WhiteHorse Finance, Inc. (WHF) Q3 2019 Earnings Report, Transcript and Summary

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Third Quarter 2019 Earnings Conference call. Our host for today's call are Stuart Aronson, Chief Executive Officer; and Joyson Thomas, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 1:00 p.m. Eastern Standard Time. The replay dial-in number is (404) 537-3406 and the PIN number is 8954769. [Operator Instructions] It now my pleasure to turn the floor over to Sean Silva of Prosek Partners.

Thank you, Brandy, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Third Quarter 2019 Earnings Results. Before we begin, I would like to remind everyone that certain statements, which are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that 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 third quarter 2019 earnings presentation, which was posted to our website this morning at www.whitehorsefinance.com. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Sean. Good morning, and thank you for joining us today. As you're aware, we issued our press release this morning prior to the market open, and I hope you've had a chance to review our results, which are also available on our website. I'm going to take you through our third quarter operating performance, and then Joyson Thomas, our CFO, will review our financial results before we open the line for questions. To start, we had a good quarter with strong earnings, stable NAV and strong deployment activity, which allowed us to begin adding assets into our joint venture. GAAP net income -- GAAP net investment income for the quarter was $8.7 million or $0.421 per share, up from $7.2 million or $0.352 per share in Q2, and core net income grew to $0.403 per share, up from $0.362 per share in the prior period, which easily covered our $0.355 dividend. Net deployments were $24.5 million before the effect of the asset transfer to the joint venture, which I'll elaborate on in one minute. Net asset value decreased slightly from last quarter by $0.02 to $15.36 and has remained within a stable range of $15.33 to $15.38 over the past four quarters. As you recall, in our Q1 Board of Director -- in the Q1, our Board of Directors approved our entry into an agreement to co-manage a joint venture with STRS Ohio. In order to maximize performance of that JV, we accumulated nine loans onto our balance sheet, five of which were transferred into the JV during Q3 and four loans, which we recently transferred into the JV in Q4. In Q3, we had approximately $80.5 million in gross investment additions, which were primarily comprised of $47 million of new originations, $23.9 million of fundings associated with refinancings and approximately $8.9 million of add-on acquisitions. This strong activity was partially offset by $56 million in sales and repayments, of which $24.6 million were repayments associated with refinancings and $31.4 million were related to other sales and repayments, resulting in approximately $24.5 million of net new investments, a very strong quarter. After considering the transfer of the five loans to the JV, the portfolio had net sales and repayments of $7.6 million, and our investment in the JV increased by $24.4 million. Turning now to yield, an approximate 40 basis point decrease in our average base rate, partially offset by an approximate 10 basis point spread increase led to a decline in our weighted-average effective yield on income-producing investments from 11.3% last quarter to 11% in Q3. We're pleased to report a $2.6 million markup on StackPath as a large strategic investor made a cash investment in the company at a level that is a multiple of our loan balance. This allowed us to put the loan back on accrual as of quarter end and shortly after the end of the quarter, we received a small paydown on the loan, in addition to the credit going back on cash-paying interest at a rate of LIBOR plus 950. At the end of Q3, the strategic investor in StackPath had approved the investment and it negotiated the terms, but had not yet closed on the investment. Therefore, at the end of the quarter, for conservatism, we marked the asset at $0.925 on the dollar, up from $0.75 in Q2. The strategic investor has since completed the investment, and so we would anticipate an improvement on the mark of that asset at the end of Q4, subject always to the company's performance and market factors over the remainder of the period. The $2.6 million markup on StackPath was offset by Q3 markdowns in the portfolio, the largest of which came from AG Kings and Grupo HIMA. Based on the data we saw at quarter end, we marked down AG Kings again from $0.75 to $0.65 on the dollar. We, the owner and the company's advisers, are continuing to actively work hard to resolve the challenges facing this company. On a positive note, we've seen stabilization of top line performance of the company, which is helping in the restructuring efforts. After a period of strong and stable earnings, we were disappointed to learn that Grupo HIMA experienced a poor earnings quarter. As a result, we marked the small position we had in the second lien asset to $0 in that from $0.10, and we marked the first lien asset to $0.85 from $0.935, which we believe are appropriate marks, given the recent financial performance. Now after the quarter closed, we received an updated set of financials on Grupo HIMA, which showed continued weakness in the company's performance. And based on those financials and subject to further performance updates and market conditions, we expect to mark the position down by another $0.05 in the quarter that we're in right now in Q4. We will continue to monitor this credit and update you accordingly. I'll now provide more detail on our investment portfolio. The fair value of the portfolio in Q3 decreased to $527.5 million as compared to $534.8 million in Q2. We added 4 newly originated loans totaling $47 million and $8.9 million to 3 existing positions. All of these deals were done in mid- to lower mid-market sector and had what we felt were strong financial covenants. All of these deals were first-lien transactions and first-lien secured loans now comprise 79.7% of our overall portfolio. In addition, we participated in 2 refinancings of existing investments during the quarter. The first honors holding added $9.2 million on a gross basis, offset by $7.5 million of repayments to the portfolio for a net increase of $1.7 million; and the second involved Clarus Commerce, LLC, which was recapitalized due to a sponsor acquisition and added $14.7 million on a gross basis, offset by $17.1 million of repayments for a net decrease on that asset of $2.4 million. The weighted-average leverage multiple of these 6 new deals was approximately 3.9x in keeping with the conservative leverage multiples that we focus on for our assets. Aside from the refinancings and our net transfer into the JV, repayments in sales during the quarter totaled approximately $31.4 million after accounting for $0.8 million of net fundings on revolvers, primarily driven by a full payoff of Planet Fitness and a partial paydown of CHS Therapy. Fee income during the quarter totaled approximately $2.2 million, driven primarily by waiver and amendment fees generated from Sigue of $1.1 million, in addition to prepayment penalties generated from the Planet Fitness payoff. Gross leverage levels on our balance sheet decreased slightly from 79% at the end of Q2 to 75% in Q3, partially driven by the aforementioned impact of the transfer of assets into the JV. Excluding our investment in the JV, our portfolio had fair value average debt investment size of $9.9 million, with all but 3 of our current portfolio companies below the upper range of our target investment size of $20 million. Our Q4 pipeline is at its most robust level that we've seen in quite some time. Thus far, we've already closed two sponsor deals and two non-sponsor deals, and we've also participated in two sponsor add-ons to existing accounts. With respect to other new mandates, we have an additional 8 deals mandated in the current quarter and one other add-on to an existing account. All of the deals closed or mandated in the fourth quarter are still first-lien transactions. And as always, there can be no assurance that any of these mandated deals will close in the quarter or otherwise. I'll now turn to the macro market outlook. We're seeing price stability in our markets and continue to see strong competition on sponsor accounts and less competition on nonsponsor accounts. That said, the liquid loan markets have experienced some recent volatility and spreads have widened in lower-rated credits. However, our core lower mid-market has not seen any disruption, and we've not seen any material change in pricing or structure with respect to our portfolio. With that said, if we find good opportunities in the liquid market, we will consider taking advantage of those opportunities. Further, we will be opportunistically investing in appropriate assets based on trading weakness in this market. As always, we will stay true to our disciplined approach to sourcing and underwriting throughout this process by maintaining rigorous credit standards, diversifying our portfolio to prevent customer concentrations and avoiding binary outcome and cyclical risk. I will now turn the call over to Joyson to speak in more detail about our financials. Joyson?

Thanks, Stuart. We recorded GAAP net investment income of $8.7 million or $0.421 per share. This compares to $7.2 million or $0.352 per share in the prior quarter. Core NII, after adjusting for a $0.4 million reversal of the capital gains incentive fee accrual, was approximately $8.3 million for the quarter, translating to $0.403 of core NII per share. This compares to $7.4 million or $0.362 per share in the prior quarter. We reported a net mark-to-market losses of approximately $1.8 million, driven by markdowns in the portfolio, aggregating to $5.4 million that were partially offset by markups aggregating to $3.6 million. After considering our net realized and unrealized losses in the portfolio, we reported a net increase in net assets resulting from operations of approximately $6.9 million or $0.34 per share for the third quarter. During the third quarter, we began transferring assets into our joint venture with STRS Ohio; $56.4 million of assets were transferred into the JV in exchange for a net investment in the JV of $24.4 million as well as net cash proceeds of $32 million. Our investment in the JV generated investment income of $0.3 million during the quarter. Once fully ramped, we expect our investment in the JV to yield between 12% and 15% on invested capital. At quarter end, net asset value was $315.5 million or $15.36 per share, down from $315.9 million or $15.38 per share as reported for Q2. As it pertains to our portfolio and investment activity, nearly 81% of our portfolio carries either a 2 or 1 risk rating on a scale of 1 to 5, where an asset rated 2 is performing according to our initial expectations and an asset rated 1 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 $22.2 million as of September 30, 2019, including $12.3 million of restricted cash and approximately $29.7 million of undrawn capacity under our revolving credit facility. We continued to closely monitor our asset coverage ratio and feel comfortable with our leverage as of September 30, 2019. The company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 234.1% at the end of the third quarter, well above our requirement under the statute of a 150%. Our net effective debt-to-equity ratio, after adjusting for cash on hand, was 0.68x as of the end of the quarter. Next, I'd like to highlight our quarterly distribution. On September 13, we declared a distribution for the quarter ended September 30, 2019, of $0.355 per share for a total distribution of $7.3 million to stockholders of record as of September 23, 2019. The distribution was paid to stockholders on October 3, 2019. This marks the company's 28th consecutive quarterly distribution since our IPO in December 2012, with all distributions at the rate of $0.355 per share per quarter. We expect to be in a position to continue our regular distributions. In addition, the company's Board of Directors declared a special distribution of $0.195 per share to stockholders of record as of October 31, 2019. The distribution will be paid to stockholders on December 10, 2019. I will now turn the call over to the operator for your questions. Operator?

[Operator Instructions] Your first question comes from the line of Mickey Schleien of Ladenburg.

Look, we're seeing a trend of prepayment activity in the third quarter and net portfolio contraction at many BDCs like yours. We're also seeing volatility and dislocation in the more liquid markets, which you mentioned in your remarks, and that should, I think, generally benefit demand in the more direct and less liquid markets where you tend to focus. So at the margin, I would expect increased demand for your capital. So my question is, in your view, what's driving those prepayments? And what's your outlook for that activity?

Mickey, we're not seeing any acceleration in prepayments. Things that are paying off for us are, what I'll call normal payoffs. The Planet Fitness payoff resulted from the company doing very well and another lender coming in and dropping the rate on the deal by, I believe a 150 or a 170 basis points, 175 basis points. So that's a normal refinancing as the company grew into a more mid-market size and therefore, became attractive to a more on-the-run player. And as you know, the on-the-run players -- the on-the-run competitors tend to give more aggressive documents and much lower price. So that was a natural evolution of a company growing out of our size zone. The other asset that we paid was CHS Therapy. That transaction, we funded into a deal knowing that we were bridging a commercial bank who is moving very slowly on their piece of the deal, an asset based revolver. And so that was a great opportunity to fund for a couple of months into a effectively asset-based position at our type of yields, while the bank went through its regulatory stuff to get approved and get that done. So the repayments in the quarter were normal, nothing particularly accelerated. The repayments that we see coming in the next quarter or two quarters are related. One is related to a sponsor or two are related to potentially sponsors selling companies, which is very normal in Q4 and certain situations where we're actually encouraging borrowers to refinance us because based on our credit standards, we feel those loans are better going forward for other players than ourselves. So no prepayment activity that's out of the norm, that we've seen yet or have projected yet. And on the other side of it, our core lower mid-market activity is very strong. It's a really good Q4. The fact that we've already closed four deals and have eight more deals that are mandated is an exceptionally robust quarter. We are seeing opportunities in the broken liquid market that looked interesting to us. And while most of the deals we close will still be directly originated lower mid-market deals. If I can add a good, stable, noncyclical, large-cap asset at very high yields into our portfolio, first-lien, that I'm going to be open to doing so. If most or all of the mandated deals that we have now closed, and again, there can be no assurance, they will. But if they do, we will make strong progress in the quarter towards moving into our leverage level of 1 to 1.25x, and we would be amending our debt facilities either on an unsecured basis or through JPMorgan, where we have an accordion to increase our borrowing capacity to fund the assets that are in pipeline.

That's very helpful color, Stuart. And as a follow-up, so very active fourth quarter coming up. And you mentioned the broken more liquid markets. So are you seeing sponsors sort of shying away from the liquid markets and turning to lenders like you and your peers for certainty of closure? Is that part of what's going on? Or is it just more seasonal M&A sort of activity?

From our capital markets person at HIG, who tracks this very closely. He believes that the underwriting banks, the banks that make markets and liquid assets, have a pipeline of deals that were coming into Q4 that they now need to syndicate, despite the fact that the markets are weak. And that, that activity has them both fully consumed and very nervous. And therefore, I'm under the impression that most of the syndicating banks, most of the banks that underwrite and syndicate to the liquid market, have effectively shut down. They're still willing to put offers out there, but the offers that they're putting out there are profoundly less aggressive than they were 8 weeks ago. As a result, for those deals that are normally syndicated that have sizes of, call it, $300 million to a $1 billion. There is right now, conversion of flow away from liquid underwriting banks and into the large direct lending shops who are remaining, according to everything we're seeing, extremely aggressive with high leverage multiples, very aggressive pricing. In fact, it's been surprising based on what we've seen so far that those larger shops have not reacted to the shift in supply/demand. But it is logical that as November continues, you will see that occur because the larger shops are now seeing these $300 to $1 billion deals. Their activities in the lower mid-market, rooting around for deals, which they do in our market when they don't have enough to do would end, and we would see less of their type of behavior in our market, which could result in increased pricing in our sector. I will highlight that as of this week and last week, based on deals that we've been competing on and, in many cases, lost, we've not seen an increase in price in the core mid-market, lower mid-market for our deals. So the pricing, as I said in my report, has been stable and a little bit of upside pricing on the nonsponsor market where competition is lighter.

Thank you for that Stuart. That's really helpful. One last sort of housekeeping question. Just trying to reconcile your interest income, which was up sharply on basically a flat portfolio. So was there accelerated OID in the quarter and/or did you recapture some past-due interest from StackPath or was there something else in interest income we should be aware of?

Joyson?

Yes. Mickey, you hit on it. It was both a combination of the recovery of the StackPath interest that we previously had not accrued for as well as some accelerated accretion from those payoffs that we had mentioned.

Can you tell us how much StackPath interest you recaptured?

Just give me one second.

And if it's not handy, you can -- we can follow-up later.

It was roughly about $800,000.

Your next question comes from the line of Tim Hayes of B. Riley FBR.

Congrats on a good quarter. This is actually Mike, on for Tim. So in your deck, you mentioned a markdown in Fluent, and it looks like the debt is still marked at 100% of cost, but the equity is marked down. So I was wondering if you could just provide some commentary on -- or some additional color on the story here. And is this a sponsored investment as well?

Fluent is a nonsponsored deal. It's a public company, and the company, which has very, very low leverage, had some operating softness and their equity traded off significantly. And so that affect the value of the warrant. Our loan to Fluent is at a very attractive price for a company that has leverage. Again, it's on their balance sheet. So you can see it's under 2x. So we're at very low loan-to-value, very attractive pricing, and we feel very good about that loan, but the value of the warranted change. So we marked the value of the warrant consistent with the change in market pricing.

Got you. That's helpful. And just on a different note, can you talk a little bit more about some of the characteristics of your new investments? It looks like first-lien jumped a little bit. But as you move later into the cycle, are you doing anything different with industries or size of the investments or anything like that?

No. But I will tell you that we are doing the vast majority of our sponsor lending at between 3.5 and 5.5x leverage with no less than a 40% equity check. We're doing our nonsponsor lending at between 2 and 4.5x leverage, typically, with at least a 50% equity cushion. We have not seen -- well, in terms of the deals we're doing, we've not seen any degradation of credit statistics. There are deals that we're losing, where people are coming in and lending more money, getting less equity cushion, setting wider covenants that we think makes sense. But we let those deals go. We led a deal go just last week where someone -- it was a $16 million EBITDA company, and the company was cyclical. We had a appropriate capital structure that we believed in that has 50% equity and a multiple below 3.5. Someone came in with much lower equity, much higher leverage and much looser covenants and rather than compete for that deal, we just let it go. And I think you'll find that's our ongoing behavior. We have a very clear credit culture about what we believe is an appropriate risk-return. If we can get it, we hit it, and we're very happy to do so. But if we need to lose deals because other people we think are too aggressive, we're very comfortable losing any transaction or group of transactions. So we, overall, are very, very much in line with our historical behaviors on credit as evidenced by the fact that the average multiple of the deals coming in this quarter was 3.9x, which is a very modest credit multiple in a world where mid-market deals are still being levered between 5 and 8x. That is the normal range in the mid-market right now. And we're finding deals that are lower levered and big equity checks.

Your next question comes from the line of Rick Shane of JPMorgan.

Appreciate the update on Grupo. I am curious with the, well, fourth quarter developments, whether or not the first-lien term loan is on nonaccrual at this point.

No. We just received a cash interest payment from the company. So the company continues to pay its first-lien debt on time and on schedule. And so there would be no reason to have the loan on nonaccrual. Again, they've given us now one quarter of surprisingly disappointing results. But the company has had volatility in their earnings history before. And it's entirely possible, and we hope this is a blip, and they will go back to their more recent -- the performance of a couple of months ago, where they were generating significant cash flows every month that led to leverage levels that were quite modest and had us feeling very comfortable with the asset. So we're digging in now to understand what led to that quarter blip, whether that will be reversible, and we're prepared to take action in either case. If things are going to recover, that's, of course, great, and we'll mark the asset back up or if things continue to be troubled. We have the wherewithal to pursue aggressive action to get value out of this company.

Got it. Okay. And you said about a nickel mark, that implies roughly $1 million carrying value in the, call it, mid-70s at par. Is that the correct math?

We have it marked at 85 at the end of the quarter based on the 1-month of update we have, we would have it marked -- all other things being equal, and we don't know if they will be at the end of the quarter. We'd mark it to 80, which would be $0.05 a share on NAV and about a $1 million -- just under a $1 million.

Okay. Some of that is pretty close, but thank you for that clarification. Next question, related to the joint venture, I'd like to understand a little bit about the loans that were contributed this quarter. Should we see this as a -- not only a ROE enhancement opportunity because of the incremental leverage, but is it also a way for you guys to manage liquidity?

It's not liquidity management for us at all. It is very simply that we're originating a broad swath of sponsor and non-sponsor deals. Many of those deals are priced at LIBOR 625 or below. LIBOR 625 and below in the BDC is not materially accretive to earnings and by putting those loans into the JV structure, we take a LIBOR 550, 7.5% asset, and we ultimately convert it into a JV junior capital asset that should yield 12% to 15%, and that's simply yield accretive to the investors. If we did not have the JV, that LIBOR 550 or LIBOR 600 asset would not go into the BDC at all. So the way we see it is the JV is purely accretive. It's all first-lien loans. They're primarily sponsored loans. In fact, I think they're all sponsored loans so far. And this allows us to improve our portfolio and also create extra earnings for the BDC in support of our ongoing goal of earning the dividend, not only on an annual basis, but trying to hit the dividend with our earnings each quarter.

Got it. Okay. That's helpful. And it ultimately relates to the last part of my question, which is that given the capacity on the revolver and your cash position, is the next incremental source of funding the accordion on the warehouse?

We have the option of going into the markets and raising unsecured debt where there are several bankers who have communicated with us that they could very quickly increase our unsecured debt position. We have our position with JPMorgan that has on it an accordion. And then we also, as that loan with JPMorgan is reaching the period where it will not have prepayment penalties on it anymore. We're in a good position to renegotiate with JPMorgan on a new leverage line, preferably at better pricing. I say that to you is JPMorgan. And we would grow the facility. So we're evaluating right now based on the strength of the Q4 deal flow, whether we would prefer to fund those assets, all unsecured in a mix of unsecured era and secured lending or all through secured lending. But we have plenty of cushion to do any of those three options, and we will optimize based on what we hear back from our different leverage providers.

Your next question comes from the line of Robert Dodd of Raymond James.

A couple of questions. I mean, first of all, actually, on Grupo HIMA, you said, I mean, the financials seem to deteriorate from what you said at the end of the third quarter and then into Q4. And looking into why that is, I mean, have you been able to [OID] whether that's weather-related yet because, obviously, there were a couple of big storms in the area? Not as big as Maria, which obviously caused the Grupo HIMA problems originally a couple of years back. But have you been able to identify whether it's that and more recoverable? Or if there's some more operational problem?

It's not an operational problem from what we can see. Revenue has been soft, and we don't know yet whether revenue was soft due to weather conditions. Or other items. And again, we have very senior-level people at HIG, who are very actively engaged in assessing the situation and if actions need to be taken to rectify it, taking those actions. It did come out of nowhere. We were marked at 93.5% last quarter. And last quarter, the trailing 12-month cash flows had the leverage at well under 4x. And we actually expect that the loan was going to be refinanced by someone who is saying they're going to do refinancing. And then very suddenly in the quarter, the revenues dropped and that led to cash flow degradation. And I mentioned in my call, this type of thing has happened before in the history of the asset, and it had been short-lived. And our hope is that this is just another short-lived, one bad quarter, but we just don't know yet until we get more reporting and have more understanding through the management and the ownership of the company. What we've done is, we've marked it to where it belonged at the end of the quarter. And then having gotten subsequent information after the end of the quarter about the prior quarter, we followed our legal guidance, which said we should alert the markets that we did have that bad news, and that -- had we had that news at the end of the quarter, we would have marked the asset to 80, not 85.

Got it. I appreciate that color. And next on sponsor, nonsponsor mix. So obviously, I mean, if we look now sponsor is about 48%. And a year ago, it was 34% as a percentage of mix. And that 48% despite from lease-up, all that the asset shifted to the JV were sponsored assets. So I mean, is there anything dynamically in the -- I would generally expect sponsored pricing to be more competitive, and it sounds like it's still very competitive versus non-sponsor. So is that two components to this question. Can you give us any color on the relative dynamics right now in sponsor versus non-sponsor on pricing and structure? And then also, secondarily, on the JV front, should we expect that to primarily hold sponsor type loans? And so on balance sheet, at WhiteHorse, we might see the non-sponsor mix, increased demand.

So the lower mid-market companies with EBITDA from $10 million to $30 million is a very broad market in the sponsor world, where big well-known firms like HIG or Audax or Harvest or Sentinel or Golden Gate will do a $20 million or $25 million EBITDA deal. And everybody in the marketplace competes like crazy to win that business because they're what we call the on the run sponsors. And everybody calls the -- calls on and tries to get deals from the on the run sponsors. The hard part of doing those deals is those sponsors because they also do larger deals. They are so well covered. They're very professional about how they auction off their deals. Their documents tend to be weaker. The leverage multiple is higher, the price is lower. And we generally do not participate in that market. Because at the moment, that market feels overheated. Now again, we're happy to do any of those sponsors I mentioned accept HIG, who we want to do business with by policy. Any of those other sponsors, I'd be happy to do one of their deals, if the deal was modest leverage with a big equity check and decent pricing. But where we find the better deals in the sponsor world are smaller sponsors, less prolific sponsors, sponsors who're spread across the nation, who benefit from the fact that we're in 11 cities and a local player and have very experienced originators in those locales. And the deals we're able to do in the sponsor world look very similar to the deals that were being done three or four years ago before the markets got so hot. And those deals are generally 3.5 to 5.5x leverage and are 40% to 50% equity checks. At pricing that typically ranges from LIBOR 575 all the way up to LIBOR 800. And those deals are, we think, very attractive old-fashioned deals for the BDC. They have normal protective covenants. They're not like large-cap or mid-cap docs. And again, the covenants, as I mentioned, are generally set at a 25% to 30% setback to the projections of the company. Remembering that the equity is 40% to 50%, if the covenants are set at 25% to 30% setback, that means when there's a covenant default, there's still equity value in the company. And when that happens, in my career experience, private equity firms, almost always support their companies with additional equity. The things we see going on in the market that we avoid are covenant light, where my view is only the largest, most stable, noncyclical companies should be covenant light. And then the new dynamic that's out there is covenant wide or covenant loose, where people are claiming they're getting covenants but the covenants are being set at or above the franchise value of the firm. So you don't get a covenant default until the equity has been completely depleted in the company. So that's a real tricky thing that's happening in the marketplace right now, where people are claiming, they get covenant protection, but the value of those covenants is very suspect. And we have not done at the moment, we've not done a single covenant wide or covenant loose deal. So we're doing sponsor deals, but the sponsor deals are following the guidelines that I've shared with you, and we feel all things being equal, sponsor deals are less volatile than non-sponsor deals because sponsors can and will, if you have covenants, support their credits through a down cycle.

Got it. Got it. I appreciate that. And then just on the JV, I mean, you said essentially, it's pretty much all sponsor transactions in that JV right now. Is there anything in the mandate that essentially requires that or is that just the mix of assets you've seen?

No, it's just the mix of assets. The non-sponsor market is much less competitive. It's really, really hard to find good deals in the non-sponsor market, it's even harder to underwrite them because there's so much inconsistency in the data that comes from the non-sponsor market, we use our private equity culture and routes to do the non-sponsor underwriting those underwriting processes routinely take between 2 and 9 months to get done. And as a result of the inefficiency and lack of competition in that market, the vast majority of those deals price at LIBOR 650 and above. If we do a really nice non-sponsor deal that prices at L600, we will put it into the JV, subject to Ohio's approval. But again, most of our non-sponsored business prices above the JV target.

At this time, there are no further questions. This does conclude the WhiteHorse Finance Third Quarter 2019 Earnings Conference Call. You may now disconnect your lines and have a wonderful day.