To all sites on hold, we appreciate your patience, and we ask that you please continue to stand by. Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Third Quarter 2024 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyceann Thomas, Chief Financial Officer. Today's call is being recorded and will be made available for replay Eastern Time. The replay dial-in number is 402-220-6085. No passcode 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. It is now my pleasure to turn the floor over to Robert Ringberg of Rosen Company. Please go ahead.

Thank you, Jamie, and thank you everyone for joining us today to discuss WhiteHorse Finance's third quarter 2024 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, there 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 2024 earnings presentation, which was posted on our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Rob. Good morning, everybody. Thank you all for joining us today. As you are aware, we issued our earnings this morning prior to market open. I hope you have had a chance to review our results for the period ending September 30, 2024, which could also be found on our website. On today's call, I will begin by addressing our third quarter results and current market conditions. Joyceann Thomas, our Chief Financial Officer, will then discuss our performance in greater detail. Afterwards, we will open the floor for questions. Our results for the third quarter of 2024 were disappointing as our investment portfolio declined this quarter due to net realized and unrealized losses, which impacted our financial performance. Q3 GAAP net investment income and core NII was $9.2 million or 39.4 cents per share, which exceeded our quarterly base dividend of 38.5 cents per share but was slightly below Q2 GAAP and core NII of $9.3 million or 40 cents per share. NAV per share at the end of Q3 was $12.77, representing a 5.1% decrease from the prior quarter. NAV per share was impacted by net markdowns in our portfolio totaling $15.9 million, the majority of which related to markdowns on American Crafts and Honors Holdings, which I will discuss shortly. Turning to our portfolio activity in Q3, we had gross capital deployments of $51 million, which was partially offset by total repayments and sales of $30.2 million, resulting in net deployments of $20.8 million. Gross capital deployments of $51 million consisted of seven new originations totaling $49 million, with the remaining $2 million used to fund four add-ons to existing investments. Of our seven new originations in Q3, three were non-sponsor and four were sponsor deals, with the average leverage of approximately 4.13 times debt to…

Thanks, Stuart. And thank you everyone for joining today's call. During the quarter, we recorded GAAP net investment income and core NII of $9.2 million, or 39.4 cents per share. This compares with Q2 GAAP NII and core NII of $9.3 million each, or 40.5 cents per share, as well as our previously declared quarterly distribution of 38.5 cents per share. Q3 fee income was lower quarter over quarter, approximately $0.3 million, compared with $0.4 million from the prior quarter. Q3 amounts are primarily comprised of prepayment and amendment fees. For the quarter, we reported a net decrease in net assets resulting from operations of $6.9 million. Our risk ratings during the quarter showed that approximately 75.1% of our portfolio positions either carried a one or two rating, slightly higher than the 74.4% reported 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 such initial expectations. Regarding the JV specifically, we continue to grow our investment. As Stuart had mentioned earlier, in the third quarter, we transferred three new deals and one add-on to the STRS JV, totaling $15.1 million. As of September 30, 2024, the JV's portfolio held positions in 38 portfolio companies with an aggregate fair value of approximately $309.8 million, compared to 38 portfolio companies with an aggregate fair value of $324.8 million as of June 30, 2024. The investment in the JV continues to be accretive to the BDC's earnings, generating a mid-teens return on equity. During Q3, total investment income recognized from our investments in the JV aggregated to approximately $4 million, which compares with approximately $3.9 million in Q2. As we have noted in prior calls, the…

Thank you. At this time, if you would like to ask a question, please press *1 on your telephone keypad. We will take our first question from Melissa Wedel with JPMorgan. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to follow up on your comments about the deal environment. Specifically, you mentioned that this fourth quarter may not be as robust as typically seen in that seasonally busy quarter, but the repayments are expected to be elevated. It sounds like we should be thinking about modest portfolio deleveraging over the next few quarters. Am I hearing you correctly there?

I would tell you that based on the mandate that we have, without clarity as to whether they will all close, if most of them do close, they should match up in balance with any repayment activity that we currently see. So I do not see leverage getting lower. That said, we have a lot of undeployed capacity both on the BDC balance sheet, which is targeted for assets priced at SOFR 600 and greater, and on the JV where there is $90 million of capacity. Those are for assets that are priced under SOFR 600, which would typically be the sponsor deals in today's market. And I am not sure, given the relative balance of deal volume, that we are going to be able to deploy much of that excess capacity here in Q4. I do not think based on what we see right now that we would have shrinkage of portfolio size. I would personally estimate based on current volume stability.

I appreciate that. I know it is difficult to estimate that with any degree of accuracy, really looking ahead. I understand there are a lot of moving parts. I think one of just second question. You know, there has been a lot of focus on the quality of investment income across the industry and the percentage of PIK income in particular as a function of total revenue. You know, when you look across the portfolio, it seems sort of a gradual increase over time over the last four quarters maybe in PIK income as a percentage of total revenue. I just want to understand how you are thinking about that, how it informs new deals that you put on the balance sheet, and how you manage any investments that are opting for PIK income and what that means for Value Mart or engagement with management. Thank you.

Yes. As it regards new deals, we generally seek either 100% cash income or the vast majority being cash income. As an example, the Westinghouse deal that we put in a couple of quarters ago had a little bit of PIK, but it was SOFR 550 cash plus 100 basis points of PIK. Most of the PIKs that we have in the portfolio relate to troubled accounts that we are looking to turn around. And we try to be very realistic if we are PIKing interest, but a company is moving in the wrong direction, and the likelihood of collecting that interest is in doubt. We take the asset on non-accrual as we did with Telestream. As I highlighted in my prepared remarks, Telestream still has a significant amount of EBITDA, but the amount of EBITDA is not supportive of the current debt load. So the lenders are likely to take over that credit, restructure the debt, and most of that debt or the debt either all or most of the debt that we come back onto the balance sheet would come on as cash pay debt would be our expectation, or at least it would be cash pay debt within a quarter or two. Thank you.

Once again, ladies and gentlemen, that is *1 to ask a question. We will hear next from Robert Dodd with Raymond James.

Hi, guys. Joyceann, you gave us the spillover number. I wrote down 26, but I think I might have written down the wrong number. Can you repeat what that is?

Robert, $26.8 million. Pro forma for the special.

Yeah. Got it. Got it. Thank you. Then, Stuart, your comments about how aggressive the market is. I mean, talking about deals being done at origination for middle market, along their mark, companies, a fixed charge coverage ratios below one. I mean, how long do you think that competitive environment can sustain itself? I mean, is it the aggressive down is just betting on growth? Or, you know, underwriting on those kinds of terms seems somewhat problematic.

Yeah. I mean, Melissa's point about PIK interest in general really gets to that point, Robert. Where people are structuring deals that have the ability to PIK part or all of the coupon of the deal in order to accommodate the fact that the cash flows of the company cannot service the debt load. I would say, yes, you are right. The people are predicting growth, which is one of the ways that they will dig themselves out of the less than 1.0 fixed charge coverage hole. But more than that, people are very much expecting SOFR to decline. Candidly, we are, as I highlighted, more skeptical of the yield curve right now. Given what we understand to be pressures that are likely to be on the economy that will be reinflationary. That is not to say we do not think there will be some more small cuts from the Fed in the near term, but we are skeptical that a year to two years from now, SOFR is as low as the yield curve is indicating. And I would say that the move in the ten-year treasuries yesterday was an indication that the market is starting to see some of the same things that we are seeing. So we are sticking to our knitting. The catch-22 is on the stronger non-cyclical credits, the leverage levels and fixed charge coverage levels are very challenged. On the more cyclical credits, the leverage levels are obviously lower. But we get very nervous putting more than three and a half or four times leverage on a cyclical credit. And the market at the moment is in many cases, well in excess of that. So we have turned down, walked away from, or lost a lot of deals in the market right now because we just think people it is not so much a price issue because we do not think we are going to walk away from a good deal based on price. But it is the fact that people are putting anywhere from a half a turn to, in some cases, a turn and a half too much leverage on credits. And that is why we redoubled our efforts in the non-sponsor sector where leverage is much lower and we hope to book a higher ratio of non-sponsored deals while the markets remain this aggressive.

Thank you for that, Tyler. One more if I can. On American Crafts, your historic track record has been to try and stay with a troubled credit long term and work it out, turn it around, and hopefully get a full recovery. Sounds like American Crafts have obviously lost a material customer, but it sounds like you have taken another look at that credit and decided that is not a viable strategy and a sooner exit might be better. So, I mean, is it just the change of, I mean, just the loss of the material customer, is there something else that has changed there in terms of your decision-making of maybe not sticking with it and working it out further versus a quick sale?

Yeah. Robert, you are exactly right. We have a very strong track record of taking over credits and turning them around and getting to full recovery. When we had to take over American Crafts because it ran into liquidity problems, we did inject additional capital into the company to bring the trade current and to get product shipped and to increase our fill rates. But given the challenges the company was facing, which we were addressing, the loss of the major customer took the revenue base of the company down low enough that we do not see a path for a real recovery of that company as a standalone entity. And it would take an injection of more capital into the company to have a shot to turn it around. And at this point, we do not think that that would be money that would be well invested. So we are exploring a sale of the company to strategic players who are the logical ones to own it. We do not think the company is going to be able to be significantly profitable on a standalone basis. So it is not consistent with our history of successful turnarounds. This would be, unfortunately, a failed turnaround, and that is why I characterized the NAV for the quarter as disappointing. And we are very disappointed. And we are, on other accounts, including Telestream and Honors, working very hard to turn those around. And get to what we have done historically is not only getting our money back but getting a gain on many of these credits that we have to take control of. And we do work with HIG Private Equity Resources to make sure that we execute on management changes, cost cuts, and revenue growth opportunities on those turnaround accounts.

Got it. Thank you.

We will turn now to Bryce Rowe with B. Riley. Please go ahead.

Good morning, Stuart.

Hi there. How are you, Bryce?

Doing well. Good. Hey. I wanted to ask about your comment around redoubling on the non-sponsor effort. You know what? And you guys have talked quite a bit about over the years, you know, the resources you have across the country within different markets to drive deal flow. When you talk about redoubling, I mean, what exactly does that mean?

It means that we have regular dialogue with our originators in our twelve regional locations, indicating to them that chasing on-the-run sponsor deals in today's market is likely to be low productivity. And asking them to work on developing more of the non-sponsor opportunities. That involves talking to CEOs, CFOs, deal brokers, lawyers, accountants, wealth managers. In fact, in support of that non-sponsor marketing activity, I find myself in Denver this morning where I joined our new Denver originator last night for a non-sponsor origination effort that was targeted at about thirty-five or forty deal professionals in this Denver market. And so things like that that I did last night, along with a number of efforts being taken by other members of the team, have resulted in us doing a higher percentage of non-sponsored deals than we did in 2022 or 2023. So in a normal market environment, we see somewhere between twenty to thirty percent of our deals being non-sponsor, but in this market environment, any given quarter, thirty to fifty percent of our deals are non-sponsor.

Yep. And, I mean, if you look across, at least in the deck that you have here, pretty consistent, you know, two-thirds, one-third, you know, sponsor versus non-sponsor. What over time, you know, kind of assuming some of these competitive dynamics do not really shift and certainly they likely will. But is there maybe a renewed effort to permanently take that non-sponsored level higher within the portfolio, especially thinking about the better pricing and better terms that you get with it?

Yes. I would say that is likely. At the moment, virtually all sponsor deals are priced below SOFR 600. So the sponsor deals that we are doing will almost all, not necessarily 100%, but almost all be targeted for the JV. And it will be primarily non-sponsored deals that will be going onto the BDC balance sheet. So if market conditions persist in their current manner, I would expect to see the ratio of non-sponsored deals in our portfolio raised over the next quarter to five quarters.

Okay. And one more for me. In terms of that non-sponsor market, what is the competitive dynamic like there? Are you running into other public BDCs or different capital providers?

If you get into the upper mid-market and large-cap market on non-sponsored deals, you see a number of historically sponsor-oriented players seeking volume because of how the markets are, and in some cases, underpricing those deals. But in the core mid-market and lower mid-market, where sourcing non-sponsor deals is a very organic and labor-intensive effort because the big banks do not intermediate those deals, we see very limited competition. There are other players who participate in the sponsor mid-market lower mid-market, they include names like, Comcast, MGG, and Goldman to name three. But there is no one competitor that we see consistently in that market. And a lot of the mid-market and lower mid-market non-sponsor deals that we work on, we are working on a negotiated basis without any direct competition on the transactions. That is not to say there is not a recognition of those clients as to what market pricing is, but there is, again, very limited competition in the non-sponsor space for organic origination, as compared to the sponsor space. In fact, I would tell you there are twenty times more players in the sponsor space than there are in the non-sponsor space.

Okay. Last one for me. When we are looking at the yield compression for the quarter, you know, it looks like seventy basis points, seven-zero basis points. Any sense for how to think about that, you know, spread compression versus, you know, interest rate or lower base rates? What the impact is?

Lower base rates, I mean, Joyceann, you can confirm it. I think they were about fifty basis points of the seventy compression. But we are seeing a combination of lower base rates and lower spreads. We, on both our sponsor and non-sponsor deals, have during favorable market environments, always sought to maximize our call protection. And so we typically get at least two years of call protection on sponsor deals and three to four years of call protection on non-sponsor deals. And that has been protecting some of our higher spread deals in the portfolio. But as time passes, you know, you have got an entire year now where market pricing has been lower. And so as those call protections either roll off or step down, we are going to see increased pressure to reprice deals to the current market level. And that market level is down a hundred to a hundred and fifty basis points from where it was in mid-2022 and mid-2023.

Okay. That is not just for us. I believe that is true across the market, both sponsor and non-sponsor, where pricing has fallen more in the sponsor market than it has in the non-sponsor market, and I believe that all of our competitors are dealing with a similar dynamic.

Yep. Okay. Appreciate all the commentary. Thank you.

Once again, ladies and gentlemen, that is *1 to ask a question. There are no further questions at this time. Ladies and gentlemen, that will conclude our question and answer session and the WhiteHorse Finance third quarter 2024 earnings call. Thank you for your participation. You may disconnect your line at this time, and have a wonderful rest of your day.

Thank you.