Q3 2025 WhiteHorse Finance Inc Earnings Call

Speaker #3: Please stand by. Your program is about to begin. If you require assistance throughout the event today, please press *0. Good afternoon. My name is Chloe, and I will be your conference operator today.

Speaker #3: At this time, I would like to welcome everyone to the WhiteHorse Finance Q3 2024 earnings conference call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer.

Speaker #3: Today's call is being recorded and will be made available for replay beginning at 4:00 PM Eastern Time. The replay dial-in number is 402-220-2572. No passcode is required.

Speaker #3: 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 *1 on your telephone keypad.

Speaker #3: If you wish to remove yourself from the queue, press star two. It is now my pleasure to turn the floor over to Robert Brinberg of Rosen Company.

Speaker #3: Please go ahead.

Speaker #4: Thank you, Chloe, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Q3 2025 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.

Speaker #4: 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.

Speaker #4: WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statements. Today's speakers may refer to material from the WhiteHorse Finance Q3 2025 earnings presentation, which was posted on our website this morning.

Speaker #4: With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Speaker #5: Thank you, Rob, and good afternoon, everybody. Thank you for joining us today. As you're aware, we issued our earnings this morning before market open.

Speaker #5: And I hope you've had a chance to review our results for the period ending September 30, 2025, which can also be found on our website.

Speaker #5: On today's call, I will begin by addressing our Q3 results and current market conditions. Joyson Thomas, our Chief Financial Officer, will then discuss our performance in greater detail.

Speaker #5: After which, we will open the floor for questions. Our results for Q3 2025 were disappointing and reflect the onset of interest rate cuts, continued pressure on market spreads, as well as the impact of material markdowns on some credits that we have previously discussed.

Speaker #5: Q3 gap net investment income in core NII was $6.1 million, or 26.3 cents per share. This compares with Q2 gap net investment income of $6.6 million, or 28.2 cents per share.

Speaker #5: NAV per share at the end of Q3 was $11.41, representing approximately a 3.6% decrease from the prior quarter. In addition to the approximate 12-cent shortfall in NII coverage of our Q3-based distribution, NAV per share was also impacted by net realized and unrealized losses in our portfolio, totaling $6.7 million or approximately 29 cents per share, which I'll discuss later in the call.

Speaker #5: As a result of these earnings and current market conditions, I have three important announcements. First, given the current earnings power of the BDC, as well as our expectations for lower interest rates and continued spread compression in challenging market conditions, our Board of Directors has taken the prudent measure to reset our quarterly distribution to $0.25 per share.

Speaker #5: This adjusted distribution rate represents an implied 8.8% annualized yield based on the company's ending NAV per share as of the end of the third quarter.

Speaker #5: This was a difficult but necessary decision. Ultimately, we believe the reset puts us in a better position to earn our base distribution going forward, given management's expected earnings power of the BDC, future base rate movements, as well as current market conditions.

Speaker #5: We will continue our distribution policy framework that was previously announced during our Q1 2023 earnings call on May 9, 2023. The company intends to distribute its base distribution as well as make potential supplemental distributions above the base level in the future to pursue this distribution policy.

Speaker #5: To the extent our non-accrual and other troubled situations in our portfolio result in recoveries, or if current market conditions improve, and/or base rates increase, and any of these factors lead to additional earnings, we will be prepared to share those incremental earnings with investors in the form of supplemental or special distributions.

Speaker #5: Joyson will provide a refresher on how our supplemental distribution policy gets calculated when he speaks in a little while. Second, on the big topics, as a result of recent disappointing results and as part of our ongoing commitment to align the interests of the advisor with those of our shareholders, the advisor has voluntarily agreed to reduce the incentive fee on net investment income from its stated annual rate of 20% to 17.5% for the next two fiscal quarters ending December 31, 2025, and March 31, 2026, respectively.

Speaker #5: This temporary 2.5-point reduction in our income-based incentive fee will provide additional financial support for our quarterly distributions to shareholders. The advisor may extend this voluntary reduction; however, the duration and extent of future reductions are uncertain and will be subject to ongoing discussions with the board.

Speaker #5: Finally, given the discount of the company's stock price relative to its book value, the board has approved a share buyback program of up to $15 million.

Speaker #5: Under the share repurchase program, the company may, but is not obligated to, repurchase its outstanding common stock in the open market from time to time at the then-current market prices at the discretion of WhiteHorse Finance's management team.

Speaker #5: The company's current share price level implies a discount to its current book value of more than 40%, which we believe will result in very accretive share repurchases.

Speaker #5: Turning now to portfolio activity, we had gross deployments of $19.3 million in Q3, which were more than offset by elevated repayments and sales of $50.5 million, resulting in net repayments of $31.2 million.

Speaker #5: Gross capital deployments consisted of two new originations totaling $14.3 million, with the remaining amounts deployed to fund two add-ons to existing investments. In addition, there were $0.5 million in net fundings made on revolver commitments.

Speaker #5: Our new originations in Q3 included one non-sponsor and one sponsor deal, at an average leverage of approximately 3.5 times EBITDA. All of our Q3 deals were first lien loans, at an average spread of 612 basis points.

Speaker #5: Total repayments and sales were driven by complete or partial realizations in five portfolio positions, including Barbecue Guys, Lab Logistics, Power Plant Services, Coastal TV, and Ross Simon.

Speaker #5: At the end of Q3, 99.2% of our debt portfolio was first lien, senior secured, and our portfolio ownership mix was approximately 65% sponsor and 35% non-sponsor.

Speaker #5: The weighted average effective yield on our income-producing debt investments decreased to 11.6% as of the end of Q3, compared to 11.9% in Q2, mainly due to lower spreads and lower base rates.

Speaker #5: The weighted average effective yield on our overall portfolio also decreased slightly to 9.5% at the end of Q3, compared to approximately 9.8% at the end of Q2.

Speaker #5: During the quarter, the BDC transferred one new deal and four existing investments to the SDRSJV. At the end of Q3, the SDRSJV portfolio had an aggregate fair value of $341.5 million and an average effective yield of 10.3%, compared with 10.6% from Q2.

Speaker #5: We continued to successfully utilize the SDRSJV and believe WhiteHorse Finance's equity investment in the JV continues to provide attractive returns for our shareholders. After net repayments and JV transfers, activity as well as the net realized and unrealized losses recognized during the quarter, total investments decreased from the prior quarter by $60.9 million to $568.4 million.

Speaker #5: This compares to our portfolio's fair value of $629.3 million at the end of Q2. During the quarter, we recognized $1.8 million in net realized losses and approximately $4.9 million in net unrealized losses, for an aggregate total of $6.7 million in net realized and unrealized losses in Q3.

Speaker #5: Our mark-to-market losses were primarily driven by write-downs in Alveria, which was formerly known as Aspect Software, and in Camarillo Fitness, also formerly known as Honors Holdings.

Speaker #5: Alveria has continued to underperform and has struggled to service its existing debt levels. At the end of the third quarter, we marked down our position in Alveria by approximately $1.7 million based on our expectations of a multi-tiered restructuring to occur in Q4.

Speaker #5: Subsequent to the quarter-end, a lender group, including WhiteHorse Finance, completed a restructuring of the transaction in which we extinguished our existing debt position for cash and equity consideration equal to approximately the aggregate fair value we marked to as of the end of September 30.

Speaker #5: Camarillo Fitness, which is the largest franchisee of OrangeTheory Fitness, also continues to underperform. At the end of the third quarter, we marked down our position by approximately $4.4 million in the aggregate.

Speaker #5: We're making every effort to optimize Camarillo to be well-positioned for the New Year sign-up period, which could give the business a boost in performance. As a partial offset to the markdowns this quarter, we were able to provide an incremental add-on to motivational marketing subsequent to the end of the quarter, to help effectuate the merging of that portfolio company with another portfolio company.

Speaker #5: As part of the add-on, the sponsor contributed a fresh amount of additional equity cushion behind the debt. As a result, that has taken leverage of Motivational Marketing down significantly and led to a slight markup of approximately $0.7 million on that asset.

Speaker #5: The BDC also recognized $2.1 million in realized losses, which was partially offset by a reversal of approximately $1.7 million in previously recorded unrealized losses from the restructuring of MSI Information Systems.

Speaker #5: With the restructuring of MSI, the restructured debt investments returned to accrual status, as we expected it would. Non-accrual investments now represent 2.7% of the debt portfolio at fair value, an improvement compared with 4.9% of the debt portfolio in the prior quarter.

Speaker #5: Other deals on non-accrual are likely to remain that way for some period of time. We are continuing to actively work on getting deals off non-accrual, leveraging the expertise of our five-person dedicated WhiteHorse restructuring team and the resources of HIG Capital.

Speaker #5: Aside from the credits on non-accrual, our portfolio is performing quite well. Turning to the lending market, M&A activity has not picked up as much as the investment banks and private equity shops had hoped for, although there has been a steady trickle of improvement.

Speaker #5: There is still plenty of capital available to serve the reduced supply of new financings in the market, and the environment remains extremely competitive, particularly for companies that are non-cyclical and do not have meaningful international sale exposure.

Speaker #5: Lenders and the sponsor markets are being very aggressive, while the non-sponsor markets continue to be less competitive. In the mid-market, pricing for sponsor deals is pretty solidly in the SOFR 450 to 500 range, as competition has compressed spreads and OID is typically a point to a point and a half.

Speaker #5: Lower mid-market sponsor deals are pricing in the 475 to 575 spread over SOFR, at least a range of that. Leveraged multiples are between 4 and 6 times.

Speaker #5: Partial pick features are being used selectively to make cash flows work on upper mid-cap and large-cap deals. The non-sponsor market remains much less competitive and has a significant pricing premium compared to the sponsor market.

Speaker #5: We are generally seeing non-sponsor deals pricing at SOFR plus 600 and above. OID is still generally two points or higher. Compared to sponsor deals, leverage levels on non-sponsor deals have been consistently lower and more stable than the sponsor-backed deals.

Speaker #5: To put the attractiveness of the non-sponsor market in context, our non-sponsor mandates are still levered only 3 to 5.5 times, and the highest deal we have priced recently is at SOFR 650 plus a warrant.

Speaker #5: We continue to focus significant resources on the non-sponsor market, where there are better risk returns in many cases and much less competition than what we are seeing, especially in the on-the-run sponsor market.

Speaker #5: We currently have 22 originators covering 13 regional markets. Given market conditions, these originators are primarily focused on sourcing off-the-run sponsor deals and non-sponsor deals as we look for value and good risk-return in a market where there is limited deal flow and a lot of aggressiveness.

Speaker #5: Subsequent to quarter-end, the BDC has closed on one new deal and one add-on investment totaling $16.2 million, and had one full repayment totaling $22.2 million.

Speaker #5: Following the net deployment activity to date in Q4, the BDC's remaining capacity is approximately $40 million, and pro forma for several transactions that we anticipate will close in Q4 of 2025, the BDC's capacity for new assets is approximately $20 million.

Speaker #5: At the end of the third quarter, the STRS JV's remaining capacity was approximately 20 million, and pro forma for recently mandated deals to eventually be transferred in the JV's capacity is fully deployed.

Speaker #5: Our pipeline remains lower than normal for this time of year. We currently have six new mandates and are working on three add-ons to existing deals.

Speaker #5: Our six mandates comprise two non-sponsor deals and four sponsor deals. While there can be no assurances that any of these deals will close, all of these credits would fit into the BDC or our JV should we elect to transact.

Speaker #5: All of the non-sponsor mandates have pricing of $600 over SOFR or better, and we'd be targeted to go into the BDC's balance sheet. Several of these mandates are large and will help us with asset balances in the BDC.

Speaker #5: The sponsor mandates have pricing of 425 to 550 over SOFR. With that, I'll turn the call over to Joyson Thomas for additional performance details and a review of our portfolio composition.

Speaker #5: Joyson?

Speaker #2: Thanks, Stuart. And thanks, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income in core NII of $6.1 million, or 26.3 cents per share.

Speaker #2: This compares with Q2 gap NII in core NII of 6.6 million, or 28.2 cents per share. As well as our previously declared third quarter base distribution of 38 and a half cents per share.

Speaker #2: Q3 fee income was only approximately $0.1 million, and it was lower than historical quarters due to lower amendment and prepayment fee activity. For the quarter, we reported a net decrease in net assets resulting from operations of $0.6 million.

Speaker #2: Our risk ratings during the quarter showed that approximately 81.8% of our portfolio positions either carried a one or two rating, an increase from 76.8% recorded in the prior quarter.

Speaker #2: Upgrades during the quarter included positions in motivational marketing and educational dynamics, which were both upgraded to a 2, and positions in Telestream, which was upgraded to a 3.

Speaker #2: As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a two rating indicates that a company is performing according to such initial expectations.

Speaker #2: Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier in the call, we transferred one new deal and four existing investments during the third quarter to the STRS JV, totaling $24.2 million.

Speaker #2: As of September 30, 2025, the JV's portfolio held positions in 43 portfolio companies, with an aggregate fair value of $341.5 million. This compares to 43 portfolio companies with an aggregate fair value of $330.2 million as of June 30, 2025.

The upcoming 25-cent distribution will be payable on January 5, 2026. The stockholders of record as of December 22, 2025.

As we've said previously, we will continue to evaluate our quarterly distribution both in the near and medium term based on the quarantine power of our portfolio, in addition to other relevant factors that may warrant consideration.

In addition to our quarterly distribution, we elected to declare a special distribution of $0.035 per share for stockholders of record as of October 31, 2025. The distribution will be payable on December 10, 2025. This distribution was related to undistributed taxable income that was earned last year, which would have otherwise been taxable.

With that, I'll now turn the call over to the operator for your questions. Operator.

Thank you at this time. If you would like to ask a question, please press the star and 1 on your telephone keypad.

You may withdraw yourself from the queue at any time by pressing *2.

Once again for your questions today, that is star and one.

And we will take our first question from Melissa W. with JP Morgan. Your line is open.

Good afternoon. Thanks for taking my questions today.

I wanted to start um with the dividend um and understand how how you're approaching it um with the announcement for the 4q level of 25 cents a share.

Should we be thinking about that as the new base level, or is this going to be something that will fluctuate a little bit more quarter to quarter, outside of the supplemental components?

Melissa, we took a look at

Uh, where interest rates are.

Uh, what are interest rates supposed to do in the future?

Uh, where deployments are, what the current market spreads are.

Um, and the earnings power of the BDC, given some losses on accounts that we've taken, both realized and unrealized losses.

And we came up with a sensitivity analysis.

That caused us to work with the board to set a new base dividend that should be a long-term dividend if our projections as to market conditions and interest rates are correct. And we set that at a level that we believe we can earn on a quarterly basis reliably, even if interest rates do continue to decline, in alignment with the current yield curve.

Okay, I appreciate that. Um, and then as a follow-up, I wanted to touch on the fee waiver. Um, I'm curious about...

I I guess 2 aspects of it, the level going to 17 and a half from 20 and the 2 quarters uh for 4 q and 1 q, that that will apply to. I guess the question behind both is why that level and why that time frame is there a a longer term consideration. Um, the board is taking under advisement. Thank you.

Thank you, Melissa. Uh, the board and the manager, uh, discussed what we should do Visa V, uh, providing some cushion to the earnings capability of the BDC. And it was agreed that we would, uh, wave the 2 and a half percent uh, amount for, or forgive the 2 and a half percent amount for the next 2 quarters. Uh, and then based on the performance of the BDC going forward, the board and the manager will discuss whether, uh, additional forgiveness is, uh, warranted and appropriate. So 2 quarters are done and going forward. Uh, it'll be based on discussions between the board and the manager and linked to the results of the BDC

And we'll take our next question from Robert Dodd with Raymond James. Your line is open.

Uh, hi guys. On look, looking at the the the BDC and and the JV uh to your comments to it sounds like you're you're you're about to be really close to, um, to full capacity in terms of Investments, um,

What?

Unless, obviously, there's recovery from some of these stressed assets. So I appreciate all the.

The color you gave us on the situation that some of these businesses, but can you give us any more thoughts on, like, and obviously some of these tournaments that they don't happen quick? To your point, Cameron, maybe it gets through Q1 and there's a refund and activity, but.

What what are your long-term?

Realistic expectations, about fair value. Recovery from these troubled assets because obviously that's that's 1 of the tools, that would potentially be reinvest. Maybe, maybe rehband the dividend and maybe give the BDC a bit more capacity. Um, any thoughts on on, on on what you can tell us on on the real prospects there?

Yeah, Robert, the deals that are on non-accrual right now, as I indicated in the prepared remarks.

are likely to remain on non-accrual for at least the next 12 to 24 months. In a number of cases, we have taken over the management of those companies, and our 5-person restructuring team works cooperatively with HIG Private Equity operating professionals to make sure that we're getting optimal management teams in those companies, cutting costs where appropriate, and driving growth strategies. But the turnaround of those credits.

For the most part is a multi-year effort uh in certain circumstances uh as it regards a credit like playmonster. Uh, we have taken it. Uh and that was a a credit where there was fraud originally uh and we found out that the ibid Dov the company was actually uh pretty strongly negative. Uh we have turned that company around and the ibida is now positive. Uh we believe we have a good management team uh and we're hoping for improved results, not only this year. Uh but heading into next year uh so that would be a good example of an account that's heading in the right direction. Uh, but in order for us to get to a markup

Up in cash realization. We need to continue to turn that account around more than has already occurred so far.

Uh, and the same is true for credits like, uh, arcserve, uh, which we're still working on, uh, and a couple of the other, uh, credits in the portfolio. So, um,

in in,

All the cases.

We're seeing stabilization to improvement in the performance of the company, but we do think it's going to be a significant period of time—again, at least 12 to 24 months—before those assets that are on a non-accrual come back onto accrual.

Got it. Thank you. Um, on the, the, the um,

Can you give us any any kind of on on like the the track record of, of performance sponsor versus non sponsor to your point? The sponsor deals um Carry meaningfully higher spreads lower leverage. Um, but obviously, you know, if something does go wrong, it it's kind of on you to fix it rather than the, the, the sponsor to, to work through the process. So can you give us an account? I mean, you know, is the the returns are higher. But what's the, the track record of, um, the income return to high, the track record of of outcomes between the 2, um, different deployment strategies.

Robert, in general, the leverage on the non-sponsored deals is anywhere from a turn to a turn and a half lower than on the sponsor deals.

Um, our track record historically, uh, has been that, uh, we see fewer defaults sorry, fewer payment defaults on the non-sponsored deals. Uh, during coid, we had, uh, a number of sponsor deals that went into payment default and needed Equity support, but we did not have any non-sponsored deals that went into payment, default, uh, during that coid period, uh, we've had 1, non sponsored deal that has resulted in a significant loss.

Uh, that was American Crafts, which is now fully resolved.

Um,

but as I think through the non-accruals, and maybe, uh, Joyce, and I'll ask you to double-check me on this, but I believe all of the non-accrual accounts. At this point are actually deals that were sponsored deals.

uh, and none of them currently are non-sponsored deals, which speaks to the

Relative strength of what we do in the non-sponsored market and Joyce. Am I right on that? Are any of the non-accrual deals non-sponsored deals?

Do what I think. Um, if we're including maybe non-income producing restructured assets, um, lift Brands might be 1 that we considered, I forgot we know response or not sponsor deal. Let's Brands was a sponsor deal that that was a deal that during coid, the private Equity Firm injected, a significant amount of equity into turning around the company.

Let me double check on the others, um, and I'll come back on that. But I I think I think that is correct then. Um, the only other 1 I could think of is potentially scar. Again, another non-income producing or a portion of the equity, which is non income producing.

But I believe SCAR, which is non-sponsored, is on a cruel path. Uh, so correct.

Yes. So so scar is also a company that we had to take control of uh we have dramatically improved, the performance of that credit since taking control of it. Uh that is a credit that if it hits its projected numbers for next year. Uh, based on new customers that have been signed up and additional leave it that we expect to be earning. Uh, that is a credit again. It's on a crew right now. The debt is paying interest uh, in cash. Uh, but we own the equity and there is potential for an equity gain, uh, upon the

Sale of that credit next year, if we are able to hit our projected numbers.

Uh, got got it. Thank you for, for all that detail. Appreciate it. There, just 1 1 more. If I can on the, on the pricing, um, to your point, I mean, in, in, in the lower, even in the lower Middle Market, um, for sponsor deals pricing is, is, um,

Uh, it's pretty tight, um, by historic standards.

I mean is, is that just, you know, large, I mean I say just is it out of consequence of, you know, more competition, in terms of large Market competitors coming down um, because there's not enough activity in there in the market or is it is it just you know it's it's your your your your same long term competitors just getting much more aggressive

It's a really good question, Robert. Um,

Large market players, not having enough volume, are coming into the mid-market and creating additional supply of capital.

And so uh in the mid-market we're typically seeing pricing of 450 to 500 and I would say that is definitely definitely been impacted by the larger players coming down, Market in the lower. Mid-market, we're not really seeing the larger players, but there have been a number of new organizations that have been formed that don't have, um, a track record of relationships in the industry and the sum of those shops are trying to buy market share, uh, by discounting price and or uh, doing higher leverage, uh, on deals. So, uh, the lower mid-market, where frankly, there are hundreds of private Equity firms operating, uh, is a much more variable Market.

Uh, where we are seeing pricing anywhere from 475 up to 575, uh, depending on how much competition There Is On Any Given deal and given on the complexity of the credit. Um, but I do not believe that lower mid-market spreads have been significantly impacted by the large shops, uh, and again, when I talk lower, mid-market, I'm talking about, EBA below 30 million.

Got it. Thank you for the car.

No problem. Robert. Thank you.

And once more for your questions, that is star and 1 on your telephone keypad. We'll pause a moment to allow any further questions to queue.

We will take our next question from Christopher Nolan with Ladenburg Thalmann.

Your line is open.

Hi, thank you for taking my question. It really revisits the incentive fee reduction.

Once we're beyond the first quarter of 206, if the EPS continues to underperform, what's the, I guess, state of mind or, um.

Headspace in terms of, um, lowering, then send a fee, um, or continuing it.

So, the board of directors.

Uh, it has provided us a perspective that the forgiveness of the incentive fee, or the temporary reduction of the incentive fee, is aligned with trying to make sure that we are earning the dividend.

uh, and so if there is

underperformance in terms of core dividend earnings, uh, I would expect that the board would take a view that they would seek additional forgiveness or additional uh, uh, waiver of uh, that 2 and a half percent uh, for additional quarters. Uh, but we, you know,

Six months is a significant amount of time in the market, and we all need to see what is going on with M&A, volume spreads in the marketplace.

Uh, and, uh, core interest rates.

Uh, in terms of what the Fed is doing, uh, to have a better sense of what earnings will be out 3 and 4 quarters or more from now.

Understood. Um, and I guess on the share repurchases, if I were to read your comments earlier, it seems like deal flow is slow. Um, should we read into that, that the company will be aggressive on share repurchases?

Um, Chris, we're trading at a very significant discount to NAV, even off of the reduced NAV that I shared with you today of $11.41.

Uh, buying back shares at levels anywhere around today's price is highly accretive for shareholders, both in terms of NAV and NII. And, given limitations in how many shares we can purchase in any given day or week, we felt that a $15 million allocation made a lot of sense to recapture shareholder value if the shares...

Did not materially trade higher.

so, um,

Uh, so long as there is a material benefit to the shareholders in doing so.

Thank you.

And it does appear. There are no further questions at this time. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.

Thank you.