Q2 2026 WhiteHorse Finance Inc Earnings Call
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That markup was led by our position in Starko, also known as Chase Products or Pressurized Holdings, where the markup on our equity investment contributed approximately $4.8 million, or roughly $0.22 per share.
I will provide more detail on the markup in Chase, as well as provide an update on the number of other investments in our portfolio later in this call.
Turning to our financial results, Q2 gaap, net investment income and core knee, where each 4.7 million or 21.7 cents per share compared with q1 gap. Net investment income and core nii of 5.6 million or 25.3 cents per share last quarter.
NAV per share at the end of Q2.
Is up to 1177 compared with 1147 at the end of q1. An increase of approximately 2.6%, the change in nav. Reflected net realized and unrealized gains of approximately 26 and a half cents per share in the aggregate. As well as share repurchases that were created to NAB by more than 6 cents per share, partially offset by the approximate 3.3 cents, per share and III shortfall as a result of the distribution paid during the court.
Order that exceeded in that investment income for the period.
A detailed bridge of the quarter-over-quarter change in the NAV per share is provided on slide 15 of our earnings presentation. Even though our NII this quarter was below the quarterly distribution rate, as I've shared in the past, we have a number of restructured credits that have been equitized that are not producing NII but are likely to be realized either later this year or in 2027.
Those realizations should add to the BDC's NII-generating capability.
Turning to shareholder value, our shares have continued to trade at a meaningful discount to NAV, and both management and the Board remain focused on actions that we believe can help enhance shareholder value over time.
So far, that focus is included: discipline, portfolio, repositioning.
Selective capital deployment, creative share repurchases, and steps to support distributable earnings management are discussed in the board. We continue to explore other options as well.
We remained active under the board's expanded share repurchase program through the first two months of the second quarter, and those repurchases were accretive to NAV, as I mentioned earlier.
We paused repurchase activity in late May. That decision reflects the balance we look to strike between buying back shares at a meaningful discount to NAV, which is accretive, and the corresponding reduction in equity, which raises our leverage ratio levels and competes with the capital we can put into newly originated investments.
Capacity remains available under the repurchase program, and we will continue to assess recommending repurchases as part of our broader strategy of seeking ways to create shareholder value.
In addition, the advisor has agreed to extend the temporary voluntary incentive fee waiver for the third quarter of 2026, reducing the applicable rate from 20% to 17.5%. We view the fee waiver as a constructive step to support distributable earnings and shareholder value. As we have said previously, this fee waiver is temporary, and any decision regarding future periods,
Will be revisited based on the then-current conditions and in consultation with the Board.
We have also been encouraged by the alignment shown through continued open market purchases by our officers and directors during the second quarter, as disclosed on Form 4 filings. We believe that reflects our confidence in the underlying value of WhiteHorse Finance.
Turning to portfolio activity, we had gross capital deployments of $25.4 million in Q2. Repayments and sales were muted during the quarter and offset gross deployments by approximately $2.2 million, resulting in net deployments of approximately $23.2 million, before the effects of transferring assets into the SDRS JV.
Gross Capital deployment consisted of 3, new originations totaling 23.1 million with the remaining amount deployed to fund add-ons to 5 existing portfolio companies. The 3 new originations were headlined by 2. Former whiteboards borrowers, Empire office for 101 million, and intermediate, Cloud Communications for 6.6 million as 1 is 1, as well as new 1 new portfolio company borrower vibration mountings and controls for 6.4 million.
Over three new originations in Q2, one was non-sponsored and two were sponsored. The sponsor deals are targeted to be transferred to the STRS JV. Our new originations in Q2 had an average leverage of approximately 4.2 times EBITDA and were all first lien loans.
Total repayments and sales of $2.2 million were driven by partial paydowns, with no full realizations during the quarter.
During the quarter, the BDC transferred to New Deals to the STRS JV totaling $7.8 million. The transfers were headlined by Industrial Service Solutions at $5.1 million and TrimLight at $2.7 million. We continue to successfully utilize the STRS JV and believe that WhiteHorse Finance is equity investment in the JV.
Continues to provide attractive returns to our shareholders.
After net deployments and JV transfer activity, as well as net realized and unrealized gains recognized during the quarter, total investments increased from the prior quarter by $26.2 million to $569.2 million. This compares to our portfolio's fair value of $543 million at the end of Q1.
During the quarter, we recognized approximately $0.1 million in net realized losses and approximately $5.8 million of net unrealized gains, for aggregate net realized and unrealized gains of approximately $5.7 million, or approximately 26 and a half cents per share.
The net mark-to-mark, the gains were driven primarily by a $4.8 million markup on Chase, a $0.4 million markup on PlayMonster, and approximately $0.5 million of other net markups across the portfolio.
For those who aren't familiar, Chase Products is a developer and manufacturer of bulk consumer and industrial chemical and aerosol products in the United States. We assumed ownership of the business in March of 2023.
Since then, the company has improved debit dollars from negative levels to a run rate in the low positive double digits, supported by new customer wins and added production capacity, and it continues to track ahead of plan this year.
The markup this quarter reflects the improvement in operating performance and the updated evaluation inputs that follow from it.
We are cautiously optimistic about the prospect of a liquidity event on this asset over the next six to twelve months.
Alongside a co-leader in January of 2022.
The business has returned to positive and growing adjusted IBA, with meaningful year-over-year improvement and continued momentum into 2026. And the markup reflects that trajectory.
Play Monsters is at an earlier stage than Chase with respect to any realization, and we would expect any process to follow the finalization of full-year 2026 results at the earliest.
Both positions generate limited cash income. Today, a realization in either case would convert the full realized value into cash available for future redeployment into income-producing investments, which would positively contribute to help support core NII over time.
At the end of Q2, 98.8% of our debt portfolio was first lien senior secured, and our portfolio continued to reflect a balanced mix of sponsor and non-sponsored investments, with non-sponsored representing approximately 40% of the portfolio at fair value.
The weighted average effective yield on our income-producing debt investments was 10.8% at the end of Q2, consistent with the 10.8% at the end of Q1.
The weighted average effective yield on our overall portfolio was approximately 8.8% at the end of Q2, compared to approximately 8.8% or 8.7% at the end of Q1.
With respect to non-accrual status, there were no additions to or removals from non-accrual during the quarter, excluding the STS JV. Non-accrual investments represented 3.6% of the total debt portfolio at fair value, consistent with the 3.6% at the end of the prior quarter, and 6.9% at cost compared with 7.2% at cost at the end of the prior quarter.
The four issuers on non-accrual at quarter end were Kala, Fitness Holdings, NewCycle Solutions, Outward Hound, and PlayMonster.
Turning to our outlook, we completed a restructuring of the business subsequent to quarter end, in early July.
Working alongside the other lenders in the group, we recapitalized the company with a new revolver and term loan, converted a substantial portion of the outstanding debt into equity, and extended the maturity.
WhiteHorse, WhiteForce now holds the majority ownership and control of the board, and the restructured term loan returned to accrual status. Upon closing, which will be positive for Q2 NII and Q3 NII.
The company continues to operate in a challenging environment for pet products, where category demand has softened and retailers have maintained lean inventory positions. Consumer sell-through has held up better than peers, so that has not yet translated into improved orders.
For the materially deleveraging control of the board, we are working closely with management on various operating initiatives to drive incremental topline growth and optimize the company's cost structure.
We will continue to evaluate both organic and inorganic paths to build value in the position and improve our ultimate recovery over time.
Regarding New Cycle, this is a small position for the DDC, representing less than one-half of one percent of the portfolio. At fair value, management has been focused on stabilizing financial performance and on cost reduction initiatives, and the company is currently preparing for a sale process. We will provide an update as that progresses.
Finally, regarding Camera Fitness, formerly known as Honors Holdings. The mark reflects the expected proceeds from the sale of the underlying locations. That process is actively underway, and as locations are sold and cash is returned, we redeploy that capital into income-producing investments. As always, we continue to actively manage underperforming credits, leveraging our dedicated restructuring resources and the broader capabilities of H.I.G.
Aside from the credits and on approval.
6. Portfolio companies.
Coming to the market conditions.
The market conditions are interesting and different from those a quarter ago.
The volume of M&A activity is only moderate, similar to last year. However, the supply-demand imbalance we experienced last year is much improved, due largely to the negative press surrounding the direct lending market.
This negative press has had multiple effects.
One effect has been to scare retail investors, resulting in capital outflows that have reduced the appetite of some of the largest players in the marketplace. Another effect is the increasing criticism of the asset-marking policies of direct lenders and BDCs, which has led to greater scrutiny of both how assets are marked down and the types of credits in which people are investing.
In particular, the software sector, which was strongly in favor a year and a half ago, is now strongly out of favor because the market recognizes that some software and technology companies face significant downside risks from potential AI disruption.
Those factors have resulted in a more conservative market environment. Deals would be completed at headline multiples that are generally more reasonable. That is certainly true in the technology and software sector, but we think we are seeing it more broadly as well.
Previously out of favor, sectors such as industrials have come back into favor because they do not face the same AI risk.
Overall, what we're seeing in the market, depending on the sector is leveraged, that is a half a turn to a full term, lower than a year to a year and a half ago, with pricing 25 to 50 basis points. Higher, this, this is particularly true in the sponsor market, and so shared before the sponsor Market Market Cycles up and down. But the non-sponsored market does not cycle very much. We are seeing lower leverage multiples, and higher pricing on sponsored deals with most deals below, 50% loan to value and some even below 40% loan to value.
In general, we are also getting better documents, including protection against LMS, or liability management, executions without LMD protection. Instead of equity coming into a troubled credit, companies may issue super-senior debt, strip existing lenders of collateral, and install the super-senior debt at the top of the capital structure. We have been vigilant in avoiding those situations ever since the Aspect Software.
That led to a loss for the BDC.
And the vast majority of deals we have completed over the past three years, we have limited or, we believe, eliminated the downside risk from LME.
As geopolitical tensions rise and fall, M&A activity slows when tensions are high and tends to pick up when tensions are lower. Across the WhiteHorse direct lending platform, we are doing about 40% to 50% more volume this year than we did last year, because we find current market conditions more attractive.
We are seeing better credits, lower leverage, and better documents. We are also getting covenants on most of our deals. In fact, the vast majority of our middle market credits have covenant protection.
Spreads in the Middle Market and the Upper Middle Market are generally as high or higher than spreads in the Lower Mid-Market. Again, this fact applies primarily to sponsored deals.
Intuitively, that does not make sense because, on average, smaller companies carry greater risk and historically have commanded a pricing premium. However, the third-party data from an investment bank that performs independent valuations for our portfolio validates what we are seeing. Pricing for midsize and larger deals is as high or higher than pricing for smaller deals. We are therefore trying to improve the risk-return tradeoff. Most of the deals we are working on now are middle.
Market or upper middle market credits, but we see a better risk-return dynamic. Current market pricing for sponsor deals is SOFR plus 475 to 550, approximately 50 basis points higher than a year ago.
As I mentioned, we're getting covenants on the vast majority of deals we are doing. We are doing senior secured debt almost exclusively.
50 to 650.
If we believe those are good credits, we will participate in them as well.
Deal prices of $600 and above are still targeted for the BDC balance sheet. Deals below $600 are generally targeted for the JV.
With that said, in subsequent to our quarter end, we closed on 1, New Deal in the BDC. We also transferred positions in 5 portfolios to the strs JV performer for those transfers. The strs JVS remaining capacity has been fully utilized, so no deals. So, New Deals will generally be added to the JV only as repayments occur on existing JV Investments.
The BDC balance sheet currently has capacity for approximately $10 million of additional assets. Similarly, we will create additional capacity there as we receive the payments.
With that, I'll turn the call over to Joyce for additional performance details, and to Jason for a review of our portfolio composition.
Thanks, Stuart, and thanks, everyone, for joining today's call.
During the quarter, we recorded GAAP net investment income and core NII of $4.7 million, or $0.217 per share.
This compares with Q1 GAAP NII and core NII of $5.6 million, or $0.253 per share, as well as our previously declared second-quarter base distribution of $0.25 per share.
Q2 fee income was approximately $0.1 million compared with $0.4 million in the prior quarter.
Driven primarily by amendment fees from LIFT brands, also known as that fitness and NA services.
For the quarter, we reported a net increase in net assets resulting from operations of $10.4 million.
Our risk ratings during the quarter showed that approximately 86.6% of our portfolio positions either carried a 1 or 2 rating, a slight decrease from the 88.3% 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 the company is performing according to such initial expectations.
Regarding the JV specifically, we continue to utilize the platform as a complement to the BDC.
As Stuart mentioned earlier, we transferred two new deals during the second quarter to the SRS JV, totaling $7.8 million, in exchange for a net investment in the SRS JV of $2.3 million, as well as cash proceeds of $5.5 million.
During the quarter, there were no full realizations in the JV.
At the end of Q2, the SRS JV's total portfolio had an aggregate fair value of $340.3 million across 43 issuers, of which 14 are common issuers with the company, and an average effective yield of 9.8%.
This compares with an aggregate fair value of $327.1 million, and an average effective yield of approximately 9.9% across 41 portfolio companies, as of March 31, 2026.
Leverage for the JV at the end of Q2 was approximately 1.10 times, compared with approximately 1.08 times at the end of the prior quarter.
The investment in the JV continues to be accretive for the BDC, generating a low-teens return on equity.
During Q2, income recognized from our JV investment aggregated to approximately $3.2 million, compared to approximately $3.6 million reported in Q1.
As we have noted in prior calls, the yield on our investment in the JV may fluctuate over periods, as a result of a number of factors, including the timing and amount of additional capital investments, changes in asset yields in the underlying portfolio, and the overall credit performance of the JV's investment portfolio.
Turning to our balance sheet, we had cash resources of approximately $28.1 million at the end of Q2, including approximately $19.6 million in restricted cash, primarily representing interest and principal proceeds received at quarter end in our securitized leverage facilities, and approximately $8.5 million at the fund level reserved for the quarterly dividend paid in early July.
We have $85 million of unsecured notes maturing in December of this year, consisting of $10 million of 5.375% notes due December 4th.
And $75 million over 4% notes, to December 15th.
We continue to monitor the debt capital markets and recent offerings in both the retail and institutional space, and we will remain opportunistic in evaluating our alternatives as we approach year-end in addressing these maturities, which may also include a combination of available capacity under a revolving credit facility as well as cash on hand.
77%, which is above the minimum asset coverage ratio of 150%.
At quarter end, gross leverage was 1.30 times compared with 1.31 times in the prior quarter, driven by the net effect of debt recovery ratio. After adjusting for cash on hand, it was 1.19 times compared with 1.12 times in the prior quarter.
The increase in net effective leverage primarily reflected a lower cash balance at quarter-end, as deployments outpaced repayments during the quarter.
In regards to our share repurchase program, the company repurchased approximately 345,000 shares during the second quarter at a weighted average price of approximately $7.42 per share, inclusive of commissions, for total costs of approximately $2.6 million.
Those repurchases increased NAV by more than $0.06 per share.
We have not repurchased any shares since late May, and approximately $9.5 million remains available under the current authorization.
Cumulatively, since the inception of our share repurchase program in the fourth quarter of 2025, we have repurchased approximately 1.8 million shares at a weighted average price of approximately $7.36 per share. We estimate that our buybacks have contributed approximately $0.33 per share of NAV accretion, demonstrating our commitment to creating shareholder value.
Before I conclude and open to questions, I'd like to discuss a recent distribution and the corresponding distribution policy.
Yesterday, we announced that our board declared a third quarter-based distribution of $0.25 per share.
The distribution will be payable on October 5, 2026. The stockholders of record as of September 21, 2026,
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 report portfolio, in addition to other relevant factors that may warrant consideration.
With that, I'll now turn the call back over to the operator for your questions. Operator.
Thank you very much, ladies and gentlemen. At this time, if you do have any questions or comments, please press star 1. Additionally, if your question has been addressed, you may remove yourself from the queue by pressing star 2.
We'll go first today to Hong Zhang with JP Morgan.
Yeah. Hey, uh, this is calling out for Rick, I guess. Off the call, you talked about potentially realizing your experience in the second half of the year. I was wondering if you could share some color as to if that was a quantity or was a part of—.
I'm sorry, I couldn't hear you. Was it something about the second half of the year?
Um, yeah, you talked about potentially modifying some realized gains in the second half of the year as well. I was wondering if you guys had some numbers, or just typing color to it.
um,
The most likely realization, or two realizations, in the second half of the year.
are, uh, Chase Sarco Pressurized Holdings, which is three different names for one account, and then also, um,
Uh, Nava.
Uh, Chase Starco is doing, uh, very well. Uh, it is operating above budgeted levels.
Uh, as I reported, the company has won new customers and actually built new production lines to accommodate those new customers, such that the run rate even—but, uh,
That was negative when we took over the company and is now in the low positive double digits.
Uh, the mark that we've taken on that asset, while it is positive.
Uh, it's frankly lower, uh, than the valuations that the investment banks have told us to expect in a sale process. Um, we have no idea where it will come out, uh, but there's, you know, there's always upside and downside. But if the investment banks are accurate, uh, there could be upside to that valuation.
Uh, Nava.
Similarly, uh, the bankers have indicated evaluation range. Uh, and on that deal, we believe we are marked, uh, at or below the low end of that valuation range. Uh, so that's another monetization that could occur where again, there can be upside or downside. But if you believe the Banker's valuations, uh, there could be upside, uh, if those occur, they will generate cash that cash can be redeployed into earning assets, uh, and or into shareholder repurchases. Uh, and, uh, while there's no assurance that will occur by year end because Lord knows there's plenty of geopolitical volatility out there. Um, you know, as we sit here today, uh, both of those processes are moving forward.
Uh, as I've shared on the call.
And if the results of the end of the year are strong, uh, we in the other lender. Uh, may choose to sell the company again. We don't know um, how that process will go, it's too far away. Uh but that could also generate uh cash revenues or cash receipts, that could be reinvested in earning assets.
Got it. And then I guess that's a really good job on buybacks. I understand it's always a moving target. But is there, I guess, a discount to any of the thresholds that you have in mind that would make buybacks, if there are, more attractive in the near term?
Um, obviously when the share price is lower, it makes the BuyBacks more attractive. Uh, we've completed enough BuyBacks that even with limited new investment activity. Our Leverage is at Target levels. Uh, and so uh, whether there will be more share BuyBacks, this quarter is still a question mark.
Thanks, and have a great week.
Thank you.
Thank you. We’ll go next to Robert Dodd of Raymond James.
Uh, hi guys and and you answered that question, partly. Let's do it with the presence. That's more potential upside, uh, on on nav from from these exes, on moving on to outward Hound, right? Um, when when we look at Chase and play monster, I mean it's a process on doing these restrictions takes a while um, sort of work involved, outward Hound, the restructuring is just occurred. So on that, I mean, is that more likely to be a
late 27, or even a 2028 kind of realization as you put some time into uh maybe hoping that the the the customer volume flows through and and and things like that or or you're looking to
Monetize some of these things, um, sooner rather than later. Some of them are just working out obviously, Chase maybe, um, in the second half um, is, is that like, are you putting your foot on the gas a little bit? Or is that just how it's working out and and what are your thoughts on that? Would have
Robert here. There's always the chance that a strategic buyer comes in and offers a surprise that we think makes sense, in terms of a quicker redeployment of capital. Uh, but if we manage the turnaround process,
For outward Hound. The same way, we've been managing, uh, a successful turnaround process for Chase and play Monster uh, that is a 2 or 3 year process. Uh, so certainly the balance of 26 and 27 would be years where we'd be implementing, uh, in conjunction with management. Uh,
Both potentially organic and inorganic, uh, growth initiatives. Uh, and also we we're already working with management, uh, to, uh, optimize on cost. Uh, keeping the long-term perspective on value, uh, but I would not, uh, I would not expect an exit absent, a strategic approaching us uh, anywhere before 2028 on that deal.
Got it, got it. Thank you.
Middle market, smaller companies? Yeah, I mean, go back.
Yes, right? You used to get a real premium and that's a lawsuit evaporated. I mean, that's, that's having that across the market. What do you think changes that to your point in in, you know, the the supply demand Dynamics changed a little bit a little bit more up Market um and spread so widening there. But I mean, is there anything that you think can can really change where that premium
at the lower end versus the, the hundred million dollar deals can can return to, you know, the, the, you know, a noticeable premium for for the incremental risk that you're taking
Robert, I'll start by answering your question with the fact that
Uh, if the lower mid-market is underpricing risk, we have the ability, as a fairly large player, to pivot.
We don't need.
The lower mid-market needs to come back to premium pricing for the BDC to do well, because we have strong tentacles into other market sectors. And we always pivot to where we see the risk-return being the best. Um,
I would tell you that the things that I think would, uh,
Shift the dynamic in the lower mid-market.
Would be number 1 uh fewer new entrance into that market. Um you know what what you see, I've I've spoken to Bankers who've told me that they'll want to process. Well they'll go out to 30 lower mid-market players to get pricing on a deal.
uh, and
uh,
Twenty-eight or twenty-nine of those players will come back with pricing and a structure that reflects the fact that the company is so small.
But one or two players will come back and undercut the market.
Uh, and in those smaller deals, you typically only need one or maybe two players to get the deal done. So those players who are, in my opinion,
Largely new entrance, who are not strong on the origination side, uh, and desperately need to deploy Capital. Uh, are the reason you're seeing that Dynamic and if they either successfully deploy, uh, the capital, they need to or fail to raise New Capital, uh, then I think you will see, uh, about balancing out of the, uh, price premium that we historically have seen in a lower mid-market. But, um, you know, even looking at deals that I was talking to my team about earlier today. Uh, that Dynamic is certainly not changed as of right now. And uh, as we sit here in August, um, the lower mid-market deals are pricing at the same price, or in some cases, even lower prices than the equivalent mid-market, or upper mid-market deal.
Got it. Thank you. That's it for me, and congrats on the turnaround success.
Thank you.
Thank you. And just a quick reminder, ladies and gentlemen: star 1, please, for further questions. Today we will next move to Christopher Nolan with Latin.
Yeah, I want Echo Roberts. Sent him in, on the, congrats on the turnarounds. I'm talking about Chase products. Um, that's an Affiliated company, uh, what's your Equity ownership there, please.
We own, other than...
The amount we've given to management, we own all the equity in the company. So if that company has a successful sale process,
As.
Uh, indicated by the bankers, all that upside will flow to WhiteHorse.
As the owner, and the BTC will get its pro rata share of that benefit.
So, it's effectively a controlled company.
Yeah, it is, it is, it is a... We have selected the management team and worked with the management team, uh, in terms of, uh...
Strategy growth and cost containment. And again, it has been very successful if you look—
From when we took over the company with negative, evida uh, we took it from negative, Eva to positive Eva Don 1 year. We approximately doubled the Eva in the next year and uh, we are on track to have without giving exact numbers. Uh, very strong growth this year and then because we landed new customers that started shipping this year, if you just
Annualize those new customers, the IBA run rate is even higher. So the story there has been, uh, remarkably positive.
Uh, and again, even though we took a markup, uh, I want to assure you that, based on the data we have from bankers, the value that that asset is marked at should be conservative.
Again, I can't control markets—anything could change—but based on the data we have today, we did not take an aggressive mark.
Well, congratulations on that turnaround in progress. That's a sweet, sweet victory for your company if you were able to pull off realization.
Starko and, uh, across the broader WhiteHorse direct, Landing platform, effectively owned 100% outside of management, uh, LTIPs and whatnot. Uh, with that being said, for purposes of the BDC itself, uh, it is not considered or qualified as a controlled portfolio company, um, as that definition is noted in the '40 Act. Just wanted to provide that small clarification. Okay, thanks, Joan. Okay, thanks, guys.
Thank you. And ladies and gentlemen, just a final reminder—star 1, please, for any further questions today. And we will pause for just one moment.
And, gentlemen, it appears we have no further questions today. So, ladies and gentlemen, that will bring us to the conclusion of the WhiteHorse Finance second quarter 2026 earnings conference call. We'd like to thank you all so much for joining us today, and wish you all a great afternoon. Goodbye.
Thank you. Bye bye.
