WhiteHorse Finance Inc (WHF) 2015 Q2 法說會逐字稿

Good morning, my name is Kristin, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second Quarter Earnings Teleconference. Our hosts for today's call are Jay Carvell, Executive 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. (Operator Instructions) It is now my pleasure to hand the call over to Brian Schaffer of Prosek Partners, please go ahead.

Thank you, Kristin, and thank you everyone for joining us today to discuss WhiteHorse Finance's Second Quarter 2015 Earnings Results. Before we begin, I'd 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. Thank you for joining us today. As you know, our press release was issued this morning before market opened and I hope you've had a chance to review our results. Starting with a brief overview. We're again pleased to report a strong quarter overall and solid first half results to start 2015 following on the success we had in 2014. Our performance across key metrics such as NII, portfolio yield and NAV bring out the story and strategy we've discussed with you all since our launch in 2012. We believe this provides a foundation for continued growth and success while also benefiting our shareholders in the long run.

I'll go through some of the high points in our strategy going forward before having Gerhard walk you through our financial results and the capital position. There are two main themes I want to highlight on today's call. The first being another solid quarter in terms of NII, which is up 47.4% year-over-year and 10.4% on a sequential basis. The second theme, which we've discussed on prior calls, is the ongoing optimization of our portfolio, which has helped us drive NII. This effort is predominantly focused on cycling out of lower yielding loans and replacing them with attractive risk-adjusted loans that have yields that are more accretive to the broader portfolio. We do this after looking to balance our portfolio in terms of investment size and industry [buckets].

During the second quarter, we replaced $20 million in five portfolio investments that carried an average effective yield of around 9%. At the same time, we had gross adds to the portfolio of over $30 million in two investments at a combined effective yield of over 11.8%, which leaves us at an effective yield of 11.7% through the June quarter. This is significant as we've seen our effective yield hold steady or increase over the last several quarters.

In the first quarter of 2015, our effective yield was at 11.4% and in the fourth and third quarters of 2014 our effective yield was at 11.3% and 10.7% respectively. While we cannot provide guidance on where the effective yield will go, you can expect us to continue our portfolio optimization efforts going forward.

We feel our pipeline will continue to provide opportunities to replace low yielding credits with attractive facilities from a risk and return standpoint. Given where our portfolio and capital structure sit, we'd expect net originations to be at a slower pace than quarters past, but are comfortable with the current strategy and ability to optimize the portfolio and operate efficiently.

However, we're certainly focused on the business and portfolio outside of just trading and optimization. This is where we benefit two-fold from our affiliation with H.I.G. First, they continue to help us originate, underwrite and manage an attractive diversified portfolio. Second, our Exemptive Relief Order provides us with flexibility and the ability to further partner with H.I.G. in the origination of particular investments that we would otherwise not be able to participate in. Furthermore, H.I.G. believes that at current pricing levels, our stock represents a highly attractive investment and as such has held them for me that H.I.G. affiliated funds are entering into a program to purchase up to $40 million of the company's stock on the secondary market. The program will be [embedded] to comply with all legal and regulatory restrictions, but from my perspective, this is a significant positive development, which demonstrates H.I.G.'s willingness to meaningfully support the company over the long run. I'd like to highlight a few items regarding our investment portfolio. As of June 30, fair value of the portfolio was $387.5 million, essentially flat with the $391.3 million we reported at the end of the first quarter. Our investment portfolio of 32 positions across 26 companies remains primarily composed of senior secured loans.

The portfolio is well diversified across a number of industries with an average investment size of $12.1 million and a weighted average effective yield of 11.7%. And as a reminder, none of our investments are currently on or happen on non-accrual status. And as I reported last quarter, more than 96% of the loans in our portfolio carry variable rate, which should continue to position the portfolio well for potential rising interest rate environment. Looking at capital markets, as we saw in the first quarter, the second quarter was a bit slower in general. The broader credit markets were slow technically and that spilled over into the sector, it's no surprise that energy continued to lag with oil prices bouncing around the $50 per barrel range.

As that relates to us, there is no change in what we've previously said, in regards to our energy related investments. We continue to prudently monitor these investments and keep them at a 3 rating more out of an abundance of caution than anything else. We still believe our investments are secure and good quality names and we will keep them at a 3 rating for the foreseeable future. We continue to see capital flowing into credit on the institutional side, while origination and M&A activity slowed. This is why the tightening spreads in general. This is even more pronounced in the higher quality into the market where our focus remains.

And as we head into the third quarter, so far we've seen a slight uptick in the markets, but overall liquidity remains tight and spreads are coming in for the better names out there. As to how that impacts us, as I mentioned earlier, we're seeing a lot of opportunities in our pipeline that we find attractive. We have been and will continue to be selective in the loans we originate and don't feel like will be forced down the quality scale in order to put money to work. Our portfolio remains invested in senior secured assets with covenants yielding attractive rates and we expect that to continue. Before turning the call over to Gerhard, there are 2 final items I'd like to address. The first is our dividend and in particular dividend coverage. We understand its importance to shareholders are well aware of the focus it receives by the analyst community. The dividend policy is constantly being reviewed by our Board, which makes the determining decision each quarter. While we're not speaking for the Board, given where we are from a financial and operational perspective we have no expectation that it will change from its current payout level, which as you're aware, has been consistent at $0.355 per share for the 11 quarters going back to our IPO. The other item I wanted to address was the appointment earlier this week of Stacy Smith as a new Director replacing Alexander Pease, who stepped down on June 01, the result of his new employer's policy not allowing its employees to serve on public company boards. As Alex did, Stacy will serve as Chairman of the Compensation Committee and as a member of the Audit Committee and the nominating and corporate governance committee of the company. We're very pleased to have Stacy join our Board and look forward to her future contributions. I also wanted to note that in our 10-Q for the quarter, you'll see that our COO Bill Markert has resigned from the company for personal reasons. I want to personally thank Bill for his professionalism and service since he joined WhiteHorse and we all wish him the best, we do not envision immediately filling this position, but could do so in the future, if necessary. With that, I'll now turn the call over to Gerhard. Gerhard?

Thanks, Jay. Let's begin with our results for the quarter ended June 30, 2015. Net investment income was $5.9 million compared with $5.3 million reported in the first quarter of 2015 and $4 million reported in the second quarter of 2014. This increase in NII is a result of our continued focus on optimization both in terms of portfolio yield and capital structure. This resulted in NII per share of $0.393 for 2Q 2015. As you are aware, our quarterly dividend has been consistent at $0.355 per share. Our investment income continues to consist primarily of recurring cash interest. Second quarter fee income was approximately $700,000 compared with the first quarter fee income of about $100,000. Average fee income, however, was $400,000 per quarter during 2014 and 2015 on a year-to-date basis. So while current quarter fee income was slightly higher than usual, it was in line with the trend and also with our expectations. Net realized and unrealized losses on investments were $137,000 during the second quarter of 2015 compared with $561,000 reported during the first quarter of 2015. As a result, we reported an increase in net assets from operations of $5.7 million or $0.38 per share for the second quarter compared with an increase of $4.8 million or $0.32 per share for the first quarter of 2015. Expenses for the quarter totaled $6.3 million, a slight increase from the $6.0 million of expenses reported during the first quarter. Second quarter 2015 expenses consisted of $1.7 million of interest expense on our credit facilities and base management fees and performance-based incentive fees of $3.6 million. When looking at expenses on a year-over-year basis, the increase in interest expense on our credit facility was due primarily to a higher outstanding balance on our revolving credit facility. And the year-over-year increase in management fees was attributable to the increase in total assets and total investment income. As of June 30, 2015, net asset value was $225.2 million or $15.03 per share as compared with $224.8 million or $15 per share reported as of March, 31 2015. Switching over to portfolio and investment activity, as Jay mentioned, as of June 30, the fair value of WhiteHorse Finance's investment portfolio was $387.5 million invested in 32 positions across 26 companies and consistent with the previous quarter was primarily comprised of senior secured debt. The weighted average current yield in the portfolio at the end of the quarter was 11.7%, increasing over the prior quarter as a result of our continued focus on portfolio optimization.

The risk rating of our portfolio assets remained unchanged and as Jay mentioned, we maintained a 3 rating on our energy holdings to reflect the current macroeconomic market conditions. As a reminder, we continue to have a low exposure to energy with approximately 6% of our portfolio representing energy-on-energy related investments. We do not see much movement in the value this quarter in these investments and we expect that these holdings would maintain a 3 rating for the foreseeable future. There were no non-accrual loans as of June 30, 2015. Turning to our balance sheet. WhiteHorse Finance had cash resources, inclusive of restricted cash, of approximately $27.3 million as of June 30, 2015. This compares with $17.6 million as of March, 31 2015. The quarter-over-quarter increase in our cash balance was largely attributable to the timing of portfolio activity.

As of June 30, 2015, the company had indebtedness in the form of senior notes and two credit facilities that on a combined basis was drawn by approximately $100.5 million. And as of June 30, 2015, the company had $49.5 million of undrawn capacity on its revolving credit facility. 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. We closely monitor our asset coverage ratio and feel comfortable with the leverage as of June 30, 2015. The company's asset coverage ratio for borrowed amount as defined by the 1940 Act was 221.4% at June 30, 2015 well above the statute's requirement of 200%. Our net effective debt to equity ratio after adjusting for unsettled trades and cash on hand was 0.7 times representing a further modest delevering from 0.73 at March 31, 2015 and 0.77 at December 31, 2014. Last, I'd like to highlight our quarterly distribution. On May 19, we declared a distribution for the quarter ended June 30 of $0.355 per share for a total distribution of $5.3 million. This distribution was paid to stockholders on July 2, 2015. This marks the company's 11th distribution since our IPO in December 2012, with all distributions at the rate of $0.355 per share per quarter. We expect to be in a position to continue our regular distributions.

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

(Operator Instructions) Troy Ward, KBW.

Jay, could you provide just a little more color on the H.I.G. affiliated funds purchasing $40 million of stock? Is there any additional information you can give us on that? Is this done through a structured program? Are there any restrictions? Just kind of give us kind of how structurally that is done.

It's a little early, Troy. We're not 100% complete. As I mentioned, we need to confirm a couple of regulatory and legal matters on that to make sure our ducks are kind of in a row there. But I expect that to not take too long and it will be a formal program where we've committed that amount and to the extent we can purchase on the secondary market we'll do so.

Okay. Can you also just give us -- you've done a lot of portfolio optimization. Just as you look at the portfolio, you did say you expect slower, maybe slower activity going forward. I'm assuming this is because there's fewer opportunities for portfolio optimization. So as you look to raise capital to make new investments, can you just speak to how much of embedded liquidity in that portfolio you see today?

It's hard for me to put a number on that, and as you pointed out, you've got some optimization opportunities there and as we find deals that we like from a risk and return standpoint, if they are more attractive than what we're currently holding, then we'll cycle in to that name and out of another. But there's, I mean, in some sense everything is available to be cycled out at one point or another. And so, we don't try to target a certain number every quarter. We really try to take it name by name where we're seeing things that we like, we have the opportunity to be selective here as well, so like where the portfolio sits. It's got an attractive yield and attractive from a risk and return standpoint.

Okay, and one final one, could you give us some color on the Golden Pear Funding investment, I saw you increased your commitment there quite a bit in the quarter. And I saw the news that they have their senior secured facility energy in your facility, where in the capital stack are you, how much debt is in front of you and just give us a little bit color on that investment If you could?

It's a name that we've known for a while. I think you saw on our portfolio last quarter and we did increase our exposure there. That was part of our plan from the beginning on that name that we thought that we would have the opportunity to participate in the next facility, we are in the second lien there and it's a business that we understand and like we've known similar businesses on the H.I.G. side for a while. And so we're pretty comfortable increasing our exposure there.

Dan Nicolas, Robert W Baird.

Thanks, guys. Good morning, Jay. I was just hoping you could kind of provide an update, high level overview of where the deal sources are coming from now relative to H.I.G. and the broader you sponsored or non-sponsored community, just trying to get kind of a breakdown of what you're seeing in recent deals and the pipeline?

Sure. It's a good question. We still see a healthy number of things coming across the [transform] from the broader H.I.G platform. And as we've talked about on other calls, there is a large number of investment professionals around the country, who are looking at middle-market deals from an equity and debt perspective, they don't all necessarily fit into the fund, where the first guy has a look out it and so to the extent an opportunity comes up that fits WhiteHorse better than it does one of the other H.I.G. funds, we'll try those ideas and have a chance to look at that. In addition, we've been expanding our direct effort on H.I.G. WhiteHorse side on the WhiteHorse Finance side, you've seen a couple of press releases this quarter, where we've made some hires around the country with people who are investment professionals, mostly focused on originating deals in the middle market and so you're getting ideas from that front as well. As far as sponsored and non-sponsored, it's really idiosyncratic, it's hard to say where each of those is coming from. We tend to lean towards the non-sponsored where we can and sometimes we do enough with sponsored deals in general, I'd say that our experience the last couple of quarters has been what we've seen in the prior six, there is a lot of different places that it comes from and it's lumpy, that's just the way the business goes, you don't know exactly where the next opportunity is coming.

Okay. That's helpful and just as you think about the balance sheet going forward, any updates on how you all might be thinking about pursuing a SBIC or not down the road?

I think we've talked about this on another call, that we're certainly aware that that's something attractive and that there's other guys who have that opportunity and can avail themselves of that. We're looking at it just like anybody else would, but I don't have anything concrete to talk about today.

Okay. And just as a follow-up to that, if you were to kind of have to characterize your deal flow now or the current portfolio now, any idea or what percentage of the portfolio or deal flow might fit SBIC criteria or have you not kind of gotten that far in the process.

I'm not really tracking out, right now, to be honest with you, it's something that we would look at closer if you're going to get very serious about it and we look at it from time to time and it really does kind of flow quarter-to-quarter. So some quarters, it seems like you've got a lot of that looks like it would fit generally and sometimes you don't.

Yes, okay. Got it. All right, thanks, good quarter.

Thank you. Thanks.

Troy Ward, KBW.

Just a follow-up on that SBIC question, again just because I felt like the call was going to be over, I just really like to get your more of an in-depth thought process about that, because, I mean as you look at your balance sheet, you are capital constrained at this point and the SBIC capital does not count against your debt to equity from a regulatory standpoint. So this would seem like the perfect time to get serious about it and really think hard and understand -- shareholders will understand if you are going to apply for that. So I guess why aren't you being more active or proactive in looking at the SBIC. Is it a time commitment, what is the thought process there?

I am glad you followed up, Troy, that. I didn't I want to leave you with that impression that we're just not taking it seriously because there are several things -- to your point about capital constraint, there's several things that we're exploring and the support from H.I.G. I think is one of things that helps support the stock and there's other things that will help support the liquidity of other company and our balance sheet, the SBIC thing is, as you point out, one of the more attractive options there. We are taking a very serious look at that, but we're also not inclined to talk about exactly where we are on projects on the capital front for competitive reasons. But you're exactly right, that's a attractive way that BDCs can expand their balance sheet without getting upsides on the regulatory leverage front.

Internally as we spoke or speaking, we are in the midst of earning season, so we are talking a lot different aims, but as we look at your performance since your IPO you've maintained that $15 plus book value. You've delivered exactly what you've said and clearly you're not being rewarded from a stock perspective, and I know that's frustrating and to us one of the most frustrating -- from where we sit, it seems like this should be one of the kind of the low hanging fruit that you can just paw ahead and say okay, we're just going to keep our head down and do a good job and here's something we can again grow the portfolio, grow what we're doing without new equity and make a real difference from a shareholder perspective and hopefully they'll be recognizing you can move closer to book value. So again just glad you provided additional color and hopefully it's a path for you to explore much greater in the next several quarters.

Appreciate it. Thanks for banging the drum for us, Troy, we think we have done fairly well since the IPO. So we're pleased to have the call this quarter and kind of talk about those results.

And that does conclude today's conference call, thank you for your participation. All participants may disconnect at this time and have a wonderful day.