WhiteHorse Finance, Inc. (WHF) Earnings

Management highlights

- Shareholder Value Initiatives - Paused share repurchases in late May 2026 after repurchasing 345,000 shares for $2.6 million (weighted average price of $7.42 per share) during the quarter, balancing the accretion benefit of buying discounted shares against increased leverage and reduced capital for new investments. $9.5 million of capacity remains under the current repurchase authorization, and management will continue assessing future repurchases. - The advisor extended a temporary voluntary incentive fee waiver for Q3 2026, cutting the rate from 20% to 17.5% to support distributable earnings. The waiver will be reassessed for future periods based on market conditions. - Officers and directors continued open market share purchases during the quarter, signaling alignment with shareholder interests and confidence in the company's underlying value. - Portfolio Activity & Performance - Gross capital deployments totaled $25.4 million in Q2, with only $2.2 million in repayments/sales, resulting in net deployments of $23.2 million before JV transfers. Deployments included 3 new originations totaling $23.1 million and add-on funding for 5 existing portfolio companies. - 98.8% of the BDC's debt portfolio is first lien senior secured, with 40% of the portfolio (at fair value) allocated to non-sponsor investments and 60% to sponsor-backed investments. The weighted average effective yield on income-producing debt investments held steady at 10.8% in Q2, while overall portfolio yield rose slightly to 8.8% from 8.7% in Q1. - No additions or removals from non-accrual status during the quarter; non-accrual investments represented 3.6% of the BDC's debt portfolio at fair value (flat quarter-over-quarter) and 6.9% at cost, down from 7.2% in Q1. The four non-accrual issuers were Camarillo Fitness Holdings, New Cycle Solutions, Outward Hound, and PlayMonster. - Two restructured equitized credits (Chase Products, PlayMonster) delivered positive operating performance driving net markups this quarter: Chase Products, acquired in 2023, grew EBITDA from negative to a low positive double-digit run rate, leading to a $4.8 million markup; PlayMonster, acquired in 2022, returned to positive growing EBITDA, leading to a $0.4 million markup. Both currently generate limited cash income, but future realizations will convert equity value to cash for reinvestment into income-producing assets to support core NII. - Subsequent to quarter end, Outward Hound completed a restructuring: Whitehorse converted most debt to equity, gained majority ownership and board control, and the restructured term loan returned to accrual status (positive for Q3 NII). - Market Observations & Originations Strategy - Current market conditions are more attractive than 12-18 months ago: negative press for direct lending has reduced competition from large players, increased valuation scrutiny, and pushed leverage multiples 0.5-1x lower, with spreads 25-50 bps higher, especially for sponsor deals. Most new sponsor deals are priced at SOFR + 475-550 bps, below 50% loan-to-value, and include stronger covenant and LME (liability management execution) protection. - The company is pivoting to mid-market and upper mid-market deals, where pricing and risk-return profiles are more favorable than smaller lower mid-market deals, which no longer command a historical risk premium due to competition from new entrants needing to deploy capital. - Pro forma for post-quarter JV transfers, STRS-JV capacity is fully utilized, so new deals will only be added to the JV as existing investments are repaid. The BDC balance sheet currently has ~$10 million of capacity for new assets.

Guidance

- Management maintained the Q3 2026 base distribution at $0.25 per share, consistent with the prior quarter's distribution rate. Distribution levels will continue to be evaluated based on portfolio core earnings power and other relevant market/company factors going forward. - Management expects potential monetizations of one or two restructured equitized positions (Chase Products/Starco and Naviga) in the second half of 2026, with potential upside to current marked valuations if banker estimates hold, but notes no guarantee of closing by year end due to geopolitical volatility. A potential PlayMonster monetization would not occur before early 2027, following full year 2026 results. - An Outward Hound exit is not expected before 2028, as management will spend 2026-2027 implementing turnaround and growth initiatives. Additional share repurchases in Q3 2026 remain undecided, as current leverage is already at target levels after prior repurchases. - The company is on track to do 40-50% higher origination volume in 2026 than 2025, as management views current market conditions as more favorable for underwriting attractive risk-adjusted returns.

Segment performance

Whitehorse Finance operates as a single-segment business development company focused on direct middle market lending, with a co-investment joint venture STRS-JV. For Q2 2026: the BDC's standalone total investments had a fair value of $569.2 million, up $26.2 million from Q1 2026's $543 million. GAAP net investment income and core net investment income (NII) were both $4.7 million (21.7 cents per share), down from $5.6 million (25.3 cents per share) in Q1. Net asset value (NAV) per share rose 2.6% to $11.77 from $11.47 at the end of Q1, driven by net realized and unrealized gains of 26.5 cents per share and 6 cents per share of accretion from share repurchases, partially offset by a 3.3 cent per share distribution shortfall. Net realized losses totaled $0.1 million, while net unrealized gains totaled $5.8 million, for an aggregate net gain of $5.9 million. The STRS-JV segment had an aggregate fair value of $340.3 million across 43 issuers at the end of Q2, up from $327.1 million across 41 issuers in Q1, with an average effective yield of 9.8% (down slightly from 9.9% in Q1) and generated $3.2 million of income for Whitehorse in Q2, down from $3.6 million in Q1.

Risks & headwinds

- Geopolitical volatility can disrupt M&A activity and delay planned asset monetizations, creating uncertainty around the timing of expected realizations and subsequent reinvestment of proceeds. - The quarterly distribution currently exceeds core net investment income, creating a distribution shortfall that will persist until restructured equitized positions are monetized and proceeds reinvested into income-producing assets. - Liability management execution (LME) risk remains a concern, where troubled companies can issue super senior debt that displaces existing secured lenders and erodes collateral value. While the company has added LME protection to nearly all recent deals, unmitigated LME risk in legacy positions could lead to unexpected losses. - Lower mid-market sponsor deals currently do not price in an appropriate risk premium for smaller company risk, compressing expected returns for deals in that segment. New entrants desperate to deploy capital continue to underprice risk in this segment, sustaining unfavorable pricing dynamics. - The company has $85 million of unsecured notes maturing in December 2026, and while management is evaluating refinancing options, unfavorable market conditions could increase refinancing costs or limit access to refinancing capital. - Software portfolio companies face downside risk from potential AI disruption, though the company's exposure to the sector is modest (10.5% of portfolio at cost).

Analyst Q&A

• Q: Hong Zhang (JPMorgan) asked for additional detail on the potential timing and size of the realizations management referenced for the second half of 2026. /

  A: Management said the most likely H2 2026 realizations are Chase Products (Starco/Pressurized Holdings) and Naviga. Both are performing well, are currently marked at or below what investment banks indicate are reasonable sale values, so there is potential upside to current NAV if the sales complete. Both sale processes are currently moving forward, though geopolitical volatility creates uncertainty around closing by year end. PlayMonster could see a sale process in early 2027 if full year 2026 results are strong, with any proceeds from all realizations available for reinvestment in new income-producing assets or share repurchases.

• Q: Zhang also asked if there is a specific discount to NAV threshold that would make share repurchases more attractive in the near term. /

  A: Management noted that lower share prices (higher discounts) do make repurchases more accretive, but after prior repurchase activity, the company's leverage is already at target levels. This means additional near-term repurchases are still an open question, with no commitment to resume activity in Q3.

• Q: Robert Dodd (Raymond James) asked for the expected timing of an Outward Hound realization following its recent restructuring. /

  A: Management said that while an unexpected attractive strategic offer could lead to an earlier exit, the turnaround for newly restructured credits like Outward Hound is typically a 2-3 year process. Absent an unsolicited bid, an exit is not expected before 2028, with management focused on implementing organic growth, inorganic growth, and cost optimization initiatives to build long-term value.

• Q: Dodd also asked what would need to change for the lower mid-market to return to its historical premium pricing for incremental smaller company risk. /

  A: Management explained the current lack of premium is driven by new entrants to the lower mid-market that need to deploy capital and regularly undercut market pricing to get deals done. The dynamic will only balance out if these new entrants either deploy all their capital or fail to raise new capital. In the meantime, Whitehorse is simply pivoting away from lower mid-market sponsor deals to more favorably priced mid- and upper mid-market opportunities, so the current dynamic does not hurt performance.

• Q: Christopher Nolan (Lattenberg) asked what equity ownership Whitehorse holds in the turnaround success Chase Products. /

  A: Management confirmed that Whitehorse owns nearly 100% of Chase's equity outside of small management incentive awards, and controls the company's strategy and management team, so nearly all upside from a sale will flow to Whitehorse shareholders. Joyson Thomas added that for 1940 Act regulatory purposes, Chase is not classified as a controlled portfolio company of the BDC.