if we contributed to the JV from the BDC.
Based on the growth of the portfolio and the diversification of assets the advance rate under the Jv's revolving credit facility has continued to approve.
As a result, the yield on the Bdc's investment and the JV produced and average annualized return above 15% and Q4, which compares favorably with the underwritten levels on a fully ramped basis.
Due to declines in LIBOR over the last 18 months and its favorable impact on the borrowing costs of the JV.
Regarding credit quality, our portfolio is generally improving but our COVID-19 affected accounts, which are a small piece of our portfolio will continue to be impacted until COVID-19 is resolved.
However, once conditions normalize on our Covid impacted positions there is the potential for <unk>.
Potential for significant recovery on these assets.
Turning now to our investment portfolio.
At the end of the fourth quarter, the fair value of our investment portfolio increased to $691 million compared to 591 $595 million at the end of Q3.
This was driven by a record setting 162 million and gross deployments and.
The average debt leverage of the new deals. We added was three nine times EBITDA.
Repayments of $39 1 million, partially offset the gross deployments.
Fee income of 400000 was slightly lower than the 700000, we reported last quarter and as discussed on prior calls fee income for the BDC varies from quarter to quarter based on the amendment and prepayment fees.
Non accruals continued to show strong improvement, representing just one 8% of our debt portfolio.
This compares to three 3% and Q3 and seven 4% and Q2.
The sale of AG Kings was consummated during Q1 and this transaction is thus not reflected and our Q4 results.
At the end of the fourth quarter King's accounted for one 2% of our non accruals at fair value and one 3% of cost on a prompt on a pro forma basis.
You have to account for the exit of AG Kings last out term loan position, our Q4, non accruals would be reduced to only 0.6% of the debt portfolio at fair value.
Lastly, and Q4, 96% of our debt.
Our debt portfolio loans were senior secured first lien and 58% of our portfolio was comprised of sponsor loans as compared to 94% and 52% and Q3, respectively.
Looking ahead, our robust Q4 momentum has carried over into Q1 into the pipeline, which is stronger than it was at the same time last year.
We currently have 11 mandated deals and our pipeline eight of which are new originations and three year EDE add ons of the eight new originations and our pipeline six or sponsor and tour and non sponsor.
Within our three add ons to Responser and one is non sponsor.
As always there can be no assurance that any of these mandated deals will close.
Potential offset to the strong original origination activity is that we have identified that over the next four quarters, we may experience, a higher level of repayment and our portfolio of historical average for.
And we're monitoring a number of these loans, which have an increased likelihood of repayment. However.
However, the good news is that our pipeline in flow is strong and knowing that we have repayments coming we will seek to prudently invest more capital potentially operating at higher leverage than one and a quarter times on a temporary basis. So that we can maintain the earnings power of the BDC.
This potential higher leverage is purely anticipatory and does not change our long term leverage target.
And if increased repayment activity does materialize, we would expect a higher level of prepayment fees that will boost fee income and net interest income as.
As we look to deploy capital I'll note that the broadly syndicated loan market is incredibly aggressive right now and unattractive to us.
The on the run sponsor market is almost back to pre COVID-19 levels in terms of pricing and leverage and is moderately attractive.
On the other hand, the non sponsor and off the run sponsor businesses, which we focus on remain above pre COVID-19 levels with pricing 50 to 75 basis points higher and leverage between a quarter turned to a half a turn lower as evidenced by our Q4 statistics from <unk>.
Turning the call the Joyce and I will provide a few company updates.
And as was publicly reported and December funds affiliated with the H I G capital agreed to sell their collective ownership interest and Whitehorse finance to H I G. Bayside loan opportunity fund for another L. P affiliated with and managed by H I G capital.
This share transfer was executed because the legacy Bayside funds are reaching the end of their terms.
Since Q1 of 2019, the funds affiliated with H I G capital Whitehorse Finance is largest shareholder have sold over half of their position and Whitehorse finance to the public markets, reducing their holdings from 51, and a quarter percentage of shares outstanding to $23 six 7% as of December 31 2020.
<unk>.
While the share transfer does not preclude the fund from selling additional shares of Whitehorse finance into the public markets and the future. There is no timing pressure to do so as this new fund has at least three to five years of remaining life.
Second I hope that our results and my commentary illustrate our commitment to seeking to cover our dividend on an ongoing basis.
We're encouraged by our record setting finish to the year.
As our three tiered sourcing infrastructure was built for cyclicality and market downturns has flourished.
We've heard our investors and analysts loud and clear the dividend coverage is critical and we believe that reaching our target leverage of one and a quarter times is an important milestone and achieving this goal.
Additionally, we have declared special dividends at the end of both 2019 and 2020 and the fee income leads to earnings above the dividend level at the end of 2021. The board of the BDC will continue whether another special dividend is warranted.
We are entering 2021 with strong momentum and.
And was strong and NAV adjusted for the special dividend increased robust new deal flow showed strong pricing and reasonable leverage and almost our entire portfolio is first lien, which is rare for bdcs with a dividend yield as high as ours.
We've increased asset deployment up to our target leverage which will help us earn our dividend on a quarterly basis Q4 was a record breaking quarter for originations and while we cannot guarantee the pipeline activity Q1, so far is shaping up to be our best quarter ever.
His fight this record activity, we have not sacrificed credit quality non accruals are down and our mix of sponsor and non sponsor assets is still balanced who have delivered.
These results amidst a year with unprecedented challenges speaks to our commitment to navigating the cycle and continuing to perform for our shareholders. We are pleased to be providing these types of updates to you. We look forward to continuing our dialogue and answering any questions I will turn the call now to Joyce and after which we will take your questions.
Thanks, Stuart and thank you all for joining today's call.
During the quarter, we recorded GAAP net investment income of $6 $9 million or <unk> 33, and a half cent per share. This.
This compares to $5 9 million or $28 nine per share during Q3.
Core NII after adjusting for the capital gains incentive fee accrual was $34 eight per share and.
And capital gains incentive fee was accrued as a result of net gains and the portfolio during the quarter.
Our investment and the Srs JV increased to $51 $2 million after the effects of transferring and for new deals and one add on totaling $32 4 million.
As of December 31, 2020, we held 20 positions and the JV with an aggregate fair value of $174 $6 million.
Q4 fee income was approximately zero point $4 million compared with <unk> 7 million and the prior quarter.
We reported a net increase and net assets, resulting from operations of $8 $2 million.
Our risk ratings during the quarter showed that 83, 3% of our portfolio positions carried either a one or two rating compared to 76, 5% and Q3.
As a reminder, a one rating indicates that accompany and has seen its risk of loss reduced relative to your initial expectations and had two rating indicates that the company is performing according to our initial expectations.
Turning to our balance sheet.
We had cash resources of approximately $15 $9 million as of December 31, 2020, including $7 9 million and restricted cash during Q4, we exercised the first $75 million available under our accordion of our JP Morgan revolving credit facility as of December 31, we had approximately 20 million undrawn under our revolving credit.
<unk>, which excludes the remaining $65 million accordion under the revolver.
As of December 31, 2020, the Companys asset coverage ratio from BARDA amounts as defined by the 1940 Act was 182%, which exceeds our requirement under the statute of 150%.
Our Q4 net effective debt to equity ratio after adjusting for cash on hand was one two times.
During Q4, we successfully raised additional unsecured debt at attractive rates to support our growing pipeline.
And this was done through a private notes offering and as discussed on our last call as well as through our follow on offering towards the end of the quarter.
And that original private notes offering which closed on October 20th which were an aggregate principal amount of $40 million or five 375% unsecured notes maturing in 2025.
In connection with this unsecured offering on December 4th we subsequently issued a follow on offering totaling $20 million and aggregate principal amount of notes.
The first set of notes was comprised of $10 million or five 375% notes maturing in 2026, while the second set consists of $10 million of 565% notes maturing in 2027 and.
The proceeds from these issuances were used to repay outstanding balances on our revolving credit facility as well as help facilitate the growth and our portfolio during the quarter.
Looking at the composition of our debt capital resources. After these offerings unsecured debt now makes up approximately 30% of our total debt, excluding unexercised accordion option under our revolving credit facility.
Next I'd like to highlight our distributions.
November 9th we declared distribution for the quarter ended December 31, 2020, or 35 five cents per share for a total distribution of $7 $7 3 million to stockholders of record as of December 21 2020 the.
The dividend was paid on January five 2021.
This marks the company's 30 <unk> consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at the rate of 35 and half cents per share per quarter and.
Additionally on December 10, 2020, we paid a special distribution and $12 five per share to stockholders of record.
<unk> 2020.
Finally, this morning, we announced that our board declared a first quarter distribution of 35, and a half cents per share to be payable on April five 2021 to stockholders of record as of March 'twenty six 2021.
Consistent with Stuart's remarks earlier.
For a robust from <unk>.
<unk> has not only allowed us to reach our target leverage levels, but we believe it also better positions us for ongoing dividend coverage by a higher deployment volume with that said and as we've always done we will continue to evaluate our quarterly distribution base and the core earnings power from the Bdc's portfolio and addition to other relevant factors that may warrant.
<unk> I.
I will now turn the call back over to the operator for your questions operator.
At this time I would like to remind everyone. If you'd like to ask a question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press. The pound key we ask is that while posing your question that you. Please pickup your handset to allow optimal sound quality and our first question comes from the.
Line of Mickey <unk> of Ladenburg.
Good morning, I'm, sorry, good afternoon, Stuart and Joyce.
Stuart you Mickey Hi.
And now that vaccines are obviously rolling out and a nice pace and the numbers are coming down I'm curious to understand how you would characterize the opportunity to invest in segments that are more exposed to pandemics like COVID-19.
Mickey we are taking a very conservative stance on that.
We have done some investments in the medical sector.
That was impacted by Covid, primarily in March April may.
But we've seen those companies.
And spring back strong and are performing for the most part.
Even during this COVID-19 period as well as they did pre COVID-19.
But I would say any company that has significant COVID-19 exposure.
We're not interested in taking the variant risks.
Or any other type of risk.
So.
Really what we're doing right now is underwriting.
Non cyclical businesses and businesses that we believe have either light or no COVID-19 exposure.
Okay, I understand and speaking of cyclical versus non cyclical, we're starting to see meaningful wholesale price inflation.
And I do understand and most of your portfolio is non cyclical, but you must have some borrowers that are exposed to wholesale inflation and I'm curious.
How you think about the ability to pass on those price increases.
At the moment, we are seeing people, having reasonably strong pricing power.
And the performance of the majority of our accounts is either stable or upward.
There is a small grouping of heavily COVID-19 impacted accounts.
And in areas like serving restaurants.
Or fitness that continue to be heavily impacted.
Companies that are exposed to the general economy outside of Covid Micky are performing frankly very strongly.
And in terms of that Stuart what trends could you give us some sense of what trends you've seen and.
Borrowers average revenue and EBITDA and what is the average revenue and EBITDA and the portfolio.
I don't have those numbers handy, but I can try to get that together and share it in the future with you mentioned alright. Thank you Stuart.
Your next question comes from the line of Robert Dodd of Raymond James.
Hi, guys congratulations on the quarter or the first one kind of caused it to your comments too.
Relatively.
Elevated prepayments to come maybe say, you'll you'll run.
Higher leverage given the really good pipeline right now.
How confident are you that the repayments will appear right. Because obviously you could you can you can go above target leverage and then if the repayments don't happen yields youre sitting above topic and leverage for some indefinite period of time. So can you give us any color about how high you're willing to run and for how long.
And what the confidence is the repayment I mean, obviously repayments will happen eventually but.
The confidence about how elevated leverage could be for how long and how you feel about that.
Yes.
Robert I can tell you that we have information flows from our portfolio that a number of the companies that we lend to.
Are either performing so strongly that theyre going to get repriced in the marketplace and in some cases have already been re priced in the marketplace and those loans will repay.
And because we're not going to chase pricing down and we also have a number of companies that are strong performers where the owners of the company might have sold them in 2020, if it hadn't been for Covid and they've indicated to us that they have every intention of selling those companies and 2021.
For the most part those are expected to be Q2, Q3, or Q4 events, but given the number of companies that are potentially for sale.
Not relying on any one or two of those sales to happen, but instead there is probably about.
Six to 10 companies that are targeted for sale and.
We are pretty sure given the performance of some of those companies.
And that they will transact and those those repayments will happen.
And the interim we will run the BDC at leverage up to one five times.
So nothing nothing too high or too edgy with.
And with an intention that the Paydowns will take us from one five times down back to one and a quarter times.
If we don't.
Manage ahead of those repayments than we will find ourselves below our target leverage and our ability to earn the dividend on a reliable basis that we're trying to get to will be compromised. So again.
We've run the math and while there can be no assurances of what's the dividend earnings will be or what the earnings on the shares will be.
At one and a quarter leverage we are much better positioned to be able to deliver at least $35.05 a quarter with prepayment penalties waiver fees amendment fees and accretion of early pay offs.
Potentially generating incremental income to the BDC and as I shared in my prepared remarks, if we have incremental income at the end of the year and excess of what was dividend. It out we will speak to the board about.
And considering an additional special dividend both in 2021 and also in any year, where we generate those excess earnings.
Thank you for that value.
I appreciate that alone.
The follow on to that obviously is if you're running higher.
And the near term you have obviously you've got.
$20 million available on the revolver without.
Obviously, there is an accordion would you be looking to utilize the revolver.
To fund those more.
The near term leverage or should we expect more unsecured and congratulations again to 30% of the debt stack being unsecured as well.
Obviously, the public buckets from unsecured BDC that are pretty attractive still.
But what's what's.
<unk>.
What's going to be the debt strat.
<unk> strategy to fund those incremental investments if you do get up towards 150.
We view the unsecured market as being attractive at this moment and if we had a need for incremental debt, we would very openly explore more unsecured debt to take our number.
Up from 30%, but if that market is not attractive.
Our senior secured line is very attractive at LIBOR 250, and.
And we would exercise the accordion as needed, but we have not made a decision yet as to whether we go unsecured or secured.
But we have explored and been communicated to by the banking community as to what they could do on incremental unsecured debt and the numbers that they're quoting us do sound very attractive.
Got it I appreciate that answer thank you and congratulations on a very good 2020.
Thank you so much Robert and have a great day.
Your next question comes from the line of Sarkis <unk> of B Riley Securities.
Thank you for taking my question, you're certainly appreciate the comments on higher repayment activity in this environment. If you can maybe help us with the cadence of deployments or repayments through fiscal 'twenty, one, but do you think youll be able to grow the book through Tony one inclusive of the repayments.
Well, we don't want to grow the book really anymore, one in a quarter times leverage so asset deployment or total assets of around $700 million is the right number but again, we may take it up by $25 million to $50 million in the face of the coming repayments.
Some of those repayments are already occurring in Q1.
Which is a good sign for.
Fee income in Q1.
And we have again visibility into a pattern of payments in Q2, Q3, and Q4, depending on the timing of sale of some of the companies that we're lending to.
At the moment, we have a very strong pipeline for Q1 as I mentioned, it's stronger than any other Q1, we've had before.
Our.
Forward pipeline not just the mandated deals, but our forward pipeline.
Is is strong right now as it was prior to Covid. So we do believe that we're going to be able to keep pace with the repayments and we will be.
Be very careful about not getting leverage too high again, we'll take it up to a maximum of one and a quarter times.
As we see.
Stagger into the repayment schedule, but we expect to see and the rest of Q1 and Q2.
Thank you for that certainly helpful and if I.
Such on the fee income.
Do you expect for this year and if I look at 2019 pretty healthy level of fee income there and if I look at 2018.
5 million Bucks and fee income I guess.
Where do you expect fee income to land just kind of given the pipeline of repayment activity Youre seeing.
It's too early to tell.
Some of the deals that are getting sold.
It depends on which quarter they get sold in terms of what our prepayment penalty will be.
I have one deal.
That's got to remain nameless at the moment, but it has a make whole prepayment penalty and the company may be sold very soon.
At a excellent price and if that happened or prepayment penalty would be.
In that case, very large or that sale of that company could get delayed six months and then that prepayment penalty will be much lower so theres really no way of knowing exactly when that will come out other than the fact that the prepayments that were getting in many cases will involve prepayment penalties and other case.
<unk> will.
<unk> the acceleration of fee accretion and all of those things will be positive for NII.
So the rotation of the accounts is a positive earnings indicator.
But it's too early to tell exactly what those numbers will look like.
Understood. Thank you I'll hop back into queue.
Your next question comes from the line of Mila Philadelphia of J P. Morgan.
And analyst day.
Hi, Thanks for taking my questions. This afternoon.
And looking at the really robust activity and for you I'm wondering and Opex cadence.
And the originations.
And for Q.
Specifically, whether or not there were and any timing impacts to consider there for example, does that put differently than the portfolio and benefit from a full quarter of earnings.
And I suspect that's not the case, but can you give us some.
Context around that.
Yes, we did not benefit from a full quarter of earnings.
As is so often the case in a Q4.
Most of the transactions close in the second half of the quarter and some number of the deals close and the last week or two of the quarter. So we have positioned ourselves with the Q4.
Volume to have very solid earnings and Q1 and going forward, but we only got a modest portion of the benefit of that in Q4.
Got it and then.
Yes.
With me on the repayment activity was that fairly evenly distributed throughout the quarter or is that and lauralee skewed one direction or the other.
Joyce and I would need to lean on you to let me know I don't remember when the payoffs during the quarter occurred.
Yes, Melissa what I'd say is.
And the full exit Invesco App and shortly after Q3, so that was early in Q4.
The remaining payments.
And sales probably would just spread out throughout the quarter.
Okay. So as we think about the portfolio yield going forward and certainly noticed that was flat.
And sequentially.
That's consistent with sort of what youre seeing in terms of new deals and what can be rolling off.
So we had very strong pricing on our deals in Q4 as it regards.
First lien pricing.
But as Youll note that the concentration of second lien deals and our portfolio has continued to contract. So the reduction of second lien assets has been offset by the higher pricing, we're getting on the first lien assets, which is why our overall pricing is stable.
As I've shared in prior calls, we really would like to BDC to be balanced about 85% first lien and 15% second lien and we just haven't been able to find second lien assets.
Our credit standards, So we've got and over concentration right now personally and assets or said another way the BDC as an overall.
Safer and more stable portfolio than we even expected to be and.
But what we're seeing so far and Q2, sorry, Q1 is pricing and our non sponsor and off the run sponsor is largely equivalent to what it was in Q4.
Pricing and anything Thats more on the run sponsor is.
Is down a little bit from Q4 down, 25% or 50 basis points.
But the deals that were mandated on and the deals that we're trying to close are all price anywhere between LIBOR 600, and LIBOR 1100, so pricing in general is holding up.
And I'm, hoping that our performance in Q1, we will continue to keep pricing across the portfolio at least stable.
Got it thank you so much.
Once again, if you'd like to ask a question. Please press star One. Your next question comes from the line of Chris Kotowski of Oppenheimer.
Yeah and good afternoon.
Most of them and were asked but just I noticed the dividend income and relatively high was that.
Is that just because of the joint venture is ramping up and then we should expect that to continue or is it.
And just to.
The one off from unusual thing that happened.
Joyce and Chris Thats correct.
It's related to the earnings contribution from the JV.
Okay. So we shouldnt view this as necessarily as an extraordinary level.
That's correct.
Okay.
The JV is doing very well and is functioning frankly, a little better than even projected where I think we indicated that the expected returns on the JV would be 12% to 15% and right now the JV is operating at better than 15%. So as we continue to move forward to fill the JV and we still.
I'll have some room to grow that that should have a incremental positive effect on earnings and once again tried to set us up to be able to earn the dividend on a reliable basis quarter to quarter with upside.
Alright, and as the JV, you're able to retain any of its earnings are paying it all out on as it turned quarterly basis.
I believe it pays it out all quarterly is that not right Jason.
The intent is to distribute it currently on a quarterly basis.
Okay, Alright, great Thats it from me. Thank you.
Thank you Chris.
At this time there are no further questions I will now return the call to management for any additional or closing comments.
Thank you operator.
I just want to highlight that we continue to be a highly credit focused organization.
We now have 20 originators in 12 locations across North America, we are directly originating a bespoke grouping of assets for the BDC.
And are utilizing.
<unk> resources across AIG to optimize origination and optimize underwriting.
Worked very hard to earn the dividend on a reliable quarterly basis and hopefully we will have earnings in excess of the dividend that will position us to be able to offer supplemental dividends.
At the discretion of the board in the future. So I appreciate everybody's time and look forward to speaking with you next quarter.
Thank you for participating and the Whitehorse Finance fourth quarter 2020 earnings Conference call. You May now disconnect your lines and have a wonderful day.
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