Good afternoon. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Third Quarter 2023 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 p.m. Eastern Time. The replay dial-in number is (402) 220-2978. No pass code is required. [Operator Instructions]. It is now my pleasure to turn the call over to Jacob Moeller of Rose & Company. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Third Quarter 2023 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 2023 earnings presentation, which was posted to our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Jacob, and good afternoon, everybody. Thank you all for joining us today. As you're aware, we issued our earnings this morning prior to market open, and I hope you've had a chance to review our results for the period ending September 30, 2023, which can also be found on our website. On today's call, I'll 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. This afternoon, I'm pleased to report strong performance for the third quarter of 2023 and Q3 GAAP net investment income and core net income was $10.8 million or $0.465 per share, which more than covered our quarterly base dividend of $0.37 per share. This represents an increase from Q2 GAAP and core NII of $10.6 million or $0.456 per share and an increase of over 10% year-over-year. As you may have seen in our press release this morning, the Board of Directors of the BDC approved an increase to our quarterly base dividend from $0.37 per share to $0.385 per share starting in Q4 of this year. The Board of Directors also improved a decrease in the base management fee rate paid to HIG WhiteHorse Advisors LLC, the BDC sponsor, from 2% to 1.75% effective January 1, 2024. This will have a further positive effect on our financial results and our ability to cover the increased base dividend on a go-forward basis. NAV per share at the end of Q3 was $13.87, representing a 0.9% decrease from the prior quarter NAV per share was negatively impacted by $5.4 million of net mark-to-market losses in our portfolio. These markdowns are related to company-specific performance and some of our consumer-facing portfolio…

Thanks, Stuart, and thank you, everyone, for joining today's call. During the quarter, we recorded net investment income and core NII of $10.8 million or $0.465 per share. This compares with Q2 GAAP NII and core NII of $10.6 million or $0.456 per share and our previously quarterly distribution of $0.37 per share. Q3 fee income decreased quarter-over-quarter to $0.4 million in Q3 from $0.9 million in Q2. Q3 amounts are highlighted by amendment fees generated from investments in our holdings, lab logistics and [indiscernible] as well as a $0.1 million prepayment fee from PFB. For the quarter, we reported a net increase in net assets resulting from operations of $5.6 million. Our risk ratings during the quarter showed that 78.2% of our portfolio positions carried either 1 or 2 rating, slightly higher than the 76.3% reported in the prior quarter. As a reminder, a 1 rating indicates that a company has ceded risk of loss reduced relative to initial expectations and a 2 rating indicates companies performing according to initial expectations. In the quarter, we also downgraded our investments in Play Monster to a 5 rating, and this is the only investment that carries a 5 risk rating across the portfolio. Regarding the JV specifically, we continue to grow that investment. As Stuart mentioned earlier, we transferred 2 new deals and 1 add-on transaction totaling $8.8 million in exchange for cash proceeds of $5.1 million and a $3.7 million in-kind investment in the JV. As of September 30, 2023, the JV's portfolio helped positions in 32 portfolio companies with an aggregate fair value of $313 million compared to 32 portfolio companies at an aggregate fair value of $324.5 million as of June 30, 2023. Subsequent to the end of the quarter, the company transferred 3 investments to the JV,…

[Operator Instructions] We will take our first question from Mickey Schleien with Ladenburg.

Stuart, in the upper middle market, we're seeing somewhat of a dislocation in terms of supply and demand where by the CLO market is bumpy, closed at times, but there's a lot of private debt capital available, but M&A volumes are down and due to interest rates as high as they are and economic uncertainty. So that's causing spreads to decline somewhat. I'm curious whether that's trickling down into the middle market and lower middle market where you tend to operate?

Yes, Mickey, you're exactly right, and spreads have moderated a bit. I would say, over the course of the year, we've seen compared to the end of 2022 we've seen spreads come down 50 to 75 basis points. That said, we're doing senior secured deals at the top of the capital structure usually with covenants and we're generally commanding yields, including the amortization of the closing fee of about 12% or even 13% and on a historical basis, being able to do senior debt at 12% to 13% is extremely, extremely attractive, which is, of course, one of the reasons why what you said is true that M&A activity is slowed down because senior debt is so expensive. But yes, we have seen spreads moderate a bit, but we still see this market environment as being very attractive because most lenders in the marketplace are concerned around economic softening next year. And as a result, the underwriting standards being applied in the market are much more appropriate and balanced than they were in advantage like 2021. So overall, we see very attractive risk return in this market. And as I mentioned earlier, volumes have picked up very significantly for us in Q4, and we have 15 or more deals that we're actively working on with mandates trying to get them closed.

Stuart, in terms of those volumes, and you may have mentioned this in the prepared remarks, but is that being stimulated by sort of more acceptance of the current rate environment, the higher for longer regime and at least the understanding amongst investors that there's less uncertainty as to where rates may go over the medium term? Or is there something else that's driving that increased volume?

We think the increased volume is due to a combination of factors. Number one, are demonstrating strong appetite for low cyclicality companies. So enterprise valuations on those companies have been very strong. We've seen companies selling for 12 to 17 times if they're noncyclical. And now that, that's going on, there are more people willing to come to market to sell. There has also been an acceptance among people who own cyclical companies, but those companies are probably worth 1 to 2 turns less than they were 1.5 years, 2 years ago. And that acceptance by sellers that valuations on cyclical companies have come down is helping more transactions actually occur. We're seeing the cyclicals trade, Mickey, at 6.5 to 8x. We're seeing light cyclicals trade typically 9 to 11x, and we're seeing noncyclicals trade typically 12 to 17.

We'll take our next question from Melissa Wedel with JP Morgan.

I wanted to dig into the decision to lower the base management fee from 2% to 1.75%, certainly something I expect shareholders will applaud. I'm curious how your team got to 1.75%. Did you consider other levels? Can you just walk us through that?

Sure. The Board of Directors did an analysis of the BDC market in general, but also an analysis of comparable BDCs who were similar in size to us and also similar in mission of what they do. And we concluded that 1.75% was the appropriate -- or the Board decided that the appropriate market level was 1.75% to manage and run the company for that lower fee.

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

One other question, in your prepared remarks, you expect a mild to potentially monitor recession in 2024, which -- that's wide nature of things that could happen in 2024 once no recession or maybe moderate. How much does that view affect your concerns about, for example, [indiscernible], some of the more stressed credits. So the more stress the credit is before a session, the more trouble it's likely you have in one. So would you say -- if there is no recession, would you say that as with that have a material positive changing your view on outlook for those stress credits? Or could you give us any indications there?

American Crafts and Play Monster are both already suffering from a softness in consumer demand that has been going on for a while now. We are working with both of those companies to cut costs and optimize value. And if there is a stronger economy next year than we're currently envisioning that could be positive for both of those credits, which are driven or impacted directly by consumer appetite. But we do think we have those assets marked as of the end of the quarter at levels that were reflective of current market conditions. And as I indicated, those current market conditions are pretty soft.

Got it. I appreciate that. And then on the 1 and 3 quarters, let that and more the over 1 turn leverage, the 1 and a quarter. That's -- there's not a lot of comps that are one in the quarter. I had the 1 or 3 quarters I can see the 1 or 2 quarter -- I mean, those that have a lower management fee over return leverage tend to be 1. So can you give us any thoughts on why a quarter there? I mean, it's marginal, right? Because obviously, on price a very small piece of the capital base in effect. But any thoughts on why that relative to most in the industry, one, if they have anything on that front?

Yes. All I can tell you is that in discussions with the Board the reduction on the core management fee from 2% to 1 or 3 quarters was considered to be the main focus and the Board felt comfortable that the 1.25 on assets over 1x leverage was a reasonable rate given what we do and the labor content that goes into the transactions that we originate making. Talking about, Mickey -- I'm sorry, Robert.

And one last one for me. On the nonsponsor piece of the portfolio, which is down to basically 1/3 now, I think, if I'm in the right slide on the first Page. What would you expect over the next 12, 24 months, would you expect that to rise? Or is that going to continue relatively speaking to decline as a share of the portfolio on a forward basis here?

Our originations pipeline has been and continues to be about 1/3 nonsponsor and 2/3 sponsor. So I would expect that ratio in the portfolio to remain fairly stable based on what we're seeing right now.

We have reached our allotted time for questions. I will turn the program back over to our presenters for any additional or closing remarks.

I appreciate everybody's time today. As always, if there are more questions that we can answer, we're happy to answer them either off-line or get indications prior to the calls of the types of things that shareholders or analysts would like to hear from us. We want to be as transparent as possible and we'll continue to do that going forward. So thank you, everyone, for your time.

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.