Q4 2022 WhiteHorse Finance Inc Earnings Call
Good afternoon, everyone. My name is Todd 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 2022 earnings conference call.
Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyce Thomas Chief Financial Officer.
Today's call is being recorded and will be made available for replay beginning at four P. M Eastern time.
The replay dial in number is four zero too.
206071.
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At this time, all participants have been placed in a listen only mode.
The floor will be opened for your questions. Following the presentation.
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It is now my pleasure to turn the floor over to Jacob Muller of Frozen company. Please go ahead.
Thank you operator, and thank you everyone for joining us today to discuss Whitehorse finances fourth quarter 2022 earnings results.
Before we begin I would like to remind everyone that certain statements, which are not based on historical facts made during this call.
Including any statements relating to financial guidance, maybe deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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 2022 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 Jacob.
Good afternoon, and thank you all for joining us today.
As you're aware, we issued our press release this morning prior to market open.
You've had a chance to review our results for the period ended December 31, 2022, 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 the current market conditions. The enjoy some Thomas our Chief Financial Officer will discuss our performance in greater detail after which we'll open the floor for questions.
This afternoon, we are pleased to report strong results for the fourth quarter and for the full year of 2022.
In 2022 core net interest income totaled $35 5 million or $1 $52 six per share representing a 19% increase from 2020 one's core NII of $29 7 million or $1, 45% <unk> five per share.
Full year core NII exceeded regular shareholder distributions by $10 six per share or two and a half million dollars.
These results demonstrate the continued strength of white horses lending platform and strong origination activity highlighted by 221 million in gross deployments for the year.
In Q4, GAAP net investment income and core NII was $11 1 million or 47, six pence per share, which more than covered our quarterly dividend of <unk> 35, and a half cent per share. This marked our highest quarterly NII since the company's IPO.
Assuming no unforeseen factors emerge as long as base rates continue to be in excess of 4%. We expect the earnings power of the Bdc's current portfolio to exceed our current dividend level.
NAV per share at the end of Q4 was $14 30.
Representing a 46 <unk> decrease from the prior quarter after accounting for the <unk> <unk> per share special dividend that was paid in Q4.
This decline was largely the result of market pricing during the quarter that led to Whitehorse, marking performing assets primarily.
Primarily due to valuation factors.
Two of our portfolio companies were marked down due to performance as I will discuss shortly.
Turning to our portfolio activity for the quarter gross capital deployments in Q4 totaled $49 8 million of this amount $42 1 million was funded into six new originations and the remaining $7 7 million was funded into six add ons to existing portfolio of accounts and.
In addition to the add ons, there was $4 million and net fundings made for revolver commitments.
Of our six new originations in Q4, three were sponsor deals and three were non sponsored deals with an average leverage of approximately four times I note that all these deals were first lien loans and had an average expected all in rate of 12% and an effective yield of almost 13% which was higher than the Q3.
Portfolio average at the end of Q4 96, 8% of our portfolio was first lien and 100% of our debt portfolio was senior secured.
During Q4 total repayments and sales were $40 7 million, primarily driven by three complete realizations. These largely offset the bdc's originations activity, leading to net deployments of $13 1 million for the quarter. In addition, one deal was transferred to the S. T. R S, Ohio JV in exchange for 8 million.
Of cash.
With originations slightly outpacing repayments net effective leverage increased to 1.26 times at the end of Q4 as compared to $1. Two two times at the end of Q3.
At this leverage level, we remain at the low end of our target leverage range of $1 two five to 135 times.
As I shared on prior calls so long as our portfolio remains heavily concentrated in first lien loans, which have lower risk than second lien loans, we expect to continue to run the BDC at up to 135 times leverage.
Regarding the three complete realizations, we earned $2 6 million from interest and prepayment fees and $1 6 million realized gain on the sale of warrants, which generated an aggregate IRR of 18, 8% on the $38 1 million of aggregate capital invested in these deals this attractive return for senior secured.
Loans demonstrates the power of our sourcing model and the lower and mid markets.
Fourth quarter realizations included ESCO on services, CHS therapy, and access USA shipping.
In the first quarter Theres only been one full realization to date and we anticipate repayment activity to remain relatively low through the first half of 2023.
Given the change in marketplace pricing, which I will discuss shortly we believe that repayments of historical investments will likely allow whitehorse to redeploy that capital into higher yielding investments.
With that in mind, I'll now step back to bring our entire investment portfolio and to focus.
After $13 3 million in net mark to market decreases $1 6 million in realized gains $1 6 million of accretion and the effects of the S. T. R. S. JV asset transfers the fair value of our investment portfolio was $760 2 million at the end of Q4.
This is down marginally from $764 6 million at the end of Q3.
The weighted average effective yield on our debt investments was 12, 6% as of the end of Q4, which reflects an increase from Q3 level of 11, 4%. The increase was primarily driven by a rise in the portfolio's base rate.
Addressing the S. T R S, Ohio joint venture, we continue to utilize our JV successfully the JV generated investment income to the BDC of approximately $4 million in Q4, as compared with $3 8 million in Q3.
This increase was driven by modestly higher interest and dividend income from the JV in Q4 during the quarter. The company transferred one new deal <unk> Solutions, Inc. Into the S. T. R. S JV.
As of December 31, the fair market value of the Jv's portfolio was $284 3 million at the end of Q4, the Jv's portfolio had an average unlevered yield of 11, 3% above Q3s average yield of 10, 1% the increase on the Unlevered yield is primarily due to rising base.
<unk>.
Additionally, as announced on February 6th we together with Str's, Ohio have increased our capital commitments to the JV by $25 million. The increased commitment comprised of an incremental $15 million investment from Whitehorse finance and an incremental $10 million investment from Str's, Ohio brings total capital come in.
<unk> to the JV to $175 million.
The JV produces average annual return on equity in the low to mid teens to the BDC, We believe white horses equity investments in the JV provides attractive return for shareholders given the Jv's return on equity we look forward to utilizing the new capital commitment as we seek to increase our exposure to highly accretive and conservative.
<unk> streams.
Transitioning to the Bdc's portfolio more broadly as mentioned earlier there are some markdowns in the portfolio as a result of the continued broad market price increases in Q4, I will elaborate on specific market dynamics shortly but would note that we see credit pressures as most acute and consumer facing companies.
This was partly because many retailers overstocked inventory during the worst of the supply chain disruptions and are now seeking to reduce those inventory levels materially.
The vast majority of our deals have strong covenant protection and we are finding that private equity owners are behaving very well and supporting their credits with new cash or contingent equity as needed other than consumer facing borrowers. The majority of our portfolio is performing well.
Notably our investment in play Monster, Inc. Was marked down $2 7 million during the quarter and remains a troubled asset our team is working hand in hand with experts in private equity as well as external advisors to turn the company around for sale and we anticipate that process will take two to three years.
Given new information since quarter end, we expect to move the original senior debt for play Monster to nonaccrual status beginning in Q1. It is worth noting however that even we play monster on nonaccrual less than 1% of the Bdc's portfolio at fair value would be on non accrual status.
In the second half of 2022, the general direct lending markets experienced a material correction stemming from a combination of economic weakness significant inflation and rising interest rates.
Spite these pressures we are comfortable with the performance and quality of our borrowers.
In general we have observed an increase in borrower revenues, which can be attributed in part to inflationary pressures and higher prices and about half of our portfolio companies have been able to maintain margins and successfully pass through increased costs with price increases and the other half theres been an uptick in leverage but thus far this has only had a modest.
<unk> on our typical borrower's debt service coverage.
While the portfolio is holding up well, we are keeping a careful eye on demand characteristics, especially in the consumer sector, although our exposure to consumer facing companies represents less than 50% of our portfolio based on fair value.
And most of our consumer facing accounts, we've seen evidence of demand weakness. However, this has not appeared in other areas, including general industrial B to B healthcare TMT and financial services, which has all been surprisingly strong.
Additionally, our portfolio remains mostly represented by non cyclical or light cyclical borrowers as we hold no direct exposure to oil and gas auto or restaurants, and a very small exposure in the construction sector.
While many borrowers have been dealing with inflationary pressures in our portfolio of those pressures appear to be moderating evidenced by lower transportation costs and a stable ish stabilization of labor costs.
Regarding rising interest rates, we've always underwritten deals with the expectation that interest rates were going to rise and we've avoided deals with excessive leverage during.
During much of 2022, a number of lower mid market lenders failed to adjust to the move in the broader market and continue to do deals on aggressive terms and surprisingly low price.
During the fourth quarter we.
We saw these players finally correct to the market. However, we understand that many lenders who underwrote at six times or more leverage are now having issues with their portfolio companies ability to service debt. Meanwhile, Whitehorse has consistently and deliberately chosen to deploy capital into deals with more conservative terms and with premium.
<unk> and as such has built a portfolio that we believe is better equipped than many to withstand a potential economic downturn.
The credit market is largely reset to levels, one would expect to see in a downturn deals for cyclical companies are no longer being underwritten at aggressive leverage levels and pricing even for non cyclical assets have seen an upward adjustment in.
In the mid to lower end of the market, which is our main focus loans are now being issued on more conservative credit terms with tighter documentation and covenants in addition to increasing prices.
From a lending perspective, the current market environment offers exceptionally attractive terms. Nonetheless, we are being cautious in the face of a weakening economy and remain focused on credits with compelling risk return characteristics. Our base case assumption is that we will see recessionary conditions in upcoming years, and we want to ensure that the companies we.
We.
Can weather that storm.
The investments in our existing portfolio were underwritten at modest leverage levels and generally are well positioned to withstand even another 100 basis points of rate increases.
White horses equipped to take advantage of these lender friendly market conditions as our pipeline activity levels remain high and our three tier sourcing architecture continues to provide the BDC differentiated capabilities.
The overall pipeline is over 150 deals and we continue to derive significant advantages from the shared resources and affiliation with H I G who is a leader in the mid market the.
The strength of the pipeline enables us to be conservative in our deal selection and the current primary limiting factor for origination as the bdcs invest in capacity.
Our strategy and competitive advantages continue to result in momentum in our originations business. Thus far in the first quarter. The company has closed three new deals two of which will be transferred to the JV as well as for add on transactions. We currently have visibility for several additional new deals. Although there can be no assurance that any of these.
Deals will close nor that the BDC will have capacity to fund any of these deals we.
We anticipate utilizing the capacity provided by repayments to continue to rotate into higher yielding assets that combined with portfolio growth and the potential for increasing our investment in the JV should ultimately lead to higher income and greater coverage for our dividend.
Regarding dividends and as announced this morning. In addition to our normal quarterly distribution of 35, and a half cent per share. Our board has declared a special distribution of seven cents per share for the quarter ended December 31 2022.
We will continue to assess future special distributions based on the company's earnings levels and the interest rate environment. The management and board of the BDC will also examine the ongoing improved earning power of the BDC portfolio given increases in spreads and base rates to assess whether there should be an increase in the <unk>.
Core dividend from 35, and a half cent per share I should have more detail to share on this topic by the next earnings call.
As we start the new year, we remain cautiously optimistic despite expectations of economic softening. We believe white horse is well positioned to continue executing on our three tiered sourcing approach and we're going to rigorous underwriting standards in the new year and beyond with that I'll turn the call over to Joyce for additional performance details and a review of our portfolio.
Oh composition drove some go ahead.
Thanks, Derek and thank you everyone for joining today's call.
During the quarter, we recorded GAAP net investment income and core NII of $11 1 million or $47 six per share compared with a quarterly distribution of $35.05 per share.
In Q3, GAAP NII was $9 8 million or <unk> 42 per share and core NII was $8 6 million or <unk> 37 <unk> per share.
Q4 fee income increased quarter over quarter up to $1 9 million from 0.4 million in Q3 and was driven by prepayment fees generated from two of the full realizations that occurred during the quarter.
In the fourth quarter, we reported a decrease in net assets, resulting from operations of $1 2 million a decline of $5 1 million compared to Q3, which was primarily driven by a mark to market losses recognized in the portfolio. This quarter, partially offset by the realized gains and net investment income earned in excess of our distributions declared.
Our risk ratings during the quarter showed that 74, 8% of our portfolio positions carried either one or two rating lower than 83, 5% reported in the prior quarter.
The decline was driven by three portfolio companies that were fully realized during the quarter that had been rated a one in the prior quarter. In addition to investments in five portfolio companies, which are downgrades with re rating in Q4.
As a reminder, a one rate indicates that a company has seen its risk of loss reduced relative to initial expectations and a two rating indicates the company's performing according to initial expectations.
Regarding the JV, specifically, one portfolio company fully realized and one new asset was transferred during the fourth quarter in exchange for cash of $8 million as.
As of December 31, 2022, the Jv's portfolio held positions in 28 portfolio companies with an aggregate fair value of $284 3 million compared to 28 portfolio companies at a fair value of $280 9 million in Q3.
The investment in the JV continues to be accretive to the Bdc's earnings as we have noted in prior calls the yield on the investment in the JV may fluctuate period over period as a result of a number of factors, including the timing and amount of additional capital investments and changes in asset yields in the underlying portfolio as well as the overall credit performance of the Jv's investment.
Palio.
Turning to our balance sheet, we had cash resources of approximately $26 3 million at the end of Q4, including $16 8 million of restricted cash.
As of December 31, 2022, the company's asset coverage ratio from BARDA mounts as defined by the 1940 Act was 174, 7%, which is above the minimum asset coverage ratio of 150%.
Our Q4 net effective debt to equity ratio after adjusting for cash on hand was one six times as compared to one to two times in the prior quarter.
Before I conclude and open up the call to questions I'd like to again highlight our distributions on November 14, 2022, we declared distribution for the quarter ended December 31, 2022 of $35 five per share to stockholders of record as of December 21.
Dividends paid on January 4th 2023, marking the Companys 41 consecutive quarterly distribution.
Speaks to both the consistent strength of the platform as well as a resilient deal sourcing capabilities and being able to create a well balanced portfolio generating consistent current income.
In addition to the quarterly distribution, we did declare a special distribution of <unk> <unk> per share for stockholders of record as of October 31 2022.
The distribution was paid on December nine 2022, and inclusive of the special distribution total distributions paid in 2022.
Amounted to $1 47 per share.
Finally, this morning, we announced that our board declared a first quarter distribution of $35 five per share to be payable on April four 2023 to stockholders of record as of March 'twenty four 2023.
It will mark the company's 40, <unk> consecutive quarterly distribution paid since our IPO in December 2012, with all distributions consistent the rate of 35, and a half cents per share per quarter.
In addition to the quarterly distributions our board declared a special distribution of <unk> <unk> per share timing of the special distribution timing of the special distribution is concurrent with our Q1 regular dividend and has to be payable on April four 2023 to stockholders of record as at March 2004 2023.
As we've said previously we will continue to evaluate our quarterly distributions and future special distributions 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 over to the operator for your questions operator.
Thank you Sir the floor is now opened for your questions. If you would like to ask a question at this time. Please press star one.
If you need to remove yourself from the queue. You may do so by pressing star to again to ask a question. Please press star one.
Our first question will come from Mickey <unk> with Ladenburg Thalmann.
Yes, good afternoon, everyone.
Stuart and choice and thanks for your really thorough remarks, it's quite helpful. So I just have a couple of questions.
Could you give us a sense of where the cash interest coverage ratio was of the on balance sheet portfolio based on fourth quarter interest rates.
Joyce and do you have that information or is that something we'd need to get for later sharing.
Yes, the cash interest coverage ratio and the underlying portfolio I apologize to make you don't actually have that readily available let us see if we can try to get this for you during the call.
Okay.
Meanwhile.
Could you tell us what kind of trends youre seeing in revenues and EBITDA of the on balance sheet portfolio and where the average EBITDA level stands today.
Mickey we just completed a full portfolio review.
Or all of the deals in our organization, both performing and troubled and.
The ratio that we saw.
Compared to closing leverage was about 40% of our deals are experiencing higher EBITDA and have lower leverage than closing about 40% of our deals have lower EBITDA and higher leverage than closing and about 20% of our deals are about static.
With closing leverage and and even at those levels.
So very balanced performance with the caveat being that the consumer facing accounts.
Have seen.
Anywhere from moderate to severe demand decreases and leverage on those consumer facing accounts is up significantly.
Okay understand thanks, Thanks tore.
My last question, if I'm not mistaken.
Have some unsecured notes due this year just curious whether the.
Terminology in the credit facility will allow you to retain goes from the credit facility or will you have to divest some assets to pay those off.
We have the availability under our existing credit facility to borrow.
To replace the unsecured notes in their entirety.
Whether we will do that under our secured facility or whether we will issue new unsecured notes has not yet been determined but again, we do have the ability under our facility to.
To fund the full amount that is maturing without having to sell any assets.
Okay. That's helpful. That's it for me and Jason I'll follow up with you on the cash interest coverage ratio a little later today.
Thanks, Vicki Thank you Mickey.
Thank you. Our next question comes from Bryce Rowe with B Riley.
Thanks, Good afternoon.
Wanted to.
Maybe start on.
The comments you just made to Mickey's question there Stuart.
The portfolio review you just finished.
The financials that you you get from the portfolio companies, where they as of the end of September or end of December .
So the vast majority of our companies because their mid market and lower mid market. We get reporting that is quicker than what you see in the upper mid market and large cap deals and so we timed our portfolio review this week because the vast majority of the companies had already reported their December numbers to us so not for all of the company.
But I would say for over 90% of our companies we had year end results.
Okay.
That's helpful.
Certainly reassuring.
To know that.
Around the around the dividend Stuart.
Obviously in your prepared remarks talked about the potential for.
An increase in.
And some discussion around around the dividend increase.
At the board level.
What what what would kind of puts you in a position to actually increase as opposed to maybe taking.
Our construct of our base plus the supplemental deck, we've seen many bdcs.
Employ here.
Yes.
What we're looking at is we're looking at the earnings health of the overall portfolio.
Offset by any accounts that we think have a risk of going on non accrual and as I mentioned already one of our accounts will go on non accrual in Q1, although it'll be a very small position in the overall portfolio.
If we determine that based on the.
The term structure of interest rates and the strength of the portfolio that we can consistently generate.
Returns above the 35 and a half since then the board and management will probably be okay with a.
Long term increase to the base dividend, if we conclude that there's going to be more variability quarter to quarter. In our earnings then we would probably stick with the 35 and a half cents and then just declaring supplemental distributions when the earnings are higher but.
Based on the modeling that we're doing so far.
It does look like the BDC as long as interest rates certainly stay above 4%.
The BDC should be able to generate income.
In excess of the current dividend level.
Okay.
And then maybe a follow up to that.
As we think about the portfolio yield the weighted average portfolio yield having having climbed with higher base rates. There Ed is there a timing mismatch in terms of.
When asset.
Assets reset in terms of our rate versus when liabilities.
<unk>.
Not much of one new joist and do we really have any delay there at all.
Yes.
Stuart not much the way to think about it Bryce is the majority of our portfolio assets either reset monthly or.
Quarterly and then with respect to.
Draws on the borrowings on the facility that would in theory.
Reset quarterly in conjunction with the waterfall.
Okay.
Okay.
I appreciate I appreciate your comments that's it for me.
Thanks Bryce.
Okay.
Thank you once again, if you would like to ask a question. Please press star one.
Our next question comes from Erik Zwick with hub group.
Good afternoon.
Just a bit of a follow up on the kind of the discussion on the dividend from that prior question.
If I look at the futures curve for three months, it looks like potentially falls below 4%.
Sometime in the second or third quarter of 2024, or so so not this year, but you know six quarters out not that far from here. So.
Just curious about is there anything you can do or strategies you have in place between now and then to potentially improve earnings because as you mentioned youre considering increasing the regular dividend and my guess is you would not want to have to cut that at any point. So just trying to kind of connect the dots there or maybe you've got a different view on market rates and think they will stay higher loss.
Then the market is currently anticipating just curious if you could provide some color there.
Well, Eric we're in a very very attractive spread environment right now and when you take base rates and spreads.
Senior debt is yielding 11, 5% to 13%, which is a world away from where we were a year year and a half ago.
I don't personally believe this spreads will stay this high for.
For an extended period I think this is evidence of a disrupted market with disruptive liquidity and people being very concerned about economic.
Softening in the marketplace.
And we also look at the yield curve, but the things that we're doing to improve earnings.
Our number.
Number one operating at the 125 to 135 leverage and number two we have increased our allocation to the JV, which will create more core income coming out of the JV in the future because as I mentioned on my prepared remarks.
IRR is on the JV investment are in the low to mid teens. So we used to run sensitivity downside cases.
Including.
With <unk>.
So for going below 4% to make sure that if we increase the dividend that the dividend should be able to be maintained through.
At a minimum an extended period.
Projected performance and again, if we don't believe we can do that then we will stick with the 35 five cents.
And do supplemental dividends as we did this quarter.
Alright, I appreciate the additional color there by.
By the way if our analysts have views as to which is a better path.
If you.
You understand the risks and rewards of what we can do.
Would be very happy to take your feedback from both analysts and shareholders as to what you guys think the right path is.
But definitely during.
The current period with current rates and current base rates.
We are seeing excess income as evidenced by the <unk> special dividend this quarter.
Got it.
And then just looking at the concentration of the portfolio that the mix between sponsored and non sponsored for a number of years that sponsored portion was growing steadily it did come back a little bit here.
Last year in 2022, I'm curious if that was a reflection of intent on your part or maybe just market dynamics and how you would expect that to trend in future quarters.
In general our originations activity is about 75% sponsor and 25% non sponsor.
But for the BDC balance sheet, we're only including assets that are priced at 700 or higher so for 700 or higher so to the extent, we're doing sponsor assets that are priced at $6 50, or 60, 75, which historically would have gone on the BDC balance sheet.
But in today's market environment or not.
Those deals if they don't fit in the JV don't fit into the BDC. So the BDC gets more of the non sponsor deals which have a generally higher yield profile.
Sponsor deals in today's market, we see pricing in a range of $6 50 to 750 and non sponsored deals in today's market, we see pricing at a range of 700 to 900.
Pretty much all of the non sponsor deals we're looking at.
Price at a level that fits onto the BDC balance sheet, assuming that that balance sheet has room.
That makes sense I appreciate the clarity and just one last one for me on the kind of credit quality front. I'm curious are you have you seen any uptick in amendment request from for many of their portfolio companies.
Absolutely we have companies again, the companies that have been affected by the.
Consumer led slowdown.
Hum trip covenants.
Where covenants have been tripped, we are generally looking for a combination of equity support and higher rate. That's the beauty of having covenants is that when you trip a covenant youre able to get both credit protection to the downside and typically a higher rate and as I mentioned in my prepared remarks.
The private equity firms that own the companies we've learnt to have been remarkably supportive I would say with the exception of play monster.
The private equity firm walked away from the company because of fraud.
Pretty much every heavily impacted private equity based account we've had.
Has demonstrated support for the company with either cash or contingent equity it's been pretty much universal.
Thanks for taking my questions today.
No problem have a good day Eric.
Thank you. Our next question comes from Robert Dodd with Raymond James.
Hi, guys.
I have a couple of housekeeping ones first if I can on the prepaid fees.
Prepaid and related fees I think Stuart in your prepared remarks, you said that thing was $2 6 million from a couple of assets. The other income lines. One nine so is it fair to say that maybe one and a half of that was in other income and then one.
Just over 1 million with embedded explicitly in interest income.
Joyce and I will pass that to you in terms of a characterization of how the numbers worked through.
Yes, Robert fee income for Q4 was $1 9 million.
As we mentioned that that was predominantly due to prepayment fees were generated on ESCO on services and <unk>.
CHS therapy.
Got it but was there any accelerated amortization related what showed up in interest income yeah that is correct.
The accelerated <unk>.
Yes.
About 700 K.
Got it thank you.
On that how much.
In terms of talking about dividend policy, how much taxable spillover.
Do you have currently because obviously.
Yes.
Yes.
Effective decision, making as well.
As of the end of Q4.
Bill over was a little over $24 million.
Based on that number related to our distribution requirement for the tax year 2022, we do not envision a required special dividend, but as Stuart alluded to earlier in regards to 2023.
<unk> forecasted potential earnings we do expect.
Earnings in excess of our distributions and so that as he had mentioned before is going to factor into our determination on how we do.
David It's going forward I E do we increase the regular dividend or do some supplemental dividends during the year.
Understood.
And then one of your response to <unk> question on the EBITDA.
And you said, 40% of the portfolio is.
As EBITA low wasn't.
<unk>, if I look at your investment <unk> got 25% that category, three four or five which.
So.
Discrepancy between 40 and 25.
Is it fair to say that a portion of those portfolio companies that have lower EBITDA.
Lows.
Just to have lower EBITDA I mean can you give us.
Any reconciliation between the 25%.
They could you know.
Higher risk so to speak with a 40% not loaded.
It's a matter of magnitude Robert.
We did a deal at four times leverage and it is currently at four and a quarter times leverage.
That would be a part of the 40% where the EBITDA is down and the leverage is up but going from four to four and a quarter times leverage would not trigger a company to become a <unk> III.
The company would need to materially underperform.
Before that would happen so if the leverage had gone from four times to call. It five five times.
And it would probably become a III, but for small decreases in EBITDA and small increases in leverage.
Those assets are generally still rated two.
Got it thank you for that clarification.
Probably last one from me I mean, you've mentioned obviously the sponsors are being quite responsive with the exception of plain old stuff.
When when necessary.
How are you.
Looking at the <unk>.
Non sponsor obviously the original sponsor to put in more casual contingent equity.
So how are you evaluating those non sponsor businesses that may be having a few issues in this situation and as the owners.
Welcome to the equity holders willing to step up even though they don't necessarily obviously fund.
Fund or anything like that.
So what's what.
The non sponsored segment looking in terms of cash.
Cash needs and all they get tickets.
That's a really good question Robert and the answer is that there is not a single answer.
In many cases non sponsor companies are owned by either very wealthy individuals or wealthy family offices and in those cases, we're generally finding that the owners are injecting capital into the companies the same way private equity firms are.
But there are other non sponsored companies that are owned by entrepreneurs that don't have deep pockets and don't have the wherewithal to support their companies through.
The economic turbulence that is going on right now, especially in the consumer sector and in those companies.
We are generally willing to provide incremental capital, but in return for that incremental capital.
We take we take minority and or majority equity Stakes in the company. So a part of non sponsor lending.
Where there are owners that either can't or won't support their companies is playing the long term game of investing those companies during the downturn getting equity in those companies during the downturn and then managing those companies back towards economic health when a downturn doesn't exist.
And then generating hopefully.
Nice equity gains off of those equity positions, we took in the downturn.
Again less true in sponsor deals because the sponsors are almost uniformly willing to put up equity to protect a good company, but on the non sponsor side.
It really breaks into two camps.
Where.
Just directionally about half of the companies have owners that can support the companies and about half the companies have owners that can't support the companies.
Thank you for that.
No problems yet.
Yeah.
Thank you at this time, we have no further questions in queue.
Turn the call back over to management for any additional or closing remarks.
I'd just say in closing that the market environment that we're in right now is a little bit more liquid than it was in Q4.
We've seen pricing <unk>.
Moderate in Q1.
By about 25 basis points.
That held on that would imply that the mark on performing assets.
In Q1 could be a little higher.
Then the Mark was in Q4 again, we mark to whatever the market prices are.
And in Q4.
We saw.
Especially the lower mid market.
Just as I said on my prepared remarks, as a number of lower mid market lenders.
Finally, adjusted to the market shift.
So it's an attractive market environment right now.
Modest leverage.
Limited add backs and synergies in the analyses that our buyers are doing and we are looking forward to putting money to work in what is a attractive market environment. So far of 2023.
Which again has worked out to be pretty much as attractive as Q2, Q3 and Q4 of 2022.
With that.
Hope, we've given you a transparency.
Anything that you want to hear about on the next call either shareholders or analysts. Please let us know so we can make sure that these calls are as useful to everybody as they possibly can be.
And thank you for taking the time.
Thank you. This concludes today's Whitehorse finance fourth quarter and full year 2022 earnings conference call.
May disconnect your line and have a wonderful day.
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