WhiteHorse Finance Inc (WHF) 2014 Q2 法說會逐字稿

Good morning. My name is Jackie and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the WhiteHorse Finance second-quarter 2014 earnings teleconference. Our hosts for today's call are Jay Carvell, Chief Executive Officer, and Gerhard Lombard, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12 PM Eastern Standard Time. The replay dial-in number is 404-537-3406 and the PIN number is 68696963. (Operator Instructions).

It is now my pleasure to turn the floor over to Emilie Lehan of Prosek Partners.

Thank you, Jackie, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's second-quarter 2014 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.

Good morning. Thank you for joining us today.

I hope you have had a chance to review our press release, which was issued this morning before the market opened. I am going to take you through some highlights for the second quarter before turning the call over to Gerhard to walk you through our financial results.

As I've mentioned in the past, our focus is on sourcing proprietary, quality investment opportunities in the small and mid-cap space across a broad range of industries. Our activity this quarter, as in quarters past, reflects those goals.

We invested $90 million during the quarter across seven positions, bringing our investment activity to $107 million for the first half of the year. Of the $90 million, two positions of $32 million and $22 million, which were proprietary and originated through our relationship with H.I.G. Capital. Repayments during the quarter were all anticipated or scheduled, with nothing out of the ordinary.

This level of originations is our second highest in our span as a public company and keeps us at our historical pace of $50 million per quarter. However, as we mentioned on prior calls, we continue to expect lumpiness from quarter to quarter. When considered over the longer timeframe, we expect quarterly originations to balance out.

For example, we invested more than $200 million in 2013 while experiencing quarter-over-quarter lumpiness and believe we will encounter similar outcomes during the remainder of 2014.

In terms of preservation of capital, our portfolio remains primarily invested in senior and secured positions and we continue to reduce risk -- our risk profile through increased diversification in the portfolio.

Gerhard will provide more detail on our financials, but I want to spend just a few minutes on our investment portfolio. As of June 30, fair value of the portfolio was approximately $347 million, an increase of $109 million from the second quarter of 2013 and up $60 million as reported in the previous quarter.

We invested $90 million during the quarter in seven new portfolio companies across a broad range of industries, some of which include healthcare, oil and gas, cable and satellite, and metal and glass containers. Proceeds from repayments totaled $30 million, $19 million of which was attributable to the refinancing of Renaissance Learning. The remainder came in through scheduled repayments, amortizations, and sweeps, including $8.2 million from GMT through the cash sweep agreement that we have discussed on previous calls.

I would like to spend a moment discussing the markets and our positioning. The capital markets remain active and competitive. We are seeing a lot of refinancing activity across all credit markets, as well as a number of mergers and acquisitions. And while we are still seeing compressed spreads, the tightening across the credit space has slightly abated recently.

In general, capital markets tend to slow down during the summer, but we remain focused on finding high-quality investments and closing deals during this traditionally quieter period. That said, while we are underwriting a healthy number of opportunities, deals tend to close on their own pace and we expect some may stretch beyond this current quarter.

As evidenced this quarter, our network through H.I.G. continues to serve as a strong asset to us in this market environment. We continue to identify high-quality investment opportunities through their network, contributing to an overall healthy pipeline of potential originations.

I wanted to note a couple of events since the end of the quarter. First, our relationship with H.I.G. was made all that much stronger recently as we announced just after quarter close that we have been granted exemptive relief by the SEC, permitting co-investments in portfolio companies, among affiliated funds. This will allow us to further provide our shareholders with access to a broader array of investment opportunities.

Also, as you might have seen in our press release last week, we are pleased to announce the addition of Bill Markert to the WhiteHorse Finance executive team as Chief Operating Officer. Bill has over 25 years' experience in operations and finance, serving most recently as CFO of Securus Technologies. His addition to the team bolsters our operations in restructure and provides further support for our anticipated continued growth.

Bill replaces Ethan Underwood, who remains with our advisor, H.I.G. Capital, in a role similar to the one he has very capably filled for the last two years. Ethan will also remain active on our investment committee.

And finally, I want to take this opportunity to formally introduce you to Gerhard Lombard. Gerhard has been a part of the WhiteHorse Finance team as Controller since before we became a public company, and I am pleased to now work with him in his role as CFO.

I also want to thank Alastair Merrick for all of his work over the last two years, especially during our conversion to a public company and subsequent bond offering last summer. Alastair will remain a consultant with WhiteHorse Finance to ensure a smooth transition of our financial reporting functions.

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

Thanks, Jay. I will spend a few minutes on the highlights of our financial results, which were released this morning before the market opened.

Looking at our earnings for the quarter ended June 30, 2014, net investment income was $4 million, essentially flat when compared with $4 million reported during the first quarter of 2014.

Second-quarter fee income was $700,000. Net realized and unrealized gains on investments were $1 million, compared with net realized and unrealized losses of $1.7 million during the second quarter of 2013. Current-quarter unrealized gains were primarily attributable to the reversal of unrealized losses previously recognized on our GMT investments that are now being reversed in line with principal repayments received.

We reported a net increase in net assets resulting from operations of $5 million, or $0.34 per share, for the second quarter of 2014, compared with $3.2 million, or $0.21 per share, in the second quarter of 2013.

Expenses for the quarter totaled $5 million, primarily consisting of the interest expense on our credit facilities of $1.4 million and base management fees and performance-based incentive fees of approximately $2.7 million. This compares with $4.6 million in expenses for the three months ended June 30, 2013.

Net asset value was $227.8 million as of June 30, 2014, resulting in net asset value per share of $15.21. This compares with net asset value of $227 million, or $15.16 per share, as of December 31, 2013.

Switching over to portfolio and investment activity, as of June 30, the fair value of WhiteHorse Finance's investment portfolio was $347.1 million, invested in 30 positions across 27 portfolio companies, and it's primarily comprised of senior secured debt investments.

The weighted average yield on the portfolio was 10.6%, compared with 11.2% at the end of the previous quarter. In addition, the risk ratings on a substantial majority of the investment in the portfolio remain unchanged.

Finally, there were no nonaccrual loans as of June 30, 2014.

Turning to our balance sheet as of June 30, 2014, we had cash resources, inclusive of restricted cash, of approximately $10.8 million, compared with $96 million as of December 31, 2013, and $103.3 million as of the second quarter of 2013.

The Company had two credit facilities and a senior note that, on a combined basis, were drawn by approximately $127 million as of June 30, 2014. We are comfortable that our cash position and credit lines will continue to provide us with the ability to source loans and meet our origination goals for the foreseeable future.

The Company's asset ratio for borrowed amounts, as defined by the 1940 Act, was 279% at June 30, well above the statute's requirement of 200%.

Last, let me speak about our distributions. On May 28, we declared a distribution for the quarter ended June 30 of $0.355 per share for total distributions of $5.3 million. This distribution was paid to stockholders on July 3, 2014. This marks the Company's seventh distribution since our IPO in December 2012, and all distributions were at the rate of $0.355 per share per quarter. And we expect to be in a position to continue our regular distribution.

This concludes my formal remarks. I will now turn the call back to the operator for your questions. Operator?

(Operator Instructions). Ryan Lynch, KBW.

In our opinion, one of the struggles of managing WhiteHorse since the IPO process has just been trying to keep the pace for originations up with the heavy amount of repayments experienced. In the third quarter, WhiteHorse received exemptive relief to co-invest with other funds managed by H.I.G. Can you just give us some color about what receiving the exemptive relief means for WhiteHorse's originations pace going forward?

Sure, thanks, Ryan. The main takeaway from that, I believe, is that it really gives you a deeper and wider opportunity set for WhiteHorse to go after.

I don't know that we will take advantage of that immediately or when it will, but I do think that gives us an opportunity to find deals that fit multiple pockets and gives us an opportunity to find things that maybe we wouldn't have been able to pursue in the past. So net net, it's a positive that each deal is its own, and we will see where that shakes out.

Okay. And then, could you give us any color on how originations and repayments are shaping up so far quarter to date?

As we mentioned in our comments, there's a lot of things we are looking at for the quarter in terms of originations, and as we said, deals close at their own pace. I am not sure when each of these will close, but there's a lot of things that we do like.

In terms of repayments, you have seen a couple of things come through the market already, if you know those in our portfolio, but I think it's really probably on our historical pace. And if I looked at it as of today and across the quarter, pretty much what we have seen over the last seven quarters would be what I would expect.

Okay. And then, one loan or investment we saw that was a little different was the $10 million investment in the NMFC senior loan program. Can you maybe just give us some more color on that investment, why it was made and what is the kind of return expectation from that?

Sure. That is a little bit different than some of our other deals. We know the guys at New Mountain. We have a relationship with some of the managers there. And so, we are comfortable with the risk/return that we are looking for in that deal.

I think that we will see -- in the next quarter or so, you'll see the payments on that and get a better feel for the run rate, but low to mid-teens is probably where you would shoot for as of today.

Okay. Is that just an investment where you guys are partnering up with the guys over there and you guys are tranching up a loan, you guys are taking a sub or a senior piece, or how is that investment actually structured?

It is more of a structured finance deal. It is not -- we're not participating in a loan with them, if that's what you're getting at.

Okay, got it. And then, one last one. As you guys ramp up the portfolio, which you guys have been to achieve you guys' target leverage, are there any investments in your portfolio that may be lower yielding, say a sub 8% yield, that you guys would be looking to trade out of into higher-yielding loans to optimize the portfolio?

There is nothing specifically I'd talk about today, other than to say over time you'll see us continually optimize the portfolio, and there is some things in our portfolio that lend themselves more to trading than others. And as we see better opportunities, we will cycle out of the lower-yielding deals, but everything that we have in there, we are comfortable from a risk and return standpoint, and as we find things that we like better, I think you will see us cycle into those.

Okay, that's all for me. Thanks, guys.

Bryce Rowe, Robert W. Baird.

A couple questions. And Jay, you mentioned the pipeline of investments. Understand that it can be lumpy, but just trying to get a feel for within the pipeline, how many or what percentage would you say are of the proprietary nature? Obviously, the two of the seven deals this quarter were in that proprietary bucket and came with some size and with some yield to them. So just trying to get a feel for what the pipeline looks like in terms of proprietary versus maybe not the proprietary channel?

It is kind of hard to answer that, honestly, Bryce. We have got a lot of things going on in there, and in looking at deals that are proprietary, that is clearly our focus. And we are looking at several of those, but for me to try to put a percentage, either a dollar or a number or anything like that, would be difficult right now.

Okay, okay.

And then, in terms of -- just a balance-sheet question, in terms of debt to equity and target debt to equity, if you could remind us where the targeted debt-to-equity level is. And then, if we think about where the stock is trading relative to book value, how do you think about longer term if we get to a point where the stock hasn't recovered to book value, how should we think about capital deployment or portfolio growth from that point forward?

Thanks for the question. Look, using debt capital is clearly efficient and accretive to our stockholder returns. So we look very carefully at our leverage ratios both from a regulatory and operational standpoint.

Having said that, we are very comfortable drawing on our credit line and we will optimize our leverage based on both market conditions and expected portfolio movement.

I don't think we are managing to a hard number. You have definitely seen our leverage pick up over the past quarter as we drew on a credit facility. We're 0.54 right now. If anything, you should expect that number to continue to go up as we draw on the credit line and deploy capital.

Okay, and just a follow-up on that. Is there a particular level where you start to get uncomfortable? Is there a hard stop in terms of how far you will go?

We certainly won't exceed 1 to 1, but I think we will obviously be conservative and stay well in from the regulatory cap, but we are not going to shy away from growing our credit line, either.

Okay, thank you. Appreciate it.

Merrill Ross, Wunderlich Securities.

Everybody's focused on how quickly you can build up the balance sheet, but if we look at an endpoint being a balance sheet that supports your quarterly distribution, what would be your goal in terms of timing to get there? Because I think that really reflects in your stock price, currently trading at a discount to NAV. You don't cover the distribution, so NAV comes under pressure. When would that be at a tipping point or what volume of assets, earning assets, all else equal?

Good question. I think if you're trying to model it, you have got to look at where we are when we are more fully spent. As Gerhard mentioned, we are probably a little bit light on leverage right now. And as you fill out the portfolio and draw your positions, then I think that you will be in a better position to meet the goals you're talking about.

Thank you.

We are committed to that distribution.

Understood.

(Operator Instructions). Terry Ma, Barclays.

So I think most of my questions have been answered already, but just going back to the New Mountain investment real quick. Is that a one-off investment or are we going to see you guys try and use more of that 30% bucket going forward?

It's a good question, Terry. We are committed to finding good risk/return on all of these investments, and so we will look at those type of investments and some of the things that would fit that 30% bucket. We are not looking to fill it. We are not looking to not fill it. So we are -- just one off, we will find things that seem to make sense and we will take those as they come.

This was something we felt very comfortable with from a structural standpoint and from a management standpoint, and so it made sense.

Okay, got it. And can you maybe just comment on the degree of competition you are seeing in your markets and how it has affected pricing or yields?

Sure. In general, as you know, everything is tightening up across credit markets. The smaller end and mid-comps are not immune to that. It is not as dramatic as you see in the larger cap space, but you are still going to see some of that.

There is nobody that I would say we consistently see across deals that we are competing against, but you see just a wide variety from time to time of whether it is a BDC or a specialty finance company or even family offices can get involved in this space.

So, it's not as dramatic as you would see in the broadly syndicated market where competition is pretty tight, but it is probably more than you would have seen five years ago.

Okay, got it. I appreciate the color. Thanks.

It appears we have no further questions at this time. I would like to turn the floor back over to Jay Carvell for any additional or closing remarks.

Okay, thanks for joining us today everyone. We look forward to speaking to you next quarter. Operator, we will turn it back to you.

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