WhiteHorse Finance Inc (WHF) 2016 Q2 法說會逐字稿

Good morning. My name is Kimberley and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second Quarter 2016 Earnings Conference Call. Our host for today's call are Stuart Aronson, 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 Time. The replay dial-in number is 404-537-3406 and the pin number is 47924688. At this time, all participants have been placed in a listen-only mode and the floor will be opened 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, operator; and thank you, everyone; for joining us today to discuss WhiteHorse Finance's second quarter 2016 earnings results. Before we begin, I'd like to remind everyone that certain statements which are not based on historical facts made during this call, 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. During this call, we will discuss GAAP and non-GAAP financial measures, for which a reconciliation can be found in our press release.

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

Thanks, Brian. Good morning and thank you for joining us today. I have a few items to address before kicking off our call this morning. As you may know, my name is Stuart Aronson. On May 23, I was appointed as the CEO of WhiteHorse Finance. My background includes over 25 years in the middle market and the lower-middle-market leveraged loan sectors. Most of this time was spent at GE Capital or as an officer of the company, I served in a series of capital markets and business leadership roles serving both the sponsor and non-sponsor markets. In these roles, the businesses I led provided financing solutions with senior secured and structured equity products across a broad range of industries. My prior experience is well aligned with the goals of WhiteHorse Finance, which remains focused on providing customized, secured financings in the mid and lower-mid markets. I'm excited about the opportunities that lie ahead for this business. In addition to the quarterly earnings process, I expect to be meeting with many of our covering equity analysts and shareholders to highlight the benefits of our direct originations resources and the low leverage and high-yielding assets that we've been able to source for WhiteHorse Finance.

Finally, one quick word of thanks to my predecessor, Jay Carvell. Jay's leadership and experience through our IPO process and the early growth stage of our business has been a particularly valuable resource. He is returning to his primary focus to HIG's syndicated loan business, but will continue to serve on WhiteHorse Finance's Board as well as being an important part of our investment committee.

Now, let's turn our attention to the second quarter results. As you're aware, we issued our press release this morning prior to 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 second quarter operating performance and then Gerhard will review our financial results, after which we'll take your questions.

Looking at the second quarter from a topline perspective, our average effective yield remains steady at 11.9% while net interest income for the quarter was $0.351. Importantly, in each of the five preceding quarters, core net investment income exceeded distributions to shareholders. We believe this consistency is confirmation of our long-term strategy and hard work. I'll talk more about our efforts to enhance shareholder value in a few minutes. I'm pleased to share that based on improved asset performance, our NAV per share was $13.37, an increase of $0.09 from the NAV of $13.28 last quarter. On the origination side, we had total activity of $20.6 million, which comprised of $12.1 million origination to Crowne Group, a manufacturer of primarily aftermarket auto and industrial components. This loan was originated at well less than four times leverage and has a double-digit weighted average effective yield. We also funded existing revolvers for client network services and gold impair funding for combined $8.5 million.

On the repayment side, we saw a total of $39.3 million in activity, and this included $20 million on the last day of the quarter from Expert Global Solutions. Our sales of $15.5 million during the quarter related primarily to Origin's, where our position was previously at $40 million. This sale was motivated by our ongoing portfolio diversification strategy, which has been discussed on prior calls, and this is one aspect of our overall portfolio optimization efforts.

Turning now to our investment portfolio, as of June 30, the fair value of the portfolio was $400.9 million, slightly down from the $417.2 million reported at the end of the first quarter. As of that date, the majority of our portfolio was comprised of senior secured loans to small-cap borrowers and over 97% of those loans were variable rate investments. The portfolio had an average investment size of $11.8 million, with the largest investment being $36.6 million and a weighted average effective yield of 11.9%. We now hold 36 senior secured positions across 30 companies. Throughout most of the quarter, the portfolio is either close to or fully invested. In addition, we achieved our goal of keeping our leverage levels between 80% and 90%. As I mentioned earlier, our average effective yield during the quarter was 11.9%. This compares with 11.9% in the first quarter and 11.8% in the fourth quarter of 2015.

Looking ahead, our pipeline remains strong as we continue to source direct investment opportunities. The strength of our originations efforts continues to reflect our relationship with HIG and their network of approximately 300 investment professionals who help identify origination opportunities. We will continue to utilize these resources to proactively and selectively uncover high-quality investment opportunities. We've also added to our dedicated sourcing capabilities with the addition of four new investment professionals, bringing the total to 14 investment professionals.

Turning now to the state of the industry, between the first and second quarters of 2016, we saw the leverage finance markets broadly recover from a volatile fourth quarter and become much more aggressive. The sponsor bid market has shown a supply-demand imbalance in favor of borrowers, which is increased leverage and decrease prices. However, we have not seen that same dynamic in the non-sponsored market, where leverage on deals is held steady at multiples between 2.5 and 4 times and the coupon on non-sponsored transactions continues to be between 9% and 11%, with non-sponsored deals now accounting for a majority of our current activity pipeline.

As in the past, we have a goal of investing prudently in a manner that allows us to earn our dividend and at the same time protect NAV. Before turning the call over to Gerhard, I would like to reiterate that we remain optimistic about our pipeline in the firm strategic direction as investors search for yield intensifies during what we expect will be a prolonged period of low interest rates, the yields offered by our portfolio will become increasingly valued. We also expect to continue benefiting from the enhanced regulatory landscape, restricting origination abilities of banks and other traditional lenders, which continues to drive business to us. We're optimistic about the strong credit quality in today's non-sponsored market where we continue to uncover high-yielding opportunities at low leverage multiples. While we continue to optimize our portfolio, we will focus on maintaining a leverage level between 80% to 90% and sourcing new loans with a prudent loan to value ratio. This will help us protect NAV and consistently earn our dividend quarter-to-quarter. We look forward to continuing to update you on our progress. And with that, I now turn the call over to Gerhard.

Thanks, Stuart. NII was $6.4 million for the quarter or $0.351 per share, a decrease from $6.8 million or $0.369 per share in the previous quarter, due in part to lower prepayment and amendment fees during the second quarter of 2016. Our investment income continues to consist primarily of recurring cash interest. We reported a net increase in net assets from operations of $8.1 million or $0.44 per share for the second quarter. As of June 30, 2016, net asset value was $244.7 million or $13.37 per share, up from $243.1 million or $13.28 per share as reported for Q1.

Switching over to portfolio and investment activity, as of June 30, the fair value of WhiteHorse Finance's investment portfolio was $400.9 million, down over the prior quarter as a result of the sales and prepayments activity Stuart mentioned a few minutes ago. Our Q2 portfolio was comprised of 36 positions across 30 companies and consisted primarily of senior secured debt investments. The risk ratings on our portfolio remained mostly unchanged. We continued to maintain a three-rating on our energy holdings to reflect the current macroeconomic market conditions. And as a reminder, we continue to have low exposure to the energy sector overall with approximately 2% of our portfolio representing energy or energy-related investments.

We had one credit Fox Rent A Car on non-accrual as of June, 30. The investment's underlying performance and cash flows are in line with plan and we remained comfortable with our investments from an asset coverage perspective. As discussed on last quarter's call, the first-lien lender group continues to block interest payments due to a technical covenant violation. We believe this issue will be resolved in the short-to-medium term and will not result in any loss of principal.

Turning to our balance sheet, WhiteHorse Finance had cash resources of approximately $44.1 million as of June, 30, and $35.5 million of undrawn capacity under its revolving credit facility. We refinanced our unsecured term loan with Citi on June 30, ahead of the contractual maturity on July 3, using available funds on our revolving credit line with JPMorgan. We continued to closely monitor our asset coverage ratio and feel comfortable with our leverage as of June 30, 2016. The Company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 226% at the end of the second quarter, well above the statute's requirements of 200%. Our net effective debt-to-equity ratio, after adjusting for cash on hand, was 0.61 times.

Lastly, I'd like to highlight our quarterly distribution. On May 23, we declared a distribution for the quarter ended June 30 of $0.355 per share for a total distribution of $6.4 million to stockholders of record as of June 20 and this distribution was paid to stockholders on July 6. This marks the Company's 15th distribution since our IPO in December of 2012, with old distributions at the rate of $0.355 per share per quarter and we expect to be in a position to continue our regular distribution.

I'll now turn the call back to Stuart.

Thanks, Gerhard. One last item before we open the lines for questions. You're all likely aware that Gerhard will be stepping down at the end of this week. I'd like to take this opportunity to publicly thank Gerhard for his service to our Company. He's played a leading role dating back to our IPO. Our Board appointed Ed Giordano as the Interim CFO following Gerhard's resignation. Ed is the CFO of H.I.G. Capital's $9 billion credit platform and a seasoned professional with institutional credit fund experience, who has been able to step in and take over leadership of the WhiteHorse Finance accounting and operations team.

I will now turn the call over to the operator for your questions. Operator?

The floor is now open for questions. (Operator Instructions) [Dan Nichols], Baird.

Hi, thanks. Good morning, guys.

Good morning.

Just, Stuart, trying to get maybe some more color around the -- as you alluded to in your prepared remarks, the kind of ongoing desire to add some diversity and I guess, the less concentration risk in the portfolio, just trying to think about how you're thinking about that, at the same time while trying to preserve yield in the portfolio. If you look at some of the more concentrated positions in the portfolio, they got comfortable double-digit yields that you alluded to now in the non-sponsored space of 9% to 11%. So just kind of thinking about how you weigh that desire to add some diversity while also obviously trying to preserve yield. How you always think about right now? Thanks.

Thanks for the question. The strength of our pipeline is what's giving us the flexibility to try to manage to increase diversity in the portfolio. The goal would be to get to that increased diversity without having the average yield on the portfolio deteriorate. We are seeing 9% to 11% yields on senior secured deals that are leveraged 2.5 times to 3.5 times. As you know, the assets that often have higher yields than that in our portfolio are second lien financings. To the extent that we look at second-lien financings, the yields on those would be even higher than the 9% to 11%. So given the pipeline of what we're working on, we're very focused on the dual effort to earn the dividend on a quarter-by-quarter basis and also preserve NAV. So where possible, if we can get acceptable risk return in senior secured first-lien assets, we do that; and where appropriate, where we can get enhanced returns with a nominal risk increase, we will then do second-lien assets as well. The focus again to remain well diversified and not have any negative impact on the average yield across the portfolio.

Okay. That's helpful and then just kind of a follow-up, if you kind of look at the pipeline or near-term, near-term closing, either forward looking or (inaudible) of what you're looking at now, is it safe to say that the non-sponsored space again is making up the majority of what you're looking at?

In the current pipeline, about three-quarters of the deals we have are non-sponsored transactions. The reason we are currently focused that way is because of the relative imbalance that I shared earlier in this call in the sponsor market. As has been well publicized, the flow of transactions in the sponsor mid and lower-mid markets has been fairly sparse and there's a lot of demand for those assets so that we've seen as a result increasing leverage and decreasing return. Again, we have not seen that in the non-sponsor market and so we have a quite robust flow of non-sponsor deals we're working on that are able to achieve the target returns that we have for WhiteHorse Finance. We are in final due diligence on two transactions and both of those transactions would be consistent with the philosophies of modest leverage, strong asset coverage and strong double-digit returns.

Okay. That's so helpful. Thanks, Stuart.

(Operator Instructions) There appears to be no further questions. That does conclude today's conference call. Thank you for your participation. All participants may disconnect at this time.

Great. Thank you so much.