WhiteHorse Finance Inc (WHF) 2013 Q4 法說會逐字稿

Good morning. My name is Lori and I will be your conference facilitator today. At this time, I would like to welcome everyone to the WhiteHorse Finance fourth-quarter and full-year 2013 earnings teleconference.

Our hosts for today's call are Jay Carvell, Chief Executive Officer; Ethan Underwood, Chief Operating Officer; and Alastair Merrick, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 1 PM Eastern Standard Time. The replay dial-in number is 404-537-3406 and the pin number is 35793303.

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 Brian Schaffer of Prosek Partners.

Thank you, Lori, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's fourth-quarter and year-end 2013 earnings results.

Before we begin, I would like to remind everyone that certain statements made during this call which are not based on historical facts, 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.

With that, allow me to introduce WhiteHorse Finance's CEO, Jay Carvell. Jay, you may begin.

Thanks, Brian. Good morning and thank you, everyone, for joining us today. Hopefully you have had a chance to review our press release which was issued before market opened this morning. This quarter marks our first full year as a public company and we are pleased to report a very successful fourth quarter.

I am going to take you through some highlights for the quarter and the year before turning the call over to Alastair to walk you through the financial results.

Before we talk about the quarter, I wanted to quickly summarize our year as a public BDC since our IPO in December of 2012.

We view two of our priorities as a manager to be deployment of capital and preservation of capital and are pleased with the performance of the fund on those fronts during our first year. Looking at deployment of capital, in the last 12 months, we have invested $264 million in new loans and refinancing of existing positions ahead of the goals we laid out during the IPO roadshow. We have successfully drawn on the capabilities in network of professionals at HIG Capital to source opportunities and have expanded our direct origination effort with hires across the country.

Our pipeline remained active throughout the year. As we have stated on previous calls, we do expect intra- and interquarter lumpiness, however, with the benefit of now having a full year to look back upon, we can see that we met or exceeded our goals in terms of putting capital to work over the longer timeframe.

In general, we have experienced what we consider an unusually high rate of refinancings and repayments in the portfolio in the last year, a total of 78% of the beginning principal balance of the portfolio. While much of this can be attributed to general credit conditions, we are pleased with our ability to deal with this and would expect the portfolio we now have to experience a much lower rate of turnover for the coming periods.

Despite those challenging conditions, we were able to grow the portfolio, diversify and mitigate our overall risk, and end the year with a strong pool of credit and a healthy pipeline.

Looking at preservation of capital, our portfolio remains 100% invested in senior unsecured positions. We reduced overall risk by increasing diversification in the portfolio. We were able to replace larger positions including Acella, which was 25% of our portfolio at the time of repayment with smaller investments that still met our risks and return objectives. And though we are evaluating across an admittedly shorter timeframe, we are pleased to report that we had no nonperforming credits or payment defaults.

We were successful in completing the Company's first offering of a debt security, placing $30 million of 6.5% senior notes in July of last year and using the proceeds to reduce outstanding obligations under our unsecured term loan. We believe this successful offering reconfirms the market's confidence in our performance and positions us well for future offerings as we grow.

Finally, despite the lumpiness we saw across the entire BDC spectrum and overall macroeconomic volatility, we were able to return capital to our shareholders, delivering a consistent distribution at the rate of $0.355 per share each quarter. We reduced our payout ratio from 133% at the first quarter of 2013 to a full-year payout ratio of 110%. We expect this to continue to decline as we grow the portfolio.

Let me now spend a moment on Q4 starting first with our investment portfolio. Fair value of the portfolio at December 31 was approximately $272 million, an increase of $58 million from the previous quarter. As you know, our focus is on small and middle market loans to high-quality borrowers. To that end we invested $113 million in the quarter.

Some of the highlights include $97 million invested in five new borrowers, a significant increase over the previous quarter's $31 million. The new investments are in the education services, Internet retail, data processing, and outsource providers, healthcare distributors, and consumer finance industries.

American Gaming Systems refinanced its credit facility this quarter, resulting in a $19.6 million paydown of our position. We subsequently invested $10 million in AGS's new facility, which is now known as AP Gaming. This is the only position in which we participated in a refinancing in Q4.

Our total repayment activity for the quarter came in at $56 million compared to $98 million last quarter. In addition to AGS, the repayment of our general healthcare position was a major contributor to the $56 million number.

The market team has been fairly consistent through the year -- strong investor appetite for credit products that produce current income with a particular weighting towards floating right products. This investor demand helps fuel supply on the manager side, leading to the environment we have been experiencing where spreads are tightening even as credit terms loosen.

As we have stated on previous calls, though, this does not affect us as dramatically in the smaller end of the market as in broader credit markets. It does trickle down somewhat and certainly adds competition in regards to existing competitors and some new entrants.

Our priority remains sourcing high-quality investment opportunities across a broad range of industries. We have worked hard this year to achieve this goal and to diversify the portfolio with a number of suitable, stable investments. Our deal-sourcing network, which is predicated on long-standing relationships in our diligent investment process, allows us to source quality alignments.

Before turning the call over to Alastair, let me conclude my formal remarks by noting that we remain committed to the preservation of capital in our existing portfolio as well as the deployment of capital in new investments while earning an attractive risk-adjusted return.

With that, I will now turn the call over to Alastair. Alastair?

Thank you, Jay, and thank you, everyone, for joining us today. I will now take you through the financial highlights of our earnings which were released this morning before the market opened. We have included the schedule investment in today's press release as it will be several more days before we file our Form 10-K.

Looking at our results for the quarter ended December 31, 2013, we reported net investment income of $4.2 million compared to $6.3 million in the third quarter. You may recall that in the third quarter included the income of $1.9 million primarily from Acella's repayment. Fourth-quarter fee income was $1 million.

As Jay discussed regarding intra-quarter lumpiness, this was also visible with refinancings occurring earlier in the fourth quarter and origination activity taking place closer to year end. Net realized and unrealized gains on investments were $2.2 million. These gains were primarily attributable to improvements in the marks and repayment of loans above their carried value.

For the fourth quarter of 2013, there was an increase in net assets from operations of $6.3 million or $0.423 per share. Expenses for the quarter totaled $4.4 million, primarily consisting of interest expense on our credit facilities of $1.3 million and base management fees and performance-based incentive fees of approximately $2.4 million. Net asset value was $227 million at December 31, 2013, resulting in NAV per share of $15.16, up slightly from $226 million and NAV per share of $15.09 as of September 30, 2013.

Let me turn our attention now to the results for the full year ended December 31, 2013. We don't believe the comparisons to 2012 are meaningful as we are only a public company for a small portion of that year. However, you can see these comparisons in today's earnings release.

For 2013, we reported net investment income of $19.3 million or $1.29 per share. Net realized and unrealized losses on investments were $280,000. There was an increase in net assets from operations of $19 million.

Switching over to portfolio and investment activity, as of December 31st, the fair value of WhiteHorse Finance's investment portfolio was $272.4 million, principally invested in 21 positions across 19 portfolio companies and is entirely comprised of senior secured debt investments. As of December 31, the weighted average current cash yield on the portfolio was 10.9%. All the investments in the portfolio were rated at 2, that is, defined as meeting expectations except for GMT which remains at 3. And there were no note nonaccrual loans at December 31, 2013.

Turning to our balance sheet, as of December 31, 2013, we had cash resources inclusive of restricted cash of approximately $96 million compared with $132 million as reported in the previous quarter. Our cash position and credit lines continue to provide us with sufficient resources to meet our origination goals for the foreseeable future.

At December 31, 2013, the Company had two credit facilities and the senior notes that, on a combined basis, were drawn by approximately $110 million. The Company's asset coverage ratio for borrowed demands as defined by the '40 Act were 306% at December 31st, well above the statutes requirement of 200%.

Let me touch briefly on our distributions. On November 26, we declared a distribution for the quarter ended December 31st of $0.355 per share for a total distribution of $5.3 million. This distribution was paid to stockholders on January 3, 2014. This marks the Company's fifth distribution since our IPO in December 2012 with all distributions at the rate of $0.355 per share per quarter.

With our current cash position and the historical performance of our portfolio, we would expect to be in a position to continue our regular distribution.

This concludes my formal remarks. I will now turn the call over to the operator. We look forward to your questions. Operator?

(Operator Instructions). Ryan Lynch, KBW.

Good morning. I was looking for a little additional color on your investment in GMT. You refinanced the loan and extended the loan last year to one year out, extended to June 2014. This quarter, it looks like you had a little bit of a principal paid on the loan.

I wanted to get a little more color on your thoughts on that repaying that, you trying to reextend that investment a little bit longer. Just a little more color on that.

Sure. Thanks, Ryan. We did have a paydown this quarter and through the year you have seen that loan pay down approximate -- pardon me, in 2013 approximately $14 million. The -- and like you pointed out, we did extent that for a year in the middle of last year. So, we do have that upcoming.

Ethan might want to touch on briefly what we are looking at on that front.

Yes, I think it is still early in the process, but it is fair to say, given our expense last year, that we felt like we can work with the Company to come up with a solution to the extent they are not going to find a lender away from us and they would like to talk about a potential extension or some other alternative.

We tend to have all of our options on the table. We haven't gone in to negotiate with them yet regarding that position, but I expect us to begin those at some point in the future. And given our experience there, I do think we will come up with a solution that works for everybody.

Okay, great. Also, the new loans you originated this quarter were quite a bit lower than historical loans in your portfolio. It brought the yield down in the overall portfolio quite a bit.

So, is there any focus for you on investing in lower yielding loans in order to ramp up the portfolio quickly?

Not exactly, Ryan. I would point you to a couple of things. One is that 78% number that we highlighted at the beginning of the call. Just a tremendous number of refinancings and turnover in the portfolio and we have been working pretty hard to get that money back out, out the door.

In the fourth quarter you can look at, I would say, kind of a split between two different kinds of investments made here. One is the ones that were slightly lower yielding and probably in the more broader syndicated market, where we're alongside may be some other BDCs, or even CLOs, those are names still where we have some kind of informational advantage that -- or we feel like we have an advantage and an edge on the investments.

So that is something like a PMSI, where the other side of the house at HIG here previously owned the company. So we feel like we have got a pretty good insight into management and what is going on in that business.

The other investments I would point you to are the proprietary ones where we were the only lender and the reason that we were brought into the process was our expertise in the businesses and our ability to close quickly and certainty of close. Future payment technologies, [Sigue Corporation], both of those are a little bit more difficult to understand. Those are two big deals in our pipeline, $25 million on Sigue, $35 million of FPT and if Sigue is carrying L 900 with a 100% floor and FPT is 1000 in a 1% floor. So we will continue to go out looking for those in trying to replace most of the things in our portfolio with those higher yielding and names where we feel very comfortable from a risk return standpoint, and as we find those broadly syndicated names that I mentioned, we feel comfortable about the liquidity there as well in addition to our risk return to the liquidity as well. But if we need to cycle out of those as we find -- things that we find more attractive we will be able to do that.

Okay, great. Then one more question. You mentioned a lot -- you had a lot of repayments and refinancings in the last year.

A broader question, what you are seeing in the market. Are you seeing any shift in the mix of growth in M&A deals in the market versus more refinancings going into 2014?

I think it is a good mix. It is hard to tell exactly what you are going to see in the next year in the broader market. You have seen just a lot of refinancing activity in the last 12 months. I think you will continue to see borrowers try to take advantage of hot credit markets that we discussed. The private equity world and M&A world has money to spend and they will continue to find deals and that is good for us.

If you are talking about our specific experience here, we certainly don't see at a high level -- as high a level of turnovers we did last year. And I don't think we would have predicted 78%.

The portfolio now is a much younger vintage as compared to a year ago when we started. And most of these deals have a fair amount of call protections, so we would expect to experience a lower rate of turnover next year.

Okay, thanks.

Bryce Rowe, Robert W. Baird.

Good morning. This is a follow-up on some of the previous questions there.

Jay, maybe you can speak to more along the lines of the proprietary deals like you booked here in the fourth quarter. Just curious about maybe the pipelines for those types of investments.

And then a secondary question to that is if we continue to see some of these investments that would be considered maybe lower yielding then optimal, has WhiteHorse considered waiving any level of fees so that you can earn their dividend fully, or at least waive some fees until you get to the point where you are earning your dividend fully?

Thanks, Bryce. In terms of the pipeline, what we are saying going -- looking out into 2014, we are pretty comfortable with our ability to deploy capital. There's a similar look to what we have seen in the last two quarters. Have a good mix of names that are similar to what we just discussed on Sigue and FPT and some things that are maybe slightly lower yielding with where we feel comfortable with the risk return.

It is hard to put a number on exactly what -- and we have not done that in the past. But in general, I would say it looks similar to what we have seen and we are comfortable saying that our goal is to be fully ramped and fully spent. And that would be around $200 million for our goal this year to put money out the door.

So that -- and I think that folds into your second question there. As you spin that capital and get fully ramped and are able to take advantage of all the leverage facilities and the tools we have, you will be fine on earning your dividend.

Okay. Thanks, Jay.

(Operator Instructions). At this time there are no further questions. I will now return the call to Jay Carvell for any additional or closing remarks.

Thanks for joining us today, everyone. Look forward to speaking to you next quarter. Operator, back to you.

That does conclude today's conference call. Thank you for your participation. All participants may disconnect at this time.