WhiteHorse Finance Inc (WHF) 2017 Q1 法說會逐字稿

Good morning. My name is Kristen, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Financial First Quarter 2017 Earnings Conference Call. Our host for today's call are Stuart Aronson, Chief Executive Officer; and Ed Giordano, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 1:00 p.m. Eastern Time. The replay dial-in number is (404) 537-3406 and the pin number is 99156801. (Operator Instructions)

It is now my pleasure to turn the call over to you Sean Silva of Prosek Partners.

Thank you, Kristen, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's first quarter 2017 earnings results.

Before we begin, I would 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 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, which is available on our website at www.whitehorsefinance.com.

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

Thank you, Sean. Good morning, and thank you for joining us today. As you are aware, we issued our press release this morning prior to the market open, and I hope you've have had a chance to review our results, which are also available on our website. I'm going to take you through our first quarter operating performance, and then Ed will review the financial results, after which, we'll take your questions.

I'm pleased to share that WhiteHorse Finance had a strong quarter. Our first quarter results were driven by continued robust pipeline that added 4 new investments to our portfolio. I'll provide more detail on these originations in a few minutes. Through our ability to capitalize on market dynamics, while leveraging enhancements we've recently made to the quality of our portfolio, WhiteHorse Finance net investment income -- generated net investment income of $0.356 per share, which is just above our quarterly shareholder distribution at $0.355. NAV for the quarter was up at $13.80 per share, a $0.17 increase from last quarter, and our average unlevered yield -- effective yield of 11.8% held constant from last quarter.

The hold position of the 4 new loans we originated during the quarter fell between our target range of $4 million to $20 million. All the deals were directly originated and ranged and leveraged from 2.9x to 5.7x, with equity cushions of between 40% and 60%. Two of these were first-lien loans, and 2 of them were second-lien loans. The first origination, AST, is an application software company based in Illinois. It is a first-lien loan of $4.9 million, with an effective yield of 9.6%. The second deal, Climate Pros, is an HVAC and refrigeration service provider based in Illinois. It is a first-lien loan of $4.9 million, with an average effective yield of 10.9%. The third asset, StackPath, is an Internet software and services company based in Dallas. It is a second-lien secured term loan of $18 million, with an effective yield of 11.4%. And finally, our fourth investment, Intermedia, is an application software company based in New York City. It's a second-lien secured term loan of $18 million, with an effective yield of 11%.

Our ability to source both sponsor and nonsponsor deals, along with our deep underwriting focus, allows us to maintain a healthy and active pipeline through different market cycles. I'll provide more detail on our pipeline in a few minutes.

Looking at our track record to contextualize this recent activity, since inception, the average leverage on assets originated into our BDC is approximately 3.4x through our investment level. We believe this is significantly lower than what other BDCs targeting similar yields are originating. We believe this demonstrates the benefits of our high-quality direct originations and our comprehensive H.I.G affiliated sourcing program. Originations have been strong enough that we have not needed to add any broadly syndicated investments into our portfolio, because in our view, our directly originated assets tend to offer better risk-adjusted returns, we intend to continue to minimize the number of broadly syndicated investments we put into our portfolio. To that end, since the inception of the WhiteHorse Finance organization, we have not suffered losses on any of our directly originated assets. And while we do not anticipate that trend to continue indefinitely, the track record so far speaks to the quality of our directly originated loans.

Turning now to repayments. Repayment and exit activity for the quarter was mostly focused on exits at par value. This included the paydown at par in ProPetro, an oil and gas drilling company. Since we have marked that position at a level less than par, this payoff led to NAV accretion. Similarly for 360 Holdings, a U.S.-based merchant distributor -- merchandise distributor, we received par plus 1% prepayment penalty upon paydown. We also sold our position in Securus, an integrated telecommunications firm and also at par value. When looking at our total activity of new origination repayment for the 3 months ended on March 31, 2017, we invested $46 million in new and existing portfolio companies, offset by repayments in sales of $30.2 million. This compares to $20.6 million invested in new and existing portfolio companies and repayments in sales of $18.4 million during the same period in 2016. Our investments in new portfolio companies had an average unlevered yield of 11%.

Turning now to our investment portfolio. As of March 31, 2017, the fair value of the portfolio was $431.7 million, which is above the $411.7 million reported at the end of the fourth quarter of 2016. As of that same date, our loan portfolio was comprised of senior secured loans to lower mid-market borrowers, and those loans were substantially all variable rate investments primarily indexed to LIBOR. The portfolio had an average investment size of $11.1 million based on fair value with the largest investment being $26.2 million. The portfolio's weighted average effective yield is at 11.8%. We continue to focus on diversifying our portfolio, holding 39 positions across 30 companies, an increase from the 37 positions across 29 companies held during the prior quarter. Throughout most of the quarter, our portfolio is either close to or fully invested. Driven by the first quarter's new origination activity, our leverage levels increased from 74% to 77%. When accounting for expected closings in our pipeline, we expect leverage to reach our target range of 80% and 90%. Regarding that pipeline, the strong originations that we saw on Q1 have continued into Q2, driven by our 3-tier sourcing architecture, which strives to find opportunities before they're intermediated by large investment banks. During the second quarter, we expect to originate at least 2 new deals allowing us to keep our BDC invested at the ratio of 80% to 90% leverage.

Turning now to the macro outlook. As mentioned, our strong origination track record has allowed us to stay away from the broadly syndicated marketplace. That has become an aggressive space, which is attracting significant capital at a rate that has outpaced current supply of assets. The market is seeing a massive wave of repricings, where investors are now getting less return for the risk that they're taking. In the sponsor market, we're seeing the same supply demand imbalance. Leverage multiples are ranging from 5.5x to as high as 7.5x, at pricing that's actually slightly below where it was in prior quarters. Since WhiteHorse focuses on both the nonsponsor and sponsor sector, we have not experienced some of the volume or pricing challenges that are evident in the sponsor mid-market. In our experience, there is a very low correlation between demand in the sponsor market and demand in the nonsponsor market. And using our 3-tier H.I.G linked sourcing infrastructure, we continue to optimize between these 2 market segments to keep the BDC fully invested with low risk and high yielding assets.

With that said, we continue to uncover opportunities that have limited competition. We are booking and closing deals that have low leverage and attractive returns consistent with our business model and strategy. And finally, as you may have seen, we recently released a new investor presentation designed to provide more transparency into how our BDC operates. We believe that in our competitive market, transparently illustrating our key differentiators is a strong positive for our shareholders.

With that, I'll now turn the call over to Ed.

Thanks, Stuart. Turning to the Q1 first quarter results. NII was $6.5 million for the quarter or $0.356 per share compared to $6.6 million or $0.358 per share in the prior quarter. Our investment income continues to consist primarily of recurring cash interest. We reported a net increase in net assets from operations of $9.6 million or $0.53 per share for the first quarter. As of March 31, 2017, net asset value was $252.5 million or $13.80 per share, up from $249.4 million or $13.63 per share as reported for Q4.

Switching over to portfolio investment activity, the risk ratings on our portfolio remain mostly unchanged. We continue to maintain a 3 rating in 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.

Turning to our balance sheet. We had cash resources of approximately $20.1 million as of March 31, 2017 and approximately $23.7 million of undrawn capacity under our revolving credit facility. We continue to closely monitor our asset coverage ratio and feel comfortable with our leverage as of March 31, 2017. The company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 229.8% at the end of the first quarter, well above the statute's requirement of 200%. Our net effective debt-to-equity ratio, after adjusting for cash on hand, was 0.69x.

Last, I'd like to highlight our quarterly distribution. On March 17, we declared a distribution for the quarter ended March 31, 2017, of $0.355 per share for a total distribution of $6.5 million to stockholders of record as of March 27, 2017. The distribution was paid to stockholders on April 3. This marks the company's 18th 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.

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

(Operator Instructions) Our first question comes from Dan Nicholas with Baird.

Stuart, appreciate the color you gave on the portfolio and the sourcing network. Just diving it a little deeper, I'm wondering if you could kind of give us a -- a bit of a breakdown on the sourcing behind 1Q originations and what you're seeing into 2Q. Is it more -- are you seeing more in the nonsponsor space or going more after the nonsponsor space given some of the competitive dynamics you mentioned?

Yes. I'm happy to give more color on that. The timing to close deals is typically between 2 and 4 months. So deals that we're closing in Q1 were for the most part deals that started gestating well before that or before that. The current position in the sponsor market was a little bit less aggressive towards the end of the year, and we did source several deals that were sponsor transactions. As we're in this year, the originations that we're finding, we are active in both the sponsor and nonsponsor market, but the deals that we're finding to be more appealing and the deals than we're seeking and getting mandates on have been primarily nonsponsor assets. So the 2 assets that are mandated and closing already in Q2 are both nonsponsor assets. But you can continue to see us expect to play both sectors and try to pick and choose the best risk return opportunities in both the sponsor and nonsponsor market.

Okay. That's helpful. And I think in the past you all talked about kind of a -- roughly a 50-50 split there between sponsored and nonsponsored activity in the portfolio. Is that still kind of what we can expect going forward?

I would say in the current market environment, my expectation would be, there will be a higher percentage of nonsponsor deals and a lower percentage of sponsor deals. If there were any type of correction in the sponsor market, where sponsor deals became relatively more attractive from a risk return standpoint, we pivot that very quickly. But in today's market and given our current pipeline, the most attractive opportunities we're seeing are mostly nonsponsor deals.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation in the WhiteHorse Financial First Quarter 2016 (sic) [2017] Earnings Call. All participants may disconnect at this time.

Thank you so much.