Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter and Full Year 2021 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 5:00 p.m. Eastern Time. The replay dial-in number is (402) 220-4942. [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 fourth quarter 2021 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 related to the 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 2021 Earnings Presentation, which was posted on 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. Thank you all for joining us today. As you're aware, we issued our press release this morning prior to market open, and I hope you've had a chance to review our results from the period ended December 31st, 2021, which can also be found on our website. On today's call, I'll begin by addressing our fourth quarter, and full year results and current market conditions as well. Joyson Thomas, our Chief Financial Officer will then discuss our performance in greater detail, after which we will open the floor for questions. We are pleased to report strong results for the fourth quarter and the full year. In 2021, core NII totaled a $1.405 per share, which increased by 12.5% from 2020s core NII of a $1.249 per share. These financial results reflect the strong quarter and annual originations with $483.2 million in gross deployments for the year, and $199 million for the fourth quarter alone. Gap net investing income in Q4 was $7.5 million or $0.331 per share. Core NII was 7.3 million or $0.322 per share. This compares with Q3 core NII of $7.8 million or $0.372 per share. This is after adjusting for capital gains incentive fee reversal, and the accelerated amortization of deferred issuance costs from the retirement of our $35 million baby bond issuance. In addition, given strength of originations and outlook for deployments this past quarter, we competed a secondary offering of shares. We issued 2.2 million shares at an average price to $15.81 generating approximately $33.7 million in new proceeds. Importantly, we issued these shares at our then NAV per share, taking into account issuance costs that were covered by our management company. Through the fourth quarter and into Q1, we were able to quickly deploy these proceeds, which…

Thanks, Stuart. And thank you everyone for joining today's call. During the quarter, we've recorded GAAP net investment income recorded GAAP net investment income $7.5 million for $33.10 per share. This compares to $7.6 million or $36.6 per share in the third quarter. Core NII was $32.2 per share after adjusting for the $0.7 million net impact of accelerated amortization of debt -- deferred debt cost associated with the retirement of a $35 million baby bonds, as well as $0.9 million capital gains incentive fee reversal. Q4 fee income was $0.3 million compared with $1.2 million in the prior quarter. The decrease was due to reduced prepayment and amendment activities during the current quarter. To that end, I'd like to highlight that a number of the anticipated repayments that were expected to occur in Q4 were pushed into 2022. So we expect to see fee income and accelerated OID accretion from these prepayment over the first half of 2022. We reported a net increase in net assets resulting from operations of $3.1 million. Our risk ratings during the quarter showed at 90.1% of our portfolio positions carried either a one or two rating as compared to 88.9% in Q3. Regarding the JV specifically, we continued to grow our investment. As mentioned earlier, we transferred three new deals, one add-on transaction, and the remaining portion of one previously transferred deal, which aggregated to approximately $35.1 million in exchange for a net investment in the JV of $3.4 million, as well as cash proceeds of approximately $31.7 million. As of 12/31, the JV’s portfolio held positions in 28 portfolio companies with an aggregate fair value of $259.5 million compared to 27 portfolio companies at a fair value of $239 million in Q3. The investment in the JV continues to be accreted to…

[Operator Instructions] And we will take our first question from Mickey Schleien with Ladenburg. Please go ahead.

Stewart, can you give us some sense of how your borrowers’ revenues and margins are trending and how do you feel about their ability to service their debt, given all the headwinds we’re confronting, including the potential for rate increases?

Mickey, it's a great question. As you know in certain parts of the leverage finance market people are making loans that are regularly at 6.5x to 8x leverage on an EBITDA basis and 10 to 12 times leverage on a cashflow basis. That is not our strategy. As I mentioned earlier, our average originations this quarter, we're at 4x EBITDA. When you do that on a cashflow basis, more typically our originations are at about 5x or 5.5x cashflow, which leads to very strong debt service coverage levels on the companies that we finance and leaves room for interest rates to move up very considerably before it would put pressure on the ability of our companies to service debt. In general, what we're seeing in our portfolio and I've heard from evaluation services, they're seeing this across the market, the vast majority of companies that are experiencing supply chain cost increases and labor cost increases are successfully pushing those through to their business and consumer customers and revenues are generally growing in the majority of our portfolio and EBITDA levels are either being maintained or increasing. So general portfolio performance is strong and even on the COVID affected accounts with the exception of Gruupo HIMA, which still remains quite bad, but all the other COVID affected accounts are improving either gently or in some cases, very significantly.

Thank you, Stuart, that's a helpful explanation. If I could just follow up, I know that you tend not to invest in cyclical companies, which is common in the BDC sector, but within the portfolio companies that you've invested in, do they have any outside risks in terms of their cost inputs to either the sanctions that are developing in Europe or to commodity prices in general that we should be aware of?

We do have companies that have inputs that are linked to oil and those companies are obviously seeing and will probably continue to see increased price pressure. But again, we have seen with, I would say literally every company in the portfolio that cost increases have been able to be pushed through. There seems to be an acceptance across the market that increased costs are requiring passthroughs. And of course, we're all reading about that and hearing about that every day in terms of the inflation rate in the country. We definitely see that going on in our portfolio, and it's not only gone on in prior months but we have a number of portfolio companies that are doing price increases right now in March and April. And the feedback we're getting is that their customers, which include places like Walmart and Whole Foods are accepting those price increases understanding the nature of the pressures that are being put on companies.

Thank you, Stuart. I appreciate that explanation. Just one last housekeeping question maybe for Joyson, can you give us a sense of where your undistributed taxable income ended for the year net of the special distribution you made?

Making pro forma for the regular distribution that was paid in January of 2022, undistributed income is approximately about $29.5 million.

$29.5 million. Thank you, Joyson. I have a couple more questions, but I'll hop into queue to give someone else a chance to ask questions. Thank you.

And we'll take our next question from Bryce Rowe with Hovde. Please go ahead.

Thanks for taking the question, and good afternoon. I think a lot to talk about here, a lot to digest. Wanting to maybe start with trying to size out the deal activity you've seen here in the first quarter, both closings and mandates, and then what that looks like relative to the repayment activity that kind of spilled over into the first quarter.

Yes. In Q3 and Q4, we were alerted by a large number of borrowers that they intended to repay, most of those repayments were from intended sales of company. A lot of those sales have not consummated yet. Some of them are going to consummate here in Q1. Some of them are expected to consummate in Q2 or Q3. Some of them have been pushed out until later in the year. So, we are not getting the repayments that we have been told to expect back in Q3 and Q4 of last year. And at the same time, our business volumes have been exceptionally strong at WhiteHorse as a consolidated entity. We had a record Q4, as evidenced by the record performance for the BDC in the addition of assets. And then on top of that, while this is not necessarily true across the whole market, we are also experiencing a record Q1 where at the WhiteHorse direct lending unit, we are likely to close 75% to a 100% more volume that we closed in Q1 of 2021 2020 or 2019, for that matter. The volumes are so strong that given where we are on the leverage in the BDC, there is not room in the BDC to put all of those assets in. And so we are targeting only higher yielding assets for the BDC in support of trying to consistently earn the dividend. If we saw a surge of repayments, we currently have plenty of origination volume to replace those. And so long as I mentioned in the prepared remarks, so long as we are not doing many second lien loans and the second lien concentration stays well under the 15% target, we will operate the BDC at slightly higher leverage of about 1.35x as opposed to the prior target of 1.25x. That larger asset balance and those more assets will generate more income that will help us cover the dividend on a more reliable basis.

Understood that, maybe a couple follow-ups to those comments. You said higher yielding, what exactly does that kind of mean? And then follow-up -- another follow-up is you've obviously increased the commitment to the JV that's something that you you've talked about in the past, curious how quickly you might take down that $25 million into the JV now that you've got such a strong pipeline?

Bryce, our existing pipeline has deals that are mandated that are supposed to close, although there never can be assurance that deals will close, that would consume all of that incremental $25 million of allocation to the JV. So, based on projections and subject to the caveat that sometimes deals don't close as planned, if mandated deals close as planned, all of that JV capacity will be utilized either by the end of Q1 or early in Q2. And to your other question, at this very moment, based on the limited capacity in the BDC, I don't have any new deals in my pipeline that I'm planning on putting on the balance sheet of the BDC, unless the yield on that asset is at least LIBOR seven. And I have several assets that are yields in excess of LIBOR seven that I am targeting to put into the BDC. So it's a very high class situation to be able to build the portfolio with the BDC with senior secured first lien assets that are yielding LIBOR 700 and above.

Yep. It certainly is. Think I'll jump back into the queue and maybe come back with a follow up or two, but I'll give somebody else a chance. Thanks Stuart.

Thanks Bryce.

And we will take our next question from Sarkis Sherbetchyan with B. Riley Securities, please go ahead.

Hi, Sarkis.

Hi, thank you for taking the question here. Just want to kind of come back again to the new leverage target, clearly, you know, with the higher concentration of the first lien, you could kind of do this, right? And as I kind of look at the balance sheet now, can you reconcile that against, you know this deal activity you're seeing? It sounds like you're going to be very choosy. And then it sounds like, you know, based on the level of repayments or prepayments that come back in, you'll just, you know, redeploy and keep the -- what's called the investment portfolio kind of in this zip code, but maybe towards higher yielding assets. Is that the right framework?

At the moment based on the current pipeline of mandated deals, your assessment is exactly right. We should have no problem operating the BDC at about 1.35 times leverage, in fact I would say based on the current pipeline, which includes some repayments that are supposed to come in, at the moment our leverage today is actually a little higher and we're expecting several repayments before the end of the quarter. But we are currently in a situation where the originations activity across our both sponsor and non-sponsor side are very strong. We are finding good high yielding assets for the JV and good, even higher yielding assets for the BDC balance sheet. And we will do our very best as we operate in the balance of Q1 and Q2 to optimize the risk return of the BDC portfolio.

Great. That's super helpful. And then just shifting gears here a bit, I think if I look at the 4Q interest expense line, a bit higher than what I was anticipating. Is that because the debt extinguishment cost was inside there or should I be thinking about it in a different place?

Sarkis, that is correct. The accelerated amortization from those debt issuance costs would be on the interest expense line.

Can you share what that cost was Joyson, just so people can calculate that in.

Yeah. Thank you. The gross amount is approximately 800,000, 0.8 million. As I mentioned before, the net impact net of the incentive fee benefit was 0.7 million, that adjusted out to core NII.

And on the first share basis, Joyson, that's about what, $3.5 a share?

Somewhere between three and a half and four. Yep.

Okay. Fantastic. That's all for me. I'll hop back in the queue.

Thank you, Sarkis.

[Operator Instructions] And we will take our next question from Melissa Wedel with JP Morgan. Please go ahead. Your line is open.

Good morning. I appreciate you taking my questions today. One of the comments you made about the delay in repayment activity, or sort of getting pushed into the first half of this year. I was hoping you could share a little bit more context around that. What's driving those delays. Is there any reason for concern or is this -- are companies sort of clinging to capital a little bit more closely, given the increased uncertainty in the environment? Anything you can share with us would be helpful. Thank you.

Yes. There's nothing bad and nothing concerning. I would say that what I've heard from some private equity firms or even some non-private equity firm sellers is that the bankers who were representing them, told them that they could get certain valuations on their assets. And in some cases, those valuations came through at lower levels leading the equity players to not want to sell. So either that or they're delaying the sale until later in 2022. So none of those exits that have not yet happened are related to problem assets, all of the companies are performing. It relates pro primarily to the desired equity gains of the sellers of the company. And they're just holding on. And in some cases, we have one credit where there was a planned sale in Q4. A strategic company is buying that credit. They're going for regulatory approval. And the regulatory approval has just taken longer than anticipated, so not a problem, and the company -- that one in particular, which is related to infrastructure spending, continues to do phenomenally well. So we do expect to see most of those repayments secure -- occur at some point during 2022, and I think we have even sitting there today, two or three more repayments that we're expecting during the month of March.

Got it. I appreciate that context. It's interesting, we've heard from some other BDC managers with a new season that -- speaking exactly to that point where there's a discrepancy between public and private market valuations, and that might hold up some deal, but that -- we've heard managers speak to two different directions on that. One could be that, it could slow originations activity. The other possible thesis is that, it could drive demand for growth capital from the private debt market in sort of a tailwind to origination. So given the hold up on some of the deal activity that you're talking about, I'm curious what's the tone of the conversations that you're having with your portfolio company? Are they looking for growth capital at this point, and understood that your constrained is on the BDC on new issuance, but contacts would be interesting. Thank you.

Yes. Our portfolio companies on the whole are doing very well and are in growth mode. We have a number of companies that continue to do add-on acquisitions or organic greenfield expansions. So with the exception of the asset -- again, the best way to get a sense of how the portfolio is doing is to look at our marks on the assets. We've always tried to have very realistic marks historically from anything that's marked down, you see it sometimes move up and sometimes move down on new quarter information. I'd say the only asset we've had, that's been a steady march downward and it will continue to be a steady march downward in the next quarter is Grupo HIMA. Grupo HIMA, I'll remind you is the second largest hospital chain in Puerto Rico and the combination of COVID and other secular issues going on in Puerto Rico have caused the performance of Grupo HIMA to suffer significantly. We're working very hard to resolve that. But it just has not been trending in the right direction, but with the exception of Grupo HIMA and that trend line, the balance of the portfolio, again, even the COVID affected accounts with Omicron seeming to be past us, the flash results for February are generally positive. And in some cases, they're very positive.

We’ll take our next question from Robert Dodd with Raymond James.

Good morning from my time line. First one on Grupo HIMA and then more on origination question. I mean, you just mentioned that it is trending in the wrong direction. Can you give us any incremental -- Is that the financials of Grupo HIMA are trending in the wrong direction or the negotiations on the work are trending in the wrong direction?

I would say, the Grupo HIMA situations financial performance has continued to be very negative and the negative financial performance has led to the ongoing markdowns. We have been employing a number of different strategies using resources that we have at H.I.G. to optimize the outs come. Last quarter, based on our mark, we had a number of different outcomes that were both above and below where our mark was, a number of those options that were above our mark have not played out based on the financial performance of the company. And that's why, our expectation -- we don't know yet because we're -- it's a week by week situation, Robert. But our best estimation is at the end of this quarter, there will be a further markdown on that asset. And I'd be comfortable giving you an estimated range. I think that markdown will probably be to $0.20 or $0.30 compared to the $0.42 that it’s marked at currently.

The other -- the general trend this quarter has been a lot of BDCs and private credit participants say, slow down in Q1 and maybe it should -- starting to rebuild as we go through this year, but it clearly doesn't seem to be the case with you, we’re up significantly versus even a pre-COVID Q1. Can you give us any -- I mean, what is it about -- is there a difference in mix of the channels that you are getting those opportunities coming through now, I mean, is the sourcing different for say Q1 versus what it was in Q4, which was also a very strong quarter? I mean, it just seems like you're outperforming in terms of volume that you're seeing in Q1 what the rest of the industry is seeing, any telling on why you think that is?

All I can tell you is that we have representatives in 12 regional offices across North America. And so we don't rely on the New York and Chicago banks to bring us volume. We generate our own volume. And so what I've heard from some of the other players in the industry is that Q1 has slowed down a lot from Q4 and most people are experiencing what I guess they'd refer to as a normal Q1, that has not been the case for us. Our regional origination network including both private equity and non-private equity deals has been exceptionally strong, frankly surprisingly strong. We didn't predict or budget that we’d be operating this heavily. And my team which is up to the mid-sixties number of people is operating at almost a hundred percent capacity in Q1. And I can't remember in my 35 year career ever being so busy, relatively speaking, in a Q1. We're being still equally selective on the deals we're doing. We're turning down anything that we think is too cyclical or too highly levered. And we're also turning down deals where we think others are being too aggressive on price. But as a result, the portfolio of deals that we're closing are modest leverage, consistent with the history of what you've seen with our BDC, and the pricing is generally strong. My biggest frustration, to be honest with you, is I wish I had more capacity, because there are deals that I would've liked to have put into the BDC, where the BDC just can't take them unless I was going to operate at even higher leverage. And we don't want to take the leverage up from what we're indicating to the market. So again, we're focusing on the higher yielding deals. I would say, the deals going into the JV, which historically is focused on deals priced 550 to 650, I would say right now the JV deals will probably be all 600 and above, and anything going on the balance sheet of the BDC is likely to be at LIBOR 700 or above.

Thank you. Thanks a lot. Yeah, appreciate it.

No problem.

We'll take a follow up from Mickey Schleien with Ladenburg. Please go ahead.

Stuart, just to follow up on your frustration about leverage at the BDC. With the stock trading above NAV, are you open to raising some common equity at these prices and unleashing some capacity?

We always consider what we think is right for the BDC shareholders. At the moment we have not been willing to do that. The BDC has been trading above NAV fairly consistently, depending on what we see as opportunities in the future we could consider it, but so far we have chosen not to go down that path and instead we're optimizing the portfolio with these higher yielding assets. And again, our desire -- can't promise it'll happen, cause you never know. But our desire is to build a very strong first lien portfolio with yields on the assets that allow us to comfortably cover our dividend on a reliable basis quarter to quarter. As you heard earlier, we had an impact of about three and a half or 4 cents a share on the write off of the bond fees. But absent that, the earnings per share would've been higher. So we're optimistic. Again no promises, but we're optimistic at the moment sitting where we are right now about capacity in 2022.

I understand. In terms of the cadence of your portfolio investments and exits in the fourth quarter, when I look at the trajectory you’re on, interesting versus the growth in the debt portfolio, it seems that your net investments were very much skewed to the end of the year. Is that correct? Or am I missing something?

Yes. We had -- it's very normal in Q4 that a lot of the deals close in December and that's been for my whole 35 year career. So yes, a lot of the assets that happened too, and then we had a couple of things that were supposed to close in Q4 that did roll over into Q1.

Understand. My last question, to what extent understanding that many of your notes are – unsecured notes are private. Can you give us a sense of which ones of them are callable at this point in time or in the near future?

Joyson, do you have a commentary on that?

Mickey, right now as of the end of -- or as of Q1 2022 we don’t have any that are callable. As you know, we do have some that roll off in 2023. And so we'll look at that probably in the back half of this year.

So those 2023s, which were the ones I was thinking about, do they have a call feature or is it kind of make --

They do, right. And so maybe just to clarify my response. As I'm sure you can appreciate some of these come with call features that would require prepayment premiums to be paid, also from that end, there are certain ones that technically could be redeemed with a prepaid in premium, right? And so from that aspect, I think that's where we would look at that maybe in the -- later on this year, and right now that that's not a focus.

Fair enough. I thank you for that. Those are all my follow-up questions. I appreciate your time.

And we'll take another follow up from Bryce Rowe with Hovde. Please go ahead. Your line is open.

Thanks a lot. Wanted to just maybe ask a question about asset sensitivity both at the BDC and at the JV, Stuart or Joyson, can you give us a feel for what the weighted average floor is within the BDC’s debt portfolio and then how the JV’s asset sensitivity might look relative to the BDC or the floors similar within the JV?

The LIBOR floors or SOFR floors across our portfolio are fairly consistently at 1%. There are a couple of deals with floors that are little bit lower, 75 basis points. I think we have floors on either all of our assets or virtually all of our assets and that is consistent with our current pipeline as well. We are not adding any deals in Q1 that don't have LIBOR or SOFR floors.

That's great, Stuart. And more for me, the move to non-accrual for PlayMonster, any reversal of interest in the fourth quarter tied to that?

There was none.

And there are no further questions at --

Any other question?

No, I apologize, there are no further questions at this time. I’ll turn the call back over to speakers for any closing remarks.

As always, we seek to have transparency in what we share with the market, if between this call and the next call there's any topics that any of our analysts or shareholders would like us to address, please do let us know and we'll do our very best to be responsive. I thank everybody for their time.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.