WhiteHorse Finance Inc (WHF) 2015 Q4 法說會逐字稿

Good morning. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance fourth-quarter and full-year 2015 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 1:00 PM Eastern. The replay dial-in number is 404-537-3406, and the pin number is 36543898.

(Operator Instructions)

It is now my pleasure to turn the floor over to Brian Schaffer of Prosek Partners.

Thank you, operator, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's fourth-quarter 2015 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. 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 which are also available on our website. I'm going to take you through our fourth-quarter operating performance, and then Gerhard will review our financial results. Afterwards, we will take your questions.

Turning now to the fourth quarter. From our perspective, the highlight was our ability to generate core earnings at or very close to our dividend despite the pressure on our per-share metrics stemming from the additional shares created in our November rights offering.

Core NII per share was $0.352 for the quarter which excludes one-time non-cash credit facility refinancing charges. As you are aware, our distribution to stockholders has been consistent at $0.355 per share for 13 consecutive quarters going back to our IPO. Our ability to drive NII and consistently cover the distribution for calendar 2015 is a result of a few items.

The primary driver is our continued focus on sourcing opportunities with attractive risk-adjusted returns. We've been consistent in pursuing this strategy since our IPO three years ago. Second, we remain focused on risk by primarily participating in senior secured loans at appropriate leverage levels though we will continue to explore other opportunities should they complement our portfolio.

Third, and as I have mentioned in prior quarters, is our emphasis on portfolio optimization, specifically cycling out of certain positions and replacing them with investments that we find more attractive. While we were more active on this front in the first half of 2015, it continues to be an ongoing process as part of overall portfolio management.

Our weighted average effective yield was 11.8% at the end of the year. Our average effective yield was consistently higher during 2015 than 2014 when we were in the mid 10% range.

During the fourth quarter, we originated three loans and added to two existing positions totaling approximately $63.7 million. These investments continue to build diversity across our portfolio. The average effective yield on our three new investments was 12.6%.

There were no significant repayments during the quarter. During the year, we invested $140.4 million into new and existing portfolio companies and received repayment and sales proceeds of $107.7 million. We successfully cycled out of lower yielding assets through a portfolio optimization program which increased yield and contributed to dividend coverage for 2015.

We continue to feel very strong about our pipeline and opportunities in direct lending in general supported by our affiliation with H.I.G. We have seen already and expect to further benefit from their support and our efforts to grow the portfolio as well as to identify opportunities to improve and diversify our holdings. I would like to point out a few items regarding our investment portfolio.

As a December 31, the fair value of the portfolio was $415.3 million, up from $376.1 million reported at the end of the third quarter. Although there was positive net growth in the portfolio, we recorded downward fair value adjustments of $18.7 million or $1.14 per share during the quarter. These adjustments were the product of our internal valuation methodology which takes into account Company-specific items as well as macro factors such as interest rate movements and recent credit market volatility.

Specifically, we recognize mark-to-market adjustments of $13.3 million related to our investment in RCS Capital Corporation. After intense work with their lenders and other constituents at the end of the year, RCS announced in January that it would file a petition for a prearranged Chapter 11, which would include the sale of non-core assets and the wind down of certain segments to focus on the profitable core financial advisory business. As stockholders and managers, we were disappointed by the developments at RCS but we are leveraging H.I.G Capital's significant experience with workouts and distressed investing to maximize the return on our holding.

Secondly, our energy exposure remains limited to approximately 4% of the portfolio as of December 31, 2015. As oil prices continued to decline, the aggregate mark-to-market adjustments on our energy-related investments declined $3.2 million or $0.81 per share during the quarter. We risk-weighted RCS at 5 to reflect its non-accrual status and continue to hold our energy positions at 3 accounting for both the macro environment and Company-specific factors.

In summary, despite certain specific challenges, we are pleased with our portfolio overall. We have 35 positions across 29 companies. These are primarily senior secured loans and over 97% carry a variable rate.

The portfolio is well diversified across a number of industries with an average investment size of $11.5 million and a weighted average effective yield of 11.8%. Looking at the capital markets, Broadleaf indicated new issue has slowed and deal flow continues to be muted. A large portion of this can be attributed to institutional demand in the loan space and regulatory challenges banks and investors are facing.

Overall, we believe this is a net positive for our markets and we continue to see attractive opportunities in our pipeline. We have capacity to take advantage of investment opportunities and expect that we will continue to leverage market conditions to drive better execution and terms.

I also wanted to note the addition of Stuart Aronson as the head of the H.I.G Direct Lending team in the first quarter. Stuart is the former head of GE Capital's sponsor finance group and brings a wealth of sourcing and underwriting experience. Stuart served as the President and CEO of GSF and was an officer of the General Electric Company.

The additional of Stuart and his team further demonstrate H.I.G's commitment to the space and the lending platform. We are excited to welcome Stuart and the team and are confident they will make a significant contribution to WhiteHorse Finance. Before I turn it over to Gerhard, I wanted to reemphasize the strong performance we enjoyed in 2015.

Our core operations and NII covered our shareholder distributions. We had healthy investment pays particularly given our capital and liquidity position. We improved our average effective yield while maintaining our senior secured strategy.

In addition, we successfully completed the rights offering in November providing us with additional capacity as we enter a market where we feel we're seeing numerous attractive opportunities to deploy. With that, I will now turn the call over to Gerhard. Gerhard?

Thanks, Jay. Let's begin with our results for the quarter ended December 31, 2015. There were three items that significantly affected our quarterly and full-year results.

First, the Company completed a public offering of non-transferable subscription rights to purchase shares of common stock at the end of November 2015. The offer was fully subscribed and the Company issued 3.3 million shares generating net proceeds of approximately $44 million. With the additional capital, the Company is well-positioned to take advantage of opportunities in the credit markets.

Second, we refinanced our revolving credit facility during the quarter extending the reinvestment period for capital deployment by three years through December 2018 and increased the facility size from $150 million to $200 million with an additional $20 million of capacity available beyond that through an accordion feature. The refinancing triggered the accelerated amortization of $3.2 million of deferred debt acquisition costs which resulted in $1.4 million of reduction and incentive fees for a net reduction of $1.8 million in net investment income during the quarter.

Third, and as Jay mentioned, we recognized $18.7 million or $1.14 per share of unrealized mark-to-market adjustments primarily from our investments in RCS capital. As a result, NII was $3.9 million for the quarter. Core NII, which excludes the net impact of the accelerated amortization, was $5.7 million or $0.35 per share.

Our investment income continues to consist primarily of recurring cash interest. This translates to core NII of $1.48 per share for 2015, which exceeded our annual distribution of $1.42 per share.

We reported a net decrease in net assets from operations of $14.8 million or $0.90 per share for the fourth quarter. As of December 31, 2015, net asset value was $244.1 million or $13.33 per share as compared with $221.4 million or $14.77 per share reported as of September 30, 2015.

Switching over to portfolio and investment activity. As Jay mentioned, as of December 31, the fair value of the portfolio was $415.3 million, invested in 35 positions across 29 companies and consistent with previous quarters is primarily consisted of senior secured debt. The weighted average effective yield on performing debt investments at the end of the year was 11.8% consistent with recent quarters.

For the majority of investments in the portfolio, the risk range remained unchanged, and as Jay mentioned, we continue to maintain the 3 rating on our energy holdings to reflect the current macroeconomic market conditions. As a reminder, we continue to have low exposure to the energy sector overall with approximately 4% of our portfolio representing energy or energy-related investments. RCS Capital was the only non-accrual loan and represented 1.7% of the portfolio as of December 31.

Turning to our balance sheet. WhiteHorse Finance had cash resources of approximately $22.8 million as of December 31 and $98 million of undrawn capacity under its revolving credit facility.

We closely monitor our assets coverage ratio and feel comfortable with our leverage as of December 31, 2015. The Company's asset coverage ratio for borrowed amounts as defined by the 1940 act was 230.5%, well above the statute's requirement of 200%. Our net effective debt to equity ratio, also adjusting for cash on hand, was 0.68 times.

Last, I would like to highlight our quarterly distribution. On November 23 last year, we declared a distribution for the quarter ending December 31 of $0.355 per share for a total distribution of $6.5 million to stockholders of record as of December 21, 2015, and this distribution was paid to stockholders on January 4. This marks the Company's 13th distribution since our IPO in December 2012 with all distributions at the rate of $0.355 per share per quarter.

And we expect to be in a position to continue our regular distributions. I will now turn the call back to the operator for your questions. Operator?

The floor is now open for questions.

(Operator Instructions)

Ben Nicholas, Baird.

Thanks, guys. Good morning.

Just wanted to get a little sense on how you're thinking about leverage on the balance sheet now with the upsizing and refinancing of the credit facility. As you noted, leverage around 70% debt to equity now. Just trying to figure out where you all might be comfortable taking that going forward.

Thanks, and I appreciate the time this morning. We have traditionally run somewhere between 0.7 and 0.9. It really is driven a little bit by market and what we see in terms of opportunities.

We're comfortable taking leverage higher than where we are today. Once we get in the 0.85 range, we start to be more cautious and circumspect about it. But we certainly run it in that range if we feel like we've got good risk and return opportunities.

So I think it will fluctuate. Like you mentioned, we have a little bit more capital come in that reduced leverage a little bit this quarter but we will run it like we have for the last three years.

Okay. That's helpful. Thanks, Jay.

Just kind of bigger picture looking at the portfolio, noting in your prepared remarks a search for additional diversity in the portfolio, and just thinking about a few concentrated type positions you have in the portfolio. I'm just kind of wondering how you think about some of those larger positions you have and comfort with that and how you view portfolio concentration and diversity moving forward.

That's a good question. We look at diversity as we are generating new ideas and looking at the different opportunities.

With the way credit markets work, sometimes as you see in the same industry pop up two or three times and you just have to decide whether that means you want to do three small positions within an industry where you are going to concentrate on one name that you like the best out of those as those opportunities arise. From the standpoint where we are today, we are comfortable with our positions and the size. As you noted, it can be slightly lumpy.

I don't think we have anything that is particularly outsized as of today, although we do take opportunities to sell down positions whether that's because of a lower yield and we have the chance to cycle out or if it's larger position like you mentioned here, it maybe something that we sell down part of to a partner or someone we're doing other work with. That's something that we are constantly looking at but there is nothing that is urgent in my mind on that front. But it wouldn't surprise me to see some of that activity going into 2016.

Okay. Great. That is all helpful. Thanks, Jay.

You bet. Thank you.

Rick Shane, JPMorgan.

Guys, thanks for taking my question this morning. Just curious given where we are in the cycle in the investment opportunities and if you're in a position where you have some liquidity and there are attractive yields out there, do you see deploying capital more follow-on investments with your existing companies to shore up their positions or do you see actually deploying capital into a lot of new -- not a lot but a number of new investments?

We will skew towards newer investments, Rick. The opportunity set seems to be growing right now, and as I mentioned some of the other things going on in broader capital markets will push opportunities our way we feel. The addition of Stuart Aronson and his team will generate more ideas as well.

And I expect that a lot of those will be appropriate for WhiteHorse Finance. So I think we will skew much more towards newer deals and the things that we're seeing right now are very attractive from risk and return, both in terms of what you're getting on yield but also how we are able to structure.

I think that's probably a theme you're hearing from a lot of guys. If you have capital right now and can deploy and be judicious about it, I think there's a lot of opportunities coming our way in the middle market and smaller cap names.

Got it. That makes sense. And I don't want to dwell too much on Stuart's addition, but historically your differentiating factor has been sourcing deals that are, I would describe off the market, a little bit niche-ier, really leveraging the network that you guys have.

It strikes me and again, I don't know Stuart at all, it strikes me that he comes from a more traditional background. Is this going to suggest that you guys are going to change what you are originating a little bit, move up a little more in terms of size or market?

That's a good catch on the story. Look, I think overall Stuart's background has been kind of both, kind of what you described as our traditional market, more off sponsor, et cetera, and also sponsor coverage. And there's other pockets of money at H.I.G that he is going to be deploying for as well.

So when I said I think there's a lot of things he's going to see that will be appropriate for us, I think there's going to be some things that don't work for us but that work in other areas for H.I.G. So it's an augmentation to the team.

I think we will see things that fall out of that practice that work for us that we may not have seen before and I think that the current team at WhiteHorse Finance certainly sees a lot of things that wouldn't have crossed their desk at GE. It's an exciting opportunity to add someone, a seasoned market pro who will be bringing a lot of new deals in. Some of those will work for us and some won't.

Terrific. Thank you very much.

You bet. Thanks for calling in.

There are no further questions. The does conclude today's conference call. Thank you for your participation. All participants may now disconnect at this time.

Thank you, operator.