Good afternoon. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Fourth 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 4:00 p.m. Eastern. The replay dial-in number is (404) 537-3406 and the pin number is 2483375. At this time, all participants have been placed in listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It now my pleasure to turn the floor over to Sean Silva of Prosek Partners.

Thank you, Maria, and thank you everyone for joining us today to discuss WhiteHorse Finance's fourth-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 fourth-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 fourth-quarter operating results, and Joyson Thomas, our Chief Financial Officer, will review our financial results before we open the line for questions. During the fourth quarter, our strong fundamentals and opportunistic approach to a disrupted marketplace produced a record setting quarter for WhiteHorse Finance are $150.6 million in gross deployments was an all time high. GAAP-net investment income for the quarter was $7.7 million or $0.375 per share and core NII was $0.385 per share, which continues to exceed our quarterly dividend of $0.355. Our NAV was $15.23 per share. As you know, in addition to our regular quarterly dividend, we issued a special dividend of $0.195 from the fourth quarter, hence on an adjusted basis excluding the special dividend NAV would have increased to $15.43 per share as compared to $15.36 at the end of the third quarter. It is important to note that our NAV per share exceeds our IPO price in December of 2012 of $15 per share. As I referenced last quarter, the liquid loan market experienced a disruption during the second half of 2019, which did normalize by the end of the year. This partially drove our elevated origination activity during the quarter. Within the confines of our disciplined approach to underwriting, we sourced an unprecedented number of high quality originations closing 13 new deals in three ad-ons, 10 of our 13 new deals were sponsored or deals, and all 3 of our ad-ons were also sponsored deals. All of our deals and…

Thanks, Stuart. We recorded GAAP net investment income of $7.7 million or $0.375 per share. This compares to $8.7 million or $0.421 per share in the prior quarter. Core NII was $7.9 million for the quarter or $0.385 per share covering a quarterly dividend of $0.355 per share. This compares to $8.3 million or $0.403 per share in Q3. Core NII adjust for 0.2 million of capital gains incentive fees accrued, which resulted from earning $1.2 million in net portfolio gains this quarter. We reported a net mark-to-market losses of $0.4 million, primarily driven by markdowns on AG Kings of $0.8 million and Mills Fleet Farm of 0.6 million, partially offset by a $1 million markup on Vero Parent, Inc, doing business at Syncsort. Realized gains this quarter were driven by the realization of our Crews of California warrants for $1.5 million, which occurred in conjunction with the related loan pay off in crews during this quarter. After considering our net realized and unrealized losses, we reported a net increase in net assets resulting from operations of approximately $8.8 million or $0.42 per share for the fourth quarter. As of December 31, 2019, net asset value was approximately 313 million or $15.23 per share, which compares to $315.5 million or $15.36 per share as reported for Q3. The decrease in NAV is attributable to the special dividend of $0.195 per share paid during the quarter. Excluding this dividend, NAV would have been $15.43 per share. As it pertains to our portfolio and investment activity, nearly 85.6% of our portfolio carries either a two or one risk rating on a scale of 1 to 5, where an asset rated a 2 is performing according to our initial expectations and an assets rate 1 has performed better such that the risk of…

Our first question comes from the line of Tim Hayes of B. Riley FBR.

Hey, good afternoon, Stuart. Thanks for taking my questions. My first one, just want to touch on your comments, I appreciate the quarter-to-date update there, but just around the region volatility in the credit markets, I know this is a seasonally slower quarter for you, but do you expect that the volatility will impact originations in the near term? And should we read into what you've closed so far, around that at all? And then similarly, would you expect increased repair activity given the rally and interest rates?

So I'll answer the second part first, Tim. Because LIBOR is the basis for all of our loans and their floating rate, the decrease in interest rates should not have any impact on repayment activity. Although if LIBOR continues to decline that does put some pressure on our earnings per share. I will highlight in that that we get LIBOR floors on our deals virtually all, if not all of our deals do have LIBOR floors the range between 1% and 1.5%. So, we have some exposure to declining interest rates, but below 1%, we have virtually no exposure. In regard to deals in the quarter, in the equity market volatility, equity market volatility in and of itself does not have any impact on the deals we close or don't close, but the reason for the equity market volatility according to most folks is of course the coronavirus. And there are transactions that we have had in pipeline specifically in the travel industry or the event industry where over the last couple of weeks our view on those credits has changed. And so, things that we might've closed up four weeks ago, six weeks ago that had event risk. i.e., the concepts of people attending events are things that we're taking a much more cautious view on given the risk of pandemic. So, we are rolling that in now. There are many deals where there is of course, general economic volatility that could come from the pandemic. We are still carefully evaluating those. I would say it's particularly in the travel and event oriented businesses where if there was pipeline flow, those deals are less likely to close. But other than that, I would say our pipeline looks at the moment pretty normal.

And when asking about the credit market volatility really the underlying factors there driving that, so I appreciate you're making that distinction. I guess just following up on that though, recapping a little bit, it sounds like you could have some more fallout in the pipeline. So, what are your expectations for growth over the course of the year, it was a very strong year for you guys in 2019. Do you see origination stacking up to the same levels? And has sentiment from any of your portfolio companies changed as a result of the coronavirus and underlying factors driving this volatility?

We are bigger and stronger than we have ever been. We are now up to with accepted offers 44 people. We are now located in 12 cities across North America with be 2 newest offices that we've opened being in Toronto, and in Portland, Oregon. We are actively involved in potentially adding additional offices in the Midwest and Southeast. And so, our direct originations model continues to be extremely robust, and we anticipate that this deal flow on average should be as good as or better than it was last year with the caveat being the disruption in Q4 did throw a couple things into our lap that we won't get this year unless there's another disruption. And again, it may be that we're experiencing that disruption right now. It may in fact be starting as of last week. In terms of estimating where we end up, we took leverage from 0.57 to 0.97 this year. We really don't want to take leverage anywhere beyond one in a quarter times. So frankly, in terms of portfolio growth, we have less that we need to get done to get to our limit than we choose last year, and we will do our very best to subject to credit considerations to increase deployment to get to that one to one in a quarter times leverage. But again, we do not anticipate being more than one in a quarter time leverage by any significant degree.

And then just on the weighted average effective yield, down 70 basis points quarter-to-quarter, I believe. Clearly, the base rate played a part in that, but how much do you attribute to the competitive environment and the impact on spreads? And also, you mentioned the mix of sponsored deals look a bit higher this quarter and then the portfolio that was a year ago, has that played into the yield degradation at all as well?

The first thing that impact to deal beyond the decreasing LIBOR was the fact that several very high returning deals repaid. Crews of California was on our portfolio list for a long, long time, that was a credit that was as evidenced by LIBOR plus 11% yield on the first lien deal, a riskier credit. And we felt it was time to exit that credit and let another vendor take it that. So that was an exit that we were supportive of. We also had a second lien loan to a company named Sunteck that was a very good performing company and the Company was sold, so that loan got repaid and took down our second lien concentration even further. I would -- if I was successful at getting our second lien concentration back up the 20% to 25%, then that would help boost the yield on the assets. But as we take the portfolio more and more into first lien, which we've done on credit considerations that has continued to put pressure on the average return of our deals. In addition, you're correct that on average sponsor deals are priced lower than non-sponsored deals. That said, most of our sponsored deals are targeted for the JV and the JV equity that we invest in returns expected level of 12% to 15%. So, the goal for the success of the BDC is to continue a robust mix of sponsoring non-sponsored deals where many of the sponsor deals will be funded in the JV. The non-sponsored deals priced at LIBOR 6.50 and above will be funded on the BDC balance sheet. And we will try to create as a stable, a high yielding portfolio as we can with an ultimate goal at one and a quarter times leverage to try to be earning the dividend on a quarterly basis from our core income without reliance on waiver fees, amendments fees and prepayment penalties, which all of you have seen happen almost every quarter. It's a very natural occurrence and a non-sponsored book to get waiver fees, amendment fees and prepayment penalties, but the analyst community and the shareholder community have asked us to try to get to a basis where core earnings generate that $0.355 and the waiver fees, amendment fees and prepayment penalties give us excess to the $0.355 and the leadership of the BDC is working hard to get to that end game.

And I know it's tough to given there so many different elements around that. But is that something you believe you can achieve in 2020? Or is it possible it takes a little bit longer than that?

I don't know what's going to happen this year, especially given the fact that we've seen the volatility in the markets over the past couple of weeks and given that we don't know what's going to happen to the economy with a coronavirus. So, I can't predict the rapidity with which we get there. All I can say is, if 2020 behave like 2019 then we would make very good progress. But I have no idea, if 2020 is going to be anything like last year.

Our next question comes from one of Mickey Schleien of Ladenburg.

So, most of the questions I think that are most people's minds have been asked previously, but just a few more if I may. Stuart, I understand that forecasting what may or may not happen related to the coronavirus is very difficult right now, but I imagine you started to reach out to your management teams of your borrowers to take their pulse on what they think is happening to their business. Are there any specific credits in your book that you're particularly concerned about right now related to that?

So, the credit that I would say has the most exposure to the virus is our credit Quest. Quest does draperies, a very simple thing at events that range from corporate events to weddings. The Company is we think a very good company with a very long, good long term value proposition, but if there were a period of time where people were no longer holding corporate events because people were afraid of the virus, then demand for the draperies that this company provides would dip during that period. That said, Quest is owned by a private equity firm, there's nothing about what they do that's going to go away, ultimately because of the virus. And I am personally of the opinion that the private equity firm would support the Company through whatever the coronavirus period would be, whether that's three months, six months, or nine months. So we don't view there being a, our particular concern on that credit, other than the fact that, again, it would at least temporarily impacted. Nothing else in our portfolio has that level of what I'll call event risk other than that credit, there's a very small amount of China sourcing exposure in our portfolio, but I think much less than the average BDC because we're focused on the lower-mid market and the lower-mid market is much more an American focus market and not so much linked in to China, which is why our portfolio companies really have not been impacted by the trade war to any measurable degree. So we do have a credit resources that have taken a look across our portfolio for the level of coronavirus exposure. And in general at the moment it seems pretty low and there has been no feedback from any of our management teams that as a moment they're seeing any economic weakness in the US resulting from the coronavirus.

That's really, that's interesting and helpful, Stuart. I appreciate it. Just a couple more questions, more housekeeping sort of questions. Were there any one time adjustments to investment income, either positive or negative in the quarter, for example, from StackPath or anything else?

Hey Mickey, this is Joyson. So we did have some nonrecurring fee income recognized during the quarter from these five exits. I think as we mentioned earlier on the call 1.2 million of our fee income was driven on from a StackPath and that was largely due to essentially that success fee premium. So I think in terms of onetime adjustments for the quarter, again, it, it really boils down to the nonrecurring fee income on that element.

I understand Joyson. How about interest income sometimes we see reversals or accruals for past interest income that may have been deferred for something that was on nonaccrual for example, anything like that?

Nothing in relation to interest calls. So we did put StackPath back on Q3, there was a little bump up and interest income in the prior quarter as it relates to that. So there wasn't any adjustments related to that. Of course we would have a little bit of accelerated recognition on the discount amortization from these prepayments as well.

Mickey I will highlight by the way since StackPath was brought up, just as it gets into how we mark troubled assets, we try to be very transparent quarter-to-quarter. StackPath ran into a problem. There were a lot of people that had the view that the StackPath asset would be good, but we view there as being downside risk. So in Q2 I believe we had it marked at $0.75 on the dollar. But, the final outcome of that highlighted that we obviously had a lot of upside in that mark as well. And we're really happy that the sponsor who managed that credit, ended up with such a good outcome for themselves and ultimately for us for our BDC as well.

Absolutely, that's welcome news, and congratulations on that. Lastly, Stuart, can you just remind us on the JV, what's the JV's target leverage on its own balance and sort of what are your expected return on equity metrics for that vehicle?

The JV will in general run in about 1.5 times leverage on the JV assets that are all expected to be first-lien assets. And the projected return on the JV junior capitals to us is 12% to 15%.

Next question comes from line of one of Christoph Kotowski from Oppenheimer.

Most of mine were asked but just you're going a little fast when you're talking about the amendments to the revolving credit facility and can you just go through looking at page 13 of the of the deck what the availability went to is it to 250 and is there any conditionality of, on the $10 million accordion feature? And I guess what I'm getting at is that is your current leverage or liquidity and leverage capacities efficient to get you into the middle or upper end of your target leverage ratio, or is there something else you need to do hand side of the balance sheet?

I'll answer the last part of that and then pass the balance of the question back to Joyson. We could hit our target and leverage just using the JP Morgan facility. That said, fixed interest rates have dropped to all time lows. And so we are also aware of and entertaining the possibility of issuing more unsecured debt as opposed to using more secure debt. And the decision as to what to do will be driven by a combination of the expected asset deployment in Q1. And also what spread the debt can be issued at, at this point in time. So again, we do not need any more unsecured debt. But unsecured debt is a option that is open to us. And it may be attractive given where 5 year and 10 year treasuries are now sitting.

Chris, this is Joyson, I'll just summarize again or changes on the credit facility. So the interest rate spread was at 2.75%. We will be setting out to 2.5%. The facility size, the core facility size was 200 million with a $35 million accordion. So now we have 250 million of capacity with additional 100 million of accordion. So again 350 in total capacity, see advanced rate on collateralized assets will go and increase from 57% to 60%. And then again that borrower's requirement say if the percentage is 70% of the facility size. So that equates to 175 million based on the 250 million current capacity.

And to draw on the accordion is, are there any special levels of bells and whistles that you need to go through to do that? Or is it just like kind like drawing on the initial 250?

It's going to take a few, a little bit of lead time in terms of, more than just a couple days, right. But it is basically submitting some paperwork. And then that just beating send for approval in terms of some approval with the committee. But we don't push it is kind of a long or large lead time on that.

Our next question comes from the line of Rick Shane of JP Morgan.

Just one question and one follow up. We see an increase in the percentage of sponsored deals over the last year. I'm wondering, if that's opportunistic or there's something strategic that we should be thinking about going on?

Rick, the business itself has ramped up very significantly. And we have a breadth of reach into the sponsor market that candidly we didn't have two or three years ago. We're very careful about what we do on the sponsor side, as people are aware. In the general sponsor market, leverage multiples are 5.5, 6.7, 7.5 or even more. And those leverage multiples are being done off of adjusted synergize EBITDA such that we believe the actual lending multiples are even higher than those 5.5 to 7.5 time ranges. We're calling primarily on smaller sponsors of what we call off the run sponsors. And the sponsor deals that we're doing are almost all in the range of 3.5x to 5.5x leverage. With equity checks that are 40% or greater. The directly originated sponsor deals were doing we're doing with covenants where much of the market has gone covenant light. And so from a credit perspective, in terms of leverage, loan to value and covenants what we're doing on the sponsor side, we think is very consistent with the risk that we're taking on the non-sponsor side. That said, non-sponsor lending is a very different endeavor. It is much harder to find a non-sponsor deals. Because there's no place you can go to just sort of get them. We directly organically originate the vast majority of our non-sponsor deals in the 12 different regions where we're situated and those non-sponsor deals are typically between 2.5x and 4.5x leverage. And often price, they almost always price between LIBOR 650 and LIBOR A on first lien deals. We would love to keep our mix about 50-50. We're hiring more people on the non-sponsor side, and we are on the sponsor side to try to keep the mix at about 50-50. But any given quarter, there's just a lot of variation in terms of what we find, what we get mandated on and what we close. And in Q4 in particular, because of the disruption in the marketplace, a lot of the things that came our way were sponsored deals. And frankly, a number of them were sponsor deals, that would have ended up at much lower pricing in the broadly syndicated marketplace that ended up getting clubbed up and said, and we joined up in those clubs. So, I'd say in the case of a market disruption, you're going to see more sponsor deals. But in the case of our normal sourcing activity, plus or minus 50-50, with any given quarter, being 40-60 or 60-40.

And then just as a follow up there, we're now two thirds of the way through the quarter. It's been a volatile quarter. Just back of the envelope, what do you think the asset marks would be, quarter-to-date given the volatility that we've seen not even on a regular basis, but just on a sort of asset basis?

Well, the good news for us is the vast majority of our assets are lower mid market assets that don't vary with the large cap marks. So, we have a couple of large cap assets and a couple assets that vary that way. But, our assets are generally valued on the core performance of the underlying asset. And so, based on what I've seen so far in the quarter, I don't believe that there is any materiality to the mark movements. Also noting that the candidly, even in the large cap debt markets, which are the most volatile notwithstanding the multi thousand points moves in the equity markets, the large cap debt markets has seen very little price compression a little bit, but very little other than in some of the travel names like the airline stocks.

Our next question comes from Chris York of JMP Securities.

I wanted to elaborate on your comment for being bigger and stronger. So, I noticed WhiteHorse raised 1.1 billion in the principal lending quantum of early January and I view this as another positive development for the growth of the platform. So, the question is should investors expect that the BDC will receive any direct or indirect benefits from this outside capital rates?

Yes, there is a very clear linkage between our ability to win new business for the BDC, and the additional capital that HIG WhiteHorse has under management. The WhiteHorse principle lending fund, as publicly announced was closed with a focus on sponsor deals. It's one of the reasons that you are seeing more sponsor flow coming through. But as an organization, we can now underwrite $200 million of an individual transaction. And that gives us the ability to be a sole source solution to the vast majority of lower mid market players in both the sponsor and non-sponsor space. So, if you go back three years ago, we really couldn't speak for more than $50 million and we found lots of opportunities that were between 50 and 150 and we weren't in a position to land those opportunities for our shareholders and for our BDC, whereas now we are positioned to do that. And the other thing you're seeing is simply as indicated to our shareholders several years ago, we are very significantly increasing diversity in the BDC. A few years ago, we had positions that were upwards of $35 million or $40 million on $400 million to $500 million and now positions that we've been adding have been between $4 million and $20 million on an asset pool that will ultimately get up to about $700 million if we hit our deployment targets. So it's much better diversified base of assets that come off of the fact that we're managing this pool of capital and we can win more deals and do appropriate allocations.

Great. That's great color. I think that I appreciate, now on your scale and platform. So, that's it for me. Thanks.

No problem.

Our next question comes from Matt Gaden of Raymond James.

Hi, guys. Just a quick question on Grupo HIMA. So, on the 3Q call, if I remember correctly, you said that, you received some financial documents post quarter end that were a little bit weaker than expected and we're expecting to take a markdown on the asset. And as far as I can tell, the asset marks are the same this quarter as compared to the prior. So, any color you can give us on that.

That's a great question. After getting the data that implied weakness, we got subsequent data that reversed that weakness, and therefore based on the improved data that came, and that we currently have, we did not see any reason to mark that asset down further. So, we did see that as a risk, but that risk abated and I'm pleased to be able to report that to you and hopefully, Grupo HIMA which is a hospital operating in Puerto Rico will continue to strengthen and hopefully that asset will be a good outcome for our shareholders.

Okay. Alright. Thanks for color. That's it for me. Thanks guys.

No problem.

Our next question comes from one of Tim Hayes of B. Riley FBR.

Hey, Stuart. Just had one follow up. I know one of your strategic initiatives is to reduce the Bayside footprint and increase liquidity and the flow to the stock. But just wondering with the stock price trading below 90% of NAV right now and at a 10.5% dividend yield, just how you think about executing on buybacks and the returns there versus where you're putting capital to work right now.

Yes. So the Bayside shareholders are, to all the evidence we have, smart, rational entities, and they understand the need to take some of the discount in order to exit as they have. They've sold assets of below NAV. But the recent market sell off of course will make it less attractive for the Bayside shareholders to exit. There are a number of routes that we can take to ultimately address the overhang. And then the question, we've taken the overhang from 51 down to 23.7, at some point, which all of you in the analyst community have to help me understand the overhang becomes small enough that, in theory, it shouldn't even worry people anymore. So we're trying to get a good gauge on where that should go, but again, we're working closely with the Bayside shareholders to get to a level that is not intimidating to the marketplace, whatever that level be and that will happen based on them viewing that the shares are trading at a fair value relative to the overhang risks that their position creates. Other than that, there's really nothing to share on that overhang, but, we're going to do our very best to try to have that resolved in 2020 if that is possible to be done.

Got it. I appreciate those comments. I guess I just want to maybe clarify one part of that question that I asked is maybe just how you feel about repurchasing your stock in the open market?

If the stock traded back down to where it was very recently for what appeared to be no good reason, the Board of the Company would take it under advisement that a repurchase of shares could make sense, but given the performance of the Company absent illogical trading levels there is no plan at the moment to repurchase shares.

[Operator Instructions]. Next question comes from Bryce Rowe of National Securities.

I'm just curious some of the activity this quarter, you flagged that L plus 650 might make its way into the JV. So just curious if we should expect activity from this past quarter to make its way into the JV here in the first quarter?

For the most part, the assets that will go into the JV will be priced between LIBOR 525 and LIBOR 625, assets that are priced at LIBOR 650 for the most part will remain on the balance sheet of the BDC. That said, we will -- with those assets that are at 650 seek to optimize deployment and returns vis-a-vis the leverage and the earnings power of the BDC. So said another way, the higher yielding an asset, the easier it is to have the asset on the balance sheet of the BDC, but so far all the assets that have been transferred into the JV have been at LIBOR 625 and below.

Okay. That's helpful. And then one follow-up to the comment about equity market volatility maybe starting to make its way into the credit markets. And with LIBOR being down here in 2020 are you finding the ability to offset that LIBOR compression with possibly some wider spreads on your deals? Or is that not -- are you not seeing that quite yet?

We were hoping to see that, but we have not seen that. We were thinking that the market may self-correct to the lower LIBOR, but in general as of -- let's call it two weeks ago before the coronavirus volatility. What we saw happening in terms of January competition was pricing was very stable. Not worse, but pretty much the same. And we're right now in price discovery on several assets based on the volatility in the market and by price discovery. What I'm trying to say is we're trying to get more price and we'll find out whether other people under cut us or not.

That was our final question. Ladies and gentlemen and with that we will conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.