Q4 2021 WhiteHorse Finance Inc Earnings Call
Good afternoon. My name is Ashley and I will be your conference operator today at this time I would like to welcome everyone to the Whitehorse Finance fourth quarter and full year 2021 earnings conference call.
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 made available for replay beginning at five P. M. Eastern time, the replay dial in number is four zero to 220494 to no passcode is required 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 handset to allow optimal sound quality.
Lastly, if you should require operator assistance. Please press star zero. It is now my pleasure to turn the floor over to Robert Greenberg arose and company. Please go ahead.
Thank you operator, and thank you everyone for joining us today to discuss Whitehorse finances fourth quarter 2021 earnings results.
We begin I'd like to remind everyone that certain statements, which are not based on historical facts made during this call, including any statements relating to financial guidance may be deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Because these forward looking statements involve known and unknown risks and uncertainties. These are important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements Whitehorse finance assumes no obligation or responsibility to update any forward looking statements.
Today's speakers may refer to material from the Whitehorse Finance fourth quarter 2021 earnings presentation, which was posted to our website. This morning with that allow me to introduce Whitehorse finances, CEO Stuart Aronson Stuart you may begin.
Thank you Rob and good afternoon. Thank you all for joining us today.
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 from the period ended December 31st 2021, which can also be found on our website.
On today's call I'll begin by addressing our fourth quarter and full year results and current market conditions as well.
Joyce Thomas our Chief Financial Officer will then discuss our performance in greater detail after which we will open the floor for questions.
We are pleased to report strong results for the fourth quarter and the full year in 2020 , One court and I I totaled $1 40, and a half per share which increased by 12, 5% from 2000, Twenty's core NII of $1 $24 nine per share.
Actual results reflect a strong quarter and annual originations with $483 2 million in gross deployments for the year and 199 million for the fourth quarter alone.
GAAP net investment income in Q4 was seven 5 million or 33, one cents per share core NII was $7 3 million or $32 <unk> per share. This compares with Q3 core NII was $7 8 million or 37.2 cents per share.
Sure.
This is after adjusting for capital gains incentive fee reversal and the accelerated amortization of deferred issuance costs from the retirement of our 35 million dollar baby bond issuance.
In addition, given strength of originations and outlook for deployments. This past quarter. We competed a secondary offering of shares we issued $2 2 million shares at an average price of 15 81 generating approximately $33 7 million in new proceeds.
Importantly, we issued the shares at our then NAV per share taking into account issuance costs.
Covered by our management company.
Through the fourth quarter and into Q1, we were able to quickly deploy these proceeds which minimize the drag on earnings per share.
To support the offering Whitehorse advisers contributed 28 cents per issue chair to subsidize underwriting teams for this offering.
N a V per share at the end of Q4 was 15 10, representing a decrease of 36 cents from Q3.
This decline was primarily due to markdowns on our investments in play Monster and Grupo Hema and due to the special dividend payment to shareholders of 13 and a half cents.
<unk> per share was also impacted as a result of the delay in deploying capital from our follow on offering during Q4.
I know this quarter's distribution was the company's 37th consecutive quarterly distribution paid since our IPO in 2012 with all distributions consistent at the rate of 35, and a half cents per share per quarter.
Furthermore, our NAV per share remains above our IPO price I think this points to the strength of our platform and deal sourcing capabilities as well as our historically conservative approach to deal structuring.
Q4 was a record setting period with capital deployments totaling $199 2 million of.
Gross capital deployments of 181.3 million went into 18, new originations made during the quarter and the remaining $17 9 million funded add ons to existing portfolio investments.
Gross deployments were partially offset by repayments of 35 million, primarily driven by four realizations. The result was $164 2 million of net deployments.
We financed this $164 2 million of net deployments from new debt issuance and equity issuance of $65 million and $33 2 million respectively.
Our record setting deployment, however, outpaced our fundraising and as a result, the company's effective leverage increased to 1.31 times. Some of this increase in leverage was due to several repayments that were delayed we expect these delayed repayments are likely to occur throughout the duration of fiscal year, 2022 which would cause.
Our leverage levels to be reduced.
As I mentioned earlier, given the strong net deployments I'm happy to report that the proceeds of our follow on share offering we're fully deployed between the closing of the offering at the end of the quarter.
Needless to say, we continue to be pleased with the pace of capital deployment.
Of the 18, new originations 12 were sponsor.
Six were non sponsor with an average leverage level of only four times I would note that all of these deals except for one where first lien transactions at.
At the end of Q4 more than 95% of our debt portfolio was first lien and 100% with senior secured.
We do continue to look to add second lien loans to balance our portfolio, but we only found one in Q4 that met our conservative risk parameters.
Given the shortage of second lien loans that meet our risk standards. Our portfolio is now approximately 5% second lien loans as opposed to our target level of closer to 15%.
So long as our portfolio remains overly concentrated in first lien loans, which have lower risk and also lower returns than second lien loans, we will consider operating the BDC at a slightly higher target leverage level of up to 1.35 times in order to help the BDC consistently earn its 35.
I've been a half cent dividend on a quarterly basis.
Now stepping back to bring our entire investment portfolio and to focus our investment portfolio achieved an increase in fair value, reaching 819 million at the end of Q4, an increase from $687 million at the end of Q3.
The weighted average effective yield on income producing debt investments was nine 1% slightly below the Q3 level of nine 3%.
Non accruals represented one 3% of our debt portfolio unchanged from Q3.
Grupo Hema remains on non accrual status and play Monster was placed on non accrual status in Q4.
Non accruals as a percentage of our debt portfolio at fair value were stable due to the growth in our overall portfolio size as.
As we indicated during our prior earnings call, we marked down the value of Grupo game up to 42% of par in Q4 as with previous quarter. We expect this investment to be in on non accrual until restructuring negotiations with the company conclude and based on new data since you at year end, we expect the Grupo.
Hema asset to be marked down again in Q1.
We marked play monster down to 65% of par and in the first quarter lenders took control of that company.
As it regards to supply chain disruptions and rising labor costs, thus far the vast majority of our portfolio companies have mitigated the impact of these issues and have generally been able to pass cost increases through to their customers keeping revenues high and keeping EBITDA stable to increasing.
Our portfolios are all well insulated from rising interest rate environment with reasonable debt levels and reasonable leverage levels Holistically, our portfolio would benefit from a rising environment rising rate environment is 99, 6% of our portfolio is comprised of floating rate debt investments.
We continue to successfully utilize our joint venture, which generated investment income to the BDC of approximately $2 2 million during the quarter as compared with $1 8 million in Q3 during the fourth quarter, we transferred $35 1 million in investments to the S. T. R S JV, including three new deals.
One add on and the remaining portion of another deal in exchange for cash of $31 7 million as well as $3 4 million in kind contribution to the JV.
The fair market value of the Jv's portfolio was $259 5 million as of December 31st the.
The Jv's portfolio had an average unlevered yield of seven 9% at the end of Q4 compared to Q3, 'twenty, one average yield of 8%.
At a portfolio size of 239 million.
The Jv's portfolio is currently comprised solely of first lien senior secured loans.
We remain pleased with the income contribution from the JV. The JV has produced an average annual return on equity in the low teens. We believe the JV supports higher returns for shareholders and is particularly relevant given the current market backdrop we.
We closed an incremental 25 million commitment to the JV in Q1, which translates into approximately 62 and a half million of additional investment capacity for the JV is.
As a result, our economic interest in the JV increased to 66, 7% from 60%. This additional capacity should allow for greater scale and diversification of the jv's portfolio and increases our exposure to a highly accretive earnings stream.
In the meantime, the market remains quite busy and our pipeline for future deal flow is at an all time high.
The sourcing process, it's still competitive, particularly for on the run sponsored deals where pricing leverage and documentation terms have returned to pre COVID-19 levels.
While we expect our origination activity levels to remain high we generally have a cautious approach and continue to underwrite to conservative downside scenarios.
Documentation terms in EBITDA adjustments in the off the run sponsor market, which are private equity firms with sizes under $1 billion or less aggressive than they are in the on the run sponsor market. We continue to have significant off the run sourcing advantages due to our presence our physical presence in 12.
Regional markets consistent with prior quarters, there is less competition for non sponsor deals and where we continue to source attractively priced transactions at attractive leverage profiles.
Whitehorse has differentiated sourcing capabilities through our three tier architecture.
We continue to derive significant advantages from the shared resources and affiliation with H I G, which is a leader in mid market investing.
The Whitehorse platform now includes 64 Gil professionals dedicated to direct lending and H I G gives us access to a 20 plus person business development team leveraging H I G. S proprietary prospect database, which includes over 20000 names of Ceos Cfos deal broker.
<unk> attorneys.
Accountants and wealth managers.
We obtained additional sourcing at the H I G level from our relationship with more than 400 investment professionals at H I G and our sourcing drives a high quality pipeline in markets with less competition for mandates.
Thus far in Q1, we have closed eight deals and are working on seven new mandates, including add ons with targeted closings in Q1 and Q2.
Five of the eight closed deals our sponsor deals and five of the mandates are sponsor.
Split between new originations and add ons.
At this stage it is likely that we will complete a record number of transactions in Q1. This exceptional pipeline growth in these mandated deals are enabling the BDC to drive portfolio growth and grow the JV, which will ultimately lead to higher income and greater coverage for our dividend.
Note. However that some of these deals that are in pipeline may not make it into our portfolio in the BDC as we continue to manage our leverage level to the new target of 1.31, 0.35 times or below again, assuming that second lien loans remain at a very low concentration in the portfolio.
In closing.
Okay.
Execute our three tiered sourcing strategy.
Rigorous underwriting standards are maintained in the new year and beyond our portfolio as a whole remains very high quality and healthy we are very optimistic about 2022.
While we remain cautious about cyclical industries, the lingering effects of the pandemic and the war in Europe as well as the competitive state of the credit market. We believe we have built a very strong team and a solid sourcing and underwriting process.
The additional capital we raised late last year, the incremental contribution to the JV and the full effect of earnings from the deployments in Q4 provide a strong tailwind for our financial performance in Q1 of 2022 and the balance of 2022.
With that I'll turn the call to join Us and for additional performance details and a review of our portfolio composition Jason.
Thanks, Stuart and thank you everyone for joining today's call.
During the quarter, we recorded GAAP net investment income of $7 5 million or 33, one cents per share. This compares to $7 6 million or $36.06 per share in the third quarter.
Core NII was <unk> $32 <unk> per share after adjusting for the <unk> $7 million net impact of accelerated amortization of debt deferred debt issuance costs associated with the retirement of a $35 million baby bonds as well as the zero point $9 million capital gains incentive fee reversal.
Q4 fee income was <unk> $3 million compared with $1 2 million in the prior quarter. The decrease was due to reduced prepayment and amendment activities during the current quarter today.
To that end I'd like to highlight that a number of the anticipated repayments that were expected to occur in Q4 were pushed into 2022. So we expect to see fee income and accelerated OID accretion from fees prepayments over the first half of 2022.
We reported a net increase in net assets, resulting from operations of $3 $1 million or risk ratings. During the quarter showed that 91% of our portfolio positions carried either a one or two rating as compared to 88, 9% in Q3.
Regarding the JV, specifically, we've continued to grow our investment as mentioned earlier, we transferred three new deals one add on transaction and the remaining portion of one previously transfer deal, which aggregated to approximately $35 $1 million in.
For our net investment in the JV of $3 4 million as well as cash proceeds of approximately $31 7 million.
As of 12 31, the JV portfolio held positions in 28 portfolio companies with an aggregate fair value of three $259 $5 million compared to 27 portfolio companies at a fair value of $239 million in Q3.
The investment in the JV continues to be accretive to the Bdcs earnings.
We expect the yield on our investment in the JV may fluctuate period over period as a result of the timing of additional capital invested the changes in asset yields in the underlying portfolio as well as the overall performance of the Jv's investment portfolio.
Turning to our balance sheet, we had cash resources of approximately $22 $5 million as of 12, 31, including $10 3 million restricted cash at.
At quarter end, we had approximately $43 $4 million undrawn under our revolving credit facility.
As mentioned during last quarter's earnings call I'd like to note that on October four 2021 in terms of the credit facility were amended to among other things allow us to temporarily upsize the credit facility by $50 million, which allowed the BDC to borrow up to $335 million for a three month period, beginning on October 4th 2021.
Subsequent to quarter end. This was a get amended to permanently upside the credit facility by $25 million to $310 million in total.
And to extend the previously agreed $25 million temporary upsize through April 4th.
This provides a significant flexibility to better account for timing differences between anticipated prepayments and originations.
As of December 31, 2021, the company's asset coverage ratio for BARDA mouse as defined by the 1940 Act was 172, 6%, which was above the minimum asset coverage ratio of 150%.
Our Q4 net effective debt to equity ratio after adjusting for cash on hand was 1.31 times as compared with $1 one four times for the prior quarter.
Turning to capital raising activities during the quarter.
During Q4, we successfully competed completed a primary offering of $2 2 million common shares at a public offering price of $15 81 per share, resulting in net proceeds of approximately $33 $7 million.
Stuart has mentioned these proceeds were quickly deployed to new investments, which speaks to the breadth and quality of our pipeline.
In November Whitehorse Finance announced the closing of a registered public offering of $75 million, 4% notes due 2026, which resulted in net proceeds of approximately $73 $5 billion.
A portion of the offering proceeds were used to redeem our $35 million six 5% notes that were due 2025.
Shortly thereafter in December we sold $25 million of 425% notes due 2028, and a private placement offering to qualified institutional buyer.
Before I conclude and open up the call for questions I'd like to highlight and distributions.
On November nine 2021, we declared a distribution for the quarter ended December 31, 2021 of 35 and assets per share to stockholders of record as of December 20th the.
The dividend was paid on January four 2022.
In addition to our quarterly distribution, we elected to declare a special distribution 13, five cents per share for stockholders of record as of October 29, 2021, as we continue to monitor spill back income and manage the excise tax.
The distribution was paid on December 10, 2021.
Inclusive of this special distribution total distributions paid in 2021 or dollar 55, and a half cents per share.
Finally, this morning, we announced that our board declared a first quarter distribution of $35.05 per share to be payable on April four 2022.
To stockholders of record as of March 25th 2022.
This will mark the company's 38 consecutive quarterly distribution paid since our IPO in December 2012, with all distributions consistent at the rate of $35.05 per share per quarter.
As we've said previously we will continue to evaluate our quarterly distribution both in the near and medium term based on the core earnings power of our portfolio. In addition to other relevant factors that may warrant consideration.
With that I'll now turn the call back over to the operator for your questions operator.
And at this time, if you'd like to ask a question. Please press star one on your Touchtone phone.
Move yourself from the queue at any time by pressing the pound can you. Once again that is star one and we will take our first question from Mickey Schlein with Ladenburg. Please go ahead.
Hum.
Stuart can you give us some sense of how your borrowers.
Revenues and margins are trending and how do you feel about their ability to service their debt.
Given all the headwinds were confronting including the potential for rate increases.
Mickey it's a great question.
As you know in certain parts of the leveraged finance market.
People are making loans that are regularly.
At six and a half to eight times leverage on an EBITDA basis and.
10 to 12 times leverage on a cash flow basis.
That is not our strategy.
As I mentioned earlier, our average originations this quarter were at four times EBITDA. When you do that on a cash flow basis more typically our originations are at about five or five five times cash flow, which leads to very strong debt service coverage levels.
On the companies that we finance and leaves room for interest rates to move up very considerably before it would put pressure on the ability of our companies to service debt.
In general what we're seeing in our portfolio and I've heard from a valuation services, they're seeing this across the market.
The vast majority of companies that are experiencing supply chain cost increases and labor cost increases are successfully pushing those through to their business and consumer customers.
And revenues are generally growing in the majority of our portfolio and EBITDA levels are either being maintained or increasing so general portfolio performance is strong and even on the COVID-19 affected accounts with the exception of Grupo chemo, which still remains quite that.
But all the other public corporate affected accounts are improving either gently or in some cases very significantly.
Thank you Stuart that's that's a helpful explanation, if I could just follow up.
I know that you tend not to invest in cyclical companies.
Companies, which is common in the BDC sector.
Within the portfolio of companies that you've invested in.
Do they have any outside risks in terms of their cost inputs.
Either the sanctions that are developing in Europe or to commodity prices in general that we should be aware of.
We do have companies that have inputs that are linked to oil.
And those companies are obviously seeing and will probably continue to see increased price pressure, but again, we have seen with.
I would say literally every company in the portfolio.
The cost increases have been able to be pushed through.
There seems to be an acceptance.
Across the market that increased cost are requiring.
Pass throughs and of course, we're all reading about that and hearing about that every day.
In terms of the inflation rate in the country, we definitely see that going on in our portfolio.
And it's not only gone on in prior months.
But we have a number of portfolio companies that are doing price increases right now.
In March and April .
And the feedback we're getting is that their customers are.
Which include places like Walmart and in whole foods.
Are accepting those price increases are understanding the nature of the pressures that are being put on companies.
Thank you Stuart.
I appreciate that explanation just one last housekeeping question, maybe for choice and can you give us a sense of where your undistributed taxable income ended for the year net of the.
The special distribution, we made.
Making pro forma for the regular distribution that was paid in January of 2022.
Undistributed income is approximately about 29 5 million.
Thank you Joyce and I have a couple of more questions, but I'll hop into Q2 to give someone else a chance to ask questions. Thank you.
Alright, Thank you happy to answer more as well.
Thank you.
Well take our next question from Bryce Rowe with Husky. Please go ahead.
Thanks.
Thanks for taking the question and good afternoon Hi.
Hi, Brian how are you doing today.
I'm I'm good steward.
I think a lot lot lot to talk about here a lot to digest them wanted to maybe start with that.
Trying to trying to size out the the deal activity you've seen here.
In the first quarter, but as closings and then and mandates and then what that looks like relative to the to the repayment activity that they kind of spilled over into the into the first quarter.
Yeah, we.
In Q3, and Q4, we were alerted by a large number of borrowers.
That they intended to repay.
Most of those repayments were from.
Intended sales of company.
A lot of those sales have not consummated yet.
Some of them are going to consummate here in Q1.
Some of them are expected to consummate in Q2 or Q3 some of them have been pushed out until later in the year. So we are not getting the repayments.
We had been told to expect back.
Back in Q3, and Q4 of last year.
And at the same time, our business volumes have been exceptionally strong.
White horse as a consolidated entity, a we had a record Q4.
As evidenced by the record performance for the BDC and the addition of assets.
And then on top of that.
While this is not necessarily true across the whole market.
We are also experiencing a record Q1.
We're at the Whitehorse direct lending unit.
We are likely to close.
75% to 100% more volume.
We closed in Q1 of 2021, 2020 or 2019 for that matter.
The volumes are so strong.
That given where we are on the leverage at the BDC. There is not room in the BDC to put all of those assets in.
So we are targeting.
Targeting only higher yielding assets for the BDC are in.
In support of trying to consistently earn the dividend.
If we saw a surge of repayments. We currently have plenty of origination volume to replace those.
And so long as I mentioned in the prepared remarks, so long as we're not doing many second lien loans and second lien concentration stays well under the 15% target.
We will operate the BDC at slightly higher leverage of about 1.35 times as opposed to the prior target of one five times.
Okay.
Maybe those go ahead, sorry that that larger asset balance in those more assets will generate more income that will help us cover the dividend on a more reliable basis.
Sure I understood that maybe a couple of follow ups too.
Today's comments.
You said higher yielding what what exactly does that does that kind of mean and then.
Follow up another follow up is you've obviously increase the <unk>.
Getting into the JV, that's something that you've talked about in the past.
Curious how quickly you might take down that 25 million.
The JV now that you've got such a strong strong pipeline.
Price our existing pipeline is deals that are mandated that are supposed to close although they're never can be assurance that deals will close.
That would consume all of that incremental 25 million of allocation to the JV.
So based on projections and subject to the caveat that sometimes deals don't close as planned if mandated deals closed as planned all of that JV capacity will be utilized either by the end of Q1 or early in Q2.
And to your other question at this very moment based on the limited capacity in the BDC I don't have any new deals in my pipeline that I'm planning on putting on the balance sheet of the BDC unless the yield on that asset is at least LIBOR seven and I have several assets that are yields in excess of <unk>.
LIBOR seven.
That I am targeting to put into the BDC.
So it's a very.
It's a very high class situation too to be able to.
Build the portfolio of the BDC with senior secured first lien assets that are yielding LIBOR 700 and above.
Yes, it certainly is.
Thank you I'll jump back into the queue, maybe come back with a follow up or two but I'll give somebody else a chance. Thanks Stuart thanks.
Thanks Bryce.
And we will take our next question from Sarkis <unk> with B Riley Securities. Please go ahead.
Hi, <unk> hi, Thank you for taking the question here I'm just.
Just wanted to kind of come back again to the new leverage target clearly you know with a.
A higher concentration of first lien you could kind of do this right and as I kind of look at the balance sheet. Now can you reconcile that against you know the.
This deal activity, you're seeing it sounds like youre going to be very choosy and then it sounds like you know based on the level of repayments or prepayments that come back in you'll just redeploy them and keep the let's call. It the investment portfolio kind of in this zip code, but maybe towards higher yielding assets is that the right framework.
At the moment based on the current pipeline of mandated deals.
Your assessment is exactly right we should have.
No problem operating the BDC.
At about 1.35 times leverage.
In fact, I would say a base.
Based on the current pipeline, which includes some repayments that are supposed to come in.
At the moment, our leverage today is actually a little higher and we're expecting several repayments before the end of the quarter.
But we are currently in a situation where the originations activity across our both sponsor and non sponsor side are very strong we are finding good high yielding assets for the J D and good even higher yielding assets for the BDC balance.
Feet.
And we will do our very best as we operate in the balance of Q1 and Q2 to optimize the risk return of the BDC portfolio.
Great. That's super helpful. And then just shifting gears here a bit.
I think if I look at the <unk> interest expense line a bit higher than what I was anticipating is is that because of the debt extinguishment cost was inside there or or should I be thinking about it in a different place.
Okay.
Sorry, if that is correct.
The accelerated amortization from those debt issuance costs would be on the interest expense line.
Okay can we share that cost was Joyce and just so people can calculate that in yeah, I think yes.
The gross amount.
<unk> is approximately 800000 zero point $8 million as I mentioned before the net impact.
Net of the incentive fee benefit was <unk> 7 million that adjusted out to call right now.
And on a share basis choice and Thats about what three and a half cents a share.
Somewhere between three five and four yep okay.
Fantastic that's all for me I'll hop back in the queue.
Thank you Sarkis.
Yeah.
And once again as a reminder to ask a question that is star one on your Touchtone phone again Thats star one for any more questions and we will take our next question from Lisa Wardell with J P. Morgan. Please go ahead. Your line is open.
Good morning, I appreciate you taking my questions today.
Good morning, and good afternoon, Eric Good morning.
[laughter].
One of the comments you made about the delay in the payment activity are starting getting pushed into the first half of this year I was hoping you could.
Sure a little bit more context around that.
What's driving the delays is there any reason for concern or you know is this a company sort of cleaning to capital a little bit more closely.
The increased uncertainty in the environment anything you can share with S&P.
Yeah.
Yes. There is there is nothing bad in nothing concerning.
I would say that what I've heard from some private equity firms or.
Or even some non private equity firm sellers is that the bankers, who are representing them told them that they could get certain valuations on their assets and in some cases those valuations came through.
At lower levels, leading the equity players to to not want to sell.
So either that we're there they're delaying the sale.
Until later in 2022 so.
None of those exits that have not yet happened are related to a problem assets all of the <unk>.
Companies are performing it relates primarily to the.
Desired equity gains of the sellers of the company.
They're just holding on and in some cases.
We have.
One credit where there was a planned sale in Q4.
Strategic company is buying that credit, they're going through a regulatory approval and the regulatory approval has just taken longer than anticipated so not a problem in the company.
That would in particular, which is related to infrastructure spending continues to do phenomenally well.
So we do expect to see most of those repayments secure occur.
At some point during 2022 and I think we have.
Even sitting there today, two or three more repayments that were expecting during the month of March.
Got it I appreciate that that contact.
It's.
Interesting, we heard from some other BDC managers.
Earning season that is speaking exactly to that point, where there there's a disparity between public and private market valuations and that might be all that bad.
Yes.
And we've heard we've heard managers C U.
Two different directions on that one can be that.
Slower originations activity.
Or possible thesis is that it could drive demand for growth capital from the private debt market and start.
A tailwind to origination so given that the hold off on some of the deal activity that you were talking about I'm curious, what's the tone of the conversations that youre, having with your portfolio companies are they looking for growth capital at this point.
Understood that you are constrained within the BDC on an English in it but.
Context would be interesting. Thank you.
Yeah, our portfolio companies on the whole are doing very well and are in growth mode.
We have a number of companies that continue to do.
Add on acquisitions or or panic Greenfield expansions are so you know with the exception of the asset against the best way to get a sense of how the portfolio is doing is to look at our marks on the assets.
We've always tried to have a very realistic marks.
Historically from you know anything that's marked down you see it sometimes move up and sometimes move down on new quarters information I'd say the only asset we've had that's been a steady march downward and it will continue to be a steady march downward in the next quarter is Grupo Hema.
<unk> group with him I'll remind you is the second largest hospital chain in Puerto Rico.
And the.
The combination of Covid.
And other secular issues going on in Puerto Rico have caused the performance of Grupo Hema to suffer significantly.
We're working very hard to resolve that.
But it just has not been trending in the right direction, but with the exception of Grupo Hema.
And that trend line the balance of the portfolio again, even the COVID-19 affected accounts with omicron seeming to be past us. The flash results for February are generally positive and in some cases, they're they're very positive.
That's really interesting thanks, so much for the context.
Problem.
Well take our next question from Robert Dodd with Raymond James. Please go ahead. Your line is open.
Thank you.
Good.
Good morning from my time about.
[laughter] okay.
Talking about and and then.
Motor which nation.
A question on fleet, though he might mean, you just mentioned that.
It is trending in the wrong direction can you give us any incremental color is that the financials at Grupo email are trending in the wrong direction or the negotiations on the work out are trending in the wrong direction.
I I would say the Grupo Hema situation.
Our financial performance.
Has continued to be a very negative.
And the negative financial performance has led to the ongoing markdowns.
We have been employing a number of different strategies using our resources that we have at H I G to optimize the outcome last quarter based on our marks we had a number of different outcomes that were both above and below where our mark was.
A number of those options that were above our mark.
Have not played out based on the financial performance of the company and that's why our expectation, we don't know yet because where.
It's a week by week situation Robert.
But our best estimation is at the end of this quarter are there will be a further markdown on that asset.
And I'd be comfortable giving you an estimated range I think that markdown will probably be 20, or 30 cents compared to the 42 cents that its marked at currently.
Okay I appreciate that color that's really helpful.
Hum.
You know the general trend this quarter has been a lot of Bdcs and private credit participants say slowdown in in Q1, and then maybe ill shoot you know starting to rebuild as we go through this year.
Clearly it doesn't seem to be the case with you.
Significantly versus.
Even pre Covid Q1.
Can you can you give us any I mean, what is it about instead of a difference in mix of the channels that youre getting those opportunities coming through now I mean is the sourcing different per se Q1 versus what it was in Q4, which was also a very strong quarter.
It just seem to you.
Yeah.
In terms of in terms of volume that you're seeing in Q1 for the rest of the industry is seeing any any color you can give us on why you think that is.
All I can tell you is that we have our.
Representatives in 12 regional offices across North America.
And so we don't rely on the New York and Chicago banks to bring us volume, we generate our own volume.
And so what I've heard from some of the other players in the industry is.
Is that Q1 has slowed down a lot from from Q4 and most people are experiencing what I guess they'd referred to as a normal Q1 that has not been the case for us our regional origination network <unk>.
Including both private equity and non private equity deals.
Has been.
Exceptionally strong frankly surprisingly strong we didn't predict or budget that we'd be operating this heavily and.
My team, which is up to the mid sixties number of people is operating at almost 100% capacity in Q1 and.
And I can't remember in my 35 year career ever being so busy relatively speaking into Q1, we're being still equally selective on the deals we're doing.
We're turning down anything that we think is two.
Two cyclical or too highly levered.
And we're also turning down deals, where we think others are being.
Too aggressive on price, but as a result, the portfolio of deals that were closing.
Our modest leverage.
Consistent with the history of what you've seen with our BDC AR and the pricing is generally strong.
Biggest frustration to be honest with you.
I wish I had more capacity because there are deals that that I would've liked to have put into the BDC or where the BDC.
Can't take them unless I was going to operate at even higher leverage and we don't want to take the leverage up from what we're indicating to the market. So again, we're focusing on the higher yielding deals.
I would say the deals going into the JV.
Which historically has focused on deals priced $5 50 to 650, I would say right now the JV deals will probably be all 600 and above.
And anything going on to the balance sheet of the BDC.
Is likely to be at LIBOR 700 or above.
Thank you. Thanks, a lot yeah I appreciate it.
Well take a follow up from Mickey Schlein with Ladenburg. Please go ahead.
Stuart just a follow up on your frustration about.
Leverage at the BDC.
With the stock trading above NAV V are you open to.
Raising some common equity at these prices and.
Unleashing some capacity.
We always consider what we think is right for the BDC shareholders.
At the moment, we have not been willing to do that the BDC has been trading above NAV.
Fairly consistently.
Depending on what we see as opportunities in the future we could consider it but so far we have chosen not to go down that path and instead, we're optimizing the portfolio.
With these higher yielding assets.
And again, our desire cant promise it'll happen because you never know, but our desire is to build a.
Very strong first lien portfolio with yields on the assets that allow us to comfortably cover our dividend on a reliable basis quarter to quarter.
As you heard.
Heard earlier.
We had an impact of about three and a half for four cents a share.
On the AR write off of the bond fees.
But absent that you know the earnings per share would have been higher. So we're we're optimistic again no promises, but we're we're optimistic at the moment sitting where we are right now are about earnings capacity in 2022.
Okay I.
I understand.
In terms of the cadence of your portfolio investments and exits in the fourth quarter when I look at the trajectory of an interesting <unk>.
First is the growth in the debt portfolio it seems that.
Your next investments, where we're very much skewed to the end of the year or is that is that correct or am I missing something.
Yeah, Yeah, we had it.
It's very normal in Q4 that a lot of the deals close in December and that's that's been covered by whole 35 year career.
So yes, a lot of the assets that happened to us.
And then we had a couple of things that were supposed to close in Q4 that did rollover into Q1.
Understand.
My last question to what extent.
Understanding that many of your notes are unsecured notes are private.
Can you give us a sense of which ones of them are callable at this point in time or or in the near future.
Choice and do you have a commentary on that.
Making right now.
As of the end of or as of Q1 2022.
We don't have any that are callable.
As you know, we do have some that roll off in 2023.
And so we'll we'll.
We will look at.
That probably in the back half of this year.
So those 2020 threes, which are the ones I was thinking about.
Do they have a call feature or is it kind of make you right. So.
So maybe just to clarify just to clarify my my response.
As Im sure you can appreciate some of these come with call features that would require a prepayment premiums to keep and so from that end.
There are certain ones that technically could be redeemed.
With a prepayment premium right and so from that aspect I think thats, where we would look at that maybe in the later on this year and right now that's not our focus.
Yeah.
Fair enough I think clarify thank you for that but yes. It does those are all my follow up questions I appreciate your time.
And we'll take another follow up from Bryce Rowe with holiday. Please go ahead. Your line is open.
Thanks, a lot.
Wanted to just maybe ask a question about asset sensitivity.
Both at the BDC and at the JV.
Steward of Joy thing can you give us a feel for what the weighted average floor is within the Bdcs that portfolio and then how the JV is asset sensitivity might look relative to the BDC at are the are the floors similar within the within the JV.
The the.
LIBOR floors or so for floors across our portfolio.
Our fairly consistently at 1%.
There are a couple of deals with floors that are a little bit lower 75 basis points.
I think we have floors on either all of our assets are virtually all of our assets.
And.
That that is consistent with our current pipeline as well we are not adding any deals in Q1.
They don't have a LIBOR or so for floors.
Yeah.
Okay, that's great and then one more for me the.
The the move to non accrual for play months' or any reversal of interest in the fourth quarter tied to that.
There was not.
Okay.
That's it for me appreciate the time.
Great.
And there are no further questions.
Oh, no I apologize there are no further questions at this time I'll turn the call back over to the speakers for any closing remarks.
As always we seek to have transparency in what we share with the market. If between this call and the next call Theres any topics that are any of our analysts or shareholders would like us to address please do let us know and we'll do our very best to be responsive.
Thank everybody for their time.
Yes.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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