Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second Quarter 2024 Earnings Conference Call. Our hosts 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 made available for replay beginning at 4:00 p.m. Eastern Time. The replay dial-in number is (402) 220-5395, no passcode is required. 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 Robert Brinberg of Rose & Company. Please go ahead.

Thank you, operator, and thank you, everyone for joining us today to discuss WhiteHorse Finance's second quarter 2024 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 second quarter 2024 earnings presentation which was posted to our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Rob, and good morning, everyone. Thank you for joining us today. As you're aware, we issued our earnings this morning prior to market open, and I hope you've had a chance to review our results for the period ending June 30, 2024, which can also be found on our website. On today's call, I'll begin by addressing our second quarter results and current market conditions. Joyson Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which we will open the floor for questions. Our results for the second quarter of 2024 were a bit softer due to elevated repayment activity and some markdowns on our portfolio. Q2 GAAP net investment income and core NII was $9.3 million, or $0.40 per share, exceeding our quarterly base dividend of $0.385 per share. This represents a decrease from Q1 GAAP and core NII of $10.8 million and $0.465 per share. NAV per share at the end of Q2 was $13.45, representing a 0.4% decrease from prior quarter. NAV per share was impacted by net markdowns in our portfolio, totaling $1.5 million, the majority of which related to Honors Holdings, which I will discuss shortly. Turning to our portfolio activity in Q2, we had gross capital deployments of $55.8 million, which was more than offset by total repayments and sales of $71.7 million, resulting in net repayments of $16.1 million. Gross capital deployments consisted of seven new originations totaling $47.4 million, with the remaining $8.4 million used to fund nine add-ons to existing investments. Our seven new originations in Q2, three were non-sponsor and four were sponsor deals with an average leverage of approximately 3.8x debt-to-EBITDA. Some of these new assets were transferred to the JV during the quarter and for the deals that stayed on the…

Thanks Stuart and thanks everyone for joining today’s call. During the quarter, we recorded GAAP net investment income and core NII of $9.3 million or $0.40 per share. This compares with Q1 GAAP NII and core NII of $10.8 million or $0.465 per share, and our previously declared quarterly distribution of $0.385 per share. Q2 fee income was lower quarter-over-quarter at $0.4 million compared with $0.6 million from the prior quarter. Q2 amounts were primarily comprised of approximately $0.3 million of amendment fees. For the quarter, we reported a net increase in net assets resulting from operations of $7.8 million. Our risk ratings during the quarter showed that 74.4% of our portfolio positions carried either a one or two rating, slightly lower than the 76.6% reported in the prior quarter. As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to such initial expectations and a two rating indicates a company is performing according to such initial expectations. Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier, in the second quarter we transferred four new deals and four add-ons to the STRS JV totaling $22 million in exchange for cash proceeds of the same amount. As of June 30, 2024, the JV’s portfolio helped position the 38 portfolio companies with an aggregate fair value of $324.8 million compared to 34 portfolio companies at a fair value of $309.4 million as of March 31, 2024. The investment in the JV continues to be accretive to the BDC’s earnings generated a mid-teens return on equity. During Q2 income recognized from our JV investment aggregated to $3.9 million during the quarter as compared with approximately $4.8 million in Q1. As a reminder and as reported in the prior call, in…

[Operator Instructions] We’ll go first with Bryce Rowe from B. Riley. Please go ahead.

Thanks so much. Good morning.

Good morning, Bryce.

Hey Stuart, I really appreciate some of the market commentary and your cautious approach. I think it’s probably the more – one of the more cautious kind of messages that I’ve heard throughout the earnings season. Wanted to ask kind of about the flows in and out of the BDC from an investment perspective, leverage is coming down. It sounds like that cautious approach could lead to a more kind of muted activity as we think about the second half of this year and into next. Can you talk about kind of where you’re comfortable with leverage in terms of how low leverage could go on the balance sheet? Do you think you can maintain here or good chance that it continues to move lower?

Bryce we’re lucky to have a HIG supplement origination capability that when the on the run markets get really aggressive like they are right now, we can squirrel down into the off the run markets and non-sponsor markets and find deals that we feel are a better risk return. When the markets were very favorable, we completely filled up the BDC and for a period of time the BDC had no capacity and we were doing deals that couldn’t go into the BDC. As I highlighted, we now have about $60 million of availability on the BDC balance sheet, which, given the average allocation, would be about six deals of incremental capacity plus an incremental two to three deals in the JV. Q3 is a decent but relatively slow quarter so far. But in general, we tend to see Q4 as a stronger quarter. And even in a very slow M&A year like 2023, Q4 had volume that was about double what Q3 was. So I don’t expect that we’re going to use up the unused capacity in Q3. But we are hopeful that we will put most of the unused capacity to work in Q4 if we see a normal upswing in economic activity with the expectation of interest rate cuts in Q4, and many private equity firms being pressured by LPs to have realizations, and bankers telling us that their pipelines are reasonably robust. We’re hoping that after the August slowdown in September, October, we’ll see robust M&A flow and be able to use up some of that capacity.

Okay, that’s helpful. And then in terms of kind of repayments, appreciate the commentary around repayment activity in the quarter. Can you help us kind of handicap if there are more portfolio companies in that “leave category or ask to leave category”? And then maybe on the flip side, help us understand or maybe handicap that other category you mentioned of companies coming to refinance and you all don’t want to participate because the terms are not up to your standards?

Yes, in general, at the moment there’s only one company I can think of that I would put in the desired exit category. And so that category is going to slow down because I think we had three of them in the last quarter where we had the opportunity to stay with the credits, but we wanted to exit because of performance issues that our credit teams felt warranted a termination of the relationship. As it regards to the refinancings in 2022 and 2023, we were adamant about getting strong call protection, and we got call protection on our deals. That was generally two years on the sponsor deals and three to four years on the non-sponsor deals. To the extent that that call protection is starting to roll off, especially on the 2022 deals, we are seeing people come back and look to do refinancings. In many cases based on the strength of the market those refinancings include dividends as well. And so where borrowers are taking up leverage, taking down equity in the company and taking down price, we’re only sticking with the stronger non-cyclical borrowers. And there are several transactions that have gone on where we just felt that the underlying leverage and price made it imprudent to stick with the borrowers. There’s no way to know how much of that we will see in the balance of Q3 and Q4. But there’s no doubt in my mind with interest rate or interest spreads as low as they are right now, that there will be continued refinancing pressure. If the credits are okay, we will adjust the pricing on those deals to the current market, which in many cases will take pricing from 600 to 650 down to pricing of 500 to 550. But the thing that will make us exit is if the performance of the borrower combined with the leverage that they’re trying to put on the borrower leaves us questioning the stability of that credit in the ongoing period, especially because we have a view that the economy really is softening. We're not necessarily predicting a recession, but we are predicting into 2025 a weaker economy, and we think it's imprudent to overly leverage companies into a weaker economy, and we're making our decisions on that basis.

Good. Good stuff.

Not recognizing Q2, it wasn't necessarily a reversal of an accrual from the prior quarter. But when we put the Honors Holding position on non-accrual in Q2, essentially we didn't recognize an additional $125,000 that we would have as compared to Q1.

Okay. And then do you have a UTI balance or estimate for us?

I don't have the UTI balance handy for me right now. Let me see if I can just pull that up. I think it's about $32 million, actually I just pull that – $32 million?

Okay, awesome. Thank you, guys.

[Operator Instructions] We'll go next to Sean-Paul Adams with Raymond James. Please go ahead.

Yes, good morning. On the portfolio risk…

Good morning.

Good morning. On the portfolio risk ratings, it seems like the uptick in risk ratings four and five was likely due to the new non-accrual. Am I correct in that?

Yes, I believe that is the case.

Okay. So, but in aggregate, over the last six months, there has been a somewhat large shift in ratings just downward within the portfolio, at the beginning of January, risk ratings one were somewhere around 18%. Now they're sitting around 12.8%. So it just seems like there's a somewhat large waterfall effect going downward within the portfolio. And it looks like you guys are really paying large attention to the new deals on the market and really focusing on credit quality and leverage. What kind of aspects are you guys thinking about in regards to your existing portfolio companies? And is there any isolated sectors that are really experiencing the largest material weaknesses?

Yes, Sean-Paul, in regard to the ones, what generally happens with credits that are overperforming is the companies get sold or the companies get refinanced. So there's a natural effect that ones tend to go away and that happens in all market, but especially true in a strong market environment. That said, as I indicated in my prepared statements, we are seeing a slowdown in the economy, as recently has been indicated by data that's been released into the marketplace and has led to some equity gyrations recently. We are spending a significant amount of time focused on existing portfolio. Most of our existing portfolio accounts are comfortably paying their interest burden and their debt burden. But we do have a number of situations that are not related to the general economy, like Honors Holdings, where it is a company specific issue that has led to the weakness in the performance. And actually it's a fairly recent issue as well. The company was only levered about 3.5x about a year ago, and the company has experienced weakness over the past 12 months. We have a five person restructuring team that gets involved in all the deals that need covenant waivers, and that restructuring team includes private equity professional who on owned accounts helps us put the right management teams in place, helps us come up with growth strategies for the company and helps us cut costs. And on Arcserve and American Crafts in particular, which are both owned assets, we are working with that restructuring team and with our private equity expertise to execute turnarounds that we hope will take hold and allow us to get strong exits in 18 to 30 months. So there is a lot of attention being paid to portfolio. And in today's market, where we think competitors are being overly aggressive, we are committed to trying to not add any marginal credit to our portfolio.

Okay, thank you so much. And I believe you remarked earlier in the call that Honors Holdings probably had a timeline of 12 to 24 months of resolution process. And Honors – I believe you also mentioned Arcserve would probably be around an 18 to 30 month timeline as well?

Yes.

Okay. Okay. That's perfect. I just needed to clarify that. Thank you so much for the color.

No problem. Thank you.

And ladies and gentlemen, as there are no further questions in queue at this time, that will conclude our question-and-answer session and the WhiteHorse Finance second quarter 2024 earnings call. Thank you for your participation. You may disconnect your line at this time and have a wonderful day.

Thank you. Bye-bye.