WhiteHorse Finance, Inc. Q3 FY2024 earnings call

• Q3 results were disappointing due to net realized and unrealized losses in the investment portfolio.
• Portfolio activity: gross capital deployments of $51 million, with total repayments and sales of $30.2 million, resulting in net deployments of $20.8 million.
• NAV per share was impacted by net markdowns in the portfolio totaling $15.9 million, mainly from American Crafts and Honors Holdings.
• Issues with American Crafts: $6.6 million write-down, seeking restructuring or sale after losing a material customer.
• Honors Holdings: $5 million write-down, placed on non-accrual, working on restructuring.
• Telestream: $0.9 million write-down, placed on non-accrual, expecting part of the loan back on accrual within two quarters.
• Lending market: sponsor segments are aggressive with thin deal flow and compressed pricing; non-sponsor market offers better risk-return and less competition.
• Fourth quarter volume likely modest, with repayments expected to remain elevated into 2025.
• Post-quarter-end activity: closed new investment and add-ons totaling $7.5 million, repayments of $21 million; BDC balance sheet has $45 million capacity for new assets, JV has $90 million capacity.
• Distributions: Q4 dividend of 38.5 cents per share, special distribution of 24.5 cents per share, spillback income estimated at $26.8 million.

In the third quarter of 2024, WhiteHorse Finance's GAAP net investment income and core NII was $9.2 million or 39.4 cents per share, which exceeded the quarterly base dividend but was slightly below Q2's $9.3 million or 40 cents per share. NAV per share at the end of Q3 was $12.77, a 5.1% decrease from the prior quarter. Portfolio activity included gross capital deployments of $51 million, partially offset by total repayments and sales of $30.2 million, resulting in net deployments of $20.8 million. The STRS JV had an aggregate fair value of $309.8 million at the end of Q3 with an average unlevered yield of 11.7% and leverage of 0.97 times. 99% of the debt portfolio was first lien, senior secured, with a portfolio mix of approximately 63% sponsor and 37% non-sponsor. Non-accrual investments totaled 5.0% of the total debt portfolio.

• Fourth quarter volume is likely to be modest compared to other fourth quarters.
• Repayments are expected to remain elevated for the balance of 2024 and into 2025.
• Pipeline has about 185 deals, with seven new mandates and four add-ons to existing deals.
• Evaluate quarterly distribution based on core earnings power of the portfolio and other relevant factors.

• Investment portfolio markdowns impacting NAV.
• Aggressive lending market leading to thin pricing and excessive leverage on some credits.
• Economic softening and potential inflation pressures from government policies affecting interest rates.
• Challenges with troubled investments such as American Crafts, Honors Holdings, and Telestream.

Q: Melissa Wedel asked about the deal environment, specifically if there would be modest portfolio deleveraging over the next few quarters.

A: Stuart Aronson said based on current mandate, if most close, they should match repayment activity, not seeing leverage getting lower but having undeployed capacity.

Q: Robert Dodd asked about the spillover number and market aggression.

A: Joyceann Thomas repeated the spillover number as $26.8 million. Stuart Aronson discussed aggressive market conditions, PIK interest, and focus on non-sponsor sector.

Q: Bryce Rowe asked about redoubling on non-sponsor effort, competitive dynamics, and yield compression.

A: Stuart Aronson explained redoubling involves targeting non-sponsor opportunities, limited competition in non-sponsor space, and yield compression due to lower base rates and spreads.