Good afternoon. My name is Chloe and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Third 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) 220-2572, no passcode required. [Operator Instructions] It is now my pleasure to turn the floor over to Robert Brinberg of Rose & Company. Please go ahead.

Thank you, Chloe and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Third Quarter 2025 Earnings Results. Before we begin, I'd 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 2025 earnings presentation, which was posted on 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 afternoon, everybody. Thank you for joining us today. As you're aware, we issued our earnings this morning before market opened and I hope you've had a chance to review our results for the period ending September 30, 2025, which can also be found on our website. On today's call, I will begin by addressing our third 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 third quarter of 2025 were disappointing and reflect the onset of interest rate cuts, continued pressure on market spreads as well as the impact of material markdowns on some credits that we have previously discussed. Q3 GAAP net investment income and core NII was $6.1 million or $0.263 per share compared with Q2 GAAP and core NII of $6.6 million or $0.282 per share. NAV per share at the end of Q3 was $11.41, representing approximately a 3.6% decrease from the prior quarter. In addition to the approximate $0.12 shortfall in NII coverage of our Q3 base distribution, NAV per share was also impacted by net realized and unrealized losses in our portfolio totaling $6.7 million or approximately $0.29 per share, which I'll discuss later on the call. As a result of these earnings and current market conditions I have 3 important announcements. First, given the current earnings power of the BDC as well as our expectations for lower interest rates and continued spread compression in challenging market conditions, our Board of Directors has taken the prudent measure to reset our quarterly base distribution to $0.25 per share. This adjusted distribution rate represents an implied 8.8% annualized yield based on the company's ending NAV per share…

Thanks, Stuart and thanks, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income and core NII of $6.1 million or $0.263 per share. This compares with Q2 GAAP NII and core NII of $6.6 million or $0.282 per share as well as our previously declared third quarter base distribution of $0.385 per share. Q3 fee income was only approximately $0.1 million and was lower than historical quarters due to lower amendment and prepayment fee activity. For the quarter, we reported a net decrease in net assets resulting from operations of $0.6 million. Our risk ratings during the quarter showed that approximately 81.8% of our portfolio positions either carried a 1 or 2 rating, an increase from 76.8% reported in the prior quarter. Upgrades during the quarter included positions in Motivational Marketing and EducationDynamics, which were both upgraded to a 2 and positions in Telestream, which was upgraded to a 3. As a reminder, a 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations and a 2 rating indicates that the company is performing according to such initial expectations. Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier in the call, we transferred 1 new deal and 4 existing investments during the third quarter to the STRS JV, totaling $24.2 million. As of September 30, 2025, the JV's portfolio held positions in 43 portfolio companies with an aggregate fair value of $341.5 million compared to 43 portfolio companies with an aggregate fair value of $330.2 million as of June 30, 2025. Leverage for the JV at the end of Q3 was approximately 1.24x compared with 1.16x at the end of the prior quarter. The investment in the JV continues to be accretive for…

[Operator Instructions] And we will take our first question from Melissa Wedel with JPMorgan.

I wanted to start with the dividend and understand how you're approaching it with the announcement for the 4Q level of $0.25 a share. Should we be thinking about that as the new base level? Or is this going to be something that will fluctuate a little bit more quarter-to-quarter outside of the supplemental component?

Melissa, we took a look at where interest rates are, what interest rates are supposed to do in the future. Where deployments are, what the current market spreads are and the earnings power of the BDC given some losses on accounts that we've taken, both realized and unrealized losses. And we came up with a sensitivity analysis that caused us to work with the Board to set a new base dividend that should be a long-term dividend if our projections as to market conditions and interest rates are correct. And we set that at a level that we believe we can earn on a quarterly basis reliably even if interest rates do continue to decline in alignment with the current yield curve.

Okay. Appreciate that. And then as a follow-up, wanted to touch on the fee waiver. I'm curious about, I guess, 2 aspects of it, the level going to 17.5% from 20% and the 2 quarters for 4Q and 1Q that, that will apply to. I guess the question behind both is why that level and why that time frame? Is there a longer-term consideration the Board is taking under advisement?

Thank you, Melissa. The Board and the manager discussed what we should do vis-a-vis providing some cushion to the earnings capability of the BDC and it was agreed that we would waive the 2.5% amount for -- or forgive the 2.5% amount for the next 2 quarters. And then based on the performance of the BDC going forward, the Board and the manager will discuss whether additional forgiveness is warranted and appropriate. So 2 quarters are done. And going forward, it will be based on discussions between the Board and the manager and linked to the results of the BDC.

And we'll take our next question from Robert Dodd with Raymond James.

On looking at the BDC and the JV, to your comments, Stuart, it sounds like you're about to be really close to full capacity in terms of investments, what -- unless obviously, there's recoveries from some of these stressed assets. So I appreciate all the color you gave us on the situation at some of these businesses. But can you give us any more thoughts on like -- and obviously, some of these turnarounds, they don't happen quick, to your point, Camarillo, maybe it gets through Q1 and there's a rebound in activity. But what are your long-term realistic expectations about fair value recovery from these troubled assets? Because obviously, that's one of the tools that would potentially be reinvestable, maybe revamp the dividend, maybe give the BDC a bit more capacity. Any thoughts on what you can tell us on the real prospects there?

Yes. Robert, the deals that are on nonaccrual right now, as I indicated in the prepared remarks, are likely to remain on nonaccrual for at least the next 12 to 24 months. In a number of cases, we have taken over the management of those companies and our 5-person restructuring team works cooperatively with H.I.G. private equity operating professionals to make sure that we're getting optimal management teams into those companies, cutting costs where appropriate and driving growth strategies. But the turnaround of those credits for the most part, is a multiyear effort. In certain circumstances, as it regards to credit like Playmonster, we have taken it, and that was a credit where there was fraud originally and we found out that the EBITDA of the company was actually pretty strongly negative. We have turned that company around and the EBITDA is now positive. We believe we have a good management team and we're hoping for improved results, not only this year but heading into next year. So that would be a good example of an account that's heading in the right direction. But in order for us to get to a markup and a cash realization, we need to continue to turn that account around more than has already occurred so far. And the same is true for credits like [indiscernible], which we're still working on. and a couple of the other credits in the portfolio. So in all the cases, except for Aspect Software and Camarillo, we're seeing stabilization to improvement in the performance of the company. But we do think it's going to be a significant period of time, again, at least 12 to 24 months before those assets that are on a nonaccrual come back on to accrual.

Got it. On the -- can you give us any color on like the track record of performance sponsor versus nonsponsor? To your point, the sponsor deals carry meaningfully higher spreads, lower leverage. But obviously, if something does go wrong, it's kind of on you to fix it rather than the sponsor to work through the process. So can you give us any kind of -- I mean, the returns are higher but what's the track record of -- the income returns are higher, the track record of outcomes between the 2 different deployment strategies?

Robert, in general, the leverage on the nonsponsor deals is anywhere from 1 turn to 1.5 turns lower than on the sponsor deals. Our track record historically has been that we see fewer defaults, sorry, fewer payment defaults on the nonsponsor deals. During COVID, we had a number of sponsor deals that went into payment default and needed equity support but we did not have any nonsponsor deals that went into payment default during that COVID period. We've had 1 nonsponsor deal that has resulted in a significant loss. That was American Crafts, which is now fully resolved. But as I think through the nonaccruals and maybe Joyson, I'll ask you to double check me on this. But I believe all of the nonaccrual accounts at this point are actually deals that were sponsored deals and none of them currently are nonsponsored deals, which speaks to the relative strength of what we do in the nonsponsor market. And Joyson, am I right on that? Are any of the nonaccrual deals, nonsponsor deals?

Stuart, I think if we're including maybe non-income-producing restructured assets, Lift Brands might be one that we considered -- I forgot whether it's a sponsor, or nonsponsor deal.

No, no, no. Lyft Brands was a sponsor deal. That was a deal that during COVID, the private equity firm injected a significant amount of equity into turning around the company.

Let me double check on the others and I'll come back on that. But I think that is correct and the only other one I could think of is potentially Sklar, again, another non-income-producing or a portion of the equity, which is non-income producing.

But I believe Sklar, which is nonsponsor, is on accrual [indiscernible].

If that condition is nonaccrual. Correct.

Yes. So Sklar is also a company that we had to take control of. We have dramatically improved the performance of that credit since taking control of it. That is a credit that if it hits its projected numbers for next year based on new customers that have been signed up and additional EBITDA we expect to be earning, that is a credit. Again, it's on accrual right now. The debt is paying interest in cash but we own the equity and there is potential for an equity gain upon the sale of that credit next year if we are able to hit our projected numbers.

Got it. Appreciate. Just one more, if I can. On the pricing, to your point, I mean, in the -- even in the lower middle market for sponsor deals, pricing is pretty tight by historic standards. I mean, is that just -- I mean, I say just, is that a consequence of more competition in terms of large market competitors coming down because there's not enough activity at that end of the market? Or is it just -- it's your same long-term competitors just getting much more aggressive?

It's a really good question, Robert. The mid-market spread compression is a result in many cases of large market players not having enough volume and coming into the mid-market and creating additional supply of capital. And so in the mid-market, we're typically seeing pricing of [ 450 to 500 ]. And I would say that has definitely been impacted by the larger players coming down market. In the lower mid-market, we're not really seeing the larger players but there have been a number of new organizations that have been formed that don't have a track record of relationships in the industry. And some of those shops are trying to buy market share by discounting price and/or doing higher leverage on deals. So the lower mid-market, where, frankly, there are hundreds of private equity firms operating, is a much more variable market where we are seeing pricing anywhere from [ 475 up to 575 ] depending on how much competition there is on any given deal and given on the complexity of the credit. But I do not believe that lower mid-market spreads have been significantly impacted by the large shops. And again, when I talk lower mid-market, I'm talking about EBITDA below $30 million.

[Operator Instructions] And we will take our next question from Christopher Nolan with Ladenburg Thalmann.

And it really revisits the incentive fee reduction. Once we're beyond first quarter '26, if the EPS continues to underperform, what's the, I guess, state of mind or head space in terms of lowering that incentive fee or continuing it?

So the Board of Directors has provided us a perspective that the forgiveness of the incentive fee or the temporary reduction of the incentive fee is aligned with trying to make sure that we are earning the dividend. And so if there is underperformance in terms of core dividend earnings, I would expect that the Board would take a view that they would seek additional forgiveness or additional waiver of that 2.5% for additional quarters. But 6 months is a significant amount of time in the market and we all need to see what is going on with M&A volume, spreads in the marketplace and core interest rates in terms of what the Fed is doing to have a better sense of what earnings will be out 3 or 4 quarters or more from now.

Understood. And I guess on the share repurchases, if I were to read your comments earlier, it seems like deal flow seems to be slow. Should we read into that, that the company will be aggressive on share repurchases?

Chris, we're trading at a very significant discount to NAV, even off of the reduced NAV that I showed you today of $11.41, buying back shares at levels anywhere around today's price is highly accretive for shareholders, both in terms of NII and NAV. And given limitations in how many shares we can purchase in any given day or week, we felt a $15 million allocation made a lot of sense to recapture shareholder value if the shares did not materially trade higher. So we, as a manager, are going to try to act in the interest of the shareholders and repurchase shares so long as there is a material benefit to the shareholders in doing so.

And it does appear there are no further questions at this time. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.

Thank you.