Q4 2024 WhiteHorse Finance Inc Earnings Call
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Operator: Good afternoon.
David: My name is David, and I'll be your conference operator today.
David: Good afternoon, My name is David and I'll be your conference operator today at this time I would like to welcome everyone to the Whitehorse Finance fourth quarter 2024 earnings Conference call.
David: At this time, I would like to welcome everyone to the WhiteHorse Finance fourth quarter 2024 earnings conference call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, Joyson Thomas, Chief Financial Today's call is being recorded and will be made available for replay beginning at 4 p.m. eastern time. Your replay dial-in number is 402-220-0022. No passcode will be required.
Speaker Change: For today's call are Stuart Aronson, Chief Executive Officer, Julian <unk>, Thomas Chief Financial Officer.
Speaker Change: Today's call is being recorded and will be made available for replay beginning at four P. M Eastern time.
Speaker Change: The replay dial in number is four zero to 2207204, no pass code will be required.
David: At this time, I'll... 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 and 1 on your telephone keypad. You may remove yourself from the question queue by pressing star.
Speaker Change: 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 and one on your telephone keypad you may remove yourself from the question queue by pressing star into.
Robert Brinberg: It is now my pleasure to turn the floor over to Robert Brinberg of Rosen Company. Please go ahead. Thank you, David. And thank you everyone for joining us today to discuss WhiteHorse Finance's fourth quarter 2024 earnings results. Before we begin, I'd like to remind everyone that certain statements which are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that can cause actual results to differ materially from those expressed or implied by these forward-looking statements.
Speaker Change: It is now my pleasure to turn the floor over to Robert Greenberg of Roast and company. Please go ahead.
Robert Greenberg: Thank you David and thank you everyone for joining us today to discuss Whitehorse finances fourth quarter 2024 earnings results before we begin I'd like to remind everyone that certain statements, which are not based on historical facts made during this call, including any statements relating to financial guidance may be deemed forward.
Robert Greenberg: Looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Robert Greenberg: Because these forward looking statements involve known and unknown risks and uncertainties. These are important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements Whitehorse finance assumes no obligation or responsibility to update any forward looking statements today.
Robert Brinberg: WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statement.
Robert Brinberg: Today's speakers may refer to material from the WhiteHorse Finance fourth quarter 2024 earnings presentation, which was posted on our website this morning.
Speaker Change: Speakers may refer to material from the Whitehorse Finance fourth quarter 2024 earnings presentation, which was posted on our website. This morning with that allow me to introduce Whitehorse finances, CEO Stuart Aronson Stuart you may begin.
Stuart Aronson: With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin. Thank you, Rob. 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 December 31st, 2024, which could also be found on our website. On today's call, I will begin by addressing our fourth quarter results and current market conditions as well. Joyson Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which we will open the floor for questions.
Speaker Change: Thank you Rob.
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 December 30, 31, 2024, which can also be found on our website.
Speaker Change: On today's call I'll begin by addressing our fourth quarter results and current market conditions as well.
Bruce Thomas our Chief Financial Officer will then discuss our performance in greater detail after which we will open the floor for questions.
Stuart Aronson: Our results for the fourth quarter of 2024 were disappointing, as our investment portfolio declined this quarter due to some net realized and unrealized losses, which impacted our financial performance. Q4 GAAP net investment income and core NII was $8 million or $0.34 per share, compared with a quarterly distribution of $0.38.5 per share, and was slightly below the Q3 GAAP and core NII of $9.2 million or $39.4 per share. NAV per share at the end of Q4 was $12.31, representing an approximate 3.6% decrease from the prior quarter, with approximately half of that decline attributable to our $0.245 special dividend.
Speaker Change: Our results for the fourth quarter of 2024 were disappointing.
Speaker Change: It's all of the investment portfolio declined this quarter due to some net realized and unrealized losses, which impacted our financial performance.
Speaker Change: Q4, GAAP net investment income and core NII was <unk> 8 million or <unk> 34 per share compared with a quarterly distribution of 38 and a half cent per share almost slightly below the Q3, GAAP and core NII was $9 2 million or $39 four pence per share.
Speaker Change: <unk> per share sorry, NAV per share at the end of Q4 was $12.31 representing.
Speaker Change: An approximate three 6% decrease from the prior quarter was approximately half of that decline attributable to our 24 and a half cent special dividend.
Stuart Aronson: NAD per share was also impacted by net realized losses and net markdowns in our portfolio totaling $4.9 million, the majority of which related to markdowns to American Crafts and to Aspect Software, which I'll discuss more shortly. Pairing to our portfolio activity in Q4, we had gross capital deployments of $35.4 million, which was offset by total repayments and sales of $46.2 million, resulting in net repayments of $10.8 million. Gross capital deployments of $35.4 million consisted of six new originations totaling $27.4 million, and the remaining $8 million used to fund various add-ons to existing investments. In addition to the BUB, there was $1.5 million in net fundings made on the revolver commitment.
Speaker Change: <unk> per share was also impacted by net realized losses and net markdowns in our portfolio totaling $4 $9 million, the majority of which related to markdowns to American crafts and to aspect software, which I will discuss more shortly.
Turning to our portfolio activity in Q4, we had gross capital deployments of $35 4 million, which was offset by total repayments and sales of $46 2 million, resulting in net repayments of $10 8 million.
Speaker Change: <unk> capital deployments of $35 4 million consisted of six new originations totaling $27 4 million and the remaining 8 million used to fund various add ons to existing investments. In addition to the Bob that there was $1 5 million in net fundings made on the revolver commitments.
Stuart Aronson: Of our six new originations in Q4, one was non-sponsor and five were sponsor deals, with the average leverage of approximately 4.4 times EBITDA. All of our Q4 deals were first-lane loans with an average spread of 540 base of points and an average all-in rate of 9.8% compared to 10.7% in the third quarter of 2024. The decrease in the all-in rate was primarily due to a decline in the base rates of approximately 60 basis points. During the quarter, total repayments in sales were $46.2 million, primarily driven by full repayments in our positions in Hair Cuttery, Industrial Specialty Services, and ATSG, as well as sales of our remaining positions in Drozdlovka and Hollander.
Speaker Change: Of our six new originations in Q4, one was non sponsor and five were sponsor deals with the average leverage of approximately $4 four times EBITDA.
Speaker Change: All of our Q4 deals were first lien loans with an average spread of 540 basis points and an average all in rate of nine 8% compared to 10, 7% in the third quarter of 2024.
Speaker Change: The decrease in the all in rate was primarily due to a decline in the base rates of approximately 60 basis points.
Speaker Change: During the quarter total repayments and sales were $46 2 million, primarily driven by full repayments on our positions in haircut or eight inch.
Speaker Change: Industrial specialty services and ATSG as well as sales of our remaining positions in drops loves coffee.
Speaker Change: And hollander.
Stuart Aronson: During the quarter, the BDC transferred three new deals and two add-ons to the STRS-JV. At the end of Q4, the STRS-JV total portfolio had an aggregate fair value of $295 million and an average effective yield on the JV's portfolio, 11.1% compared to 11.7% in Q3. The decrease in the effective yield was primarily due to a decline in base rates of approximately 50 basis points. Leverage for the JV at the end of Q4 was 0.88 times compared with 0.97 times at the end of the prior quarter. We continue to utilize the STRS-JV successfully and believe that WhiteHorse's equity investments in the JV continue to provide attractive returns for our shareholders.
Speaker Change: During the quarter the BDC transferred three new deals and two add ons to the S. T. R. S JV at.
Speaker Change: At the end of Q4, the Str's JV total portfolio had an aggregate fair value of $295 million.
Speaker Change: The average effective yield on the Jv's portfolio 11, 1% compared to 11, 7% in Q3. The decrease in the effective yield was primarily due to a decline in base rates of approximately 50 basis points.
Speaker Change: Leverage for the JV at the end of Q4 was <unk> 88 times compared with <unk> 97 times at the end of the prior quarter.
Speaker Change: We continue to utilize the Trs JV successfully and believe the white horses equity investments in the JV continue to provide attractive returns for our shareholders.
Stuart Aronson: At the end of Q4, 98.4% of our debt portfolio was first lien, senior, and secured, and our portfolio mix was approximately two-thirds sponsor and one-third non-sponsor. After net realized and unrealized losses of $4.9 million, as well as $1 million of accretion, total investments decreased $12.1 million from the prior quarter to $642.2 million. This compares to our portfolio's fair value of $654.3 million at the end of Q3. The weighted average effective yield on our income-producing debt investments decreased to 12.5% as of the end of Q4, compared to approximately 13.1% in the third quarter of 2024 and 13.7% in the fourth quarter of 2023.
Speaker Change: The end of Q4 98, 4% of our debt portfolio was first lien senior and secured in our portfolio mix was approximately two third sponsor and one third non sponsor.
Speaker Change: After net realized and unrealized losses of $4 9 million as well as $1 million of accretion total investments decreased $12 1 million from the prior quarter to $642 2 million.
Speaker Change: This compares to our portfolios fair value of $654 3 million at the end of Q3.
Speaker Change: The weighted average effective yield on our income producing debt investments decreased to 12, 5% as of the end of Q4 compared to approximately 13, 1% in the third quarter of 2024, and 13, 7% in the fourth quarter of 2023.
Stuart Aronson: The weighted average effective yield on our overall portfolio also decreased to 10.2% as of the end of Q4, compared to approximately 10.6% at the end of Q3 and 12.4% in the fourth quarter of 2023. Most of this decrease was attributable to lower base rates.
Speaker Change: The weighted average effective yield on our overall portfolio also decreased to 10, 2% as of the end of Q4 compared to approximately 10, 6% at the end of Q3 and 12, 4% in the fourth quarter of 2023. Most of this decrease was attributable to lower base rates.
Stuart Aronson: Transitioning to the BDC's portfolio, the challenges in this quarter generally do not relate to the overall economy. but rather more company-specific. We are working with experts within HIG to optimize the outcomes on the workout account. The balance of the portfolio is generally stable. During the quarter, we took a $2.6 million write down on American Crafts, which was impacted by the second bankruptcy of Joanne's Fabric and Craft Stores. We're in the process of liquidating the remaining pieces of that company. We also took a write-down of $2.2 million on Aspect Software and placed our third-out and fourth-out tranche investments in Aspect Software on non-accrual in the fourth quarter.
Speaker Change: Transitioning to the Bdc's portfolio the challenges in this quarter generally do not relate to the overall economy.
Speaker Change: But rather a more company specific.
Speaker Change: We are working with experts within HIV to optimize the outcomes on the workout accounts.
Speaker Change: The balance of the portfolio is generally stable.
Speaker Change: During the quarter, we took a $2 $6 million write down on American crafts, which was impacted by the second bankruptcy of Jo Ann fabric and crafts stores. We're in the process of liquidating the remaining pieces of that company.
Speaker Change: We also took a write down of $2 2 million on aspect software and.
Speaker Change: Placed our third out in fourth out tranche investments in aspect software on non accrual in the fourth quarter.
Stuart Aronson: As a result, non-accrual investments totaled 7.2% of the debt portfolio, compared with 6.5% of the debt portfolio at fair value in the third quarter. In regards to our nonaccrual investments overall, we hope to have part of our investment in Telestream back on accrual status either by the end of Q1 or Q2. As a whole, our nonaccrual investment in Telestream themselves represents 3.5% and 3.4% based on the fair value and the cost of the debt portfolio, respectively.
Speaker Change: As a result, non accrual investments totaled seven 2% of the debt portfolio.
Speaker Change: <unk> was six 5% of the debt portfolio at fair value in the third quarter.
Speaker Change: In regards to our non accrual investments overall, we hope to have part of our investment in Telus stream back on accrual status either by the end of Q1 or Q2 as a whole our non accrual investments Intel a stream themselves represents three five and three 4% based on the fair value and the cost.
Speaker Change: The debt portfolio prospectively.
Stuart Aronson: Turning to the lending market. Conditions across all of the sponsor segments remain very aggressive. Lenders have relaxed their underwriting standards in terms of fast-tracking the due diligence process and continue to accept EBITDA adjustments that we don't necessarily agree with based on our credit analysis. In terms of pricing, we've seen middle market price compress down to spreads of SOFR 450 to SOFR 525, and lower mid-market spreads move to approximately SOFR 475 to SOFR 600. Leverage multiples and loan devalues have also continued to creep up. From our perspective, we believe there is excessive leverage on a lot of credits that have cyclicality, and we are not participating in those credits.
Speaker Change: Turning to the lending market.
Speaker Change: Additions across all of the sponsors segments remain very aggressive lenders are relaxed underwriting standards in terms of fast tracking the due diligence process and continue to accept EBITDA adjustments that we don't.
Speaker Change: Necessarily agree with based on our credit analysis in terms of pricing, we've seen middle market price compressed down to spreads are so for $450 or so for $5 25, and lower mid market spreads moved to approximately so for $4 75 to sell for 600 <unk>.
Speaker Change: Leverage multiples and loan to values have also continued to creep up from our perspective. We believe there is success of leverage on a lot of credits that have cyclicality and we are not participating in those credits.
Stuart Aronson: There continues to be a more attractive backdrop in the non-sponsored market, where the market continues to support leverage of three to four and a half times, and pricing tends to be between SOFR 575 to SOFR 800. Diligence standards have also remained more consistent in this segment of the market. In 2024, we did more non-sponsor lending than we have done in a typical year, and we expect that to continue. We are redoubling our efforts to focus on the non-sponsored market, where there are better risk returns in many cases, and much less competition than what we're seeing in the on-the-run sponsor market.
There continues to be a more attractive backdrop in the non sponsored market where the market continues to support leverage of three to four five times and pricing tends to be between <unk> 75 to suffer 800 diligence standards have also remained more consistent in this segment of the market.
Speaker Change: In 2024, we did more non sponsor lending than we have done the typical year and we expect that to continue.
Speaker Change: We are redoubling, our efforts to focus on the non sponsored market, where there are better risk returns in many cases and much less competition than what we're seeing in the on the run sponsor market.
Stuart Aronson: In the on-the-run sponsor market, we see generally very aggressive terms, and therefore we are focusing more, in addition to the non-sponsor market, on the off-the-run sponsor market, which are the smaller private equity firms. First quarter volume will be solid. That said, supply demand is generally out of balance, with lenders stretching too far for both better and weaker credits. For example, on better credits, loans are being made where cash flow is not sufficient to service fixed charges due to the amount of leverage being employed and the level of adjustments to the EBITDA.
Speaker Change: And the on the run sponsor market, we see generally very aggressive terms and therefore, we are focusing more in addition to the non sponsor market on the off the run sponsor market, which are the smaller private equity firms.
Speaker Change: First quarter volume will be solid that said supply that supply demand is generally out of balance with lenders stretching too far for both better and weaker credits for example, I'm better credits loans are being made where cash flow is not sufficient to service fixed charges due to the amount of leverage being.
Speaker Change: Floyd and the level of adjustments to the EBITDA.
Stuart Aronson: More broadly, we think the economy is generally healthy, and some policies in the new administration seem to be favorable to middle-market and lower-mid-market American companies. That said, the lack of clarity about tariffs in regard to both levels and targets is creating uncertainty for borrowers who either source or sell products overseas. Given the potential for policies to be inflationary, we think the Federal Reserve is going to be cautious on the timing and extent of rate cuts. In general, we think economic performance across our portfolio will be stable with pressure on the economy coming from lower-income consumers who have been compromised by inflation over the past several years.
Speaker Change: More broadly we think the economy is generally healthy and some policies and the new administration seem to be favorable to middle market and lower mid market American companies.
Speaker Change: That said the lack of clarity about tariffs in regard to both levels and targets is creating uncertainty for borrowers who either source or sell products overseas.
Speaker Change: Given the potential for policies policies to be inflationary.
We thank the federal reserve is going to be cautious on the timing and extent of rate cuts in general we think economic performance across our portfolio will be stable with pressure on the economy coming from lower income consumers, who have been compromised by inflation over the past several years.
Stuart Aronson: Subsequent to quarter end, the BDC has closed five new investments already this year, and three add-ons to existing credits as well, totaling approximately $27.8 million, and we've had two repayments of approximately $13.8 million, including two full realizations. Two of the five new investments were transferred to the JV, and one new investment is expected to be transferred to the JV by quarter end. Following net repayment activity in Q4 and pro forma for several transactions in early Q1 of 2025, the BDC balance sheet has approximately 40 million of capacity for new assets. The JV also has approximately 40 million of capacity, supplementing the BDC's existing capacity.
Speaker Change: Subsequent to quarter end. The BDC has closed five new investments already this year and three add ons to existing credits as well totaling approximately $27 8 million.
Speaker Change: We've had two repayments of approximately $13 8 million, including two full realizations.
Speaker Change: Two of the five new investments were transferred to the JV and one new investment is expected to be transferred to the JV by quarter end.
Speaker Change: Following net repayment activity in Q4 and pro forma for several transactions in early Q1 of 2025, the BDC balance sheet has approximately $40 million of capacity for new assets. The JV also has approximately $40 million of capacity supplementing the bdc's existing capacity.
Stuart Aronson: Given the decline in market pricing, we continue to expect repayment activity to be high in 2025. While volume is lighter than we'd like it to be in all market segments, our pipeline is still solid at about 170 deals. We currently have seven new mandates and are working on three add-ons to existing deals. While there can be no assurances that any of these deals will close, all of these credits would fit into the BDC or RJV should we elect to transact.
Speaker Change: Given the decline in market pricing, we continue to expect repayment activity to be high in 2025.
Speaker Change: While volume is lighter than we'd like it to be in all market segments. Our pipeline is still solid at about 170 deals. We currently have seven new mandates and are working on three add ons to existing deals while there can be no assurances that any of these deals will close all of these credits can fit into the BDC.
Speaker Change: Or our JV should we elect to transact.
Joyson Thomas: With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition. Thank you, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income in core NII of $8 million, or $0.343 per share. This compares with Q3 GAAP NII and core NII of $9.2 million, or $0.394 per share, as well as our previously declared quarterly distribution of $0.385 per share. Fee income of $0.9 million in Q4 was higher compared with Q3 due to non-recurring fee income. In the quarter, we reported a net increase in net assets resulting from operations of $3.9 million.
Speaker Change: With that I'll turn the call over to Joyce for additional performance details and a review of our portfolio composition Jason.
Speaker Change: Thanks, Stuart Thank you everyone for joining today's call.
Speaker Change: During the quarter, we recorded GAAP net investment income and core NII of $8 million or 34 three per share.
Speaker Change: This compares with Q3, GAAP NII and core NII from $9 2 million or <unk> 39, <unk> per share as well as our previously declared a quarterly distribution of $38.05 per share.
Speaker Change: Fee income of <unk> $9 million in Q4 was higher compared with Q3 due to nonrecurring fee income.
Speaker Change: In 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 approximately 72, 5% of our portfolio positions either carried a one or two rating slightly lower than the 75, 1% reported in the prior quarter.
Joyson Thomas: Our risk ratings during the quarter showed that approximately 72.5% of our portfolio positions either carried a 1 or 2 rating, slightly lower than the 75.1% reported in the prior quarter. As a reminder, a 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a 2 rating indicates a company is performing according to such initial expectations. quarter over quarter, our five rated positions increased from approximately 0.5% to 1.3% as a result of our remaining investments in American Crafts, as well as our third out and fourth out tranches in Aspect Software being downgraded to a five.
Speaker Change: As a reminder, a one rating, indicating the company is huge risk of loss reduced relative to initial expectations and a two rating indicates the company's performing according to essentially initial expectations.
Speaker Change: Quarter over quarter, our five rated positions increased from approximately 0.5% to one 3% as a result of our remaining investment in American crafts as well as our third out and point that tranches in Aztec software being downgraded to a five.
Joyson Thomas: Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier, in the fourth quarter, we transferred three new deals and two add-ons to the SGRS JV, totaling $13.7 million. As of December 31st, 2024, the JVs portfolio held positions in 38 portfolio companies with an aggregate fair value of $295 million, compared to 38 portfolio companies at a fair value of approximately $309 million as of September 30th, 2024. The investment in the JV continues to be accreted to the BDC, BDC's earnings generate a negative yield return on equity. to approximately $4 million during the quarter, similar to Q3.
Speaker Change: Regarding the JV, specifically, we continued to grow our investment.
<unk> mentioned earlier in the fourth quarter, we transferred three new deals and to add on to the <unk> JV totaling $13 7 million.
Speaker Change: As of December 31, 2020 for the JV portfolio positions from 38 portfolio companies with an aggregate fair value of the $295 million.
Speaker Change: Compared to 38 portfolio companies and a fair value of approximately $309 million as of September 32024.
Speaker Change: The investment in the JV continues to be accretive to the BDC Bdc's earnings generate.
Speaker Change: Return on equity.
Speaker Change: B to approximately $4 million during the quarter similar to Q3.
Joyson 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 investments, the 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 have cash resources of approximately $27.8 million at the end of Q4, including $15.4 million of restricted cash and approximately $173 million of unjoined capacity available under a revolving credit facility. Subsequent to year end in January of this year, we amended the terms of a revolving credit facility with J.P.
Speaker Change: 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.
Speaker Change: Changes in asset yields in the underlying portfolio as well as the overall credit performance of the Jv's investment portfolio.
Speaker Change: Turning to our balance sheet, we had cash resources of approximately $27 $8 million at the end of Q4.
Speaker Change: We received $2 1 million of restricted cash.
Speaker Change: 173 million of Undrawn capacity available under our revolving credit facility.
Speaker Change: Subsequent to year end in January of this year, we amended the terms of the loyalty credit facility with Jpmorgan to among other things reduced the applicable spread over the reference rate borrowings.
Joyson Thomas: Morgan to, among other things, reduce the applicable spread over the reference rate on borrowings to 225 basis points from 250 basis points, as well as to extend to 225 basis points from 250 basis points, as well as to extend the reinvestment period and schedule maturity date to January 28, January 2028, and January 2030, respectively. As of December 31st, 2024, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 180.4 percent, which was above the minimum asset coverage ratio of 150 percent. Our Q4 net effect to equity ratio after adjusting for cash on hand was approximately 1.15 times compared with 1.13 times in the prior quarter.
Speaker Change: To 225 basis points from 250 basis points.
Speaker Change: As long as the extended to 225 basis points and 250 basis points.
Speaker Change: As long as we extend the reinvestment period and scheduled maturity date to January 28 January 2028, and January 2030, respectively.
Speaker Change: As of December 31, 2024, the company's asset coverage ratio for borrowed amounts as defined by the 940 Act was 184% which was above the minimum asset coverage ratio of 150%.
Speaker Change: For Q4.
Speaker Change: So after adjusting for cash on hand.
Speaker Change: 115 times compared with $1, one three times in the prior quarter.
Joyson Thomas: Before I conclude and open up the call to questions, I'd like to again highlight our distributions. This morning, we announced that our board declared a first quarter distribution of $0.385 per share, which is consistent with the prior quarter. In assessing distributions, we will also consider a taxable income relative to amounts that we have distributed during the year when settling our overall dividend. A current estimate of undistributed taxable income, sometimes referred to as our spillover, as of the end of Q4 2024, after factoring our $0.245 per share dividend, is approximately $28.4 million. We continue to believe that having a healthy level of spillover income is beneficial to the long-term stability of our base dividend.
Speaker Change: Before I conclude and open up the call to questions.
Speaker Change: I'd like to again highlight our distributions. This morning, we announced that our board declared a first quarter distribution of $38 five per share, which is consistent with the prior quarter.
Speaker Change: And distributions we will also consider in taxable income relative to amount that we have distributed during the year and settling our overall David.
Speaker Change: Our current estimate of undistributed taxable income, sometimes referred to as our spillover at the end of Q4 2024 after factoring our 24 and a half cent per share dividend is approximately $28 4 million.
Speaker Change: We continue to believe that having a healthy level of spillover income invest beneficial to the long term stability of our base dividend. We will continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations.
Joyson Thomas: We will continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations.
Joyson Thomas: The upcoming regular distribution, the 50th consecutive quarterly distribution paid since your IPO in December 2012, with all distributions at or above a rate of 35.5 cents per share per quarter, will be payable on April 4th, 2025, to stockholders of record as of March 21st, 2025. As we said previously, we will continue to evaluate a 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.
Speaker Change: The upcoming regular distribution fifth consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at or above the rate of $35.05 per share per quarter will be payable on April four 2025 to stockholders of record as of March 21 2025.
Speaker Change: 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 and May warrant consideration.
Operator: With that, I'll now turn the call back over to the operator for your questions.
Speaker Change: With that I'll now turn the call back over to the operator for your questions operator.
Operator: Operator? Thank you, at this time, if you'd like to ask a question, please press the star and 1 on your. Keep in mind, you may remove yourself from the question queue at any time by pressing star and...
Speaker Change: Thank you at this time, if you'd like to ask a question. Please press the star and one on your telephone keypad.
Speaker Change: Keep in mind, you may remove yourself from the question queue at any time by pressing star and two.
Mickey Schleien: We'll take our first question from Mickey Schleien. Go ahead, you're live. Yes, good afternoon, Stuart and Joyson. Stuart, I appreciate your insight into terms available in the markets. And clearly, you know, it's not just spreads, but also structures that are important. But according to what I've read, spreads had more or less stabilized in the fourth quarter.
Speaker Change: We will take our first question from Mickey <unk> with Ladenburg. Please go ahead. Your line is open.
Mickey Ladenburg: Hi, Yes, good afternoon Steward and choice.
Speaker Change: Stuart I appreciate your.
Speaker Change: Insight into terms available in the in the markets and clearly it's not just spreads but also structures that are important but.
Speaker Change: According to what Ive read spreads had more or less stabilized in the fourth quarter and I was curious.
Stuart Aronson: And I was curious whether you think there's scope for them to widen as risk perception perhaps increases given all the uncertainties that we're seeing in the market. Hey, Mickey, good afternoon. The answer to your question, or actually to confirm what you said, yes, we did see spreads stable in Q4 to Q3. So far, spreads at the beginning of 2025 are also more or less stable. I think if there was a better supply and demand balance in the marketplace, I think that's a good point. Thank you. than the increased volatility that we're seeing both in the stock market and the geopolitical environment would or could lead to increased pricing.
Speaker Change: Whether you think there's scope for them.
Speaker Change: To widen as risk perception, perhaps increases given all the uncertainties that we're seeing in the market.
Speaker Change: Hey, good.
Speaker Change: Good afternoon.
Speaker Change: The answer to your question or actually it's been permit you said, yes, we did see spreads.
Speaker Change: Table in Q4 to Q3.
Speaker Change: So far spreads at the beginning of 2025.
Speaker Change: Are also more or less stable.
Speaker Change: I think if there was a better supply and demand balance in the marketplace.
Speaker Change: Then the increased volatility that we're seeing both on the stock market and the geopolitical environment.
Speaker Change: Would or could lead to increased pricing.
Stuart Aronson: But the M&A markets really have not picked up much at all. And the anchors, though they've said that there's a pipeline of deals coming, have been saying that for the better part of two years. And it really has not proven to be true so far.
Speaker Change: But the M&A markets really have not picked up much at all.
Speaker Change: And the anchors, though they've said that there is a pipeline of deals coming.
Speaker Change: Had been saying that for the better part of two years.
Speaker Change: And it really has not proven to be true so far.
Stuart Aronson: So, while I acknowledge that there's more uncertainty in the market, including recently some uncertainty as to whether the economy is potentially going to hit a recession. We have not seen any upward pressure on spreads and that includes data right through this morning on deals that we were talking about.
Speaker Change: So while I acknowledged that there's more uncertainty in the market.
Speaker Change: Including recently, some uncertainty as to whether.
Speaker Change: The economy.
Speaker Change: Is.
Speaker Change: Potentially going to hit a recession.
Speaker Change: We have not seen any upward pressure.
Speaker Change: On spreads and that includes.
Data right through this morning on deals that we were talking about.
Mickey Schleien: So I think firstly there needs to be a larger economic disruption that would make people nervous like happened in 2022 or there would need to be a resumption of M&A flow that creates a better balance in the market between capital that is available and the demand for that capital. Very insightful, Stuart. I appreciate that. And those are all my questions this afternoon. Thank you for your time. Thank you, Mickey.
Speaker Change: So I think firstly there needs to be a.
Speaker Change: Larger economic disruption that would make people nervous like happened in 2022.
Speaker Change: Or there would need to be a resumption of M&A flow that creates a better balance in the market between capital that is available and the demand for that capital.
Mickey Ladenburg: Very insightful Stuart I appreciate that and those are all my questions. This afternoon. Thank you for your time.
Speaker Change: Thank you Mike.
Sean Paul Adams: We'll take our next question from Sean Paul Adams with Raymond James. Please go ahead. Hey guys, good afternoon.
Speaker Change: We will take our next question from Sean Paul Adams with Raymond James. Please go ahead. Your line is open.
Speaker Change: Hey, guys good afternoon.
Sean Paul Adams: When evaluating the meaningful uptick in the nonaccruals this quarter, and, you know, kind of comparing it to the backdrop of The tariff impact, along with this higher for longer base rate environment, it seems like there's going to be, you know, consistent downward pressure on credit quality. What's kind of the strategy for mitigating this over the next few quarters?
Speaker Change: When evaluating the meaningful uptick in non accruals this quarter and kind of comparing it to the backdrop of the.
Speaker Change: The tariff impact along with this higher for longer base rate environment. It seems like theres going to be consistent downward pressure on credit quality.
Speaker Change: Kind of a strategy for mitigating this over the next few quarters.
Speaker Change:
Stuart Aronson: Good afternoon and good question. We have sought to make sure that our investing is first lien, which keeps us away from some of the pressures on the non-accrual side that might otherwise be there, although, as we shared, the non-accrual numbers that we have posted at this moment are too high. And we are working hard to remediate those, where Telestream in particular is a deal that still has solid EBITDA. And as we resolve the restructuring of that company, part of that company's debt will be put back on accrual, which will help to moderate our non-accrual numbers.
Speaker Change: Good afternoon and good question.
Speaker Change: We have sought to make sure that our investing is first lien.
Speaker Change: Which keeps us away from some of the pressures.
Speaker Change: On the nonaccrual side that might otherwise be there.
Speaker Change: Although as we shared.
Speaker Change: The non accrual numbers that we have posted at this moment.
Hi.
Speaker Change: And we are working hard to remediate those.
Where telus stream in particular.
Speaker Change: The deal that still has solid EBITDA.
Speaker Change: And as we resolve the restructuring of that company.
Speaker Change: Part of that companies that will be put back on accrual.
Speaker Change: Which will help to moderate our non accrual numbers.
Stuart Aronson: We see a lot of risk in the economy where tariffs are the most obvious risk item, where there's a lot of uncertainty. No one is able to know which countries are going to be subjected to tariffs or how large those tariffs will be. And even the news that we have in the market on any given day, as we've seen, it can change literally within 24 hours. So what we've been doing is an extensive analysis of our portfolio and which credits do have tariff risk, not just China, but also, of course, Mexico and Canada. And in addition to that, the EU and other countries.
Speaker Change: We see a lot of risk in the economy.
Speaker Change: Where tariffs are the most obvious risk item, where there's a lot of uncertainty.
Speaker Change: No one is able to know which countries are going to be subject to tariffs or how large those tariffs will be.
Speaker Change: And even the news that we have in the market on any given day as we've seen that can change literally within 24 hours. So what we've been doing is.
Speaker Change: Extensive analysis of our portfolio.
Speaker Change: And which credits do have tariff risk.
Speaker Change: Not just China.
Speaker Change: But also of course, Mexico, and Canada and in addition to that the EU and other countries.
Stuart Aronson: One benefit of the mid-market and lower mid-market where we focus is that fewer of our companies have international exposure than you might see in larger cap companies with more international operations. So, we are trying to be particularly careful about tariff risk because it's just, at the moment, impossible to underwrite. And we're also being very careful on debt service coverages to make sure that the companies we're financing can not only tolerate SOFR staying at current levels, but if the administration's policies prove to be inflationary, there is, of course, a risk that the Fed could raise rates again.
Speaker Change: One benefit.
Speaker Change: The mid market and lower mid market, where we focus is that fewer of our companies have international exposure.
Speaker Change: Then you might see in larger cap companies with more international operations. So we are trying to be.
Speaker Change: Particularly careful about tariff risk because it's just at the moment impossible to underwrite.
Speaker Change: And we're also being very careful on debt service coverages.
Speaker Change: To make sure that the companies we're financing.
Speaker Change: Not only tolerate sofa staying at current levels, but if the administration's policies proved to be inflationary.
Speaker Change: There is of course, a risk that the fed could raise rates again and.
Stuart Aronson: And we don't want to be in transactions where there wouldn't be enough cash flow to service the debt. So, we are avoiding cyclicals, making sure debt service coverages are reasonable on the new deals that we're doing. In many cases, as I highlighted in my prepared remarks, that means that some of the companies that are good companies that are just being structured with too much debt right now, we're staying away from because we have run analyses of actual cash flow as opposed to adjusted EBITDA, but actual EBITDA to debt service charges. And we are seeing that there are deals getting done in the market right now where we think the net cash flows are insufficient to meet the fixed charges of the companies that are borrowing the money.
Speaker Change: And we don't want to be in transactions, where there wouldn't be enough cash flow to.
Speaker Change: To service the debt.
Speaker Change: So we are avoiding.
Speaker Change: Avoiding cyclicals.
Speaker Change: Making sure debt service coverages are reasonable on the new deals that we're doing.
Speaker Change: In many cases as I highlighted in my prepared remarks that means that some of the companies that are good companies that are just being structured with too much debt right now we're staying away from because we have run analysis of actual cash flow as opposed to adjusted EBITDA.
Speaker Change: Total EBITDA.
Speaker Change: Two desk service charges and we are seeing that there are deals getting done in the market right now where we think the net cash flows are insufficient to meet the fixed charges of the companies that are borrowing the money.
Sean Paul Adams: Got it. Thank you. I appreciate the color and that seems like a really reasonable approach.
Speaker Change: Got it. Thank you I appreciate the color and that seems like a really reasonable approach. Thank you.
Operator: Thank And as a reminder, if you'd like to ask a question, please press the star and one keys on your telephone.
Speaker Change: Yeah.
Speaker Change: And as a reminder, if you'd like to ask a question. Please press the star and one key on your telephone keypad take our next question from Melissa Wedel with Jpmorgan. Please go ahead. Your line is open.
J.P. Moore: We'll take our next question from... with J.P. Moore.
J.P. Moore: Good afternoon, appreciate you taking my questions today. First thing I want to touch on is, you know, we're trying to work through, you know, the change, the very rapid decline in base rates during the fourth quarter, but also account for the fact that there's typically a lag, maybe about by a quarter on average. in terms of how that flows through to income statements for BDCs. So when you look at sort of 4Q NII, I'm curious how much of that quarter over quarter decline was a function of base rate versus credit or anything else? And then How much more of that resetting of base rates do you expect to flow into the first quarter of the?
Melissa Wedel: Good afternoon I appreciate you taking my questions today.
Speaker Change: First thing I want to touch on is.
Melissa Wedel: We're trying to work through.
Melissa Wedel: The team very rapid declines in base rates during the fourth quarter, but also account for the fact that there's typically a lag.
Melissa Wedel: And maybe about a quarter on average.
Melissa Wedel: In terms of how that flows through to income statements for BDC. So when you look at sort of for Q NII I'm curious how much of that quarter over quarter decline was a function of base rates.
Melissa Wedel: First as credit or anything else and then.
Melissa Wedel: How much more of that resetting our base rates do you expect to flow into the first quarter of this year.
Joyson Thomas: Joyson, I'll pass that to you. Hey, Melissa. So as we had mentioned before, quarter over quarter, the effective yield on the income producing assets went from 13.1% to 12.5. That was largely based on, you know, lower base rates with a slight decrease in spreads as well for the average. So when we calculate the effective yield, it's obviously as of the end of the quarter. So on a quarter to quarter basis, I think that's where you have to see that when we're calculating, it's based on kind of that effective amounts as of the end of each quarter, but it was largely due to a reduction in base rates.
Melissa Wedel: Joyce and I will pass that to you.
Melissa Wedel: Hey, Melissa.
Melissa Wedel: As we had mentioned before.
Melissa Wedel: Quarter over quarter, the effective yield on income producing assets went from 313, 1% to 12, 5% that was largely based on.
Melissa Wedel: Lower base rates.
Melissa Wedel: Slight decrease in spreads as well for the average.
Melissa Wedel: So when you calculate the effective yield Thompson as at the end of the quarter. So on a quarter to quarter basis, I think thats, where you have them.
Melissa Wedel: See that when we are calculated based on kind of that effective amounts as of the end of each quarter, but it was largely due to a reduction in base rates.
Joyson Thomas: Okay, I might try to rephrase my question a little bit. I apologize if I was unclear. I'm wondering, do you have a rough estimate as to how much of the portfolio has repriced to, you know, sort of prevalent base rate levels? Or is there another sort of leg down a portion of the portfolio that will reset in the first quarter? A good majority of the portfolio does reset on a quarterly basis, we do have some that reset monthly, I don't have the information handy right now, let me see if I can come back to you while on this call with that breakdown.
Speaker Change: Okay, and I may try to rephrase my question around that I apologize.
Melissa Wedel: Unclear I'm wondering if you can do you have a rough estimate as to how.
Melissa Wedel: How much the portfolio has repriced two.
Melissa Wedel: Sort of prevalent base rate levels or is there another sort of grind down a portion of the portfolio that well read that.
Melissa Wedel: In the first quarter.
Melissa Wedel: A good majority of the portfolio does reset on a quarterly basis, we do have some that.
Melissa Wedel: Reset monthly.
Melissa Wedel: I don't have the information handy right now when you see if I can come back to you on this call with the net that breakdown.
Joyson Thomas: Okay, fair enough. I appreciate that.
Melissa Wedel: Okay.
Speaker Change: Fair enough I appreciate that.
Joyson Thomas: The other thing I wanted to clarify were around the comments about expecting elevated repayments this year, combining that with Sort of what sounds like a very cautious outlook on terms and sort of the risk in the market right now and also the slow deal environment. Would it be fair to say that this could be a year of a little bit more deleveraging, similar to what we saw in 24? deleveraging of the BDC. Yes, yes. Um, our goal is to operate at the target leverage level and, um, You know, last year, we were largely successful at offsetting repayments with new volume flow.
Speaker Change: The other thing I wanted to clarify.
Speaker Change: Around the comments about expecting elevated repayments this year.
Speaker Change: Now with.
Speaker Change: That sounds like a very cautious outlook on terms and the rest kind of market right now and after the deal environment.
Speaker Change: Would it be fair to say that therapy. This could be a year of a little bit more deleveraging.
Speaker Change: Similar to what we saw in 'twenty four.
Speaker Change: Deleveraging of the BDC.
Speaker Change: Yes, yes.
Speaker Change: Our goal is to operate at the target leverage level.
Speaker Change: And.
Speaker Change: Last year, we were largely successful at offsetting repayments with new volume flow.
Joyson Thomas: While we are cautious on new volume flow, we do have a very large originations force. We do have an ability to tap into all the market sectors, the on-the-run sponsor, the off-the-run sponsor, and the non-sponsor. And as I indicated in the prepared remarks, we really are redoubling our efforts on the non-sponsor side, because that market is less competitive. It's much more labor-intensive, but it is less competitive. And we're hoping that we will be able to keep the DDC fully invested in 2025. But again, our ability to do that is based on finding the new deals, the due diligence on those deals proving out, such that we actually are willing to invest the money.
Speaker Change: While we are cautious on new volume flow.
Speaker Change: We do have a very large origination force, we do have an ability to tap into.
Speaker Change: All the market sectors. The on the run sponsor of the off the run sponsor of the non sponsor and as I indicated in the prepared remarks, we really are redoubling our efforts on.
Speaker Change: On the non sponsor side.
Speaker Change: Because that market is less competitive it's much more labor intensive.
Speaker Change: But it is less competitive.
Speaker Change: And we're hoping that we will be able to keep the BDC.
Speaker Change: Fully invested in 2025.
Speaker Change: But again, our ability to do that is based on finding new deals due diligence on those deals proving out such that we actually are willing to invest the money.
Joyson Thomas: Thank you. which is all a long way of saying, no, I would not expect deleveraging unless the supply-demand imbalance is so great that we can't originate enough to offset the repayments. But our current Q1 performance, as shared with you in the earlier remarks, has been, or so far is, sufficient to offset the repayments. Okay, I appreciate that.
Speaker Change: Which is all a long way of saying no I would not expect deleveraging.
Speaker Change: And less the supply demand imbalances, so great that we can't originate enough to offset the repayments, but our current Q1 performance as shared with you in the earlier remarks.
Speaker Change: Has been or so far is sufficient.
Speaker Change: Too.
Speaker Change: Offset the repayments.
Speaker Change: Okay I appreciate that and then I might sneak one last question in here anything come at the end of the queue.
J.P. Moore: And then I might sneak one last question in here. I think I'm at the end of the queue. When it comes to the dividend, I definitely take your points in the prepared remarks about evaluating that each quarter. You know, I also appreciate the information you provided around the spillover income. By our math, that looks like a little over $1.20 a share.
Speaker Change: When it comes to the dividend I definitely take your points in the prepared remarks about evaluating that each quarter.
Speaker Change: I also appreciate the information you provided around the spillover income IR math that looks like a little over a $1 20, a share when you have that amount of question in terms of spillover.
Joyson Thomas: When you have that amount of cushion in terms of spillover, I'm wondering if it makes you more reluctant to adjust the dividend in, you know, this sort of spread environment. Thank you. So, again, good question. We are actively looking at the earning power of the BDC based on the assets that are on accrual. And obviously, the increase in assets on non-accrual puts pressure on the earning capacity of the BDC. At the moment, the BDC is not fully invested. We have $40 million of availability for assets on the balance sheet and another $40 million in the JV.
Speaker Change: I'm wondering if it makes you more reluctant to adjust the dividend.
Speaker Change: And.
Speaker Change: This is sort of spread environment.
Speaker Change: Thank you.
Speaker Change: So.
Speaker Change: Again good question.
Speaker Change: We are actively looking at the earning power of the BDC.
Speaker Change: Based on the assets that are on accrual.
Speaker Change: Obviously, the increase in assets on non accrual.
Speaker Change: Puts pressure on the earning capacity of the BDC.
Speaker Change: At the moment the BDC is not fully invested we have $40 million of availability for assets on the balance sheet and another $40 million in the JV.
Joyson Thomas: And we are running models and sharing with our board the results of those models in terms of earnings per share and our ability to sustain the dividend. So, the board will be actively evaluating our payout level based on that information. And we will update the market and all our analysts as soon as any decision on that is rendered. But at the moment, based on the data that we had last quarter, the board did decide to keep the dividend at the current rate of $38.5. and there is no change to that at the moment. Once again, if you would like to ask a question, please press the star and 1 keys on your telephone Thank you.
Speaker Change: And we are running models and sharing with our board.
Speaker Change: The results of those models in terms of earnings per share.
Speaker Change: And our ability to sustain the dividend.
Speaker Change: The board will be actively evaluating.
Speaker Change: Our payout level.
Speaker Change: Based on that information.
Speaker Change: And we will update the market and all our analysts.
Speaker Change: As soon as any decision on that.
Speaker Change: Is rendered but at the moment.
Speaker Change: Based on the data that we had last quarter.
Speaker Change: The board did decide to keep the dividend.
Speaker Change: At the current rate of $38.05 and there is no change to that at the moment.
Speaker Change: Once again, if you would like to ask a question. Please press the star and one key on your telephone keypad.
Operator: Have a great day. Bye.
Operator: I'm going to pause for another moment to allow any further questions. Any further questions on the line at this time? All right. Thank you, operator.
Speaker Change: Compose for another moment to allow any further questions to queue.
Speaker Change: Yeah.
Speaker Change: And there are no further questions on the line at this time.
Speaker Change: Alright. Thank you operator, thank you everyone for your time and.
Stuart Aronson: Thank you, everyone, for your time. And we will do our very best to invest intelligently in this market environment and continue to deliver returns on the BDC. Thank you and have a good day and a good weekend.
Speaker Change: We will do our very best to invest intelligently in this market environment and continue to deliver returns on the BDC. Thank you and have a good day and a good weekend.
Speaker Change: Sorry, Jason.
Joyson Thomas: I was just going to get back to Melissa on her question on the breakdown of the portfolio. So it's roughly split 50-50 between debt instruments resetting on a monthly basis versus debt instruments resetting on a quarterly basis. So approximately 49% is monthly resets and about 51% is three-month resets.
Speaker Change: Yes, I was just going to get back to Melissa to your question on the breakdown of the portfolio. So it's roughly split 50 50 between.
Speaker Change: Debt instrument as we sat in on a monthly basis versus debt instruments resetting on quarterly basis, So approximately 49% as monthly resets and about 51% is three month resets.
Joyson Thomas: Thank you, Joyce.
Speaker Change: Thank you Joseph.
Operator: Operator, I think that concludes the call. Thank you very much. Again, thank you for your participation.
Speaker Change: Operator, I think that concludes the call. Thank you very much.
Speaker Change: Absolutely.
Speaker Change: Thank you for your participation. This does conclude today's program and you may now disconnect.
Operator: This does conclude today's program. See all of these links in the video description below.
Speaker Change: Okay.
Speaker Change: [music].
Operator: Thats all, Ciao!