WhiteHorse Finance Inc (WHF) 2014 Q4 法說會逐字稿

Good morning. My name is Maria, and I'll be your conference operator today. At this time I would like to welcome everyone to the WhiteHorse Finance fourth-quarter and full-year 2014 earnings teleconference. Our hosts for today's call are Jay Carvell, Chief Executive Officer; Bill Markert, Chief Operating Officer; and Gerhard Lombard, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 1:00 PM Eastern time. The replay dial-in number is 404-537-3406 and the pin number is 75705168.

(Operator Instructions)

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

Thank you Maria, and thank you everyone for joining us today to discuss WhiteHorse Finance's fourth quarter and full year 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 those forward-looking statements.

WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statements. With that, allow me to begin. WhiteHorse Finance's CEO, Jay Carvell. Jay, you may begin.

Thanks, Emily. Good morning. Thank you for joining us today. As you know, our press release was issued this morning before market open, and I hope you've had a chance to review our results. We are very pleased to report a strong fourth quarter in terms of both portfolio activity, and NII. Gerhard and I will go over some of the details during the call today, but the results for the quarter and the year continue to flow out of our disciplined investment approach in the smaller end of the capital markets.

We achieved a strong quarter in originations and exceeded our full-year origination goals for 2014. During the fourth quarter, we invested $91 million across nine portfolio companies, bringing our investment activity to $261 million for the year. We previously discussed targeting a $50 million per quarter investment pace, and are glad to have surpassed that over the last year.

Gross proceeds from sales and repayments for the quarter totaled $56 million, which was in line with our expectations. For the year gross proceeds from sales and repayments were $135 million, or $35 million lower than total repayments for 2013. While we expect some natural turn in the portfolio from early repayments and refinancings, that activity slowed somewhat from our historical pace during Q4. A portion of the repayment activity in the quarter was tied to portfolio optimization.

I'd like to highlight a few items regarding our investment portfolio. As of December 31, fair value of the portfolio was $404 million, an increase of $131 million from the fourth quarter of 2013 and approximately $34 million higher than what we reported last quarter. Our investment portfolio, up 37 total positions, is primarily composed of senior secured loans to 31 different borrowers.

The portfolio is well diversified across a number of industries, with an average investment size of $10.9 million and a weighted average yield of 11.3%. None of our investments are currently in or have been in nonaccrual status.

One topic that seems to be at the forefront of everyone's mind is the energy sector. The drop in oil prices at the backend of last year caused a big downdraft in trading levels of names related in any way to energy, and particularly to exploration and production companies.

Our overall portfolio exposure to energy names is about 6%. We're comfortable with our position and believe there will be attractive risk return opportunities in the space over the longer term. More than 96% of the loans in our portfolio carry a variable rate, which should continue to position the portfolio well for a potential rising interest rate environment.

The $91 million we invested in the fourth quarter was spread across nine companies and nine different industry segments including healthcare facilities, food, retail, and trucking. The $56 million of proceeds we received from sales and repayments was attributable to the prepayment of two loans and ongoing portfolio optimization whereby we improved the overall risk return of the portfolio by opportunistically divesting away from lower yielding positions.

Looking at the broader capital markets, we saw a great deal of volatility in the fourth quarter of 2014. As mentioned earlier, the drop in oil prices drove the energy sector lower which led the way for the larger market. We expect this general market tone to persist, both in the sector and as a whole for the near to mid-term.

While volatility persisted, the smaller end of credit markets were somewhat shielded from this phenomenon. And as you can see by our origination activity during the quarter, WhiteHorse took advantage of this environment by putting money to work at attractive rates of return.

Over the longer horizon, we expect to see solid opportunities to put capital work in this space. We believe that our overall portfolio is well positioned to withstand any further movements in the market.

We believe the BDC space in general should see favorable tailwinds as fewer banks are able to meet the borrowing needs of small businesses. Also as you are aware, the CLO market is facing hurdles of its own due to regulatory changes, further benefiting us.

Heading into 2015, our outlook remains positive and we are seeing excellent opportunities within the small-cap space. Our close relationship with H.I.G. Capital continues to serve as a strong asset to us as we selectively identify opportunities to add to the portfolio. With that, I'll now turn the call over to Gerhard. Gerhard?

Thanks, Jay. Let's begin with our results for the quarter ended December 31, 2014. Net investment income was $5 million compared with $4 million reported last quarter. This 23% increase in NII over the prior quarter is the result of the continued deployment of capital into higher-yielding directly originated loans.

Assuming no other changes in the portfolio, we would expect to see a further increase in NII during Q1 2015 from the full quarter revenue impact of investments made during Q4 2014. Our investment income continues to consist primarily of recurring cash interest. Fourth quarter fee income was $197,000 compared to third quarter fee income of $346,000.

Net realized and unrealized losses on investments were $1.4 million compared with net realized and unrealized gains on investments of $520,000 during the third quarter of 2014. As a result we reported an increase in net assets from operations of $3.6 million, or $0.24 per share, for the fourth quarter of 2014 compared with $4.6 million, or $0.31 per share, in the third quarter.

The variance between the two quarters relates primarily to unrealized losses on our energy investments recorded during the fourth quarter. Although we cannot state with certainty at which levels we will exit any of our positions, we feel comfortable with where our portfolio assets, and our energy investments in particular, are marked.

Expenses for the quarter totaled $6 million, and primarily consisted of interest expense on our credit facilities of $1.7 million and base management fees and performance-based incentive fees of $3.4 million. This compares with $5.2 million in expenses for the prior quarter. The primary driver of the increase in expenses from Q3 to Q4 was portfolio growth, which caused variable expenses like interest and management fees to increase in line with the underlying portfolio assets. As of December 31, 2014, net asset value was $225.4 million, or $15.04 per share, compared with $227.1 million, or $15.16 per share as of September 30, 2014.

Now let me turn my attention to our results for the full year ended December 31, 2014. For 2014 we reported net investment income of $17 million, or $1.13 per share, which compares with $19.3 million, or $1.29 per share in 2013. 2014 net investment income includes fee income of $1.6 million, while fee income was $3.5 million during 2013 and included significant non-recurring fees related to the prepayment of a number of large investments.

Net realized and unrealized gains on our investments were $2.5 million for 2014 compared with net realized and unrealized losses on investments of $280,000 in 2013. The Company reported an increase in net assets from operations of $19.5 million in 2014, up from $19 million in 2013.

Switching over to portfolio and investment activity. As of December 31 the share value of WhiteHorse Finance's investment portfolio was $403.5 million invested in 37 positions across 31 companies, and consistent with the previous quarter. The portfolio is primarily comprised of senior secured debt.

The weighted average current yield on the portfolio at the end of the quarter was 11.3%, increasing over the prior quarter as a result of direct proprietary originations. For the majority of investments in the portfolio, risk ratings remained unchanged. Last, there were no nonaccrual loans as of December 31, 2014.

Turning to our balance sheet, WhiteHorse Finance had cash resources including restricted cash of approximately $16.1 million as of December 31, 2014. And this compares with $26.5 million as of September 30, 2014, and $96 million as of December 31, 2013.

As of December 31, 2014 the Company had indebtedness in the form of senior notes and two credit facilities that on a combined basis were drawn by approximately $105.5 million. We remain comfortable that our cash position and credit lines will continue to provide us the ability to source loans and meet our origination goals, and the ability to optimize the portfolio, as Jay mentioned earlier, whereby we replace lower yielding loans with investments that have more attractive risk return profiles.

The Company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 218% at December 31, 2014, well above the statute's requirements 200%. Our net effective debt-to-equity ratio after adjusting for unsettled trades and cash on hand was 0.77.

We closely monitor our asset coverage ratio and feel very comfortable with our leverage as of December 31, 2014. We do not manage to a specific target but continue to take into account a variety of factors, including portfolio liquidity and market conditions. As we continue to make direct proprietary investments that are less liquid, we may decrease our leverage.

Finally, I'd like to highlight our quarterly distribution. On November 25 we declared a distribution for the quarter ended December 31 of $0.355 cents per share for a total distribution of $5.3 million. The distribution was paid to stockholders on January 2, 2015.

This marks the Company's ninth distribution since our IPO in December 2012, with all distributions at the rate of $0.355 cents per share, per quarter. We expect to be in a position to continue our regular distributions.

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

(Operator Instructions)

Troy Ward, KBW.

Great. Thank you, and good morning, Jay. Good morning, Gerhard. Could you just provide a little bit of -- you talked about spreads. We've heard a lot about spreads widening in the last half of the year. Can you talk about how that's maybe came in to the first quarter of 2015 here, and how your quarter to date activity?

Sure. Thanks for dialing in, Troy. Appreciate it.

Look, you're right that the volatility in the markets and then credit markets in general is a somewhat of a good sign for companies like ours, and we're seeing more opportunities and the opportunity to put work to -- put money to work at attractive levels. So we generally don't comment on -- specifically on the pipeline, as you know.

I'll tell you that we are seeing a lot of what we consider attractive opportunities and think we'll be able to put that money to work in Q1 and into the year. What that will mean for us, I think, is some of that portfolio optimization activity I talked about earlier where we're able to cycle out of some of the things that are yielding less than the things that we're looking at now.

Okay. On that, can you talk about what, kind of on a numbers side, what you do have for portfolio optimization? What's left in that portfolio and how that's been impacted by wider spreads?

I think you saw some of that in Q4. You can kind of compare the portfolios quarter over quarter and see where we were able to cycle out of some names that were yielding less than 10% and into things that are yielding more than 10%, for example. We don't like to talk about trading very much in terms of future activity. We try to hold that a little bit closer to our vest.

But it's not that big of a mystery, probably to look through and see things that you think are trading, or not trading but are yielding at a level that you say, that's not as attractive as something that you are probably seeing in the new market.

But in terms of how much that is, that'll be a little bit market driven. It'll be a little bit driven both on the kind of origination side and a little bit on the optimization side. I mean, I'm comfortable that we can cycle out of the names that we want to as we find opportunities that are more attractive.

Okay. And then one final one. On your investment in the New Mountain senior loan program, I saw where you added, I think, about $7 million to that. You're up to a $20 million investment, which is one of your larger investments in the portfolio.

Can you just provide us some color onto your thought process there to invest in obviously a fund of another BDC? And why shareholders, quite honestly, would be giving you capital to invest with another BDC?

They -- we know the New Mountain guys. I think we talked about this at the outside of this. This is -- what we feel like was good yield for us. That's -- the commitment there is $20 million, so you won't see that grow. And they frankly traffic in things that we don't.

And it's a good diversification for our portfolio as well. We're comfortable with them as a manager in those names and feel like it's good use of capital for us and the portfolio, given where the names that they invest in versus kind of what we do.

What is the current yield on that?

It's roughly 12%.

Okay. All right. That's all my questions. Thanks.

Thanks, Troy.

(Operator Instructions)

Rick Shane, JPMorgan.

Guys, can you hear me now?

Yes.

Sorry about that. It's been a little bit of a crazy morning. I would love to talk about two things.

You talked a lot about the demand for capital, but given where your balance sheet is, you guys are to some extent capital constrained in your ability to take advantage of that. Can you talk about ways that you can potentially increase your capital base?

Obviously trading way below book, that becomes a little bit harder. Could you get capital from your sponsor?

And in light of that, would you talk a little bit about your dividend policy, at this point still that covering the dividend, that erodes further book value, uses capital. Can you think about what that might look like going forward as well?

Yes. Thanks, Rick. You're right.

We feel like we're pretty efficient with our balance sheet right now in terms of our leverage and where we are with the portfolio. So I think in the near term, there is a lot -- there's still some opportunities for us to optimize some of those names, like we were talking about with Troy in terms of cycling out of some of the lower-yielding deals into some higher-yielding deals, and that folds in with your question about the dividend.

I mean, we're right on top of it at this point. And I think that, given the longer runway with having deals in the portfolio during the quarter and earning that interest over the longer timeframe, we feel comfortable with where we are in terms of our distribution and our NII. You rightly point out that kind of given where we are trading, we're probably not likely to go out and seek a secondary, but we also feel like as we're earning that dividend and as you see that, that we will get closer and closer to that level, that NAV level, and that will give us more opportunities to raise capital.

Out -- away from that, you're right that there's -- it's possible to talk to the sponsor here. It's possible on a couple of other fronts in terms of raising capital to put to work in the BDC itself. We are exploring those.

We haven't felt too constrained yet, just given where we are in the portfolio and the kind of things I've talked about today. So we haven't really felt like we needed to panic and find some other way to bring capital in, but it's certainly something we're exploring. You're looking over the longer-term horizon and we're seeing the opportunities. We want to be able to put that capital to work and use our network and not miss opportunity. So it's certainly something we're looking at.

Yes. Look, it certainly makes sense to be in front of that and avoid that sort of panic scenario. We never know two or three quarters down the road what the world's going to look like.

Yes. That's our thinking.

Got it. Thank you guys.

(Operator Instructions)

I'm showing no further questions at this time.

Thanks for joining today. We look forward to speaking to you all next quarter. Operator, back to you.

Thank you. That does conclude today's teleconference call. Thank you for your participation. All participants may now disconnect.