Q2 2023 WhiteHorse Finance Inc Earnings Call
During today's call you May press Star zero.
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Good morning, My name is Mike and I will be your conference operator today at.
At this time I would like to welcome everyone to the Whitehorse Finance second quarter 2023 earnings Conference call.
Our hosts for today's call are Stuart Aronson, Chief Executive Officer enjoys some Thomas Chief Financial Officer, today's call is being recorded and will be made available for replay beginning at 12 P. M Eastern time.
The replay dial in number is four zero to 2207 to seven three and no passcode is required at this time all participants have placed been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.
Do you like to ask a question at that time. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. You May press star two it is now my pleasure to turn the floor over to Jacob Muller of Roes and company. Please go ahead Sir.
Thank you operator, and thank you everyone for joining us today to discuss Whitehorse finances second quarter 2023 earnings results before we begin I would like to remind everyone that certain statements, which are not based on historical facts made during this call, including any statements relating to financial guidance may be deemed forward looking statements within the meaning of the.
Private Securities Litigation Reform Act of 1995.
Cause 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 second quarter 2023 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.
Morning, and thank you for joining us today.
You're aware, we issued our press release this morning, and I Hope you've had a chance to review our results for the period ending June 32023.
It can also be found on our website.
On today's call I'll begin by addressing our second quarter results and current market conditions.
Thomas Our Chief Financial Officer will then discuss our performance in greater detail.
Afterwards, we will open the floor for questions.
This morning, I'm pleased to report strong performance for the second quarter of 2023.
Q2, GAAP net investment income and core NII was 10 6 million.
$45 six per share.
More than covered our quarterly base dividend of <unk> 37.
Sure.
Core NII declined by half a cent per share compared with Q1 Q2 core NII increased by 34, 5%.
Increase over year over year.
<unk> per share at the end of Q2 was $14 representing a one 4% decrease from the prior quarter.
<unk> per share was impacted by a $6 million net mark to market loss in our portfolio.
These markdowns were related to company specific performance in some of our consumer facing portfolio companies as well as some specific challenges certain portfolio companies are experiencing independent of economic conditions.
Turning to our portfolio activity you saw a relatively quiet quarter with regards to originations and repayments.
Transaction activity for the quarter remained slower than recent history, we have seen that pick up relative to Q1 across our markets with market prices trending in the direction conducive for increased deal activity as I will discuss shortly.
Q2, gross capital deployments totaled $23 8 million.
$19 3 million funding three new originations and the remaining $4 5 million funding add ons to existing portfolio investments.
Our new originations in Q2, two were sponsor deals and one was non sponsor.
Average leverage of approximately three seven times debt to EBITDA.
I know that these deals were all first lien loans with spreads of 675.
Basis points or higher.
Faulting and an average all in annualized interest rate of 12, 6% across the three originations.
At the end of Q2 97, 2% of our debt portfolio is first lien and 100% with senior secured.
Q2, total repayments and sales for $28 8 million, primarily driven by three complete realizations and there was also one and a half million dollars in net repayments from revolver commitments.
As previously discussed on our last earnings call.
For the full realizations was the successful sale of our formerly troubled asset our KOL day.
In April of this year, we exited one of our investment in our coal it's approximately a 1.25 times return on the original invested capital.
This outcome demonstrates whitehorse at H I G S capital's ability to leverage our collective resources and expertise turnaround troubled investments with the objective of minimizing losses and capital preservation.
Looking forward, we have seen some increased M&A activity relative to earlier in the year.
As a result anticipate repayment activity.
Up in the back half of the year.
Believe that investment repayments when they occur likely allow whitehorse to redeploy that capital into assets with the same or higher yield.
During the quarter, the BDC transferred to new deals and one add on to the Ohio S. U S. S. T. R S JV totaling $12 6 million.
In exchange for cash of $10 8 million and $1 8 million in kind contribution to the <unk> JV.
I will discuss activity within the JV shortly.
Well, the repayments and sales outpaced originations at the end of Q2, the company's net effective leverage is one in a quarter times up slightly from 1.323 times at the end of Q1.
As I've shared on prior calls so long as our portfolio remains heavily concentrated in the 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.
With that in mind, I'll now step back to bring our entire investment portfolio to focus.
After the effects of the S. T R. S J V transfers.
Almost $6 million and net mark to market changes, Sharepoint 3 million unrealized losses and $1 million of accretion.
Fair value of our investment portfolio was 728.
4 million at the end of Q2.
This compares to our portfolio of fair value of $749 2 million at the end of the previous quarter.
The weighted average effective yield on our income producing debt investments increased to 13, 4% as of the end of Q2 2000.
13, 2% at the end of Q1.
This was primarily driven by an increase in the portfolio space right.
We continue to utilize the S. T. R S, Ohio joint venture successfully JV generated investment income to the BDC for approximately $3 7 million in Q2 relatively unchanged from the $3 8 million in Q1.
As of June 30th the fair value of the JV portfolio.
$324 5 million at the end of Q2, the Jv's portfolio had an average unlevered yield of 12, 2%.
Comparatively the average yield was 11, 8% in Q1 and eight 7% in Q2 of 2022.
The increase in Unlevered yield is primarily due to rising base rates.
With the rise in base rates. The JV currently producing an average annual return on equity.
The mid teens to the B D C.
I believe white horses equity investments in the JV.
Attractive return to shareholders.
J D has approximately 35 million of capacity.
Which supplements to bdcs existing capacity.
Yeah.
Transitioning to the Bdcs portfolio more broadly.
Some markdowns in the portfolio in Q2 as I mentioned earlier.
I will elaborate on specific market dynamics shortly but note that we continue to see credit pressure is most acute in consumer facing names.
The BDC is Q2 mark to market declines are primarily driven by our investments in Crown brands Art server storage crashed Sklar holdings and American Crafts show, partially offset by mark to market activity increases across the portfolio.
As I mentioned on our last call our investments in American Crafts, the Sklar holdings.
Restructurings during Q1 as both companies so consumer exposure I think it's been experiencing demand softness.
We're selecting joins us liquidity in both companies and returned for control equity positions in each company.
Alongside restructuring professionals at H I G. We are working to strengthen the companies and manage through a weaker demand environment in order to position each company for a successful exit in the next two to four years.
As of the end of Q2, our investments in art served from loan and Crown brand second lien were placed on non accrual play monstrous first lien term loan also remains on nonaccrual.
Our surface moved to non accrual and may resulting in an impact of approximately two cents per share of net income.
For the quarter.
He along with other lenders are actively working to restructure the company.
Aim to return a portion of the debt accrual status in Q3 or Q4.
Carlin brands, a second lien loan was moved to non accrual on June 30th and therefore did not contribute to Q2 results.
The Crown brands will remain on non accrual until the company achieves its projected performance levels I would note that the company's sponsor that's been supportive of the company providing equity injections over the past 12 months at this time Crown brands continues to make interest payments.
Investments on non accrual totaled two point, 70% of our total debt portfolio at fair value at the end of the quarter.
As we shared before where you're seeing some pressure on our portfolio and the general economy.
Primarily in the consumer segment.
Main vigilant in monitoring our portfolio companies as we have not seen demand weakness in other sectors, including general industrial B to B healthcare TMT or financial services.
Additionally, our portfolio includes mostly non cyclical or light cyclical borrowers we hold nobody we hold no direct exposure to oil and gas auto our restaurants and very little exposure in the construction sector.
The vast majority of our deals are strong covenant protection, where you're finding that private equity firms. We partner with are generally supporting their credits with new cash or contingent equity as needed.
General we observed an increase in borrower revenues, which can be attributed to inflation.
About half of our portfolio companies have been able to maintain margins by successfully passed secure increased costs through higher prices.
Other half of the portfolio, we've seen an uptick in leverage which thus far has only had a modest impact on our typical borrower's debt service coverage.
Turning to the broader lending market in the back half of 2022 saw material correction in direct lending markets, just a combination of general economic weakness significant inflation.
<unk> interest rates applied credit pressure on borrowers while these consistent conditions persisted through Q1 of this year. We saw Q2 begin shift back in the direction normal market activity.
Late in Q1, and early Q2, the quality of deals we were seeing with generally lower than those we have been seeing in late late 2022, with many borrowers experiencing material credit issues as we move through Q2, which was an increase in activity from the banking community more competition came back.
Into the markets as conditions move towards normalization in terms of pricing and covenants.
Quality is the quality of deals we looked at also improved in late Q2.
As of the end of Q2 the markets. Once again started treating lower mid market companies more conservatively than mid market companies with lower mid market deals being priced 25 to 50 basis points higher.
Four mid market deals this.
This is a reversal from the abnormal lending conditions you saw in 2022.
This represents a return to a more normal market condition.
Mid market companies get less leverage and more priced in mid market borrowers. It's been over a year now where the market has been inverted and lower mid market companies, we're getting equal or better pricing that bid market due to the capital limitations in the market.
In the mid to lower end of the mid market, which is our focus leverages generally up a quarter to a half turn compared to 2022.
Lower mid market deals are being leveraged four to five times.
Pricing, which was 625 to 700 is moderated to 600 to 675.
Also loan to value was running between 40%, 50% of the sponsor deals and 30% to 50% of non sponsored deals.
As an example, our non sponsor origination in Q2 was done with a loan to value of 45% with pricing of 754. We believe is a late cyclical company.
Non sponsor market continues to hold steady compared to the sponsor market.
We've seen a number of attractive non sponsored deals that you'd be developed across our pipeline.
The deals that we're continuing to work on or most of them on cyclical or light cyclicals and given the Bdcs limited capacity, we continue to be highly selective about which credits will actually be D. C.
Whitehorse has consistently and deliberately chosen to deploy capital into deals with more conservative terms with premium pricing and as such has built a portfolio. We believe is well equipped to withstand a potential economic downturn.
Oh recessionary indicator indicators have still been minor.
We're maintaining expectations for a weaker economy in 2024 and work to ensure that the companies we invest in can weather that storm.
We are also increasingly focused on cash flow coverage and the risk that rates will continue to rise. Although the forward curve indicates rate will decline rates will decline.
That said our pipeline returned to an all time high of three tier sourcing architecture continues to provide the BDC with differentiated capabilities and we continue to derive significant advantages from the shared resources and our affiliation with H I G, whereas a leader in the mid market and lower mid market.
The strength of the pipeline enables us to be conservative in our deal selection and their current primary limiting factor for origination as the bdcs investing capacity.
Currently the BDC is very limited balance sheet capacity.
Anticipate that capacity to grow over the next two quarters given expected repayments.
We anticipate utilizing that capacity provided by repayments when they occur continue to rotate into strong high yielding assets, leading to strong income and ongoing coverage of our dividend.
At the conclusion of the quarter, we remained cautiously optimistic for the second half of the year, despite sustained concerns or economic softening at.
We believe continued execution of our three tiered sourcing approach and rigorous underwriting standards. So these whitehorse well positioned to navigate any potential future economic challenges and continue delivering for our shareholders.
With that I'll turn the call over to Joyce for additional performance details a review of our portfolio composition Joseph.
Thanks, Stuart and thank you everyone for joining today's call.
During the quarter, we recorded GAAP net investment income and core NII of $10 $6 million or $45 six per share.
This compares with Q1, GAAP NII and core NII of $10 7 million or $46 one per share.
In a previously declared a quarterly distribution of <unk> 37 per share.
Q2 fee income decreased marginally quarter over quarter, because your appoint $9 million in Q2 from $1 million in Q1 with Q2 amount has been highlighted by amendment fees of approximately zero point $6 million generated from investments in future payment technologies clean choice energy barbecue buyer and <unk> car care holdings.
For the quarter, we reported a net increase in net assets, resulting from operations of $3 9 million or risk ratings. During the quarter showed that 76, 3% of our portfolio positions carrier to either a one or two rating slightly higher than the 73, 2% reported in the prior quarter.
As a reminder, a one rate indicates that a company has seen its risk of loss reduced relative to initial expectations two rate indicates the company's performing according to initial expectations.
Regarding the JV, specifically, we continued to grow our investment as Stuart mentioned earlier, we transferred two new deals and one add on transaction totaling $12 $6 million in exchange for cash proceeds of $10 8 million and a $1.8 million in kind contribution.
As of June 30 of 2023, the Jv's portfolio help physicians in 32 portfolio companies with an aggregate fair value of $324 $5 million compared to 30 portfolio companies at a fair value of three $8 9 million as of March 31 2023.
Subsequent to the end of the second quarter the company transferred one new portfolio company investment to the J D.
The investment in the JV continues to be accretive to the Bdc's earnings generate a mid teens return as we have noted in prior calls the yield on our 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 asset yields in the underlying portfolio as well as the overall credit performance of the Jv's investment portfolio.
Turning to our balance sheet, we had cash resources of approximately $23 $1 million at the end of Q2, including $12 7 million of restricted cash and approximately $96 million of undrawn capacity available under our revolving credit facility.
As of June 32023, the company's asset coverage ratio for Bart amounts as defined by the 1940 Act.
175, 9%, which is above the minimum asset coverage ratio of 150%.
Our Q2 net effective debt to equity ratio after adjusting for cash on hand was approximately 1.25 times as compared to $1 two three times in the prior quarter.
Subsequent to quarter end and as discussed on prior earnings calls 30 million of unsecured notes paying 6% interest matured and were repaid with existing cash on hand, and proceeds drawn from a robbing credit facility as.
As mentioned on those past calls the capacity under our revolving credit facility allowed us to comfortably repay these notes and pro forma for this borrowing our remaining capacity under our G. P. M line still provides sufficient liquidity to meet our obligations, including relative to our existing unfunded commitments portfolio company borrowers.
With that said, we continue to monitor the debt capital markets and recent offerings in both the retail and institutional space and may explore the possibility of issuing new unsecured notes depending on market conditions.
Before I conclude and open up the call to questions I'd like to highlight our distributions again on our previous earnings call. It was announced that our board has declared an increase in the company's quarterly base distribution as well as implemented a formulaic quarterly supplemental distribution program.
Amendments to Whitehorse finances distribution framework took effect at the beginning of Q2.
The board did not declare a supplemental distribution for this quarter, which is consistent with a formulaic supplemental distribution framework.
Specifically for Q2 2023, we had generated $45.06 per share of NII, which was in excess of our previously declared regular base distribution of 37 cents per share.
The framework with doesn't have us take 50% of the eight six cents per share access and rounded to the nearest cent, which would equate to a proposed four cents per share supplemental distributions.
However, given our negative NAV per share movement. During Q1, and Q2 2023, primarily as a result of unrealized mark to market declines in the portfolio.
<unk> per share NAV declined limitation was a factor for this quarter's calculation.
We believe this framework allows us to maximize distributions to our shareholders, while preserving the stability of our antibody a factor that we do believe to be important driver of shareholder economics over time.
On May nine 2023, we declared distribution for the quarter ended June 32023, a 37 per share stockholders of record as of June 21st that dividend was paid on July five 2023, marking the company's 40 <unk> consecutive quarterly distribution all at a level of 35, and a half cents per share or higher.
This 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.
Finally, this morning, we announced that our board declared a third quarter distribution of <unk> 30.
37 per share to be payable on October three 2023 to stockholders of record as of September 19, 2023.
This will mark the companys 44th consecutive quarterly distribution paid since our IPO in December 2012.
As we said previously we will continue to evaluate quarterly distribution, both in near and medium term based on the core earnings power of the 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.
Thank you at this time, if you would like to ask a question. Please press the star and one key on your telephone keypad, you may remove yourself from the queue at any time by pressing star two and once again that is star. One if you would like to ask a question, we'll pause for just a moment to allow questions to queue.
And our first question comes from Sean Paul Adams with Raymond James.
Hey, guys good morning.
Can you quantify the exact number of companies in the portfolio with interest coverage below one times.
And then just provide some general commentary on.
The rise in amendment activity.
So your outlook for the rest of 2023.
Okay.
I'll give choice in the moment to see if we can come up with that.
A number of companies that have a fixed charged below one O us, but it is a small minority of the overall portfolio and if we can't provide that to you today will get that to you after the call.
In terms of amendment activity. It is I'd say at a normal pace.
We have real covenants on the vast majority of our deals.
And as others have volatility in the economy are we do see some number of companies that are violate those covenants.
As I mentioned in the prepared remarks.
Where we do have covenant problems or we have found the owners of the company both sponsors and non sponsors have been generally willing to provide an.
Equity support if they had the capacity to do so where squad holdings and American crafts are examples where the owners are.
Did not have that ability.
Our general posture on Covenant waivers, we as we look to get equity support from the owners who are.
Leverage on the company is significantly higher than it was at close and then we also seek to get a pricing adjustment on the loans to reflect any heightened risk return that we have.
I'm.
Just curious were you able to come up with the number for the <unk>.
Number of deals that are.
At less than a one on one I'll quick charge or do we need to come back on that question.
We will need to come back on quantifying the specifics that are under one times generally speaking.
Portfolio as a whole, though obviously the averages is much greater than one times.
As to what you said before Stuart it speaks to the overall general coverage of the portfolio as a whole.
Okay. Thank you and as a follow up can you just comment on the I believe you guys said you predicted a rise in prepayment income for the over the next two quarters.
Can you provide some commentary on that along with <unk>.
Just a general margin compression.
<unk> within your portfolio.
Not necessarily an increase in prepayment income, but an increase in prepayments of companies. The income will only go up with those companies are still within.
At a time, where prepayment penalty will be due.
The improved general market conditions mean that we've gotten notice that more of the companies in our portfolio are targeted for sale in Q3 or Q4.
And so we do expect to see increased.
Increased prepayment activity compared to what we saw in Q1 and Q2 and the markets were very slow on M&A. There are also a couple of credits we have what are the owners of the company have asked for additional capital, which given our concerns about the economy slowing down in 2024.
We are not willing to accommodate.
And it is.
Possible that those companies will choose to get financing.
Another source of repay us.
Because we're not willing to increase the leverage on those credits.
Yeah.
Okay perfect. Thank you so much for your comments. Thank you.
Welcome.
And just a reminder that was the starkey followed by the one key for questions now.
And what's the one that was star one if you'd like to ask a question.
And our next question comes from Mitchel Penn with Oppenheimer.
Hey, guys, Hey, can you provide some detail.
On the <unk>.
Is there a number or percentage of companies with a loan to values greater than 50% in the portfolio.
Again.
We don't necessarily track portfolio.
According to L. T V.
That is a question that I'm almost sure we're going to need to come back to you on to try to provide an answer.
We do have the ability to get that data.
Out of our automated systems.
I will tell you that as it regards.
Companies that we financed or.
Over the past two years.
Either zero or close to zero of those loans have been done at greater than 50% loan to value.
And to the extent that we're at more than 50% loan to value.
Most of the credits would be in that position due to a shift.
Shift either in the EV of the company.
In the earnings of the company.
Over the past couple of years.
Well, we'll work with our Chief Credit Officer.
To get that data and get it to you.
Okay.
That's all for me.
Okay.
And our next question comes from Ernest Watts with what's associates.
Thank you good morning, I do appreciate you're growing over the weeks, but is that a feel for how the company is doing.
I do think it should.
The more progress we.
We believe that the NDA would be.
The DVA people would be more enthused, but company if they reached 40 million in earnings.
And does.
It's well below that.
We.
Oh at the 7 million in bonuses and herbs that.
Independent directors.
Hey.
Required.
Do you have at least one year's take.
And that's it in shares of the company.
They're all in the money.
Suggest that they might be more of a vigorous and filings, but slow progress. Thank you.
Thank you for your commentary and we will definitely take it under consideration.
Thank you.
And our next question comes from Erik Zwick with Hovde group.
Good morning.
Just kind of thinking about some of your commentary with regard to the current market environment offering are exceptionally attractive turns and and a pipeline being at an all time high.
But just kind of given where your leverage is today you mentioned that now your ability to kind of make new investments is somewhat dependent on.
Kind of some of the current portfolio companies prepaying and exiting the portfolio. So just curious from that perspective with an attractive investing opportunity.
What are your thoughts today on potentially raising new capital.
And if you.
Tested that at all you know what that what the market receptivity is like from from that perspective as well.
In general the market is.
Not receptive at the moment to a new raises from Bdcs.
But we do acknowledge that the market opportunity and new investments is attractive.
And again, that's one of the things that the board.
Taken under consideration and discussed but at this moment there are no plans to be raising new capital.
I appreciate the commentary there that's all I had today. Thank you.
Thank you.
And at this time I'm currently showing no questions in the queue I will turn the call back over to today's hosts.
Alright I.
Appreciate everybody's time, and we will continue to work hard.
To deliver value for all of our shareholders and appreciate everybody's time and questions and as always if there are more things that people would like to see a share.
Future calls please let us know.
In advance of the next call and we'll do our very best to provide transparency into the.
Operations and performance of the company.
So much have a good day.
Thank you. This does conclude today's program. Thank you for your participation you may now disconnect.
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