WhiteHorse Finance, Inc. (WHF) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance First Quarter 2015 Earnings Teleconference. Our hosts for today's call are Jay Carvell, Chief Executive Officer; Bill Markert, Chief Operating Officer; and Gerhard Lombard, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 1'o clock p.m. Eastern Standard Time. The replay dial-in number is (404) 537-3406 and the pin number is 28287913. 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. [Operator Instructions]. It is now my pleasure to turn the floor over to Brian Schaffer of Prosek Partners.

Thank you, Jennifer, and thank you everyone for joining us today to discuss WhiteHorse Finance's first quarter of 2015 earnings results. Before we begin, I would like to remind everyone that certain statements made during this call, which are not based on historical facts 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 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. With that, allow me to introduce WhiteHorse Finance's CEO, Jay Carvell. Jay, you may begin.

Thanks, Brian. Good morning. Thank you for joining us today. As you know, our press release was issued this morning before market open and I hope you have had a chance to review our results. Starting with a brief overview. We are pleased to report a strong first quarter in 2015 on the heels of a very satisfying Q4 and full-year for 2014. Given the traditional first quarter slowdown in our industry, we feel good about our results from an NII, portfolio yield, NAV, and investing perspective. As we highlighted on our last call, we ended 2014 with an attractive portfolio and efficient capital structure. Gerhard will hit some of the details from the quarter in a moment but I would like to point out that we added over 19 million of new investments across three portfolio companies that yielded approximately 12.8%. We would expect to be down from a seasonally strong Q4 but we were up compared to the first quarter of 2014 where we invested $16.6 million across three companies. At the same time, our gross proceeds from sales and repayments were approximately $32 million, with the majority of that being strategic sales of some of our lower yielding positions, the average yield of which was 8.4%. As we mentioned on last quarter's call, we expect this kind of portfolio optimization to be a continuing theme for Whitehorse Finance. Our strategy is to originate and invest in the best risk adjusted loans for inclusion in our portfolio. At the same time, we will seek to improve the overall yield and quality of the portfolio by cycling out of certain names. We feel this kind of portfolio management is beneficial across several fronts. While we maintained our focus on senior instruments, and strong borrowers, you saw this quarter's average effective yield tick up from 11.3% to 11.4%. Other positives include better diversification or upgrades in the risk return profile. And while we aren't providing guidance on what future yields may look like, or exactly what we are targeting, we will remain disciplined when looking at existing positions as well as new originations. We will get into a few more details later in the call but I would highlight that our investment approach has remained unchanged since we launched in December 2012. That approach, combined with our relationship with HIG, has helped us originate and manage an attractive diversified portfolio. We are pleased that our NII exceeded our stated dividend this quarter and are optimistic about the state of the smaller end of the credit markets. I would like to highlight a few items regarding our investment portfolio. As of March 31, fair value of the portfolio was $391.3 million, down slightly from $403.5 million as of December 31, 2014, and up from $286.9 million at the end of the first quarter of 2014. Our investment portfolio of 35 positions cross 29 companies remains primarily composed of senior secured loans. The portfolio is well diversified across a number of industries, with an average investment size of $11.2 million, and a weighted yield of 11.4%. As a reminder, none of our investments are currently on or have been on non-accrual status. As we reported last quarter, more than 96% of the loans in our portfolio carry a variable rate which should continue to position the portfolio well for a potential rising interest rate environment. Looking at the broader capital markets, we saw a great deal of activity along with a little volatility in the fourth quarter of 2014. The first quarter of 2015 slowed down quite a bit but we don't anticipate an end to credit -- volatile credit markets in 2015. The energy sector is still challenged and overall M&A activity is slowed due to factors in both the equity and debt markets. We continue to expect this general broader market tone to persist for the near to mid-term. As I've mentioned on other calls, the smaller end of the capital markets where we tread will experience the same phenomenon that the larger markets do but usually lagging and in a lesser way. We are still able to originate loans at terms that meet our requirements from a risk and return standpoint and we've been generally pleased with the interest rate as well as terms in new deals that we're working on. I've also talked about the advantages we enjoy as a result of our relationship with HIG Capital in terms of investment origination and management. The exemptive relief order we have discussed is also beneficial from the standpoint of more flexibility as a firm when we pursue and originate certain investments. While we're seeing an expected seasonal slowdown in pace of deal activity, over the long horizon we expect to see solid opportunities to put capital to work in our target markets. We believe that our overall portfolio is well-positioned to withstand any further upticks in volatility or movements in the market. We believe that BDC space in general should see favorable tailwinds as fewer banks were able to meet the borrowing needs of small businesses. And though we saw a record issuance of collateralized loan obligations in the first quarter, the CLO market is facing hurdles of its own due to regulatory changes further benefitting us. As we continue through 2015, we like the market and feel like we will continue to see attractive opportunities for our strategy. With that, I will now turn the call over to Gerhard. Gerhard?

Results for the quarter ended March 31, 2015. Net investment income was $5.3 million compared with $5.0 million reported in the fourth quarter of 2014, and $4.0 million reported in the first quarter of 2014. This increase in NII is the result of the continued deployment of capital into higher-yielding directly originated loans and our continuing focus on portfolio optimization. This resulted in NII of $0.356 per share and as you are aware our quarterly dividend has been consistent at $0.355 per share. Our investment income continues to consist primarily of recurring cash interest. First quarter fee income was $100,000 compared with fourth quarter fee income of approximately $197,000. Net realized and unrealized losses on investments were $561,000 during the first quarter of 2015 compared with $1.4 million during the fourth quarter of 2014. As a result, we reported an increase in net assets from operations of $4.8 million or $0.32 per share for the first quarter of 2015 compared with an increase of $3.6 million or $0.24 for the fourth quarter of 2014. Expenses for the quarter totaled $6 million which was consistent with $6 million of expenses reported for the fourth quarter of last year. First quarter 2015 expenses consisted primarily of interest expense on our credit facilities of $1.7 million and base management fees and performance-based incentive fees of $3.5 million. When looking at expenses on a year-over-year basis the increase in interest expense on our credit facilities was due to a higher outstanding balance on our revolving credit facility. The year-over-year increase in management fees is attributable to the increase in total assets and net investment income. As of March 31, 2015, net asset value was $224.8 million or $15 per share as compared with $225.4 million or $15.04 per share reported as of December 31, 2014. Switching over to portfolio and investment activity, as Jay mentioned, as of March 31, the fair value of WhiteHorse Finance's investment portfolio was $391.3 million invested in 35 positions across 29 companies and consistent with previous quarters is primarily consisted of senior secured debt. The weighted average current yield on the portfolio at the end of the quarter was 11.4% increasing over the prior quarter as a result of direct proprietary origination, and our focus on portfolio optimization. For the majority of investments in the portfolio, risk ratings remained unchanged. However, we moved the ratings on certain of our investments primarily energy related positions from 2 to 3 to reflect market condition. As a reminder, we continue to have low exposure to the energy sector overall with approximately 6% of our portfolio representing energy or energy-related investments. I would also note that we remain comfortable with our position. As Jay mentioned, there were no non-accrual loans as of March 31, 2015. Turning to our balance sheet. WhiteHorse Finance had cash resources, inclusive of restricted cash, of approximately $17.6 million as of March 31, 2015. This compares with $16.1 million as of December 31, 2014. As of March 31, the company had indebtedness in the form of senior notes and two credit facilities that's on a combined basis were drawn by approximately $100.5 million. And as of March 31, the company had $49.5 million of undrawn capacity on its revolving credit facility. We remain comfortable that our cash position and credit lines will continue to provide us with the ability to source loans and meet our origination goals. The company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 221.2% at March 31, 2015, well above the statute's requirement of 200%. Our net effective debt to equity ratio after adjusting for unsettled trades and cash on hand was 0.73 times, representing a modest delivering from 0.77 at December 31, 2014. We closely monitor our asset coverage ratio and feel very comfortable with our leverage as of March 31, 2015. Although, we do not manage to a specific target, we continue to take into account a variety of factors, including portfolio liquidity and market conditions. As we continue to make direct proprietary investments that are less liquid, we may decrease our leverage. Last, I would like to highlight our quarterly distribution. On March 9, we declared a distribution for the quarter ended March 31 of $0.355 per share for a total distribution of $5.3 million. The distribution was paid to stockholders on April 2, 2015. This marks the company's tenth distributions since our IPO in December 2012, with old distributions at the rate of $0.355 per share per quarter. We expect to be in a position to continue our regular distributions in the future. This concludes my formal remarks. I will now turn the call back to the operator for your questions. Operator?

The floor is now open for questions. [Operator Instructions]. Thank you. Your first question is coming from Ryan Lynch with KBW.

Good morning and thank you for taking my questions. Just the first one, in the quarter you guys had net portfolio repayments. Was this a purposeful move, given that you guys ended 2014 with leverage of 0.85 times, and are you guys comfortable drawing down more on your credit facility to leverage up your balance sheet more than where you currently sit, or should we just kind of think about the portfolio just kind of churning from the current level?

Thanks, Ryan. As I mentioned during the call, the main goal during the quarter is always one, finding new investments but then also optimizing that portfolio. And I think that's what you are referring to there is that we sold down positions that were lower yielding and replace those with things that were higher yielding and that we like from a quality and diversification standpoint. In terms of leverage, Gerhard mentioned, we don't really try to target a specific number there. We've always had the 0.7 to 0.8, little bit above 0.8 is okay with us, depending on kind of where we sit in the sector and the economy and that what we feel about the portfolio. Right now, we're pretty comfortable from where are from a leverage standpoint. It may tick up from time-to-time. It may tick up inter-quarter. But we're not trying to manage to a certain number on that. We're really more managing the portfolio, so we continue to generate good income and that we have maximize that NII.

Based on the current loan environment and where you're in a composition of your current portfolio right now, I mean how much additional optimization do you see in your portfolio?

It's hard for me to put a number on that. And we'd like the loan environment right now; there is a lot of good opportunities out there in kind of the middle and smaller end of the capital markets. We're able to be selective right now frankly with what we're putting in given where we sit in the portfolio and we want to optimize that again from a quality and yield standpoint. So as we find deals that we like, we'll -- you'll see a cycle out of some of the things that are a little bit lower yielding or lower yielding a thing that we're putting in. But we're -- there is not a specific number on that that we're targeting. We are letting the market kind of come to us. But I'd say we are fairly busy. We like what we're seeing out there but we're also -- we have a luxury of being pretty selective.

Okay. And then you mentioned about 6% of your portfolio is in energy investments. Looks like some of them had some markdowns in the quarter, but nothing too big. Just at a high level, can you give us some updates on how that -- how your energy portfolio is performing, and what are you hearing from your energy companies regarding their 2015 business plans?

All right. The decrease in credit rating on those as Gerhard mentioned, was more out of response to what the general market is doing and trying to be conservative overall with how we rate those and view those. And the companies, we feel fairly comfortable with here. And the -- I think we've mentioned in the past that we look for guys who are either in certain plays, being certain basins that sort of thing or if you're in -- you've got to get hedged position or you're exposed to the right kind, you were a service guy the right kind of drillers or the -- in larger companies. And there is a lot of different ways to play in energy and there is a lot of companies up and down the value chain there. In general, I'd say we feel very comfortable with where we are in those. Those are going to get marked down in sympathy with the entire market. The energy sector has dropped somewhat. The thing that we have is not dropped as dramatically as others within the sector, whether you're talking about larger or smaller companies. So we're on top of those but we want to be diligent with that. We're not -- I'd say we're not particularly worried about those from the standpoint of default or loss of principle at this point.

Okay. And then one last just kind of housekeeping question. The $660,000 of dividend income recorded in the quarter is that just from the New Mountain Senior Loan Program or is there another investment that was distributing those dividends to you?

Ryan, you're correct. That's the only equity position we have that distributes or make distributions on a quarterly basis. So that's all in New Mountain.

Is that -- is this quarter a pretty good run rate of what we should expect on a quarterly basis from that investment, the $660,000?

It's hard to say. Obviously, it's a -- that return is based on the distributions made from an underlying loan portfolio. But I think you could say that on average it's probably an indication of what you should expect in the future as well.

[Operator Instructions]. This does conclude today's teleconference call. Thank you for your participation. All participants may now disconnect at this time.