Good afternoon. My name is Angela, 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 2023 Earnings Conference Call. Our hosts 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) 220-2985. No pass code is required. 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 Jacob Moeller of Rose & Company. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's fourth 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 Fourth 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 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 December 31, 2023, which can also be found on our website. On today's call, I'll begin by addressing our fourth quarter results and current market conditions. Then Joyson Thomas, our Chief Financial Officer, will 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 fourth quarter of 2023. Q4 GAAP net investment income and core net interest income was $10.6 million or $0.456 per share, which more than covered our quarterly base dividend of $0.385 per share. This represents a slight decline from the Q3 gap and core NII of $10.8 million or $0.465 per share. NAV per share at the end of Q4 was $13.63, representing a 1.7% decrease from the prior quarter. NAV per share was negatively impacted by a $6.8 million of net mark-to-market in our portfolio. Markdowns were related to company-specific performance and were partially offset by markups across four credits, as I will discuss shortly. Turning to our portfolio activity. In Q4, gross capital deployments totaled $56.9 million, with $54.1 million funding eight new transactions and the remaining $2.8 million funding add-ons to existing portfolio investments. This was the highest level of origination activity in 2023 but was slightly below quarters in past year fourth quarters and past years. Origination constraints were primarily a lack of deal opportunities with a slow 2023 M&A environment, leading to a tight deal market. Half our new originations in Q4 were sponsored deals and the other half were non-sponsor deals. The sponsor deals…

Thanks, Stuart, and thank you, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income and core NII of $10.6 million or $0.456 per share. This compares with Q3 GAAP NII and core NII of $10.8 million or $0.465 per share and our previously declared quarterly distribution of $0.385 per share. Q4 fee income increased quarter-over-quarter to approximately $0.6 million in Q4 from $0.4 million in Q3. Q4 amounts are highlighted by a $0.4 million prepayment fee generated from the full realization of our investment in Aeyon and a small amendment fee from motivational marketing. For the quarter, we reported a net increase in net assets resulting from operations of $3.4 million. Our risk ratings during the quarter showed that 77.7% of our portfolio positions carried either one or two rating, slightly lower than 78.2% in the prior quarter. As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to initial expectations and a two rating indicates the Company is performing according to initial expectations. Regarding the JV specifically, we continue to grow its portfolio. As Stuart mentioned earlier, we transferred four new deals and one add-on transaction totaling $26.6 million. As of December 31, 2023, the JV's portfolio helped positions in 34 portfolio companies with an aggregate fair value of $322.2 million compared to 32 portfolio companies at an aggregate fair value of $313 million as of December 30, 2023. Subsequent to the end of the fourth quarter, the Company transferred three investments to the JV, including one new portfolio company. The investment in the JV continues to be accretive to the BDC's earnings, generating a mid-teens return on equity. As we have noted in prior calls, the yield on our investment in the JV may fluctuate…

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg.

Good afternoon, Stuart and Joyson. One question this afternoon, Stuart. You mentioned how aggressive the market has become and spread with tighter spreads at the more liquid end of the continuum, and you're focused now on direct origination, which, as we know, is harder to source and has a longer lead time. So are you comfortable in the BDC's ability to potentially replace all these repayments that you're likely to see with direct origination deal flow in this environment that we're experiencing?

Well, Mickey, I'd start by sharing with you that in 2022 and 2023, which were very favorable markets for lenders to originate deals in, we focused very heavily more than most of our competitors on getting call protection. And on our non-sponsor deals, we got call protection at three to four years. And on many of our sponsor deals, we got call protection of three years or at least two years. So we think that, that -- while repayments will pick up this year, due to M&A activity, we think the repayments due to pricing will be mitigated by the call protection that we got in 2022 and 2023. Our overall volumes in the pipeline right now are pretty solid. And what we hear from the market is that they're likely to pick up based on higher M&A activity being driven by the more aggressive debt markets and the strong desire of LPs to get returns of capital from private equity firms. So, we do think that there will be plenty of volume to replace deals that get repaid. But deals that have been put on in a higher interest rate environment may be replaced with assets that have lower spreads. So in the JV, that could look like deals that were on at 600 being replaced with deals at 550 or 575, and on the BDC balance sheet, that could look like deals that we're at 700 being replaced with deals that are 650 or 675. But there's definitely been a tightening of the pricing market in the sponsor sector. And as we've always shared with you, the non-sponsor sector remains pretty stable with pricing on deals typically between SOFR 650 and SOFR 900.

The next question comes from Bryce Rowe with B. Riley.

Stuart. Let me kind of start with the -- some of the commentary around quarter-to-date -- first quarter-to-date repayment activity. You noted five deals. Curious if those are driven by kind of price refinance? Or are they kind of slated for or were they slated for maturity here in '24 or maybe even driven by some kind of M&A activity?

Well, Bryce, one of the deals was a deal that was maturing and the sponsor owner of the Company not only wanted to refinance the debt, but wanted to take a dividend. And given the credit profile of the Company, we did feel comfortable giving the Company a dividend whereas the other lenders that were in the Company did feel comfortable doing it. So that deal refinanced, but we chose to exit. The other deals that we paid were mostly based on M&A activity where companies were being sold and we were getting repaid on the sale of those companies.

Okay. That's helpful. And then, if you look at kind of your schedule of investments, you have, I guess, a decent amount of maturities in '24. How do you feel about those kind of getting to the finish line? Do you think they can get refinanced within the BDC or do you kind of foresee them moving outside of the BDC?

We have certain assets that we like for the long term based on our expectation of a muted economy in 2024 and '25. And for those situations, we would hope to refinance those companies or follow them to new owners. But we have other companies where we see long-term trend lines that we are less optimistic about. And as these companies come up for refinancing, we will probably not definitely, but probably choose to exit. So there really is a mix based on our credit outlook for each of the deals. But the market is very aggressive right now. And anything that we have that's maturing, that is performing and marked at a normal level, we feel highly confident that the more it will refinance those transactions with no problem.

Okay. Okay. You noted the capacity both at the BDC level and at the JV. Does that capacity -- or let's say, let's ask it this way. The capacity at the JV, is it taking up with the new deals that have already been kind of transferred in there. And is that kind of based on the, I guess, the current equity capital or borrowing base within the JV? And do you have kind of more firepower behind that in terms of being able to invest or commit more capital into the JV?

I believe that the numbers of $50 million for the BDC balance sheet and $40 million for the JV, take into account all the recent transfers that we have done. They do not take into account the deals that are in the pipeline that we are looking to close. And again, all the new deals in pipeline that are looking to close our non-sponsor deals and all of those deals are priced at SOFR 650 or higher. In fact, one of the non-sponsor deals that we closed here in Q1 was at modest leverage and modest loan to value. But because of our origination network, we were able to source an opportunity at SOFR plus 900. So that was -- and that's a first lien deal at normal, what we would call bank terms. So very, very good origination on that.

Yes. Okay. Last one for me. You mentioned some markups within the portfolio. What's driving the markups? By specific, just any thoughts around the markups would be helpful.

Yes. There are certain accounts where there's an improving credit situation. I mentioned earlier that Crown Brands, we may be exiting this quarter. And we have negotiated an exit on that, that if it happens, we'll be -- that deal was marked up in the last quarter. And if we get this transaction done as contemplated, it will be at a price that's even higher than the current mark.

The next question comes from Erik Zwick with Hovde Group.

Good afternoon. I want to -- I wanted to start first with a question on the pipeline, which you've mentioned has a number of attractive opportunities on it and a number in process now. But wondering if you could maybe provide a little additional commentary in terms of the mix in terms of new versus add-on opportunities and also whether there is any kind of common themes you're noticing in times of the type of opportunities and/or kind of by industry or region of the country that you're seeing?

I believe that the mix is about five new platforms and about seven add-on opportunities. The add-on opportunities, for the most part, price above the current market because those deals were done in a higher priced market, although borrowers are looking for adjustments of price based on the fact that the market has become more aggressive. As I mentioned before, all of the new pipeline activity that is mandated right now are non-sponsor deals. And all of those non-sponsored deals are priced at 650 and above, so would be targeted for the BDC balance sheet. And there is no particular sector that we are finding more attractive. I would say what we are seeing, there was recently a deal that was brought to us for a company that we thought was a good company and a scaled company, but it was a cyclical company. And on a cyclical, we don't like putting more than 4x leverage on the Company, and this deal came to us at 5.25x leverage and about 65% loan to value. And we just found that to be a stunningly high leverage multiple and loan to value for a cyclical company heading into what we believe is a weakening economy. And so despite the fact that, that deal was well priced at 650 or above, we walked away from that opportunity. So sticking to our knitting regards a conservative credit outlook and the non-sponsor deals that we're working on, I believe, are all levered between 3x and 4x. So, modest leverage, good cash flow coverages and companies that we believe will be either non-cyclical or light cyclicals.

I appreciate the additional details there. And then just looking at Slide 8 of the presentation, I noticed that the average investment size in the portfolio has come down about $1 million since three quarter -- third quarter of '22. So curious if that's something that you guys have actively been trying to do to work the position size smaller? Or if it's more reflected, as you said, kind of the larger end of the market becoming more competitive? And just curious, would you expect that trend to continue? Just thinking that certainly smaller deals mix is a little bit harder to kind of run in place and keep the portfolio size the same, but also potentially has some benefits in terms of lower concentration to a particular position. So just curious about your thoughts there.

Yes. For a significant portion of the last two years, the BDC has either been full or almost full and not able to take on new deals. So -- we actually feel good about the fact that we're getting some repayments and getting the opportunity to put new deals into the BDC. We definitely believe with our 3-tier sourcing architecture that we are well positioned to continue to bring in a solid flow of deals. We are definitely, as I mentioned earlier, focused in on the off-the-run market and the non-sponsor market, which sometimes do smaller deals and sometimes do larger deals. I would say that in general, over the last quarter, you're correct that the deals we were doing were more lower mid-market deals. And as a result, the average asset allocation to the BDC was a little bit lower. But in general, the most important thing is, we are not putting any large concentrations in the BDC. When I first joined, we had positions that were $35 million or $40 million, which, on a BDC of our size, we thought it was just too much of a concentration and we are going to keep maximum allocations to no more than approximately $20 million going forward with an average allocation that will probably be closer to $8 million to $10 million to give us good diversity across the portfolio.

The next question comes from Melissa Wedel with JPMorgan.

It's possible I missed this but I wanted to check in with you about whether or not you provided a specific amount on the post quarter end new investment activity? I think you said there were $39 million of repayments subsequent to quarter end, but I'm not sure we got a total amount on the origination side.

I think it was five deals closed. But Joyson, do you have how much volume, the new deals and add-on deals represented in this quarter so far?

Yes. In regards to new deployments during Q1, they approximated about $30 million. So I think the way to think about this right now is as of the end of Q4 to Stuart's earlier comments, we had about $50 million of capacity on the BDC balance sheet, taking into account the approximately $40 million of repayments during Q1 and then that gets offset by the $30 million of deployments we just did in Q1 currently right now. So I think that's the way to think about it.

Okay. Okay. That's really helpful. And I wanted to also follow up about your comments on sort of the pipeline. And it sounds -- it's very clear based on your comments today that there is strong preference for the non-sponsored space just because of the terms, the pricing, the leverage levels you can get there right now. Would you say that, that segment is develop -- the pipeline is developing as strongly as sort of the sponsored space? Or is it a little bit tougher to source those?

Non-sponsor business is always much harder to find, much harder and longer to underwrite and frankly, even more complicated from a portfolio perspective. That said, our experience, including during the COVID downturn is that the non-sponsor deals that we do because they're very conservatively structured and levered have performed as well or better than our sponsor portfolio. So we are actively involved in sourcing those non-sponsored transactions. It is frankly, harder to source them than it is to source the sponsor deals which just sort of come out on a regular basis. But we have 22 originators in 11 locations across North America, many of whom understand that their primary responsibility is to source either non-sponsor or off-the-run sponsor deals. And those teams due to the fact that we've had extremely low turnover over the past three years are very experienced in their regions and more broadly. And our pipeline is solid at the moment. The pipeline is certainly not as large as it was in 2021 or even 2022. But it's similar to what it was in 2023. And from what we hear in the marketplace, with the more aggressive terms available in the financing market, there's more M&A activity going on, and that should feed both our sponsor and non-sponsor pipeline.

That's really helpful. I appreciate it. One last one, if I could sneak it in there. So in the non-sponsored space, you mentioned that I think the example that you gave was the owner dividend and to do a refi, you're comfortable with refi, not the dividend, et cetera. Begs the question, in the non-sponsored space, what are you seeing the use of capital as being right now? Is it a lot of refi activity? Or are non-sponsored companies also engaging in M&A?

The non-sponsor deals that we're working on are primarily loans that are targeted to grow companies either organically or through M&A activity. I don't think any of the mandated deals involve dividends. We are always very cautious about doing dividends to either private equity firms or to non-sponsor owners. But -- so these are primarily growth loans. And again, the pickup in M&A activity broadly across the market does serve both the non-sponsor and sponsor deal flow.

This does conclude today's question-and-answer period. I will now turn the program back over to our presenters for any additional or closing remarks.

I appreciate everyone spending time with us on a call today. Recognize that the NII was very strong that the NAV did decrease for the quarter. We do believe that we mark deals on a realistic and conservative basis, which is not necessarily true through the entire BDC industry and we try to be accurate each quarter based on the information we have. That said, the companies that we have marked down, we are using the expertise across WhiteHorse and across H.I.G. to try to turn those companies around. And we do believe that there is a possibility of recovery and potentially significant recovery in both 2024 and 2025 on some of those accounts. So, we will work hard to continue to optimize the portfolio. And as I said in my prepared remarks, the Arcole acquisition transaction was a good example of the deal that we had to own the Company for three years, but we're ultimately able to get out of that one at a 1.2x return to the original capital invested. And with hard work and hopefully, some fortunate luck. We hope to have similar types of recoveries on some of the other troubled assets we're dealing with right now. And that's it. I appreciate everyone's time. Thank you very much.

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