WhiteHorse Finance Inc (WHF) 2021 Q1 法說會逐字稿

Good morning. My name is Angella, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance First Quarter 2021 Earnings Conference Call. Our host for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 5:00 O'clock p.m. Eastern. The replay dial in number is (404)537-3406 and the pin number is 4287043. (Operator Instructions) It is now my pleasure to turn the floor over to Sean Silva of Prosek Partners.

Thank you, Angela, and thank you for everyone, for joining us today to discuss WhiteHorse Finance's First quarter 2021 earnings results. Thank you for your patience as we work to remind our technical issues that cause this brief delay. 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 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. Today speakers may refer to material from the WhiteHorse Finance First Quarter 2021 Earnings Presentation, which was posted to our website this morning.

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

Thank you, Sean. Good afternoon, everyone, and thank you for joining us today. I hope you and your families continue to be safe and healthy as we navigate these unprecedented times. 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 start part by addressing our first quarter results and market conditions.

Joyson Thomas, our Chief Financial Officer, will then discuss our performance in more detail, after which we will open the floor to questions. Our first quarter results were defined by an improving economic backdrop, supporting both COVID impacted and non-COVID impacted credits. This delivered some of the recovery in our portfolio but also led to elevated repayments, both of which we had forecasted on prior calls. As a result, our outlook for 2021 remains unchanged.

GAAP net investment income was $7.6 million or $0.37 a share. Core net investment income was $7.7 million or 37.5% -- $0.375 per share, covering our dividend. NAV was $15.27 per share compared to $15.23 per share in Q4. Gross deployments of $58 million were offset by repayments of $110 million. Our weighted average effective yield on income-producing debt investments modestly decreased to 9.6% compared to 9.9% in Q4. Leverage at the end of Q1 was 1.1x, within our targeted range of 1x to 1.25x. Activity in our JV remains stable.

At quarter end, the JV held 22 positions at a fair value of $174.6 million in Q4 -- I'm sorry. At quarter end, the JV held 22 positions with an aggregate fair value of $185.7 million compared to 20 positions at a fair value of about $174.6 million in Q4. The return to our BDC on our investment in the JV at the end of Q1 was 14.8%. We continue to believe that our JV is accretive to the BDC's earnings.

Turning now to our investment portfolio. At the end of the first quarter, the fair value of our investment portfolio decreased to $617 million compared to $691 million at the end of Q4. Gross deployments of $58 million resulted from 5 new originations and a number of add ons. Comparatively to first quarters in prior years, this year's Q1 origination level was stronger. Gross deployments were more than offset by $110 million of repayments, which is consistent with the projected outlook we provided during our last call. The timing of some of these transactions resulted in a higher Q1 repayment level than expected but it does not change our overall projections for the year.

Nonaccruals represented 2.5% of our debt portfolio compared to 1.8% in Q4. We are disappointed to share that Grupo HIMA failed to make its interest payment during Q1. This Puerto Rican hospital company, like other hospital companies, is being impacted by COVID. As a result, we wrote off 2 months of current accrued interest previously recorded in Q4 and placed a first lien loan on non-accrual. This reversal had a negative impact of $0.014 to net interest income. We are actively engaged in restructuring negotiations with Grupo HIMA, and we'll provide updates as they become available.

Regarding our other nonaccrual, we're pleased to report that subsequent to quarter end, Sure Fit emerged with Hollander (inaudible) products, both Sure Fit and Hollander are owned by the same sponsor. As a result of this merger, our loan investment in Sure Fit will be back on accrual in Q2 and all past due interest and fees have been paid. At the end of the first quarter, Sure Fit has accounted for 0.8% of our nonaccruals at fair value, after giving effect for Sure Fit going back on accrual, on a pro forma basis, our Q1 non-accruals would have been only 1.7% of the debt portfolio at fair value. We are pleased that even with the markdown on HIMA, NAV was still up during Q1 as the rest of our COVID impacted accounts improved. We've seen emerging strength in our fitness concepts investments as the economy begins reopening.

Our restaurant exposure, while a small part of our portfolio was also improved. This account represents 1.8% of our debt portfolio as of March 31, 2021. At the end of the first quarter, 85% of our debt portfolio is first lien, senior and secured. Sponsor loans comprised 65% of our portfolio compared to 58% in Q4. Also, subsequent to quarter end, Honors Holding had a significant equity investment made by a PE firm, which will provide additional equity pushing to our loan and will have a materially positive impact on the mark for Honors in Q2.

Looking ahead, our Q2 pipeline is strong. We already have 11 mandated deals, 10 of which are new originations. Of the 10 new originations in our pipeline, 6 are sponsor and 4 are nonsponsor. As always, there can be no assurance that any of these mandated deals will close. Turning to the market outlook. In Q1, we saw a notable increase in supply demand imbalance in favor of borrowers. This is most true in the on-the-run sponsor market, which is right now comparatively less attractive than the off-the-run sponsor market and the nonsponsor market. Pricing and structures in the on-the-run sponsor market have returned to pre-COVID levels. But in the off-the-run sponsor market, there is still a slight premium on pricing to pre COVID and the same is true for the non-sponsor market.

In closing, I'm encouraged by the directionally positive trends we're seeing in our business. The improving economic backdrop is benefiting our portfolio and we have a healthy pipeline going into Q2. Many of our COVID-impacted credits are beginning to deliver the economic upside that we've been projecting on prior calls as the vaccine rollout program improves. This improving momentum brings particularly significance to our 3-tiered sourcing architecture, which is foundational to our strategy. It includes 24 deal professionals, dedicated to origination in 12 locations across North America, a 20-plus person business development team, leveraging H.I.G. Capital's proprietary prospect database of over 21,000 names and sourcing at the H.I.G. level by over 400 investment professionals overall.

As a result, we believe we are optimally positioned to capture the economic recovery in a way that benefits our business and our shareholders. With that, I'll turn the call to Joyson, after which we'll take your questions.

Thanks, Stuart, and thank you all for joining today's call. During the quarter, we recorded GAAP net investment income of $7.6 million or $0.37 per share. This compares to $6.9 million or $0.335 per share in Q4 2020. Core NII was $0.375 per share, which covered our quarterly dividend. Our investment in the SCRS JV increased by $4.3 million after the effects of transferring 4 new deals totaling $28.9 million.

As of March 31, 2021, we held 22 positions in the JV with an aggregate fair value of $185.7 million. Q1 fee income was approximately $0.8 million compared with $0.4 million in the prior quarter. Largely a result of prepayment fees collected from the elevated repayment levels during the quarter. We reported a net increase in net assets resulting from operations of $8.2 million. Our risk ratings during the quarter showed that 84.3% of our portfolio positions carried either a 1 or 2 rating compared to 83.3% in Q4.

Turning to our balance sheet. We had cash resources of approximately $24.5 million as of March 31, 2021, including $16.8 million in restricted cash. As of March 31, we had approximately $70.4 million undrawn under our revolving credit facility. As of March 31, 2021, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act was 192.6%. We see the requirement under the statute of 150%. Our Q1 on net effective debt-to-equity ratio after adjusting for cash on hand was just above 1x.

Next, I'd like to highlight our distributions. On March 2, 2021, we declared distribution for the quarter ended March 31, 2021, $0.355 per share for a total distribution of $7.3 million to stockholder record as of March 26. The dividend was paid on April 5, 2021. This marks the company's 34th consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at the rate of $0.355 per share per quarter.

Finally, this morning, we announced that our Board declared a second quarter distribution $0.355 per share to be payable on July 2, 2021, to stockholder record as of June 18. Consistent with what we have said in prior quarters, we will continue to evaluate our quarterly distribution, both in the near and medium-term based on the core earnings power of our portfolio, in addition to other relevant factors that may warm consideration.

I'll now turn the call back over to the operator for your questions. Operator?

(Operator Instructions) Your first question comes from the line of Robert Dodd with Raymond Jones.

Some moving parts. A question on Grupo HIMA, for example, that -- the $0.014 impact that is about $300,000, is that correct? It was reversed out of interest income during Q1?

That's correct.

Got it. Then just on green. Obviously, Puerto Rico suffered another COVID spike earlier and just a couple of months ago. Is -- do you have any expectation or belief that the failure to pay the coupon payment was related to that? Or are other issues that have been ongoing in the business for a while?

We're led to understand that the vast majority of hospitals across the country and the world have been very heavily impacted by COVID in terms of normal activity that we go on. And that has been true for Grupo HIMA since COVID hit. And the company's liquidity, including support from the government was not enough to bring the company through this period. So with great questions about what's going to be the timing of the recovery from COVID, and also questions around the levels of government support, we felt it was prudent given that the company did not pay its interest to put the loan on nonaccrual. And it will stay there until and unless we get data that would suggest that the company would be able to service its debt properly. And at the moment, we're in active negotiations with the company around the potential for restructuring.

Got it. I appreciate that color. And then just another one on the front shoreside. You said back on accrual and this paid or past due interest, will that be recognized as interest income in Q2? Or is it going to get some other kind of special treatment like even it's into catalog, or anything like that?

Robert, that's correct. So now that we're current in Q2, all of that back to interest that was received would be with as interest income in the Q2 period.

Got it. And then just one more, if I can, sorry. I know its quite simple for you, but in terms of -- obviously, the repayments to it were very strong in Q1. If I look at your book, it looks like you may be continuing to expect a pretty high level of repayments. Obviously, you also have a lot of mandates already for Q2. So just you said your expectations for the year aren't really changed, but could you reiterate for us exactly what that expectation is in terms of do you expect the book at, say, the end of '21 to be above the size at the end of '20 or can you give us any color on where you expect that relatively to be? Not quarter-to-quarter is hard to predict, but maybe by the end of the year can give some color.

Yes. Robert, there are a good number of companies in our portfolio that are either currently in the market for sale or we believe will be coming to market in Q3 or Q4. So we have visibility into a number of accounts that are likely to repay, some of which have significant prepayment penalties that will be accretive to the what we can't predict is beyond what we have as our current pipeline, how many new deals we will win and how many new deals we will close, as in Q3 and Q4, given that we're distant from those and don't have mandates for those quarters yet. So the goal is to be operating at about 1.25x leverage with about $700 million of assets. And it's just not possible at the moment to know where we'll be at the end of the year other than the fact that we have a very strong pipeline. As of this morning, there were 133 deals in pipeline, whereas prior to COVID the norm is typically 100 to 120 deals. So we're above what our pre-COVID pipeline was. And if we can win our fair share of transactions, which we've historically done, that should position us to operate in the direction of the total leverage and asset picture that we want to be at.

Next question is from the line of Sarkis Sherbetchyan with B. Riley Securities.

You mentioned one particular deal that had a large maple prepayment penalty. Did that sale occur in the first quarter? Or should we expect that yet to come?

We had deals that had prepayment penalties occur in Q1, but there is a transaction that has, as you correctly discussed it, a make-whole prepayment penalty that is currently expected to close in June, although again, there can be no assurance that will occur. And so there is the possibility that we'll get a significant prepayment (expletive) penalty on that transaction if the acquisition of the company is consummated by the end of the quarter.

And in the last call, you mentioned potentially expecting the BDC to run that interim leverage of up to 1.5x, given the elevated prepayment levels, and it sounds like the repays, the expectations there are continuing. So is that still the right way to think about it? And then as those repays come in, you'll kind of go back to your target leverage of 1.25x? Or should we think about that differently?

So there were more repayments in Q1. Then we knew about on the last call, which have resulted in lower assets and lower leverage. We have visibility into Q3 -- Q2, Q3 and Q4 of companies that are intended to be sold. And so if we could originate enough business to take the leverage up above 1.25x to up to 1.5x. And we would do that in anticipation of the paydowns of these deals. That said, given the repayments that were above our expectations in Q1, the likelihood of getting above 1.25x in the near future is low.

One more for me. Seeing the first liens kind of dominate the mix here. I think in prior calls, you were targeting more of 85:15 mix there between first lien and second. Any comments or updates on kind of pricing and where you're finding more value for the portfolio? Or any changes to those longer-term objectives?

Sure. The markets are aggressive, especially in the large-cap and upper mid-cap market. We have looked at a number of second lien loans but have only found one that we've been willing to do so far. And of the 11 mandated transactions, one of them is, in fact, a second lien loan. As you know, our second lien loan portfolio has continued to shrink over several years now. And it's actually lower. The number and the amount of second lien loans that we have is lower than our targeted level. So we do intend to bring in a second lien loan for $15 million. That loan is priced at LIBOR plus $900 and should be accretive to the portfolio. And we do, in our pipeline that I mentioned of 133 deals, 3 of those 133 are second lien loans. So there's still some more second lien that we're working on. Although, the vast majority of our pipeline is first lien lending. Does that fully answer your question?

Your next question is from the line of Melissa Wedel with JPMorgan.

I think first question for you would be about sort of expected portfolio yields trends did come down a bit quarter-over-quarter. And I'm wondering if that's related to -- you talked about the sponsor certainly on a responsive deal pricing pretty competitively. I've also noticed that the -- I think in your slide deck, you had the share of foster deals increasing sort of over time. I'm wondering if that's still weighted. Should we expect that to continue?

Nonsponsor deals priced higher than sponsor deals, despite the fact that the non-sponsor deals generally have lower leverage. As I've shared with the market before and we'll reiterate sourcing of non-sponsor deals is much tougher than sourcing of sponsor deals. There's much less competition, but it's hard to find those deals. There's no centralized point you can go to directly originate nonsponsored transactions. Our non-sponsor deals are typically levered only 2.5x to 4.5x with an average more in the low to mid-3s and most of our non-sponsor deals are priced at LIBOR $700 and above, sometimes priced as high is $800, $900 or $1,000 over. A number of the repayments we took in Q1 were, in fact, nonsponsor repayments. And that's one of the reasons that you see the ratio of sponsor and nonsponsor deals are shifting and the average yield shifting a bit as well. We work very, very hard to optimize and maximize our sourcing in the nonsponsor market. And as I mentioned, of the 10 new top forms that we have mandates for in the quarter, 4 of them are nonsponsor deals. So we continue to have a good participation from that piece of the market. But it would be directionally true that the more non-sponsor deals that we source that will generate in a normal scenario, a higher average return on the assets. And then the other thing, of course, that will help the average or healthy average return on assets is if we successfully get our second lien concentration back in the range to 10% to 15% of the overall portfolio, which would be very modest and is much, much less than we were a couple of years ago. You've seen our second lien concentration decrease markedly over time.

Okay. Second question is around the JV. How are you going to be thinking about the sort of level and trajectory of dividend income from that vehicle?

Our goal is to successfully deploy all the capital we have in the JV, which would be $75 million of junior capital from the BDC. The 14.8% is actually, I think, either at the high end of the range or above the high end of the range of what we projected for the JV ROR as evidenced by strong originations of oil price deals. If we deploy the $75 million into the JV, we would actively consider based on what we're seeing in the market increasing the allocation to the JV by another $25 million because we do believe that, that return anywhere from 13% to 15% is very accretive to the BDC shareholders.

(Operator Instructions) Your next question comes from the line of Chris Kotowski with Oppenheimer.

Most of my have been asked, but it's kind of an interesting case study. I'm looking at the $8.16 million of net realized gains and the $7.6 million of unrealized depreciation. I'm wondering if that is related mainly to AG kings? And if it is, it just seems to me, I've lost track of it a little bit, but -- and the cost par have moved around over the last 2 years since it's been on non-accrual. But it seems to me like that -- it kind of implies that you've got a more or less full recovery on that loan after having marked it. Is that the right way to read that?

I'll have (inaudible). Go ahead, Joyson.

Yes. No worries. So Chris, you're absolutely right. That's the way to think about it. As you know, we last year had done a secondary trade to buy a portion of the debt at a deep discounted price. And as a result of that, the cost basis was lower than essentially what we had marked it at and essentially, the realization that we -- that occurred in the quarter was that marked value. So the $7.5 million of unrealized losses really is from just the reversal of those unrealized gains that now are transferred over to realized gains. And then the additional amounts mainly relate to sales that we had in (inaudible) also on missing sold during the quarter.

Okay. And it does pretty much imply a pretty complete recovery of your original loan, right?

Yes. We recovered more than our original principal amount, yes.

Correct.

And I'm showing open question at this time, I would like to turn the call back to management for closing remarks.

I am pleased that things continue to go well to BDC. We will continue to seek to give transparency to our investors. And I encourage investors or analysts who cover us to let us know prior to these calls, any questions that you'd like to see addressed. And I hope everybody has a good day and a good week.

And this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect your lines.