Q1 2021 WhiteHorse Finance Inc Earnings Call
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Yeah.
Good morning, My name is Angela and I will be your conference operator today.
This time I would like to welcome everyone to the Whitehorse Finance first quarter 2021 earning conference call. Our hosts for today's call are Stuart Ahsan, Chief Executive Officer enjoy from Thomas Chief Finance Officer, today's call is being recorded and will be available for replay beginning at five o'clock P M. Eastern.
The replay dial in number is 4045373406 and the pin number is 4287043.
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 telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.
We ask that you. Please pick up your heart grafts will allow osmose, how holiday if you should require operator assistance. Please press star zero. It is now my pleasure to turn the floor over to Sean Silva of Classic partners.
Thank you Angela and thank you for everyone for joining us today to discuss Whitehorse finances first quarter 2021 earnings results.
For your patience as we work through a minor technical issue that caused this brief delay.
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 within the meaning of the private Securities Litigation Reform Act of 1995.
Because these forward looking statements involve known and unknown risks and uncertainties. These are important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements.
Whitehorse Finance assumes no obligation or responsibility to update any forward looking statements.
Today's speakers may refer to material from the Whitehorse Finance first quarter 2021 earnings presentation, which was posted to our website. This morning.
With that allow me to introduce Whitehorse Finance CEO Stuart Aronson Stuart.
You may begin.
Thank you Sean good afternoon, everyone and thank you for joining us today.
Hope you and your families continue to be safe and healthy as we navigate these unprecedented times.
As you're 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 first quarter results from market conditions choice.
Joyce Thomas our Chief Financial Officer will then discuss our performance in more detail after which we will open the floor to questions.
Our first quarter results were defined by an improving economic backdrop supporting both COVID-19 impacted and non COVID-19 impacted credits.
This delivered some of the recovery in our portfolio, but also led to elevated prepayments both of which we had forecasted on prior calls.
As a result, our outlook for 2021 remains unchanged.
GAAP net investment income was $7 $6 million or <unk> 37 cents a share.
Core net investment income was $7 7 million or <unk>, 37.5%, 37, and a half cents per share.
Covering our dividend.
NAV was $15 27 per share compared to $15 23 per share in Q4.
Gross deployments of $58 million were offset by repayments of $110 million.
Our weighted average effective yield on income producing debt investments modestly decreased to nine 6% compared to nine 9% in Q4.
Leverage at the end of Q1 was one one times within our targeted range of one to one and a quarter times.
Activity in our JV remained stable.
Quarter end, the JV held 22 positions at a fair value of $174 6 million in Q4.
I'm sorry at quarter end, the JV held 22 positions with an aggregate fair value of $185 7 million compared to 20 positions at a fair value of $1 74, six in Q4.
The return to our BDC on our investment in the JV at the end of Q1 was 14, 8%.
We continue to believe that our JV is accretive to the Bdcs earnings.
Turning now to our investment portfolio at the end of the first quarter. The fair value of our investment portfolio decreased to $617 million compared to 691 million at the end of Q4.
Gross deployments of $58 million resulted from five new originations and a number of add ons comparatively.
Comparatively two first quarters from prior years. This year's Q1 origination level was stronger.
Gross deployments for more than offset by a $110 million of repayments, which is consistent with the projected outlook. We provided during our last call.
The timing of some of these transactions resulted in a higher Q1 repayment level than expected, but it does not change our overall projections for the year.
Non accruals represented two five per cent of our debt portfolio compared to one 8% in Q4.
We were disappointed to share that Grupo chemo failed to make its interest payment during Q1.
This Puerto Rican Hospital company like other hospital companies is being impacted by COVID-19.
As a result, we wrote off two months of current accrued interest previously recorded in Q4 and placed the first lien loan on non accrual.
This reversal had a negative impact of $1.04 to net debt.
Net interest income.
We are actively engaged in restructuring negotiations from Grupo Hema and we'll provide updates as they become available.
Regarding our other non accrual we're pleased to report debt subsequent to quarter end sure fit merged with Hollander sleep products both share fit from Hollander are owned by the same sponsor.
As a result of this merger.
Our loan investment to ensure that we'll be back on accrual in Q2, and all past due interest and fees have been paid.
At the end of the first quarter sure get hedge accounting for 0.8% of our non accruals at fair value after giving effect for sure going back on accrual on a pro forma basis. Our Q1 non accruals would have been only 1.7 per cent of the debt portfolio at fair value.
We're pleased that even with the markdown on Hema and <unk> was still up during Q1 as the rest of our COVID-19 impacted accounts improved we've.
We've seen emerging strength in our fitness concepts investments as the economy begins reopening.
Our restaurant exposure, while the smart small part of our portfolio has also improved this account represents one eight per cent of our debt portfolio as of March 31 2021.
At the end of the first quarter, 85% of our debt portfolio was first lien senior unsecured.
Sponsor loans comprised 65 per cent of our portfolio compared to 58% in Q4.
Also subsequent to quarter end honors holding had a significant equity investment made by a P E from which will provide additional equity cushion to our alone and we will have a materially positive impact on the mark for honors in Q2.
Looking ahead, our Q2 pipeline is strong we already have 11 mandated deals 10 of which were new originations.
Of the 10, new originations and our pipeline.
Six our sponsor and for our non sponsor.
As always there can be no assurance that any of these mandated deals will close.
Turning to the market outlook.
In Q1, we saw a notable increase.
In Q1, we saw a notable increase in supply demand imbalance in favor of borrowers. This is most true in the on the run sponsor market, which is right now comparatively less attractive than the off the run sponsor market and the non sponsor market.
Pricing and structures in the on the run sponsor market have returned to pre COVID-19 levels, but in the off the run sponsor market. There is still a slight premium on pricing to pre COVID-19 and the same is true for the non sponsor market.
In closing I am encouraged by the Directionally positive trends, we're seeing in our business the improving economic backdrop is benefiting our portfolio and we have a healthy pipeline going into Q2.
Many of our COVID-19 impacted credits are beginning to deliver the economic upside that we've been projecting on prior calls is the vaccine rollout program improves this improving momentum brings particularly significance to our three tiered sourcing architecture, which is foundational to our strategy that includes 24 deal professionals dedicated to.
Origination and 12 locations across North America.
A 20 plus person business development team leveraging H I G. Capital's proprietary prospect database of over 21000 names and sourcing at the H I G level by over 400 investment professionals overall.
As a result, we believe we are optimally positioned to capture the economic recovery in a way that benefits our business and our shareholders with that I will turn the call to Joyce and after which we'll take your questions.
Thanks, Stuart and thank you all for joining today's call during.
During the quarter, we recorded GAAP net investment income of $7 $6 million or <unk> 37 per share.
This compares to $6 9 million $33.05 per share in Q4 2020.
Core NII was 37, five cents per share, which covered our quarterly dividend.
Our investment in the Crs JV increased by $4 $3 million after the effects of transferring for new deals totaling $28 9 million.
As of March 31, 2021, we held 22 positions from the JV with an aggregate fair value of $185 7 million.
Q1 fee income was approximately zero point $8 million compared with 0.4 million in the prior quarter largely a result of prepayment fees collected from the elevated repayment levels during the quarter.
We reported a net increase in net assets, resulting from operations of $8 $2 million.
Our risk ratings during the quarter showed that 84, 3% of our portfolio positions carried either one or two rating compared to 83, 3% in Q4.
Turning to our balance sheet.
We had cash resources of approximately $24 $5 million as of March 31, 2021, including $16 8 million and restricted cash as of March 31, we had approximately $70 4 million undrawn under our revolving credit facility.
As of March 31, 2021, the company's asset coverage ratio for Bart amounts as defined by the 1940 Act was 192, 6%.
She's a requirement under the statute of 150%.
Our Q1 net effective debt to equity ratio after adjusting for cash on hand was just above one times net.
I'd like to highlight our distributions.
In March 2021, we declared distribution for the quarter ended March 31, 2021, 35, and a half cents per share for a total distribution of $7 3 million to stockholders of record as of March 26th.
Dividend was paid on April five 2021.
This marks the company's 34th consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at the rate of $35.05 per share per quarter.
Finally, this morning, we announced that our board declared a second quarter distribution and 35 and a half cents per share to be payable on July <unk> 2021 to stockholders of record as of June 18th 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 power of our portfolio.
Dish into other relevant factors they may warrant consideration I'll now turn the call back over to the operator for your questions operator.
If you would like to ask a question at this time. Please press star one on your telephone keypad. Your first question comes from the line of Robert Dodd with Raymond James. Please go ahead.
Hi, guys.
Some moving parts. So a question on Grupo Hema.
Example, that the the one form.
And Pat level about $300000 is that correct that was reversed out of interest income.
During Q1.
That's correct.
Got it.
Then just on gripping, obviously put them eco suffered another COVID-19 spike.
Earlier.
Just a couple of months ago is do you have any expectation or belief that the failure to pay the debt.
<unk> payment was related to that.
Paul.
All other issues that have been ongoing in the business for a while.
We are led to understand that.
The vast majority of hospitals.
Cross the country in the world have been very heavily impacted by COVID-19 in terms of normal activity that would go on.
And that has been true for Grupo Hema.
Since COVID-19 hit.
And the company's liquidity.
Including support from the government was not enough to bring the company.
Through this period.
So with great questions about what's going to be the timing of the recovery from COVID-19 and also questions around the levels of government support.
We felt it was prudent given that the company did not pay its interest to put the loan on non accrual and it.
Will stay there until and unless we get data that would suggest that the company would be able to service it properly.
And at the moment, we're in active negotiations with the company around the potential for restructuring.
Got it I appreciate that color and then just another one on the Shaw fit.
You said back on on accrual and it's paid all past due interest will that be recognized.
Recognized as interest income in Q2 or is it going to get some other kind.
Kind of special treatment.
That's from the catalog anything like that.
Robert Thats correct. So now that we're current in Q2 all of that back to interest that was received would be with net interest income.
The Q2 period.
Got it. Thank you and then just one more if I can I one off licensing fees.
In terms of obviously the repayments Stuart what where we're very strong in Q1, if I if I look at your book.
It looks like you may be continuing to expect a pretty high level of repayments. Obviously, you also have a lot of.
A lot of mandates already for Q2. So just you said you know your expectations for the year, all really changed but could you could you reiterate for us exactly what that expectation is in terms of do you expect the book at the end of 'twenty one to be above.
The size at the end.
End of <unk>.
'twenty one.
Can you give us any color on the way you expect that relatively to be quarter to quarter is hard to predict but maybe by the end of the agent goes from color.
Yeah, Robert there are a good number of companies in our portfolio that are either currently in the market for sale or all we believe we will be coming to market are in.
In Q3 or Q4, so we have visibility into a number of accounts that are likely to repay some of which have significant prepayment penalties that will be accretive to the BDC. What we can't predict is beyond what we have is our current pipeline.
How many new deals we will win and how many new deals we will close, especially in Q3 and Q4 given that were distant from those and don't have.
Mandates for those quarters yet.
So the goal is to be operating at about one and a quarter times leverage was about $700 billion of assets.
And it's just.
Not possible at the moment to know where we'll be at the end of the year other than the fact that we have a very strong pipeline.
As of this morning, there were 133 deals in pipeline, whereas prior to COVID-19. The norm was typically 100 day 120 deals. So we're above what our pre COVID-19 pipeline was and if we can win our fair share of transactions, which we've historically done.
That should position us to operate.
In the direction of the total leverage and asset picture that we want to be yet.
Got it I really appreciate that color. Thank you.
Your next question is from the line of Turkey share at Cheyenne with B Riley Securities. Please go ahead.
Hey, good morning, and thank you for taking my question here from one order you mentioned, one particular deal that had a large make hold prepayment penalty did that sale occur in the first quarter or should we expect that are yet to come.
We had deals that had.
Prepayment penalties occur in Q1, but there is a transaction that has as you correctly discussed it a make whole prepayment penalty.
That is currently expected to close in June although again, there can be no assurance that will occur.
And so there is the possibility that we will get a significant prepayment penalty on that transaction at the acquisition of the company is consummated by the end of the quarter.
Thanks for that.
And.
You know in the last call you mentioned potentially expecting the BDC to run out in term leverage of up to $1 five X given the elevated prepayment levels and it sounds like the.
The repays.
The expectations there are continuing so as is that still the right way to think about it and then as those <unk> come in Youll kind of go back to your target leverage of one five times or should we think about that differently.
So.
There were more repayments in Q1.
And then we knew about on the last call.
<unk>, which have resulted in lower assets and lower leverage.
We have visibility into Q3, Q2, Q3, and Q4 of companies that are intended to be sold and so if we could originate enough business to take the leverage up above one in the quarter to up to one and a half times, we would do that in anticipation of the pay downs of these deal.
That said given the repayments that were above our expectations in Q1.
The likelihood of getting above one in a quarter.
In the near future is low.
Thanks for that one more from me I'll hop back in the queue.
Seeing the first liens kind of dominate the mix here I think in prior calls you were targeting more of an 85 2080 515 mix there between first lien and second.
Any comments or updates on kind of.
Pricing and where you're finding more value for the portfolio or any changes to those longer term objectives.
Sure.
The markets are aggressive, especially in the large cap and upper mid cap market.
We have looked at a number of second lien loans, but have only found one that we've been willing to do so far and of the 11 mandated transactions one of them is in fact, a second lien loan.
As you know.
Our second lien loan portfolio has continued to shrink over several years now and it's actually lower than the number and amount of second lien loans that we have is lower than our targeted level.
So we do intend to bring in a second lien loan for $15 million.
That loan is priced at LIBOR plus 900.
And should be accretive to the portfolio and we do in our pipeline that I mentioned of 133 deals.
Three of those 133 are second lien loans so.
There is still some more second lien debt, we're working on although the vast majority of our pipeline is first lien London.
Does that fully answer your question, yes, that's very helpful. Thank you very much I'll hop back in the queue no problem.
Your next question is from the line of Melissa Wedel with Jpmorgan. Please go ahead.
Good morning, guys. Thanks for taking my question.
I think first question for you would be about sort.
Sort of expected portfolio yields.
Trends did come down debt quarter over quarter, and I'm wondering if that's related to <unk>.
You talked about the sponsor or certainly on the non sponsor deals.
Pricing pretty competitively I also noticed that day I think in your slide deck you had.
The share of sponsored deals increasing sort of over time I'm.
And I'm wondering if that's related to.
Thank you.
Non sponsored deals price higher than sponsor deals disc.
Despite the fact that the non sponsored deals generally have lower leverage.
As I've shared with the market before and we'll reiterate.
Sourcing of non sponsor deals is much tougher than sourcing of sponsor deals there's much less competition.
But it's hard to find those deals there's no centralized point you can go to to directly originate non sponsored transactions.
Our non sponsor deals are typically levered, only two and a half to four and a half times.
With an average more in the low to mid threes.
And most of our non sponsor deals are priced at LIBOR 700 and above.
Sometimes price to as high as 800, 900 or 1000 over.
A number of the repayments we took.
In Q1 were in fact non sponsor repayments.
And that's one of the reasons that you see.
The ratio of sponsored and non sponsored deals shifting and the average yield shifting a bit as well.
We work very very hard.
To optimize and maximize our sourcing.
In the non sponsor market.
As I mentioned of the.
10, new platforms that we have mandates for in the quarter.
Four of them are non sponsor deals. So we we continue to have a good participation from that piece of the market.
But you would be directionally true that the more non sponsored deals that we source.
That will generate in.
A normal scenario a higher average return on the assets and then the other thing of course that will help the average average would help the average return on assets.
We successfully get our second lien concentration back into range to 10 to 15 per cent of the overall portfolio, which would be very modest and is much much less than we were a couple of years ago.
You have seen our second lien concentration decreased markedly over time.
Yeah.
Okay. Thanks for that and second question is around the JV. How how are you guys thinking about the sort of level and trajectory of COVID-19.
Net income from light vehicle.
Our goal is to successfully deploy all the capital we have in the JV, which would be $75 million of junior capital.
From the BDC.
The 14, 8% is actually I think when you look at the high end of the range or above the high end of the range of what we projected for the JV IRR.
As evidenced by strong originations of well price deals.
If we deploy the $75 million into the JV, we would actively consider based on what we're seeing in the market increasing the allocation to the JV by another $25 million because we do believe that that return.
Anywhere from from 13% to 15% is very accretive to the BDC shareholders.
Okay. Thanks, so much.
Have a good day Melissa.
Once again, if you'd like to ask a question. Please press star one on your telephone keypad.
Your next question comes from the line of Chris Kotowski with Oppenheimer. Please go ahead.
Yes, good afternoon, and thank you most of mine have been asked but it's kind of an interesting case study I am looking at the.
The 816 million of <unk>.
Net realized gains in the.
$7 6 million.
Unrealized depreciation.
Lost track of it a little bit but.
The cost per.
<unk> has moved around over the last two years since it's been on non accrual, but it seems to me like that it kind of implies that you've got a more or less full recovery on that loan after having market is that the right way to read that.
I'll have Gary that's share them go ahead Joseph.
Yeah, no worries, so Chris you're absolutely right day, that's the way to think about it.
No.
Last year had done a secondary trade.
By a portion of the debt and the deep discounted price and as a result of that the cost basis was lowered than essentially what we had mark to that and essentially the realization that.
Debt.
It occurred in the quarter.
It was at that debt Mark.
Value so the $7 5 million.
Unrealized losses really is from just the reversal of those unrealized gains that now are transferred over to realized gains and then the additional amounts.
Mainly relate to sales that we had in narrow parent also known as <unk> during the quarter.
Okay, and it does pretty much imply a pretty complete recovery of your original alone.
We recovered more than our original principal amount yes.
Correct.
To that debt.
Okay, Alright, that's it from me thank you.
No problem.
And Im showing no further questions at this time.
I would like to turn the call back from management for closing remarks.
I am pleased that things continue to go well to BDC, we will continue to seek to give transparency to our investors and I encourage investors or analysts who cover us to let us know prior to these calls any questions that you'd like to see addressed and I hope that.
Everybody has a good day and a good week.
And this concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect your line.
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