Q1 2024 WhiteHorse Finance Inc Earnings Call
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Mike: My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance First Quarter 2024 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer. Today's call is being recorded, and a replay is available through a webcast in the Investor Relations section of our website at WhiteHors
Mike: Good morning, My name is Mike and I'll be your conference operator today.
Mike: At this time I would like to welcome everyone to the Whitehorse Finance first quarter 2024 earnings conference call.
Mike: Our host for today's call are Stuart Aronson, Chief Executive Officer enjoys and Thomas Chief Financial Officer.
Mike: Today's call is being recorded and a replay is available through a webcast in the Investor Relations section of our website at Whitehorse Finance dotcom.
Mike: At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. If you should require operator assistance again, you may press star 0. It is now my pleasure to turn the call over to Robert Brinberg of Rosen Company. Please go ahead.
Mike: 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.
Robert Brinberg: If he would like to ask a question at that time. Please press star one on your Touchtone phone.
Mike: At any point. Your question has been answered you may remove yourself from the queue by pressing star too. If you should require operator assistance again, you May press Star Zero. It is now my pleasure to turn the call over to Robert Greenberg of Raws and company. Please go ahead.
Robert Brinberg: Hey, Thank you Mike and thank you everyone for joining us today to discuss Whitehorse finances first quarter 2024 earnings results.
Robert Brinberg: Thank you, Mike, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's first quarter 2024 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. Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that can cause actual results to differ materially from those expressed or implied by these forward-looking statements.
Robert Brinberg: 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.
Robert Brinberg: 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.
Robert Brinberg: WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statement. Today's speakers may refer to material from the WhiteHorse Finance First Quarter 2024 Earnings Presentation, which was posted to our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart. Stuart, you may begin.
Robert Brinberg: Whitehorse Finance assumes no obligation or responsibility to update any forward looking statements.
Robert Brinberg: Today's speakers may refer to material from the Whitehorse Finance first quarter 2024 earnings presentation was posted to our website. This morning.
Robert Brinberg: With that allow me to introduce Whitehorse finances CEO Stuart.
Stuart: Stuart you may begin.
Stuart: Thank you Rob good morning, and thank you for all of you for joining today.
Stuart D. Aronson: Thank you, Rob. Good morning. And thank you to all of you for joining us today.
Speaker Change: As you're aware, we issued our earnings this morning prior to market open and I Hope you've had a chance to review our results for the period ended March 31, 2024, which can also be found on our website.
Stuart D. Aronson: As you're aware, we issued our earnings this morning prior to the market open, and I hope you've had a chance to review our results for the period ended March 31, 2024, which can also be found on our website. On today's call, I'll begin by addressing our first quarter results and current market conditions. Joyson Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which we will open the floor for questions.
Stuart: On today's call I'll begin by addressing our first quarter results and current market conditions.
Joyson C. Thomas: And Thomas our Chief Financial Officer will then discuss our performance in greater detail after which we will open the floor for questions.
Stuart D. Aronson: I'm pleased to report continued strong performance for the first quarter of 2024. Q4 GAAP net investment income in core NII was $10.8 million, or $0.465 per share, which more than covered our quarterly base dividend of $0.385 per share. This represents a slight increase from the Q4 gap in core NII of 10.6 million or 45.6 cents per share. NAV per share at the end of Q1 was $13.50, representing a 1% decrease from the prior quarter.
Stuart D. Aronson: I am pleased to report continued strong performance of the first quarter of 2024.
Stuart D. Aronson: Q4, GAAP net investment income and core NII was $10 8 million or <unk> 46, and a half cents per share.
Stuart D. Aronson: Which more than covered our quarterly base dividend of 38, and a half cents per share.
Stuart D. Aronson: This represents a slight increase from Q4, GAAP and core NII of $10 6 million or $45 six per share.
Stuart D. Aronson: And <unk> per share at the end of Q1 was $13 50, representing a 1% decrease from the prior quarter.
Stuart D. Aronson: NAV per share was negatively impacted by net markdowns in our portfolio totaling $5.2 million, the majority of which related to a markdown in equity warrants in Seagate Corporation, which I will discuss shortly. The NAV decrease was partially offset by the excess of core NII over our quarterly dividends.
Stuart D. Aronson: NAV per share was negatively impacted by net markdowns in our portfolio totaling $5 2 million the majority of which related to a markdown in equity warrants in Seagate Corporation, which I will discuss shortly.
Stuart D. Aronson: The decrease was partially offset by the excess of core NII over our quarterly dividend.
Stuart D. Aronson: Turning to portfolio activity in Q1, gross capital deployments totaled $55 million, with $44.7 million funding five new originations and the remaining $10.3 million funding add-ons to existing investments as activity remained reasonably strong. In addition to the add-ons, there were $0.8 million in net fundings made for Revolver commitments. Of our five new originations in Q1, two were sponsor deals, and three were non-sponsor deals with an average leverage of approximately three and a half times that to EBITDA.
Stuart D. Aronson: Turning to portfolio activity in Q1 gross capital deployments totaled 55 billion with $44 7 million.
Stuart D. Aronson: Funding five new originations and the remaining $10 3 million funding add ons to existing investments as activity remained reasonably strong.
Stuart D. Aronson: In addition to the items there were 0.8 million and net fundings made for revolver commitments.
Stuart D. Aronson: Of our five new originations in Q1, two were sponsor deals and three were non sponsored deals with an average leverage of approximately three five times debt to EBITDA.
Stuart D. Aronson: All of these deals were first lien loans, with an average spread of 730 basis points and an average all-in rate of 12.6%. I note that both of these statistics are attractive from a historical and current market perspective.
Stuart D. Aronson: All of these deals were first lien loans with an average spread of 730 basis points and an average all in rate of 12, 6%.
Stuart D. Aronson: I note that both of these statistics are attractive from a historical and current market perspective.
Stuart D. Aronson: During the quarter, the BDC transferred two of these new deals and one existing investment to the Ohio STRS-JB, totaling $8.5 million. At the end of Q1, 99% of our debt portfolio was first lien, senior secured, and our portfolio mix was approximately two-thirds sponsor and one-third non-sponsor, which is consistent with the prior quarter. In Q1, total repayments and sales were $43.4 million, primarily driven by five complete realizations and one partial realization. We expect repayment activity to remain relatively high, particularly for credits that are more than two years old, where call protection has expired or is more limited.
Stuart D. Aronson: During the quarter the BDC transferred two of these new deals and one existing investment to the Ohio S. T. R S JV totaling $8 $5 million.
Stuart D. Aronson: At the end of Q1, 99% of our debt portfolio was first lien senior secured and our portfolio mix was approximately two third sponsor and one third non sponsor which is consistent with the prior quarter.
Stuart D. Aronson: In Q1, total repayments and sales for $43 4 million, primarily driven by five complete realizations and one partial realization.
Stuart D. Aronson: We expect repayment activity to remain relatively high particularly for credits that are more than two years old where call protection has expired or is more limited in some cases deals will be repriced and we will evaluate risk and return it on a case by case basis to determine whether we want to follow up credits into the call it more aggressively.
Stuart D. Aronson: In some cases, deals will be repriced, and we will evaluate risk and return on a case-by-case basis to determine whether we want to follow credits into the current, more aggressive market environment. Thus far in Q2, we've had $15 million in full repayments and sales. With repayments and JV transfers mostly offsetting our deployment activity, the company's net effective leverage increased slightly to 1.19 times and remains below the lower end of our target leverage range.
Stuart D. Aronson: The market environment.
Stuart D. Aronson: Thus far in 2000 in Q2, we had 115, sorry, we've had $15 million in full repayments and sales.
Stuart D. Aronson: With repayments and Jay Z transfers, mostly offsetting our deployment activity. The company's net effective leverage increased slightly to $1. One nine times and remains below the lower end of our target leverage range.
Stuart D. Aronson: So long as our portfolio remains heavily concentrated in first lien loans, which have lower risks than second lien loans, we expect to continue to run the BDC at up to 1.35 times leverage. With that in mind, I'm going to step back to bring our entire investment portfolio into focus.
Stuart D. Aronson: So long as our portfolio remains heavily concentrated in first lien loans, which have lower risks in second lien loans, we expect to continue to run the BDC at up to 1.35 times leverage.
Stuart D. Aronson: With that in mind, I'll now step back to bring our entire industrial portfolio and to focus.
Stuart D. Aronson: After the effects of net repayments and STRS-JV transfers, as well as $0.8 million in net mark-to-market increases and $6.1 million of realized losses, the fair value of our investment portfolio was $697.9 million at the end of Q1. This compares to the fair value of our portfolio of $696.2 million at the end of the previous quarter. The weighted average effective yield on our income-producing debt investments was 13.7% as of the end of Q1, unchanged from the end of last year.
Stuart D. Aronson: After the effects of debt repayments and S. T. R. S JV transfers as well as zero point $8 million and net mark to market increases and $6 1 million of realized losses. The fair value of our industrial portfolio was $697 9 million at the end of Q1. This compares to our portfolio of fair value.
Stuart D. Aronson: $696 2 million at the end of the previous quarter.
Stuart D. Aronson: The weighted average effective yield on our income producing debt investments was 13, 7% as of the end of Q1 unchanged from the end of last year.
Stuart D. Aronson: We continue to utilize the STRS-JV successfully; the JV generated investment income to the BDC of approximately $4.8 million in Q1, up from $4.2 million in Q4. As of March 31st, the fair value of the JV's portfolio was $309.4 million, and at the end of Q1, the JV's portfolio had an average unleveraged yield of 12.4%, consistent with Q4. The JV is currently producing an average annual return on equity in the mid-teens for the BDC.
Stuart D. Aronson: We continue to utilize the S. T. R. S. JV successfully the JV generated investment income to the BDC of approximately $4 8 million in Q1.
Stuart D. Aronson: Up from $4 2 million in Q4 as.
Stuart D. Aronson: As of March 31st a fair value of the Jv's portfolio was $309 4 million and at the end of Q1, the Jv's portfolio had an average unlevered yield of 12, 4% consistent with Q4.
Stuart D. Aronson: The JV is currently producing an average annual return on equity in the mid teens to the BDC.
Stuart D. Aronson: We believe WhiteHorse's equity investment in the JV provides attractive returns for our shareholders. Transitioning to the BDC's portfolio more broadly, there were some markdowns in the portfolio during Q1. Most notably, there was a $3.5 million markdown on our equity investment in Seagate Corporation. We exited the Seagate loan several years ago, and due to covenant defaults at the time, we were granted warrants equal to at least 17% of the company. I should note that we had no cash basis on these warrants.
Stuart D. Aronson: We believe white horses equity investment in the JV provides attractive returns for our shareholders.
Stuart D. Aronson: Transitioning to the Bdc's portfolio more broadly there was some markdowns in the portfolio during Q1.
Stuart D. Aronson: No smoke most notably there was a three and a half million marked down to our equity investment and Sigue cooperation.
Stuart D. Aronson: We exited the seagate loan several years ago and due to covenant defaults at the time, we were granted warrants equal to at least 17% of the company I should note that we had no cash basis and use warrants in any event Sigue went out of business in Q1, and we therefore, mark the warrants down to zero.
Stuart D. Aronson: In any event, Seagate went out of business in Q1, and we therefore marked the warrants down to zero. There were some other modest markdowns on three other credits, including New Cycle Solutions, also known as Navigup, which was placed on non-accrual in the quarter. Markdowns were more than offset by reversals of aggregate prior unrealized losses upon the realization of Crown Brand's second lien investment and the restructuring of Atlas Purchaser, which is also known as Aspect Software. We resolved the Crown Brands loan in Q1 by selling it back to the sponsor who was running the company.
Stuart D. Aronson: There were some other modest markdowns in three other credits, including a new cycle solutions also known as navigate which was placed on non accrual in the quarter.
Stuart D. Aronson: Markdowns were more than offset by reversals of aggregate prior unrealized losses upon the utilization and Crown brand second lien investment and the restructuring of Atlas purchaser, which is also known as aspect software.
Stuart D. Aronson: We resolved the crown brand slow in Q1 by selling it back to the sponsor who is running the company.
Stuart D. Aronson: Although the loan was sold at a discount, we were able to sell it at a price that was a premium to where the loan had been valued at the end of Q4. We also participated in a restructuring of our position in Atlas Purchaser, also known as Aspect Software, which resulted in a portion of the investment causing a portion of the investment to incur a realized loss. New Cycle was the only credit moved to non-accrual during the quarter, and at the end of Q1, investments on non-accrual totaled 1.3% of our debt portfolio at fair value, compared with 2.5% at the end of Q4. Naviga is in a sale process, and values for the company have unexpectedly come in at a modest discount to the value of the debt. American Crafts and ARCSRV remain on non-accrual status.
Stuart D. Aronson: Although the loan was sold at a discount we were able to sell it at a price that it was a premium to where the loan had been valued at the end of Q4. We also participated in a restructuring of our position in Atlas purchaser also known as aspect software, which resulted in a portion of the U S.
Stuart D. Aronson: Resulted in a portion of the investment to incur a realized loss.
Stuart D. Aronson: New cycle was the only credit moved to non accrual during the quarter and at the end of Q1 investments on non accrual totaled one 3% of our debt portfolio at fair value compared with 2% to 5% at the end of Q4 navigate is in a sale process and values for the company of unexpected.
Stuart D. Aronson: They come in at a modest discount to the value of the debt. We have therefore marked the asset to a level that we think is consistent with where the company will be sold.
Stuart D. Aronson: American Crafts and art serve remain on non accrual status you may recall that we have a control position American crafts, and we along with other lenders took control of Archer earlier in Q1, we are continuing to work with our restructuring resources and our private equity resources to turn those companies around and maximize value the trend.
Stuart D. Aronson: You may recall that we have a control position in American Crafts, and we, along with other lenders, took control of ARCSRV earlier in Q1. We are continuing to work with our restructuring resources and our private equity resources to turn those companies around and maximize value. The trends we're seeing in both these accounts are positive relative to where they were one quarter ago. Across the portfolio generally, we see balanced activity in terms of credit performance and remain overall pleased with the health and relative stability of our debt portfolio.
Stuart D. Aronson: We are seeing in both these accounts are positive relative to where they were one quarter ago.
Stuart D. Aronson: Across the portfolio generally we see balanced activity in terms of credit performance and remain overall pleased with the health and relative stability of our debt portfolio.
Stuart D. Aronson: The cyclical accounts are continuing to be surprisingly strong, and the accounts that are having trouble are either facing the consumer market or have idiosyncratic problems that we have discussed in the past. As always, we remain vigilant in monitoring our portfolio of companies.
Stuart D. Aronson: The cyclical accounts are continuing to be surprisingly strong in the accounts that are having trouble.
Stuart D. Aronson: Our easier facing the consumer market or has idiosyncratic problems that we have discussed in the past as.
Stuart D. Aronson: As always we remain vigilant in monitoring our portfolio of companies we have.
Stuart D. Aronson: We have not seen demand weakness in other sectors, including general industrial B to B healthcare TMT or financial services.
Stuart D. Aronson: We have not seen demand weakness in other sectors, including general industrial, B2B, healthcare, TMT, or financial services. Additionally, our portfolio includes mostly non-cyclical or light cyclical borrowers. We hold no direct exposure to oil and gas, auto, new home construction, or restaurants.
Stuart D. Aronson: Additionally, our portfolio includes mostly non cyclical or like cyclical borrowers, we hold no direct exposure to oil and gas auto new home construction or restaurants.
Stuart D. Aronson: The vast majority of our deals have strong covenant protection, and we are finding that, in most cases, the private equity firms we partner with are supporting their credits with new cash or contingent equity as needed. Turning to the broader lending market, lenders have become significantly more aggressive in terms of credit, documents, and price, a continuation of the trend that we saw emerging in Q4. As Q1 progressed, we saw a modest increase in M&A activity coming out of the sponsored market and the non-sponsored market.
Stuart D. Aronson: Vast majority of our deals with strong Covenant protection and we are finding that in most cases, the private equity firms, we partnered with a supporting their credits with new cash or contingent equity as needed.
Stuart D. Aronson: Turning to the broader lending market lenders have gotten significantly more aggressive in terms of credit documents and price a continuation of the trend that we saw emerging in Q4.
Stuart D. Aronson: As Q1 progressed, we saw a modest increase in M&A activity coming out of the sponsor market and the non sponsored market. Despite that modest increase there is still a significant supply demand imbalance in favor of borrowers since directing lending shops that are coming off of core volume numbers in 2022 and 2020.
Stuart D. Aronson: Despite that modest increase, there is still a significant supply and demand imbalance in favor of borrowers since direct lending shops that are coming off of poor volume numbers in 2022 and 2023 are trying to make sure they hit their budgets and, again, are willing to be more aggressive to make that happen. You've definitely seen a shift all the way from the broadly syndicated market into the upper mid market and also the mid market and lower mid market.
Stuart D. Aronson: Three are trying to make sure they hit their budgets and again are willing to be more aggressive to make that happen.
Stuart D. Aronson: We've definitely seen a shift all the way from broadly syndicated market into upper mid market and also the mid market and lower mid market did.
Stuart D. Aronson: The degradation of the market has been most severe in the sponsor market, where leverage is up half a turn to a turn and loan to value is now 55 to 65%. More middle market deals are being done with no financial covenants, and pricing has come down 100 to 150 basis points from last quarter. This decline came suddenly, and we have not seen a reversal of that in Q2.
Stuart D. Aronson: Gradation of the market has been most severe in the sponsor market, where leverages I'll pass it turned to return and loan to value is now 55% to 65%.
Stuart D. Aronson: More middle market deals are being done with no financial covenants and pricing has come down 100 to 150 basis points from last quarter.
Stuart D. Aronson: This decline came suddenly and we've not seen a reversal of that in Q2.
Stuart D. Aronson: The upper mid-market has seen prices decline to where deals are now priced at SOFR 450 to SOFR 525. The mid-market and lower mid-market are pricing deals more in the range of SOFR 500 to SOFR 575. The shift in the non-sponsor market has, thankfully, been less dramatic. Credits are still at three to four and a half times leverage, and pricing has come down by only about 50 basis points. What we have seen over time is that the non-sponsor market is less volatile than the sponsor market because there's less competition and it's harder for lenders to access the non-sponsor market. As I alluded to earlier, the deals that we did in 2022 and 2023, for the most part, still had call protection.
Stuart D. Aronson: The upper mid market has seen prices decline to where deals are now priced at so for $4 50 to show for 525, the mid market lower mid market or pricing deals more in the range of so for 500 to sell for $5 75.
Stuart D. Aronson: A shift in the non sponsor market is thankfully been less dramatic credits are still at three to four five times leverage and pricing has come down by only about 50 basis points. While we have seen over time is that the non sponsor market is less volatile than the sponsor market because theres less competition and it's harder for lenders to access them.
Stuart D. Aronson: Non sponsor market as I alluded to earlier the deals that we did in 2022 and 2023 for the most part still have call protection and we're doing a good job of holding onto prices. We captured in those years when the markets were much more favorable to lenders with pricing typically at $6 50 to 750 <unk>.
Stuart D. Aronson: And we're doing a good job of holding on to prices we captured in those years when the markets were much more favorable to lenders, with pricing typically at 650 to 750 on both sponsor and non-sponsor deals. In the current market environment, we are being very cautious in our deal sourcing with on-the-run sponsors, and our focus remains on the off-the-run sponsor market and non-sponsor business, where market terms remain Because of our ability to access the off-to-run sponsor market and the non-sponsor market, we are still commanding higher prices than what you see in the upper mid market or mid market, in general.
Stuart D. Aronson: Sponsor and non sponsor deals.
Stuart D. Aronson: And the current market environment, we are being very cautious in our deal sourcing was on the run sponsors and our focus remains on the off the run sponsor market and non sponsored business where market terms remained comparatively more attractive because of our ability to access the off the run sponsor market and non sponsor market. We are still commanding.
Stuart D. Aronson: Higher prices than what you see in the upper mid market or mid market in general.
Stuart D. Aronson: With respect to the broader economy, recent data indicates that inflation will continue at a higher level than what the Fed is targeting. We agree with the current thinking that there'll be somewhere between zero to two rate cuts in the balance of the year, probably happening later in the year. As a result, we expect slower economic growth through 2024 and into 2025.
Stuart D. Aronson: With respect to the broader economy recent data indicates that inflation will continue at a higher level than what the fed is targeting we agree with the current thinking that there'll be somewhere between zero to two rate cuts in the balance of the year probably happening later in the year.
Stuart D. Aronson: As a result, we expect slower economic growth through 2024 and into 2025.
Stuart D. Aronson: The year started out slowly in terms of pipeline, which is normal for the beginning of the year, but we did enter the year with a decent backlog of deals, most of which were non-sponsored. Our pipeline is full as we move through the first half of the year, due in part to our sourcing model, which allows us to source deals in corners of the market where there's less competition, including the off-the-run sponsor market and the non-sponsor market.
Stuart D. Aronson: The year started out slowly in terms of pipeline, which is normal for the beginning of the year, but we did enter the year with a decent backlog of deals most of which were non sponsor.
Stuart D. Aronson: Our pipeline has grown as you move through the first half of the year due in part to our sourcing model, which allows us to source deals and corners of the market, where there's less competition, including the off the run sponsor market in the non sponsor market.
Stuart D. Aronson: Our three-tier sourcing architecture continues to provide the BDC with differentiated capabilities, and we continue to derive significant advantages from the shared resources and affiliation with HIG, who is a leader in the mid-market and lower mid-market. WhiteHorse has approximately 22 origination professionals located in 11 regional markets across North America. The strength of the origination pipeline enables us to be conservative on our deal selection.
Stuart D. Aronson: Our three tier sourcing architecture continues to provide the BDC with differentiated capabilities and we continue to derive significant advantages from the shared resources and affiliation with H I G, who is a leader in mid market and lower mid market.
Stuart D. Aronson: Of course as approximately 22 origination professionals located in 11 regional markets across North America. The strength of the origination pipeline enables us to be conservative on our deal selection.
Stuart D. Aronson: Following repayment activity in Q1, the BDC balance sheet has approximately $40 million of capacity for new assets at our target leverage range. The JV has approximately $50 million of capacity, supplementing the BDC's existing capacity. With the move in the market, deals that are priced below SOFR 600 are targeted for the JV, while those priced at 600 or above are largely targeted for the BDC balance sheet. We're actively working on 11 new mandates and add-on acquisitions of the new platform mandates. The majority are non-sponsored deals.
Stuart D. Aronson: Following the repayment activity in Q1, the BDC balance sheet as approximately $40 million of capacity for new assets in our target target leverage range. The JV has approximately $50 million of capacity supplementing the bdcs existing capacity with the move in the market deals that are priced below chauffeurs 600.
Stuart D. Aronson: Our targeted for the JV those priced at 600 or above are largely targeted from the BDC balance sheet.
Stuart D. Aronson: We're actively working on 11, new mandates and add on acquisitions of the new platform mandates.
Stuart D. Aronson: The majority of non sponsor deals while there can be no assurance that any of these deals will close all of these mandates could fit within the BDC or our JV should we elect to transact.
Joyson C. Thomas: While there can be no assurance that any of these deals will close, all of these mandates could fit within the BDC or our JV, should we elect to transact. Since quarter end, we have closed two new originations and three add-ons to existing portfolio companies, with several more pending. Of the new originations, one investment was transferred to the JV during the second quarter. We also transferred two add-on investments to the JV during the second quarter.
Joyson C. Thomas: Subsequent to quarter end, we have closed two new originations and three add ons to existing portfolio companies with several more pending.
Joyson C. Thomas: The new originations one investment was transferred to the JV during the second quarter. We also transferred two add on investments to the JV in the second quarter.
Joyson C. Thomas: In short activity continues to pick up and we remain cautiously optimistic that the market will remain conducive to whitehorse.
Joyson C. Thomas: In short, activity continues to pick up, and we remain cautiously optimistic that the market will remain conducive to WhiteHorse. Despite sustained concerns of economic softening, we believe we are well positioned to continue to source attractive opportunities, navigate economic challenges due to our rigorous underwriting standards, and continue delivering to our shareholders. With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition. Joyson
Joyson: Despite sustained concerns of economic softening. We believe we are well positioned to continue to source attractive opportunities navigate economic challenges due to our rigorous underwriting standards and continue delivering to our shareholders with that I'll turn the call over to Joyce for additional performance details and a review of our portfolio composition.
Joyson C. Thomas: Jason.
Joyson: Thanks Stuart.
Joyson C. Thomas: and thank you everyone for joining today's call. During the quarter, we recorded GATT net investment income in core NII of $10.8 million, or $0.465 per share. This compares with Q4 GAAP NII and core NII of $10.6 million, or $0.456 per share, and our previously declared quarterly distribution of $0.385 per share. Q1 fee income was unchanged quarter over quarter at $0.6 million.
Joyson: Thank you everyone for joining today's call.
Joyson C. Thomas: During the quarter, we recorded GAAP net investment income and core NII of $10 8 million or $46 five per share. This.
Joyson C. Thomas: This compares with Q4, GAAP NII and core NII of $10 6 million or $45 six per share.
Joyson C. Thomas: Previously declared a quarterly distribution of <unk> 38, and half cents per share.
Joyson C. Thomas: Q1 fee income was unchanged quarter over quarter at zero point $6 million.
Joyson C. Thomas: Q1 amounts were primarily comprised of $0.5 million of amendments, the majority of which came from an amendment fee from TeleStream. For the quarter, we reported a net increase in net assets resulting from operations of $6 million. Our risk ratings during the quarter showed that 77.6% of our portfolio positions carried either a 1 or 2 rating, slightly lower than the 77.7% in the prior quarter. As a reminder, our 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations.
Joyson C. Thomas: Do you want amounts were primarily comprised of <unk> $5 million of amendment fees. The majority of which came from an amendment fee from Telus from holdings.
Joyson C. Thomas: For the quarter, we recorded we reported our net increase and net assets, resulting from operations of $6 million.
Joyson C. Thomas: Our risk ratings during the quarter showed that 77, 6% of our portfolio positions carrying either a one or two rating slightly lower than the 77, 7% in the prior quarter.
Joyson C. Thomas: As a reminder are one rating indicates that the company has seen its risk of loss reduced relative to initial expectations.
Joyson C. Thomas: <unk> indicated the company is performing according to initial expectations.
Joyson C. Thomas: Regarding the JV, specifically, we continue to grow our investment as Stuart mentioned earlier in the first quarter, we transferred to new deals at one existing investment totaling $8 5 million.
Joyson C. Thomas: And a 2 rating indicates the company is performing according to such an initial, Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier, in the first quarter, we transferred two new deals at one existing investment totaling $8.5 million in exchange for cash proceeds of the same amount. Additionally, during the quarter, two existing portfolio company investments fully realized in the portfolio, and as a result, as of March 31st, 2024, JV's portfolio held positions in 34 portfolio companies with an aggregate fair value of $309.4 million compared to 34 portfolio companies at an aggregate fair value of $312.2 million as of December 31st, 2023.
Joyson C. Thomas: In exchange for cash proceeds of the same amount.
Joyson C. Thomas: Additionally, during the quarter two existing portfolio company investments fully realized in the portfolio and as a result as of March 31, 2024, JV Jv's portfolio held positions at 34 portfolio companies with an aggregate fair value of $309 4 million compared to 34 portfolio companies at an aggregate fair value of 312.
Joyson C. Thomas: $2 million as of December 31, 2023.
Joyson C. Thomas: Subsequent to the end of the first quarter, the company transferred three investments to the JV, including one new portfolio company. The investment in the JV continues to be accreted to the BDC's earnings, generating a mid-teens return on equity. During Q1, we did see an elevated amount of income recognized from our JED investment, which aggregated to $4.8 million during the quarter as compared with approximately $4.3 million in Q4 of last year. The approximate $0.5 million increase, or 2.4 cents per share, is largely attributable to non-recurring events that occurred in the JV's portfolio.
Joyson C. Thomas: Subsequent to the end of the first quarter the company transferred three investments the JV, including one new portfolio company.
Joyson C. Thomas: The investment in the JV continues to be accretive to the Bdc's earnings generating a mid teens return on equity.
Joyson C. Thomas: During Q1, we did see an elevated amount of income recognized from a JV investment, which aggregated to $4 8 million during the quarter as compared with approximately $4 3 million in Q4 of last year.
Joyson C. Thomas: The approximate zero point $5 million increase or two four <unk> per share is largely attributable to nonrecurring events that occurred in the jv's portfolio.
Joyson C. Thomas: 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 investment, changes in 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 $20.9 million at the end of Q1, including $10.2 million in restricted cash and approximately $135 million of undrawn capacity available under a revolving credit facility.
Joyson C. Thomas: As we've noted in prior calls the yield on our investment in the JV may fluctuate carried 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 portfolio.
Joyson C. Thomas: Turning to our balance sheet, we had cash resources of approximately $29 million at the end of Q1, including $10 2 million and restricted cash and approximately $135 million of undrawn capacity available under our revolving credit facility.
Joyson C. Thomas: As of March 31st, 2024, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 179.5%, which was above the minimum asset coverage ratio of 150%. Our Q1 Net Effective Debt-to-Equity Ratio, after adjusting for cash on hand, was 1.19 times compared with 1.16 times from the prior quarter.
Joyson C. Thomas: As of March 31, 2024, the company's asset coverage ratio for BARDA mounts as defined by the 1940 Act was 179, 5%, which was above the minimum asset coverage ratio of 150%.
Joyson C. Thomas: Our Q1 net effective debt to equity ratio after adjusting for cash on hand was $1, one nine times compared with $1 one six times from the prior quarter.
Joyson C. Thomas: Before I conclude and open up the call to questions, I'd again like to highlight our distribution. This morning, we announced that our board declared a second quarter distribution of 38.5 cents per share, which is consistent with the prior quarter. The upcoming distribution, the 47th consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at or above a rate of $0.355 per share per quarter, will be payable on July 2, 2024, to stockholders on record as of June 18, 2020.
Speaker Change: Before I conclude and open up the call to questions I'd again like to highlight our distributions.
Joyson C. Thomas: This morning, we announced that our board declared a second quarter distribution of $38 <unk> per share, which is consistent with the prior quarter.
Joyson C. Thomas: The upcoming distribution the 47th consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at or above the rate of 35, and a half cents per share per quarter will be payable on July <unk> 2024 to stockholders of record as of June 18, 2024.
Joyson C. Thomas: As we 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 over to the operator for your questions.
Joyson C. Thomas: As we 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.
Joyson C. Thomas: With that I'll now turn the call over to the operator for your questions operator.
Operator: Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad now. You may remove yourself from the queue at any time by pressing star two. And once again, that is star and one if you'd like to ask a question. We'll pause for just a moment to allow questions to queue, and we do have our first question from Mickey Schleien with Ladenburg.
Speaker Change: Thank you at this time, if you would like to ask a question. Please press the star and one on your telephone keypad now you may remove yourself from the queue at any time by pressing star two and once again that it started one if you'd like to ask a question, we'll pause for just a moment to allow questions to queue.
Mickey Max Schleien: And we do have our first question from Mickey <unk> with Ladenburg.
Mickey Max Schleien: Yes. Good morning, everyone. Just one quick question for me with the movements in our non accruals this quarter.
Mickey Max Schleien: Was there any impact on interest income in terms of recaptures or reversals of previous interest income.
Mickey Max Schleien: Troy, So I'll leave that for you.
Joyson C. Thomas: Joyson, I'll leave that for you. Mickey, we did not.
Joyson C. Thomas: Mickey, we did not reverse out any income accruals during the period. We just ceased to recognize the additional accruals during Q1. Okay, thank you, Joyce, and that's all.
Mickey Max Schleien: Making we did not.
Joyson C. Thomas: Reverse out any income accruals during the period.
Joyson C. Thomas: <unk> ceased recognizing any additional accruals during Q1.
Speaker Change: Okay. Thank you Joyce and that's it for me this morning.
Speaker Change: Thank you Mickey.
Operator: And we do have our next question from Bryce Rowe with B. Reilly.
Joyson C. Thomas: And we do have our next question from Bryce Rowe with B Riley.
Bryce Wells Rowe: Hi, Thanks, good morning.
Bryce Wells Rowe: Good morning Bryce.
Stuart D. Aronson: Hey Stuart, I wanted to follow up on some of the prepared remarks you talked about, you know, obviously, spreads and pricing having come in, more aggressive terms and conditions out there in the market. And you did talk about evaluating whether you would follow some credits that were at least exploring some kind of refinance option. Curious, what would keep you in the credit and what kind of pricing deterioration would you see relative to what's on the books right now?
Bryce Wells Rowe: Hey, Stuart wanted to follow up on some of the prepared remarks, you talked about you know obviously spread.
Stuart D. Aronson: Spreads and pricing having come in.
Stuart D. Aronson: More aggressive.
Stuart D. Aronson: Terms and conditions out there in the market.
Stuart D. Aronson: And you did talk about.
Stuart D. Aronson: Evaluating whether you would follow follows some credits that were at least exploring some kind of REIT refinance option.
Stuart D. Aronson: Curious, what what would what would kind of keep you in the credit and what kind of pricing deterioration would you see relative to what's on the books right now.
Stuart D. Aronson: To give you two examples, Bryce, we were in a company that had industrial cyclicality to it, and they got an offer to do the deal at higher leverage and a 100 basis points lower price. We may have gotten there on the price, but the higher leverage in a cyclical left us uncomfortable, so we chose to exit that credit. As compared to a company we have in the business services sector where the prepayment penalties have expired, the company has performed well. It has delivered over returns since closing.
Stuart: So to give you two examples Bryce we were in a company.
Stuart D. Aronson: That had industrial cyclicality to it.
Stuart D. Aronson: And they got an offer to do the deal at higher leverage and 100 basis point lower price.
Stuart D. Aronson: We may have gotten there on the price that's the higher leverage in the cyclical left us uncomfortable. So we chose to exit that credit as compared to a company. We have in the business services sector, where the prepayment penalties have expired the <unk>.
Stuart D. Aronson: Company has performed well it has de levered over returns since closing.
Stuart D. Aronson: In order to keep that asset, we're going to need to reduce the price, I believe, from SOFR 625 or 650 down to SOFR 525. But because it's a strong-performing asset, non-cyclical, low-capital X, we are going to hold that asset and accept the lower price. So it'll be primarily driven by credit concerns and how aggressive the market is getting. And in general, as I mentioned, the market is now a 500 to 575 market in the part of the market we cover, which is the mid market and lower mid market. And we will accept those prices because those are the market prices for credits that we think are strong and stable.
Stuart D. Aronson: In order to keep that asset, we're going to need to reduce pricing I believe from so for $6 25, or $6 50 down to so for $5 25, but because it's a strong performing asset non cyclical low capex.
Stuart D. Aronson: Are going to follow that asset and accept the lower price. So it will be primarily driven by credit concerns.
Stuart D. Aronson: And how aggressive the market is getting and in general as I mentioned the market is now a 500 to 575 market in the part of the market, we cover which is the mid market lower mid market.
Stuart D. Aronson: And we will accept those prices because those are the market prices for credits that we think are strong and stable.
Stuart D. Aronson: Okay.
Stuart D. Aronson: that that's fair. And then maybe you could talk, you know, a little bit about it.
Speaker Change: That's fair.
Stuart D. Aronson: And then.
Stuart D. Aronson: Maybe you could talk a.
Stuart D. Aronson: Little bit about.
Stuart D. Aronson: I assume you've got a bit of a watch list within WhiteHorse and, you know, it's... reflected in the internal risk ratings. What are you seeing internally to move credits around within that internal risk rating system, just trying to kind of understand what the tail risk is within the portfolio and if it's growing with this higher-for-longer environment?
Stuart D. Aronson: I assume you've got a bit of a watch list.
Stuart D. Aronson: Within within Whitehorse and.
Stuart D. Aronson: Reflected in the internal risk ratings.
Stuart D. Aronson: What what what are you what are you seeing internally to move credits around.
Stuart D. Aronson: And within that internal risk rating system.
Stuart D. Aronson: Just trying to kind of understand what the kind of what the tail risk is within the portfolio and if it's.
Stuart D. Aronson: Growing.
Stuart D. Aronson: If it's growing with this higher for longer environment.
Stuart D. Aronson: Yeah. The average leverage on our deals is is and has been modest so the higher rate environment is not in and of itself, causing us much concern.
Stuart D. Aronson: Yeah, the average leverage on our deals is and has been modest. So the higher rate environment is not, in and of itself, causing us much concern. We do, as we've indicated in the ratings on the deals and the marks you see on the deals, have a number of credits that are underperforming the original plan. That results in a mark of three or a rating of three.
Stuart D. Aronson: We do as we've indicated in the ratings on the deals and the marks you see on the deals have a number of credits that are underperforming to the original plan that results in a mark of three or rating of three <unk>.
Stuart D. Aronson: Some were concerned of losing principal amounts.
Stuart D. Aronson: Some where we're concerned about losing principal amounts, those are ratings of four. And, as I mentioned in my prepared remarks, there is no broad trend other than consumer-facing companies being weaker. There's no broad trend that we're seeing in terms of reasons why companies are underperforming. In some cases, it's, you know, ArcServe had a technology outage and lost customer data a couple years ago. And that has led to us taking over the company and trying to turn it around; other creditors that we're dealing with are dealing with idiosyncratic issues.
Stuart D. Aronson: Those are ratings of four.
Stuart D. Aronson: And as I mentioned in my prepared remarks.
Stuart D. Aronson: There is no broad trend other than consumer facing companies being weaker.
Stuart D. Aronson: There is no broad trend that we're seeing in terms of reasons why companies are underperforming.
Stuart D. Aronson: In some cases, it's a.
Stuart D. Aronson: Arc served.
Stuart D. Aronson: Technology outage and lost customer data a couple of years ago.
Stuart D. Aronson: And that has led to us taking over the company and trying to turn it around.
Stuart D. Aronson:
Stuart D. Aronson: Other credits that were dealing with are dealing with it.
Stuart D. Aronson: Synchronic issues.
Stuart D. Aronson: We are not seeing broad economic weakness at this point, and we would tell you that revenues for companies across the portfolio are, on average, up, partially due to inflation, but partially due to reasonably strong demand in the general business market.
Stuart D. Aronson: We are not seeing broad economic weakness at this point and we would tell you that the revenues for companies across the portfolio on average are up.
Stuart D. Aronson: Partially due to inflation, but partially due to reasonably strong demand in the general business market.
Stuart D. Aronson: Okay, that's helpful. Last one for me, you kind of made some comments about the news cycle going through a sale process and, you know, maybe seeing a lower valuation than would have been expected. Can you talk about, you know, kind of the puts and takes of that in terms of how you deal with that, you know, within your portfolio and whether you opt to...
Speaker Change: Okay. That's helpful.
Stuart D. Aronson: Last one for me you kind of made some comments around new cycle.
Stuart D. Aronson: Going through a sale process and maybe seeing a lower valuation than would have been expected can you can you talk about kind of how the puts and takes of that.
Stuart D. Aronson: In terms of how you how you deal with that within your within your portfolio, and whether you opt to sell or or or keep it.
Stuart D. Aronson: Thankfully, it's a very small investment, and The situation is a sponsor that owns the company, put the company up for sale, got an offer that they're trying to transact on, but the offer is for less than the debt value. It's a club deal. We're a very small piece of the club, but it's a club deal, and there is no active market for that paper. So the best thing for us to do is just wait for the sale of the company and collect out what we can collect on that asset. That'll be, we think, similar to
Stuart D. Aronson: Thankfully its a very small investment and.
Stuart D. Aronson: The situation is the sponsor that on the company.
Stuart D. Aronson: I'll put the company up for sale.
Stuart D. Aronson: <unk> got an offer that theyre trying to transact on.
Stuart D. Aronson: But the offers for less than the debt value.
Stuart D. Aronson: It's a club deal.
Stuart D. Aronson: Small piece of the club, but its a club deal.
Stuart D. Aronson: And there is no active market for that paper. So the best thing for US to do is just wait for the sale of the company.
Stuart D. Aronson: And collect out what we can collect on that asset that will be.
Stuart D. Aronson: We think similar to where the asset is mark okay.
Joyson C. Thomas: Bryce, one more thing on news cycle, and this also relates to Mickey's prior question on reversals. We did reverse out a small fee that was due at exit or maturity on news cycle of approximately $98,000, given our prognosis on what we expect to collect. Okay, but that had already been accrued, uh, Joyson, or is it just not? That's correct; it had previously been accrued based on
Speaker Change: That's it for me precise one more thing.
Joyson C. Thomas: Brian I was going to just say one more thing on news cycle and this also relates to making prior question on reversals.
Joyson C. Thomas: We did reverse out a small fee that was due at exit or maturity on new cycle of approximately $98000 given our prognosis on what we expect to collect.
Joyson C. Thomas: Okay, but that had already been accrued joycean.
Speaker Change: That's correct.
Joyson C. Thomas: previously been accrued based on an amendment in an earlier period and reversed out during Q1. Okay, I got it. Thanks.
Joyson C. Thomas: Previously been accrued based on an amendment.
Joyson C. Thomas: In an earlier period and reversed out during Q1, Okay got it thanks.
Operator: And we have our next question from Erik Zwick with Hub-DeGroote.
Joyson C. Thomas: And we have our next question from Erik Zwick with Hovde group.
Erik Edward Zwick: Good morning, just one question for me and maybe kind of a two part question.
Erik Edward Zwick: Good morning. I just have one question for you and maybe kind of a two-part question. Could you just remind me kind of the characteristics that you consider for transferring investments into the JV and, you know, the JV is at just over 15% of the total portfolio at fair value today. You know, what's your comfort range with the size of that relative to the total investment portfolio?
Erik Edward Zwick: Could you just.
Erik Edward Zwick: Mind me kind of the characteristics that you consider off we're transferring investment into the JV and you know that.
Erik Edward Zwick: The JV that just over 15% of the total portfolio at fair value. Today, you know where is your comfort range with the size of that relative to that the total investment portfolio.
Stuart D. Aronson: Answering the second part of your question first, we think the JV has now reached a size with the committed capital that is appropriate to the BDC. I don't think we'd increase the JV size again, and we, depending on market conditions, reserve the higher-priced deals to remain on the BDC balance sheet, and the lower-priced deals go into the JV. At this point in time, as I indicated in the prepared remarks, deals that are priced $600 or higher, which would be considered a premium price in today's market, and the price we're getting on non Deals that are priced under $600 will typically head to the joint venture.
Speaker Change: Answering the second part of your question first.
Stuart D. Aronson: We think the JV has now reached a size.
Stuart D. Aronson: With the committed capital.
Stuart D. Aronson: That is appropriate to the BDC I don't think we'd increase the JV size again.
Stuart D. Aronson: And we depending on market conditions reserve the higher price deals to remain on the BDC balance sheet and the lower price deals go into the JV at this point in time as I indicated in the prepared remarks deals that are priced 600, or higher which would be considered a premium.
Stuart D. Aronson: In today's market and the price, we're getting on our non sponsor deals.
Stuart D. Aronson: It will typically go onto the BDC balance sheet deals that are priced under 600 will typically head to the JV.
Speaker Change: Got it. Thank you that's all for me today I appreciate it.
Erik Edward Zwick: Got it. Thank you. That's all for me today. I appreciate it. Have a good day. Thank you.
Erik Edward Zwick: Have a good day. Thank you.
Operator: And just a reminder, if you'd like to ask a question, that was star and one on your telephone keypad. And our next question comes from Sean Paul Adams with Raymond James.
Speaker Change: And just a reminder, if you'd like to ask a question that was star and one on your telephone keypad and our next question comes from Sean Paul Adams with Raymond James.
Speaker Change: Hi, guys good morning.
Sean Paul Adams: Good morning. It looks like the average investment size in the portfolio has continued to go down quarter over quarter, which is, It's been following the trend for the last couple quarters, and I think it is now averaging around $5 million. Earlier in the year, you mentioned that the new average allocation target would probably be closer to $8 to $10 million. Have you guys lowered that target allocation range going forward, or are forecasted add-ons impacting that figure? Um, I think what's really going on.
Speaker Change: Good morning, it looks like the average.
Sean Paul Adams: <unk> investment size in the portfolio has continued to go down quarter over quarter, which is.
Sean Paul Adams: It's been following the trend for the last couple of quarters, I think now averaging around $5 million.
Sean Paul Adams: Earlier in the year, you mentioned that the new average allocation target would probably be closer to $8 million to $10 million.
Sean Paul Adams: Are you guys lowered that target allocate screens going forward or.
Sean Paul Adams: Our forecasted add ons impacting that figure.
Stuart D. Aronson: I think what's really going on is a lot of the non-sponsored deals we do are smaller deals, and so the BDC's allocation to those smaller deals is ultimately a smaller number. That is just a natural result of again the average size of the deals that we're closing. So I would say, as if we see a normal market environment, I would still expect the average size of an asset going into the BDC to be more in the eight to $10 million range.
Sean Paul Adams: I think what's really going on is a lot of the non sponsored deals we do are smaller deals.
Stuart D. Aronson: So the bdc's allocation into those smaller deals is ultimately a smaller number.
Stuart D. Aronson: Sure.
Stuart D. Aronson: That is just a natural result of again the average size of the deals that were closing.
Stuart D. Aronson: No I would say.
Stuart D. Aronson: If we see a normal market environment.
Stuart D. Aronson: I would still expect the average size of an asset going into the BDC to be more in the $8 million to $10 million range.
Speaker Change: Got it thank you.
Operator: And once more, that was Star End one for any questions and or comments now. And again, that star, if you'd like to ask a question. And at this time, I'm currently showing no questions in the queue. I'll now turn the call back over to Steve, Stuart Aronson for closing remarks.
Stuart D. Aronson: And once more that was star and one for any questions and comments now.
Operator: Yes.
Operator: And again that started I'd like to ask a question.
Speaker Change: And at this time I'm currently showing no questions in the queue I'll now turn the call back over to Steve Stuart Aronson for closing remarks.
Speaker Change: Alright, well, we continue to work hard to keep the portfolio as healthy as possible.
Stuart D. Aronson: All right, well, we continue to work hard to keep the portfolio as healthy as possible and to add good credits that will give the BDC stability going forward regardless of market conditions. I appreciate everybody's time today, and, as always, heading into next quarter's call, if anyone has topics they want us to address in the prepared remarks, please communicate with either Joyston or me in advance of those calls, and we will do our best to answer questions with complete transparency. Thank you very much, and have a good day.
Stuart D. Aronson: Add a good credits that will give the BDC stability going forward regardless of market conditions.
Stuart D. Aronson: I appreciate everybody's time today and as always heading into next quarters call. If anyone has topics they want us to address in our prepared remarks, please communicate with either georgeson awry in advance of those calls and we will do our best to answer questions with complete transparency.
Stuart D. Aronson: Thank you very much and have a good day.
Speaker Change: This does conclude today's program. Thank you for your participation you may now disconnect.
Operator: This does conclude today's program. Thank you for your participation. You may now disconnect.
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