Q2 2019 Earnings Call
Good morning, My name is Christie and I will be your conference operator today.
At this time I would like to welcome everyone to the Whitehorse Finance second quarter 2019 earnings Conference call.
Our host for today's call are Stuart Aronson, Chief Executive Officer, and Jason Thomas Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at one PM Eastern standard time.
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It is now my pleasure to turn the floor over to Sean Silva of Prosek partners.
Thank you Christie and thanks to everyone for joining us today to discuss Whitehorse finances second quarter 2019 earnings results.
Before we begin I would like to remind everyone that certain statements, which are not based on historical facts me. 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 995.
Because these forward looking statements involve known.
Our known risks and uncertainties. These are important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements.
Whitehorse Finance assumes no obligation or responsibility to update any forward looking statements.
Today's speakers may refer to material from the Whitehorse Finance second quarter 2019 earnings presentation, which was posted to our website. This morning at Www Dot finance dotcom.
With that allow me to introduce Whitehorse finances, CEO Stuart Aronson Stuart you may begin.
Thank you Sean.
Good morning, and thank you for joining US today as you are aware, we issued our press release. This morning prior to market open and I Hope Youve had a chance to review our results, which are also available on our website.
I'm going to take you through our second quarter operating performance and then Joyce and Thomas our newly appointed Chief Financial Officer will review, our financial results before we open the line for questions.
Ill provide more detail on choice since appointment at the end of my prepared remarks.
Our second quarter results were mixed it was an otherwise strong quarter, but was impacted we hope temporarily by the markdown of two assets.
We had strong originations in the quarter and close seven deals.
Furthermore, net asset value was up to 15 38.
A 5% increase from the prior quarter and the 51 cents increase from Q2 of 2018.
GAAP net investment income for the quarter was $7.2 million or 35.2 cents a share and core net investment income was 30 to 36.2 cents per share covering our 35 and a half cent dividend.
Although our weighted average effective yield on income producing investments was 11.3% as of the end of the second quarter. The weighted average effective yield on our total portfolio declined to 10.7% due to the impact of AG Kings and stock path, both of which we placed on non accrual during the quarter as they face challenging dynamics I will now provide further detail on these positions.
As reported in the prospectus published ahead of the secondary offering announced in June we placed AG kings on non accrual and marked our position down to 75 cents on the dollar.
The position affected not only our yield for this period, but the reversal of previously accrued interest from the prior period impacted our earnings as well.
We the sponsor and the company's advisors are working hard to resolve the challenges facing this company as quickly as possible.
Also based on data we saw at quarter end, we placed our investment in stack path on nonaccrual and marked the position to 75 cents down from 82 cents in Q1.
We continue to work closely with the sponsor of this company as they take action to reduce debt.
As I mentioned last quarter as a result of these efforts to sponsor reduce debt if the company, which resulted in a $3.8 million of our loan being repaid at par this quarter and the remaining loan converting to a first lien facility.
However, there remains a risk that we may not collect all of our remaining investment in this asset we do expect to have more information regarding of resolution by the end of next quarter.
While these two investments meaningfully impact our results we were able to partially offset these markdowns. Thanks to other operational highlights from the quarter, which I'll now address in more detail.
As mentioned, we experienced strong deal flow during the quarter and able to source high quality deals and continue deploying proceeds from the Arotech sale, we made seven new investments in added on to one position in Q2.
Because of significant cash balances during the quarter, our advisor HKG Whitehorse advisers agreed to waive management fees on the cash portion of our assets for the quarter, so as to not disadvantage our shareholders. While these proceeds are reinvested.
Given those balances are now largely deployed we do not anticipate the need for future waiver is based on the data we have at this time.
Further as a result of the strong of this strong period of deal activity, we determined it appropriate to launch the operations of our previously formed joint venture with state teachers retirement system of Ohio, having contributed five assets at the beginning of the third quarter.
The JV will allow us to efficiently invest in more senior secured assets with the goal of achieving a levered yield of 11% to 15% on our investment.
Finally during the second quarter, we announced that private funds managed by HRG capital also known as the Bayside funds conducted a secondary offering of shares at an offering price of $14 per share.
As a result, approximately 2.6 million shares were sold which reduced the bayside funds total share ownership of Whitehorse finance to under 39%.
It is important to note that this was a secondary offering and so no new shares were issued nor did we receive any proceeds from this offering and therefore this offering was not dilutive to our shareholders.
The secondary offering advances our goal of addressing the overhang of shares owned by the base side fund investors by enhancing liquidity of our public listed shares.
We intend to continue managing liquidity of our publicly listed shares an orderly process potentially through block trades or additional secondary offerings. In addition to exploring other options such as an at the market offering program.
Understanding that the timing of any sales will be determined by many factors, which are beyond our control.
I'll now turn to our investment portfolio.
The fair value of our portfolio in Q2 grew by 14% to $534.8 million.
Compared to $468.4 million as of the previous quarter.
The increase in portfolio balances was mainly attributable to net deployments made during the quarter.
We originated seven new first lien loans during the quarter totaling $71.4 million the weighted average leverage multiple on these new deals was approximately 4.1 times.
We also made one small add on during the quarter, which was a secondary purchase of 3.9 million principal amount at 93.5% of face on our first lien loan to Grupo Hema, whose performance continues to improve.
Repayments in sales during the quarter totaled 12.3 million, which included the Paydown on stack path that I mentioned earlier as well as a paydown on our remaining position in HCT as discussed on our prior earnings call.
Fee income from the quarter was very strong and totaled approximately $2.9 million and was primarily driven by prepayment fees on AC.
$8.9 million as well as waiver and amendment fees generated from SIGA of $1.8 million.
Our portfolio had an average debt investment size of 8.8 million based on fair value with all but three of our current portfolio companies falling below the upper range of our target investment size of $20 million.
Elevated origine activity during the quarter drove an increase in our leverage ratio to 79% up from 57% last quarter. This advances our objective of carefully ramping up investments to manage our portfolio at leverage levels between one and one in the quarter times.
The timing of this ramp up is dependent on market conditions and as always we will only underwrite assets that meet our rigorous credit standards.
Turning now to our Q3 pipeline.
Thus far in the third quarter, we have closed to sponsor deals and one non sponsored transaction.
With an additional eight transactions that are mandated as well as one other additional add on transaction to an existing account, which would increase funding.
As always there can be no assurance that any of these mandated transactions will close I should also mention that all the deals that closed in Q2, all the deals that have closed so far in Q3 and all the mandated deals in Q3, our first lien transactions as of the end of Q2, our portfolio is up to 85% first lien transactions.
And 15% other.
More broadly market conditions remain largely unchanged from last quarter and the non sponsor market. We are seeing deals between two to four and a half times leverage normally with at least 50% equity cushions, we don't see any new competitors in the non sponsor market pricing has been stable in that market for the last several quarters.
In the off the run sponsor market, we continue to find attractive assets with leverage of between three and a half to five and a half times normally with at least 40% equity cushions.
However, we have observed the broader sponsor market continues to be very crowded on those deals. We are typically finding 10 or more competitors on transactions in that sponsor on the run market. Although pricing has been generally stable over the last several quarters.
Our strong deal flow. Despite this competitive market underscores the value of our direct origination infrastructure backed by our three tiered sourcing architecture at HRG, which we view as a key differentiator.
As always we are staying true to our disciplined approach to sourcing and underwriting throughout this process by meeting our retaining our rigorous credit standards diversifying our portfolio to prevent customer concentrations and avoiding binary outcome risk.
In closing I will now share a management update edgy Redondo, who his previous previously our interim Chief Financial Officer has left Whitehorse finance to pursue other opportunities.
We thank Ed for his numerous years of dedicated service and wish him the best moving forward.
As mentioned Joyce and Thomas who has been with the company for several years and who you may have heard in previous earning calls has been promoted from controller to Chief Financial Officer, We look forward to Joyce's can contributions in this elevated role and I will now turn the call over to Joyce and frozen.
Thanks Stuart.
We recorded GAAP net investment income on $7.2 million or 35.2 cents per share. This compares to 7.6 million or 37 cents per share in the prior quarter.
Core Eni after adjusting for 0.2 million capital gains incentive fee accrual was approximately $7.4 million for the quarter translated to 36.2 cents per share. This compares to $7.5 million or 36.5 cents per share in the prior quarter.
We reported net mark to market gains of approximately $1 million driven by markets in the portfolio aggregating to $4.4 million that were partially offset by Mark downs and portfolio aggregating to 3.4 million.
After considering our net realized and unrealized gains in the portfolio. We reported a net increase in net assets, resulting from operations approximately $8.2 million or 41 cents per share for the second quarter.
As of June Thirtyth, 2019, net asset value was $315.9 million or $15.38 per share up from $350 million or $15.33 per share as reported in Q1.
As it pertains to our portfolio investment activity nearly 85% of our portfolio calories, either two or one risk rating on a scale of one to five.
Where NASA rated to two is performing according to plan and our initial expectations and NASA ready to one has performed better such that the risk of loss has been reduced relative to those initial expectations.
Turning to our balance sheet.
We had cash resources of approximately $50.4 million as of June 32019, including $33.8 million unrestricted cash and approximately 15.6 million of undrawn capacity under our revolving credit facility.
We continue to closely monitor asset coverage ratio and feel comfortable with our leverage as of June 32019.
The company's asset coverage ratio for borrowed amounts as defined by the 940 Act was 226.7% at the end of the second quarter, well above a requirement under the statute of 150%.
Our net effective debt to equity ratio after adjusting for cash on hand was 0.63 times as at the end of the quarter.
Next I'd like to highlight our quarterly distribution.
On June 10th we declared distribution for the quarter ended June 32019 of 35, and a half cents per share for a total distribution of $7.3 million stockholders of record as of June 22019.
The distribution was paid to stockholders on July 3rd 2019.
This marks the Companys 27 distribution since our IPO in December 2012, with all distributions at the rate of 35.5 cents per share per quarter.
We expect to be in a position to continue our regular distributions.
I will now turn the call over to the operator for your questions operator.
Thank you as a reminder to ask a question press Star then the number one on your telephone keypad.
And your first question is from Tim Hayes of B. Riley FBR.
Hey, everyone. This is actually Mike on for Tim and Thank you for taking my questions.
So the first question is with stack path last quarter, you mentioned that the private equity sponsor was investing in the company and you kind of reiterated that today I was just wondering what drove the markdown this quarter and whats the outlook here looking forward.
The change in the Mark was driven by an update and financial results. So we got at the end of June .
The financial results were disappointing, which in our mind lowered the value of the asset.
And we are in the sponsor has injected equity.
And is very actively involved in seeking to reduce the debt at the company.
And we expect to we are in.
Multi times, a week dialog with them.
And expect to have.
Significant information by the time, we get to next quarter's update.
That's helpful. Thank you and then another question on non accruals, let's like AG Kings was added to non accrual this quarter and we noticed that one of your peers have placed debt investment on non accrual status a quarter earlier. So I was just wondering what actually changed this quarter that led you to make that decision now.
I guess compared to earlier.
Have we got again more information on the performance of the credit and that information on the performance of credit led led to more understanding of the value on the credit and we determined that the.
A likelihood of recovering that interest was.
Lower than we thought before and we did reverse the accrual that we took in the prior quarter. So.
We have corrected that and that is included in our earnings results for the quarter.
Gotcha. Thank you and then just a follow up I guess in terms of the overall portfolio. How would you characterize the health of your portfolio companies compared to maybe a year ago are you seeing any material changes in EBITDA growth interest coverage different things like that.
No. We have companies that are over performing companies that are underperforming and companies that are performing on plan.
We are not seeing any systemic change in the performance of the lower mid market economy in the United States.
The economic when this that we read a lot about resulting from trade wars and other macro issues do not seem to be impacting our portfolio.
So I would say would be.
Exception.
Of stack path that is.
A specific issue and kings, which is dealing with.
Issues in that sector.
We are.
Consistent in portfolio quality with a year ago.
Thank you that's helpful. And then one last question from me.
Thanks to the all in yield declined 40 basis points quarter over quarter, and so I'm just wondering how much of this decline was driven by LIBOR and then how much of that was driven by competition if any.
Joyce and do you happen to have.
A breakdown of those numbers.
You had to break down is roughly about 30.
It's related to sprint and another 10 minutes, let's call it on the base rate.
Thats helpful. Thank you very much for taking my questions.
Thank you. Your next question is from Mickey Schleien of Ladenburg.
Yes, good morning, everyone actually like to follow up on that last question. When we look at the impact of spread and spread compression as capital has come into the market seems pretty clear in looking at.
Your portfolio yield on page 11.
That that's been a major trend when you think about the potential for the fed to continue to loosen with the economy looking to slow down and taking into account the floors in your loans, which I assume are well below the current LIBOR rate.
How do you think about how do you think competitors will behave in this sort of developing environment and where do you see the portfolio yield settling.
Well, let me just highlight that we continue to be booking first lien loans and not second lien loans. So.
Everything booked in Q2, so far in Q3 and plan for Q3 are first lien.
Secondly, we continue to book assets that we would not have booked in the BDC before that are modestly levered lower returning sponsored transactions that are targeted for the JV. So when you look at the.
Average returns.
It is not apples to apples.
To compare it with periods of time before we had the JV because with the JV were knowingly taking on assets that price from LIBOR 525. The LIBOR 625 that we did not take on before those assets when contributed to the JV should in aggregate.
Generate 11% to 15% returns.
Through the leverage structure of the JV. So I would indicate to you that we are not experiencing.
Spread compression, we are not seeing a change in pricing in the market over the last several quarters.
But we are having a change in yield based on the composition of the assets. We're taking both in terms of them being senior secured first lien assets.
And.
The fact that we're doing what we believe our low leverage low LTV.
Senior secured assets that do not have the lofty yields on them that historically, we would we would be putting in the BDC. That's one of the reasons that the originations in the BDC.
Have been so strong.
In terms of how the market will react to a declining interest rate environment.
That would be a prediction of future market behavior that I, just don't have any insight to.
But we will.
Gauge the markets and sticking with our credit standards.
Do the right things that we can do for the BDC.
The beauty of our model continues to be we have 19 originators in 11 cities across North America, we're not competing toe to toe with all those people who are buying deals off of sales desks of the major banks and regional banks.
We are doing.
In general a bespoke transactions, where the majority of deals that we do.
We as an organization are holding all of that asset or in some cases clubbing those deals together with just one or two other players.
Stuart just to make sure I understand given that we haven't seen the Q yet you view I guess effectively warehouse some lower yielding loans that will be contributed to the JV. In this current quarter is that correct.
Yes, we have been putting assets on the books that are priced at LIBOR 525 to 625 and those assets five of those assets in the third quarter early in the third quarter were transferred into the JV.
So were they transferred was that accounted for as a sale or what's the counting for that transfer.
Joyce and I'll pivot to you to answer that question. The accounting was was a sale to the JV, obviously, a portion of that would count as our contribution into the JV along with Crs is portion.
Okay.
Just a couple more questions if I can.
Does the recent I understand in your prepared remarks, you said the group of chemo is improving but does the recent unrest in the government in Puerto Rico.
Pose any specific risks to that credit.
We have seen generally improving financial performance at Grupo Hema.
The situation in Puerto Rico is.
As reported in the news to the best of our knowledge, but it does not seem to be having any material impact on the need of the residents of Puerto Rico.
For hospital care and the company seems to be managing itself.
Better and their balance sheet situation has improved.
Over the past three to six months.
Okay and on AG Kings I, just want to confirm you said you reversed the entire interest accrued from the previous quarter.
Was that correct.
Yes that that had an impact I believe of three cents a share. So earnings would have been three cents higher had we not needed to take that reversal and was there any reversal first stack path.
Backpass went on non accrual at the end of May set right Jason.
That's correct.
And based on the data we have at stack path we.
Believed that we have marked appropriate 75 without.
Having to reverse any accruals.
Okay. So you accrued two months for stack pad in the current quarter in the quarter Yep Yep. Okay. That's helpful. Those are all my questions I. Appreciate your time. Thank you.
Thank you and once again as a reminder, if you would like to ask a question press Star one.
And your next question is from Rick Shane of JP Morgan.
Hi, guys. This is actually Melissa uncollectible.
I wanted to touch on two.
Awesome.
The prepayments.
And that you guys are seeing that I think is identified and sort of one time quarter Im wondering.
What your outlook is.
Headed into the back half of 19 on similar certain nonrecurring a lumpy fee and prepayment income.
You know Melissa we can't.
Project prepayments or waivers or amendments.
But we run a.
Book that is over 50% smaller non sponsor companies and those companies over the entire life of the BDC have.
Regular.
Defaults on covenants, which result in waivers and amendment fees so that is.
A very natural piece of our income.
As I've reported in prior quarters, it varies from quarter to quarter.
In some quarters as high like last quarter in some quarters is low.
But it is a normal part of our income stream and always has been and will be primarily in the non sponsored transaction flow, we do get some waiver and amendment fees on the sponsor deals, but because sponsors have.
Generally looser covenants the non sponsor deals the sponsors.
Violate those covenants less frequently and so we don't see as many fees generally coming from the sponsor deals.
The highlight both HCP and Seagate, who are the key contributors to fees in the quarter are both non sponsor transactions.
Okay.
I'm also looking at the press release that you guys put out on June 13 for you talked about 13 cents per share.
Of mom or what you guys are classified as non recurring fee and other non recurring investment income from pro forma level.
Other items when I look when we look at fee.
Lower yield, but I think you described really well what the strategy is.
In terms of bringing on lower yielding investments on the balance sheet before they're transferred into the joint venture, but if you look at that impact combined with perhaps lower.
Sort of nonrecurring non regularly recurring.
And some additional non accruals, what how do you think that bodes well for dividend coverage.
Again, we never get into projecting forward results.
Stack path and kings until they were resolved.
Will be a drag on earnings.
Fees and waiver fees amendment fees and prepayment penalties.
We expect to have continued to come in but we cant predict the levels.
But the non accruals will put pressure on our ability to.
Our earn or generate net interest income and it's all a function of deployment resolution of those issues.
And.
What waiver and amendment fees, we get.
Okay. Thank you.
Thank you. Your next question is from Robert Dodd of Raymond James.
Hi, guys on only the spread issue, which you've given us some color on obviously you ended this quarter down excluding libel spreads down call. It 30 basis points call. It 50 over the last two quarters, but a lot of that due to the JV assets being onboarded you've talked about before.
When obviously that went live at the beginning of the third quarter. So you transferred them. So how much of that spread should we expect to come back in all other things being equal obviously in the third quarter.
Given that those.
Those at those lower spread assets at going to shift off the balance sheet.
Great. It's a great question, Robert I mean, Joyce and have you calculated that number yet or is that something we need to generate.
We need to get back you on that Robert.
Okay I appreciate that second one on on CK.
Obviously, I mean, the waiver and amendment fees I mean, it's great income, but that implies to me some fairly material.
Adjustments needed to be made at with which the debt structure that asset. So I mean is there anything that we should be concerned.
And about the in terms of elevated stress in that asset and obviously I know that the fair value to cost Mark but.
The.
The scale of that implies a lot of work and raise is at.
An eyebrow.
If you can give us any more color on on if there is any issues there that could become a pilot and then the next few quarters or anything like that.
Again very good question.
Seagate is generating waiver and amendment fees.
And at the same time, the underlying performance of the company is solid and in fact, it is better in the last year than it was in the prior year.
The leverage on the asset that we have is very modest.
But the company.
Has been in default on other issues that do not relate to the core financial performance, we do not anticipate.
Any more changes there otherwise we would have already taken those marks and.
Again the company performance is.
Solid so it is it is not a credit concern of the business at this time.
Got it got it I appreciate that thank you.
Thank you there are no further questions at this time.
We thank you for joining today's Whitehorse Finance second quarter 2019 earnings Conference call. You may disconnect. Your lines at this time and have a wonderful day.
Thank you.