WhiteHorse Finance, Inc. 7.875% Notes due 2028 (WHFCL) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Crystal, and I will be your conference operator today. At this time I would like to welcome everyone to the WhiteHorse Finance First Quarter 2016 Earnings Conference Call. Our host for today is Jay Carvell, Chief Executive Officer, and Gerhard Lombard, Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 1 p.m. EST. The replay dial-in number is 404-537-3406, and the pin number is 89615045. 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, Operator, and thank you, everyone, for joining us today to discuss WhiteHorse Finance’s first quarter 2016 earnings results. Before we begin, I’d 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 opened, and I hope you’ve had a chance to review our results, which are also available on our website. I am going to take you through our first quarter operating performance, and then Gerhard will review our financial results. Afterwards, we’ll take your questions. Turning now to the quarter. We had a strong Q1 during which we maintained high deployment levels and, as we have over the last year, generated net investment income in excess of our shareholder distribution. NII per share was $0.369 for the quarter exceeding our distribution, which has been consistent at $0.355 per share for 14 consecutive quarters going back to our IPO. Our weighted average effective yield was 11.9% at the end of the quarter, up from 11.8% at the end of the fourth quarter. We like risk return profile of our holdings at this level, and we have the room to selectively add positions that enhance the portfolio. During the first quarter, we originated three loans and added to one existing position totaling approximately $20.6 million. These investments continue to build diversity across the portfolio. The average effective yield on our three new investments was 12.6% in excess of the average effective yield of the portfolio. We were repaid on two investments for a total of $12.2 million during the quarter. I’d like to point out a few items regarding the investment portfolio. As of March 31st, the fair value of the portfolio was $417.3 million, relatively flat when compared to the $415.3 million reported at the end of the fourth quarter. Given our leverage level, we have room to expand the portfolio but will continue to be highly selective in making new investments. We recognize negative mark-to-market adjustments of $1.2 million during the quarter. There were no material adverse credit developments during the quarter, and the fair value adjustments are largely a function of the application of discount rates and other inputs in our valuation models. Our energy exposure remains limited to approximately 4% of the portfolio as of March 31st. The market is still experiencing downward pressure on energy and energy-related investments, in general, that had abated slightly during the quarter. We continue to watch those positions with energy exposure closely. I have one other portfolio update I’d like to make you aware of. On last Friday, we received a notice of a technical default and payment blockage on one of our smaller positions, Fox Rent-a-Car. We are currently working towards a resolution with the other lenders and the borrower. It is worth noting here that the company is operating within our underwriting expectations and we’re comfortable with our position and expect to have more of an update next quarter. Overall, we had 38 positions across 31 companies at the end of the Q. These are primarily senior secured loans, and over 97% carry a variable rate. The portfolio continues to be well diversified with an average investment size of $11.7 million and, as I mentioned earlier, a weighted average effective yield at 11.9%. Looking at credit markets, after a very choppy fourth quarter credit markets, in general, snapped back towards the end of the first quarter of 2016. The broader credit markets still yields tightening in the secondary market as well as more borrower-friendly terms in primary issuances. Part of this is attributable to stabilizing demand in the broadly syndicated market. Middle market names tightened as well, though not as much as the larger names. Again, this is attributable, at least in part, to the difference in capital sources for those markets. We’ve seen this effect trickle down to our traditional market in the lower end of the middle market space though to a lesser degree. We’ve talked about this in the past, how our market reflects the broader credit markets. They’re not in as a pronounced manner. Overall, we’re seeing good opportunities in our originated deals, and that’s been reflected in our portfolio quality and yield. We’ve seen lower-quality deals at the market passed on at the end of last year resurface, which I believe is an indication of more capital-chasing deals in the smaller end of the market as well as the health of the larger markets, in general. Our investment process remains unchanged, and we are able to be selective about opportunities. Looking at our forward pipeline, we have a number of deals at various stages of the process. We anticipate having the ability to add to the portfolio as well as cycle other names from time-to time and further optimize a portfolio. Our deal sources are busy and seeing capital activity across a number of fronts. We’ve mentioned our dedicated team on other calls, but I’d like to highlight that in addition to our investment professionals, our origination team includes nine professionals who focus exclusively on sourcing our originated lines up from six individuals about six months ago. Directly originating loans is the cornerstone of our strategy, and we continue to invest in this area. As you may have seen in our press release issued this morning, our Board of Directors elected Stuart Aronson as Chief Executive Officer of WhiteHorse Finance effective May 23rd. I mentioned Stuart’s addition to the team last quarter and highlighted his extensive background and experience in credit markets. The Board believes Stuart is exceedingly well qualified from a sourcing and underwriting standpoint to lead WhiteHorse Finance. I will continue to remain closely involved with WhiteHorse Finance’s operations and will remain a member of the Board of Directors as well as a member of the Investment Committee. I look forward to working with Stuart as he transitions into the CEO role, and we are confident that his leadership will contribute positively to our direct lending platform. With that, I’ll now turn the call over to Gerhard. Gerhard?

Thanks, Jay. Let’s begin with our results for the quarter ended March 31st. NII was $6.8 million for the quarter, or $0.369 per share, which exceeded stockholder distributions of $6.5 million for $0.355 per share. Our investment income continues to consist primarily of recurring cash interest. We reported a net increase in net assets from operations of $5.5 million with $0.302 per share for the first quarter. As of March 31st, net asset value was $243.1 million or $13.28 per share as compared with $244.1 million, or $13.33 per share reported as of December 31. Switching over to portfolio and investment activity, as of December 31st, the fair value of WhiteHorse Finance’s investment portfolio was $417.2 million, up slightly over the prior quarter, and we were invested in 38 positions across 31 companies. Our portfolio consisted primarily of senior secured debt. The weighted average effective yield on performing debt investments at the end of March was 11.9%, up from December. The risk rating on our portfolio assets remained unchanged. We continued to maintain a 3 rating on our energy holdings to reflect the current macroeconomic market conditions. As a reminder, we continue to have low exposure to the energy sector overall with approximately 4% of our portfolio representing energy or energy-related investments. RCS Capital was the only non-accrual loan as of March 31, representing 1.7% of the portfolio. Turning to our balance sheet, WhiteHorse Finance had cash resources of approximately $21.1 million as of March 31st, and $95 million of undrawn capacity on risk revolving credit facility. We closely monitor our asset coverage ratio and feel comfortable with our leverage as of March 31, 2016. The Company’s asset coverage ratio for borrowed amounts as defined by the 1940 Act was 228% at the end of the first quarter, well above the statute’s requirement of 200%. Our net effective debt-to-equity ratio after adjusting for cash on hand was 0.69 times. Last, I’d 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 $6.5 million to stockholders of record as of March 21. That distribution was paid to our stockholders on April 4th. This marks the Company’s 14th distribution since our IPO in December 2012 with all distributions at the rate of 0.355 per share per quarter. And we expect to be in a position to continue our regular distributions. With that, I’ll now turn the call back to the operator for your questions. Operator?

The floor is now open for your questions. [Operator Instructions] Our first question comes from the line of Merrill Ross with Wunderlich.

Good morning. I’m wondering, given the recency of the information on Fox Rent-a-Car, if the evaluation did incorporate that technical default that you published this morning?

Yes, that’s a good question, Merrill. We did take that into account. We looked at that, we didn’t move our mark given the information that we have and where we feel this is going and the materiality of it. So it didn’t move the mark. Overall, that’s a $7.5 million position, so it’s a small part of the portfolio. We’re kind of real time here, and I think that we’ll have more of an update at the end of next quarter.

Okay. Do you have any idea what the resolution of the technical default is or what the nature of it is? Or if can you can’t share that?

It’s not that we can’t share, it was at a level, like I said today, that we don’t feel it rises to materiality, but we wanted to highlight it for you just because it’s new information.

Okay. Thank you. Appreciate.

[Operator Instructions] At this time there are no further questions. I’d like to turn the call back to Jay Carvell for any closing remarks.

Thank you, Operator. This will be my last earnings call. I want to take the opportunity to thank you all for the time and attention you’ve given to WhiteHorse Finance since our IPO. It’s been a pleasure working with you, and I’m pleased to remain involved with the Company and management. Operator, back to you.

That does conclude today’s conference call. Thank you for your participation. All participants may disconnect at this time.