Good afternoon. My name is Shelby, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Third Quarter 2022 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 made available for replay beginning at 4:00 pm Eastern Time. The replay dial-in number is 402-220-2655. No passcode is required. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for 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 third quarter 2022 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 third quarter 2022 earnings presentation, which is posted to our website this morning. With that, allow me to introduce WhiteHorse Finance’s CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Robert and good afternoon and thank you all for joining today. As you are aware, we issued our press release this morning prior to market open. And I hope you’ve had a chance to review our results for the period ending September 30, 2022, which can also be found on our website. On today’s call, I’ll begin by addressing our third quarter results and the current market conditions, then Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail. After which, we’ll open the call for questions. This afternoon I am pleased to report solid third quarter performance for 2022. Q3 GAAP NII was $9.8 million or $0.42 per share. Core NII was after adjusting for $1.1 million capital gains incentive fee reversal was approximately $8.6 million or $0.372 per share, and more than covered our quarterly dividend of $0.355 per share. NAV per share at the end of the Q3 was $14.76, representing a $0.19 decrease from prior quarter. This decline was primarily the result of mark-to-market reductions, rather than any actual losses on investment. The marks on our portfolio reflect market pricing that is adjusted due to disruptions in the debt markets. Turning to our portfolio activity for the quarter. Gross capital deployments in Q3 totaled $39.5 million. Of this amount, $26.1 million was funded into three new originations and the remaining $13.4 million was funded into seven add-ons to existing portfolio investments. In addition to the add-ons, there was $0.6 million in net fundings made on revolver commitments. During Q3, total repayments and sales were $36.3 million, primarily driven by three complete realizations, these largely offset the BDC’s origination activity, leading to net deployments of $3.8 million for the quarter. With originations slightly outpacing repayments, net effective leveraged increased to 1.22 times…

Thanks, Stuart and thank you all for joining today’s calls. During the quarter, we recorded GAAP net investment income of $9.8 million, or $0.42 per share. This compares to $7.9 million or $0.339 per share in the second quarter. Core NII was approximately $8.6 million or $0.372 per share after adjusting for $1.1 million capital gains incentive fee reversal. This compares with Q2 core NII of $7.8 million or $0.334 per share and the quarterly distribution of $0.355 per share. Q3 fee income decreased slightly quarter-over-quarter to $0.4 million from $0.7 million in Q2. The decline was due to lower prepayment amendment activities during the current quarter. In the third quarter, we reported a net increase in net assets resulting from operations of $3.8 million, a decrease of $3.5 million, when compared to Q2, which was driven by unrealized mark to market losses on the overall portfolio. Our risk ratings during the quarter showed that 83.5% of our portfolio positions carried either a 1 or 2 rating, slightly lower than 84.8% in the prior quarter. 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 company’s performing according to initial expectations. Regarding the JV specifically, no new assets were transferred during the third quarter. However, subsequent to quarter end, we have transferred one new portfolio company already in Q4. As of September 30, 2022, the JV’s portfolio held positions in 28 portfolio companies with an aggregate fair value of $280.9 million compared to 32 portfolio companies at a fair value of $318.8 million as of the end of Q2. The decrease in the number of portfolio companies quarter-over-quarter was a result of full realizations of positions in four portfolio companies during the third…

[Operator Instructions] We’ll take our first question from Bryce Rowe with B. Riley.

Let’s see. Maybe I’ll start on the dividend. Obviously great to see dividend coverage here in the third quarter, and would kind of project that with base rates continuing to rise, you’ll likely continue to earn the dividend, all else being equal. Can you kind of talk about how you think about distributing any kind of excess dividend or excess earnings above that $0.355 rate, if we do, in fact, see that emerge?

Yes. Bryce, you’ve seen for the past three years where we have excess income that would be subject to taxation. We have made the decision -- we and the Board have made the decision to distribute that income to shareholders. With rising interest rates, there is an increased likelihood that we will in fact, have earnings that would be undistributed and subject to taxation. And each year, we will carefully consider whether it makes sense to do a supplemental dividend as we did for the $0.05 this year. But that’ll be based on performance over the course of the year.

And then maybe just a question around credit and internal risk ratings. You highlighted just essentially a stable portfolio, maybe a slight increase and what you’re seeing in three rated credits. So, can you kind of walk us through, what’s happening within those particular companies? And just to help us get some level of comfort with what’s going on from a credit perspective? Thanks.

Yes. Bryce, there is a clear slowdown in consumer demand. And there is equally clear slowdown in retailers, restocking inventory. We do believe that inventory levels got inflated during the latter half of the COVID period, where people were not confident in supply chain and so are getting as much stuff on their shelves as they could. Retailers are now looking to deplete that inventory. And so between consumer softness and too much inventory on store shelves, our consumer facing accounts have seen a real and significant slowdown in demand. Uniformly, they all expect that as inventory levels get down to more appropriate levels, the retailers will start a more normal ordering pattern again. But we are very careful about what we’re seeing in consumer demand. We are not seeing any particular slowdown in B2B. It is at the moment a consumer led slowdown based on the evidence that we’re seeing on our portfolio. But in general, where we have seen slowdowns and where there have been covenant defaults, the owners of the company have been supportive of the company. In the case of sponsor owned companies, in every situation, the owners have been willing to support those companies as needed with cash or contingent equity.

We’ll take our next question from Erik Zwick with Hovde Group.

First question for me. From the prepared comments, I think you mentioned that you’ve had five new deals closed in 4Q and potentially 10 more in the works, no guarantee that those will close or that you’ll have capacity. And I guess my question is around kind of the second part of that comment. If you have investments that seem to be good for the portfolio, have attractive underwriting and attractive yields, how do you think about the potential to either not close those and/or take on additional borrowings to potentially fund those. I now you’re kind of getting towards the top end of your targeted arrange now, but just curious how you think about portfolio growth going forward? Maybe just in general, but also in a period of economic uncertainty like we’re in now.

Yes. We are very skeptical of the repayment pipeline. So, we are trying to manage the portfolio so that we are not above the 1.35 times leverage. That means we have about $35 million of capacity of which we are thinking $15 million will be committed into the JV. The JV will invest in assets that are priced at less than SOFR 700, for the most part. The JV used to be focused on deals that were priced primarily SOFR 550 to 600 over the shift in the market environment, the yield on those assets is now going to be targeted more like 625 to 675. In terms of the remaining $20 million -- sorry, yes $20 million of capacity on the BDC balance sheet, we are reserving that for assets that are priced at SOFR 700 or above, and we are regularly seeing SOFR 700 on assets that are modest leverage 50% or less LTV and first lien, senior secured first lien. So, just to give you a flavor for how much the markets have moved, back about a year ago, second lien loans were yielding in the range of 650 to 750. And now we’re able to book first lien loans with returns of 700 and put them on the balance sheet. So, we are very pleased that we did not jump into that overheated market a year ago, and take on a lot of second lien assets at spreads that today would look very, very unattractive. I’ll also mentioned that we are keeping our eyes open for good second lien investments in this market environment where people are being more conservative on EBITDA adjustments, more conservative on leverage levels more conservative on loan to value. And we think this is the type of environment for a good noncyclical company where it makes sense to book second lien loans. So, while our portfolio is currently -- I think it’s 97% first lien, and our pipeline candidly is majority first lien right now, I would not be surprised over the next quarter or two if we were able to find a couple of good second lien investments in noncyclical companies that we thought presented compelling risk return for our investors.

And then, just looking at your funding profile, looks like you have some notes coming due in 2023. Could you remind me I guess what month those come due and just your thoughts are on how you would replace those?

Eric, those notes come roll off in August of next year, $30 million of unsecured paper. The way to think about it is we’ll obviously be monitoring just the market environment. But in regards to the JPM credit facility, that facility has capacity up to $335 million and so we can comfortably replace that $30 million with the JPM facility and still be within our 1.25 to 1.35 times target profile.

And last one for me, just in terms of the unrealized losses that you recorded in the quarter. Curious if you could split that between how much was market spread related versus company specific performance?

I don’t have that split, but just working the numbers in my head.

It was largely -- I would say, Stuart, it was largely due to mark-to-market.

Right. I would have said one-third credit related and two-thirds mark-to-market. Sounds about right, Joyson?

Sure. I’d come back to you in terms of the breakdown between the two. Yes.

Okay. It sounds like definitely more market spread versus company specific. So, that’s helpful.

The market spread was broad based where’s the Company-specific was only in a couple of accounts.

Makes sense. Thank you for taking my questions.

No problem. Thank you, Erik.

[Operator Instructions] We’ll take our next question from Melissa Wedel with JP Morgan.

I’m not sure if I missed this one. I know that you did talk about some of the activity in 4Q to date with some five new deals, and also expecting some realizations, I believe. Did you quantify that in terms of dollars?

I don’t think we did. I don’t have those numbers handy. Joyson, do you?

Melissa, in terms of the deals that we had originated in Q4, they related to about three new deals and then several add-ons, right? So, in terms of the total quantum, what I’d say is it probably would have been no more than somewhere between $25 million and $30 million. And then, as regards to the realizations, we had noted three exits during Q4 already, and proceeds aggregated to $30 million with respect to that.

Okay. Thank you. I appreciate that clarification. Given your comments about the JV and seen opportunity with an additional transfer in 4Q and then potential additional investment, $15 million into that, fair to say that the growth that you’ve seen in the income from that vehicle should -- that should sort of continue on that trajectory in the near-term?

Yes, if we invest more in the JV, and the assets going into the JV have higher yields, both the existing assets and the new assets, the JV should continue to throw off returns in the low to mid-teens. And again, this market environment is extremely attractive and historically deals that were priced at 650 or 675, we were putting on the BDC balance sheet. But now based on the shift in the market, we’re able to put those higher price deals in the JV and reserve the BDC balance sheet for deals that are priced at 700 or greater. So, when you take that in combination with the rising base rates, we have a very positive trend line in the core earnings of the BDC. That could change, of course, always. But right now, the trend lines are very positive, which is not unique to us. I think the BDC community broadly is benefiting from the higher spreads and the higher base rates.

Just one last question for me. Are you seeing any evolving sort of metrics around PIK payments, any borrowers kind of edging towards that as things get a little bit tighter? Thanks so much.

No problem. Melissa, as we reported last year, and for several years, we’d observed in the marketplace that a lot of people were lending at leverage multiples of 6 to 8 times EBITDA off of adjusted synergized EBITDA and we thought not taking account of cash flow multiples. So, EBITDA minus CapEx, such that we saw many deals, where we believed that the operating cash flow leverage was between 10 and 14 times with LIBOR and SOFR under 1%. Those deals worked in terms of cash flows, despite the very high cash flow leverage. But with SOFR having increased 400 basis points so LIBOR as well. Our belief based on what we’ve seen, because we’ve been shown some of those deals, again, is that a lot of companies that were done at higher leverage, are now running into trouble servicing their debt on an operating cash flow basis. And we believe those companies are more likely to start having to pick some of their payments. We did not do many or any of the deals at those high leverage levels. And as a result, we are particularly well positioned compared to others who did that to keep our deals on cash pay interest. And so, for the vast majority of our accounts, we continue to be cash pay on either -- all where the vast majority of the interest payments. And again, with average leverage around four times on the deals that we’ve done, even with SOFR at 4% to 5%, or even if SOFR goes up to 6%, we believe the majority of our portfolio companies will continue to be able to pay cash interest to us and we will not have to resort to PIK.

It appears that we have no further questions at this time. I will turn the program back over to our presenters for any additional or closing remarks.

I appreciate everybody taking the time. As always, we are happy to provide as much transparency into our portfolio and management as we can. We invite shareholders or analysts to communicate with us ahead of these public earnings calls to let us know what type of information you’d like to see. And we do make ourselves available to the analyst community to answer questions outside of this call. So again, thank you very much and we hope to share positive performance in Q4, depending on what happens over the next couple of months. Thank you much.

That concludes today’s teleconference. Thank you for your participation. You may now disconnect.