WhiteHorse Finance Inc (WHF) 2020 Q3 法說會逐字稿

Good afternoon. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Financial Third Quarter 2020 Earnings Conference Call.

Our hosts 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 p.m. Eastern Standard Time. The replay dial-in number is (404) 537-3406, and the pin number is 4571047. (Operator Instructions)

It is now my pleasure to turn the floor over to Sean Silva of Prosek Partners. Please go ahead.

Thank you, Christie, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Third Quarter 2020 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 related 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's speakers may refer to material from the WhiteHorse Finance third quarter 2020 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, everybody, and thank you for joining us today. I hope you and your families continue to be safe and healthy as we navigate these precedented times. And our thoughts remain with all of our stakeholders, including the dedicated employees across WhiteHorse and our H.I.G. family. We would also like to express our continued gratitude to all the health care and other frontline and essential workers. And we continue to send our sincere condolences to those families who have lost loved ones.

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 by addressing our third quarter results and market conditions; and Joyson Thomas, our Chief Financial Officer, will then discuss our performance in more detail, after which we will open the floor for questions.

We're pleased to report a very strong third quarter, with virtually every key metric trending positively. During the quarter, we earned our dividend. We increased our NAV. We had strong asset deployments. We reduced our nonaccruals. And we currently have the strongest pipeline in our history. I'll now provide more details on all of this.

The NAV increased by 4.8% to $15.31 in Q3 compared to $14.61 in Q2. Q3 NAV eclipsed our pre-COVID level NAV of $15.23 at the end 2019 and is also in excess of our 2012 IPO price of $15 a share. Core NII, after adjusting for a $1.9 million capital gains incentive fee accrual was $7.8 million or $0.38 per share compared to $5.42 million or $0.255 per share in Q2, comfortably covering our quarterly dividend.

Our $1.9 million capital gains incentive fee accrual was the result of the $15.7 million in net realized and unrealized gains recognized in the quarter, which were driven primarily from the large mark-to-market gains recorded on our investments. GAAP net investment income was $5.9 million or $0.289 per share. Core NII was driven by interest payments received from AG Kings, where we will now be able to announce positive resolution to that situation. I'll provide more details on this shortly.

Our strong origination activity and improved credit quality were key factors in our improvement during the quarter. Despite a COVID-impacted environment, we recorded gross deployments totaling $58.3 million, partially offset by repayments of $26.5 million, resulting in net deployments of $31.8 million.

Our weighted average effective yield on income-producing investments was 9.9% in Q3 compared to 9.6% in Q2, an increase of approximately 30 basis points. Our ability to deploy capital into high-quality assets despite the current economic environment resulted in leverage of 0.94x at the end of Q3 compared to 0.86x at the end of Q2. And as a reminder, our target leverage range is up to 1.25x.

I'm also pleased to report that subsequent to the end of the quarter, we successfully issued $40 million of new senior notes in a private placement that matures in 2025 and pays a fixed interest rate of 5 3/8%. This is materially lower than our prior issuances and demonstrates the strength of investor confidence in the quality of WhiteHorse Finance credit portfolio.

We used the proceeds of this issuance to pay down the outstanding balance of our JPM facility, which currently has approximately $216 million outstanding on the $250 million that's available. The debt issuance results in additional cushion to key advance rate thresholds on our JPM facility, while also providing capacity to opportunistically deploy capital at attractive rates. Joyson will provide more detail shortly on this.

Now despite our strong quarter and several positive markups across our portfolio, we classify the larger percentage of credits as high exposure to COVID during the quarter, moving Grupo HIMA up from moderate to high. We also recorded moderate markdowns during the quarter on 4 of our previously designated high-exposure credits.

As a result, our high-exposure credits represented 9% of our portfolio at the end of Q3 compared to 7% of the portfolio during the prior quarter. With that said, we still firmly believe in the quality of the portfolio and continue to have productive conversations with our borrowers as we push through this environment.

Turning now to our investment portfolio. At the end of Q3, the fair value of the investment portfolio increased to $595.3 million compared with $547.4 million at the end of Q2. As mentioned earlier, the increase in our portfolio during the quarter was due in part to our deployment activity totaling $58.3 million, which consisted of 3 new originations as well as several meaningful add-ons to our portfolio.

Our originations were all first lien, with our 3 new portfolio companies consisting of 1 new sponsor deal and 2 new nonsponsor deals. Gross deployments were partially offset by repayments of $26.5 million during the quarter, which included forward realizations on 2 portfolio credits.

During the third quarter, a portion of our debt in Ag Kings was converted into a superpriority DIP loan that will pay interest during the bankruptcy process. As a result, this portion of our investments in AG Kings was put back on accrual during Q3.

During the quarter, we also began receiving payments on the "last out" term loan portion of our Kings' investment, approximately $2.9 million was recorded as interest income, with an additional $3.5 million in payments being recorded as a recovery of our basis on the loan, further reducing our cost in that investment. As mentioned earlier in the call, the bankruptcy auction yielded a buyer for the Kings' WHF assets, and that process is moving forward.

The final figures are still to be determined, and the purchase is still dependent on the outcome of regulatory approvals. However, based on the auction bid and the cash flows of the company currently, we believe there is potentially modest upside above the blended mark we have across all our positions in Kings at the end of the quarter. It is important to note that this is unlikely to be an immediate process. We estimate that regulatory approvals could take anywhere between 1 to 6 months.

As compared to Q2, nonaccruals improved to 3.3% of our debt portfolio's fair value from 7.4%, with our position in Arcole converting into an equity position in Q4. Once AG Kings is repaid upon completion of the bankruptcy sale, we project a further decrease in our nonaccrual level, given these 2 nonaccrual positions account currently for 2.6% of the Q3 debt portfolio at fair value.

Turning now to our pipeline. As I mentioned in my opening remarks, we are seeing our strongest pipeline ever. We are experiencing extremely strong business activity. And the opportunities upon which we are engaged are more attractive than anything we've seen since the 2012 to 2013 vintage.

Our origination force is at peak levels related to headcount and number of offices. We're up to 19 originators and 12 offices across North America, with our newest office based in Cincinnati, Ohio.

As our business and portfolio continue to grow, we are seeing increased levels of repeat business from sponsors and add-on opportunities or upsizing opportunities from our portfolio. Already in Q4, we have closed 4 new deals, all first-lien sponsored loans. We also have an additional 7 mandated deals as well as 3 add-ons, with 6 of these total deals being sponsor deals and 4 of them being nonsponsor deals.

All of the transactions are first-lien transactions. Now as always, we can make no guarantees that any of these transactions will close, but we're certainly working on them and doing our best to get closure on these as many as possible.

Following the end of the third quarter, we exited our position in Vessco Holdings. Not only did this generate prepayment fee income, but there was also a significant gain on our co-investment equity position in Vessco. We believe our strategy of adding small equity positions into the portfolio provides upside to our NAV and has proven to be successful to date.

A key to our success in originations was that because of our underwriting discipline and conservative portfolio construction, we were able to remain active throughout the entire COVID-correction period, whereas many other lenders were forced to exit the market. Our continued activity positioned us to close $42.6 million and 3 new investments at a weighted average spread of L plus 7.10% and average leverage of only 3x in Q3.

As an example, one of our deals is a transaction for a company at less than 3x leverage. The other lenders in this deal are banks who are lending at LIBOR plus 300. However, we were able to secure a position on that loan at LIBOR plus 7.50% with a 3.75% closing fee, and we are pari passu with the banks that are lending at LIBOR plus 300. We continue to endeavor to book assets that have yields such that when we get to the target leverage, we will be able to consistently earn our dividend on a quarterly basis.

In terms of macro outlook, our pipeline is 30% higher than at the same time last year and more than double what it was at the lowest point of COVID. The vast majority of our investments are still senior secured first lien. In fact, so far, all of them are senior secured first lien, with a nice mix of sponsor and nonsponsor deals.

In the sponsor market, we're generally seeing much more competition compared to 3 months ago as parties who were sidelined have reentered the marketplace. The increased competition has, in part, led to more aggressive structures and lower pricing, but they're still not back to pre-COVID levels.

The nonsponsor market has remained very conservative, with leverage multiples of between 2.5 to 4.5x. Pricing is approximately 50 to 150 basis points higher than pre COVID, with strong prepayment penalties available on these transactions. With the banks having become even more conservative about what they will or won't do, we have several lower mid-market nonsponsor deals under mandate that are first-lien deals, which we expect will command double-digit pricing.

In summary, while we maintain our prudence and discipline in this uncertain environment, we are encouraged by our performance during Q3, also by the activity we've seen thus far in Q4 and our position heading into 2021. With that, I will now turn this over to Joyson to speak in more detail about our financials.

Go ahead, Joyson.

Thank you, Stuart, and thank you all for joining today's call. During the third quarter, we recorded GAAP net investment income of $5.9 million or $0.289 per share. This compares to $5.2 million or $0.255 per share during Q2. Core NII was $7.8 million for the quarter or $0.38 per share, covering our dividend of $0.355 per share.

During the quarter, we recorded net unrealized gains in our portfolio of $15.2 million, which were primarily driven by markups on fixed investments, aggregating to approximately $12.6 million and 1 markdown totaling $1.2 million. Our investment in the STRS JV increased to $50.4 million after the effects of transferring one position as well as from unrealized appreciation during the quarter. As of September 30, the JV's total portfolio comprised 18 issuers for the aggregate fair value of $162.6 million.

Q3 fee income was approximately $0.7 million compared with $0.5 million in the prior quarter, driven by amendment and prepayment fees. After considering our net realized and unrealized gains, we reported a net increase in net assets resulting from operations of approximately $21.6 million. As of September 30, net asset value was approximately $314.6 million or $15.31 per share, which compares to $300.2 million or $14.61 per share in Q2, primarily driven by improved markups.

As a result, our risk rating improved meaningfully during the quarter, whereas in Q2, 64.2% of our portfolio carried either 1 or 2 rating. That number in Q3 has increased to 76.5%. As a reminder, a 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations and a 2 rating indicates that the company is performing according to our initial expectations.

Turning to our balance sheet. We had cash resources of approximately $22.9 million as of September 30, 2020, including $14.1 million of restricted cash and approximately $18.9 million of undrawn capacity under our revolving credit facility, excluding the $100 million accordion under the revolver.

As of September 30, 2020, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 206.2%, well above our requirement under the statute of 150%. Our net effective debt-to-equity ratio, after adjusting for cash on hand, was 0.87x as of the end of the quarter.

Following the close of the quarter, we conducted a private notes offering of 5.375% unsecured debt maturing in 2025 for an aggregate principal amount of $40 million. The proceeds from the offering were used to repay outstanding balances on our revolving credit facility. We were very encouraged by the favorable pricing received and the corresponding flexibility afforded to our capital structure.

Next, I'd like to highlight our distributions. On August 10, we declared distribution for the quarter ended September 30, 2020 of $0.355 per share for a total distribution of $7.3 million to stockholders of record as of September 21, 2020. The distribution was paid to stockholders on October 2, 2020. This marks the company's 32nd consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at the rate of $0.355 per share per quarter.

Additionally, during the fourth quarter, on October 9, we declared a special distribution of $0.125 per share to stockholders of record as of October 30. The distribution will be paid to stockholders on December 10, 2020, and is related to income that was earned last year, which would have otherwise been taxable.

Finally, this morning, we announced that our Board declared a fourth quarter distribution of $0.355 per share to be payable on January 5, 2021 to stockholders of record as of December 21, 2020. 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 warrant consideration.

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

(Operator Instructions) And your first question is from Mike Smyth of B. Riley Securities.

Congrats on a good quarter. So my first question is, if I look at Slide 16, it looks like 1-rated companies jumped a pretty good amount, from 2.3% to just over 14%. It seems like kind of a big jump.

So I'm just wondering, is this just 1 large investment getting upgraded or several smaller ones? And if that's the case, is there any concentration of industries? I'm just wondering if you could provide any color here, that would be helpful.

Joyson, do you have the list of deals that were moved up to a 1 handily available?

We do. Roughly speaking, it was 11 borrowers that saw improvements.

Got you. That's now [playing]. Is there any concentration with industries or anything like that?

Yes.

Just so you have clarity, we are seeing that, outside of the directly COVID-impacted companies, the balance of the economic activity in our portfolio has been pretty strong, very strong. And so there are more companies, as Joyson has highlighted, that are performing at expected levels or above-expected levels.

But Joyson, go ahead, you were going to share some more detail?

Sure. I can share with you the names that saw improvements for the quarter, if that's helpful for you.

Yes, sure. That would be helpful.

NMFC. [Oak TV], Source Code, our position in Arcole, Alpha Media, Mills Fleet Farm, NNA Services, CHS Therapy, Potpourri, Vessco. Vero Parent -- excuse me, TrueBlue, not Vero Parent, and Lift Brands.

Got you. That's helpful. And then another question would be, just given where the stock is trading and your confidence around credit, how do you think about balancing at between potentially looking at buying back stock or putting capital to work in an investing environment?

Our general philosophy is that we are investing in very strong assets that are generating excellent returns for our investors. And we hope that, with the continued earnings and a trend line where we hope to be able to earn our dividend on a quarterly basis from core net income, that the shares will trade better. If the shares continue to trade very low, the Board does discuss, and we can consider share buybacks, but that has not been determined to be the right thing to do so far.

Your next question is from Mickey Schleien of Ladenburg.

Stuart, a couple of high-level questions, if I can. First, broadly speaking, it seems like we can view credit today as it relates to sectors that are performing well despite the pandemic, and those are things like software and grocers. And then there are those that are struggling.

Your portfolio is quite diversified by industry. So I'd like to understand how you view the potential for more -- some deterioration of credit in the companies that are underperforming, if we were to see more stay-in-place orders as the pandemic's curve gets worse now in the fall and going into the winter?

Mickey, it's good to hear from you. And it's a great question. Number one, we feel very fortunate that there's a limited portion of our portfolio that is COVID affected. I also feel fortunate that in the case of all of the sponsor companies, who are in our portfolio that have been affected, the private equity firm owners have injected equity in to help these companies.

Now as COVID has gone on longer than people originally hoped, and it looks like it will go on -- well, notwithstanding this morning's announcement, go on for at least another quarter or 2, some of the companies that have gotten equity injections have gotten thin on liquidity. And we continue to work with the sponsors and the owners on those companies to help those companies get to the other side of COVID.

If these companies get to the other side of COVID, frankly, all of them have the potential to return to par. These are otherwise fundamentally healthy companies that have been affected by the virus and the repercussions from it.

That said, in the quarter, despite the fact that our NAV is above pre-COVID peak and above our original issuance, we did mark down 4 of our COVID-impacted assets because of the continued pressure. So we are trying to remain very realistic about the valuation on these assets. But it does help that all of these assets are first lien, and it does help that the majority of these assets are sponsor owned.

And we hope to get to the other side of COVID and, again, see even more NAV improvement as these companies return back to par, if COVID ends and if the owners of these companies invest in the companies through the rest of the COVID period. If they don't, and if we need to take over a company, we certainly have the ability to do that.

We have restructuring experts in the company. We have private equity professionals in the company. And we do have the wherewithal to run a company and turn around the company for our investors, if the existing owners choose not to do that.

That's -- well, I appreciate all that color, Stuart. That's really helpful. And on the flip side, there's a lot of yield-hungry private debt capital out there. And there are plenty of strong companies, as you've mentioned in your remarks, and they're getting a lot of attention. So how would you characterize the prepayment risk in your portfolio?

3 or 4 months ago, Mickey, I would have told you I wasn't going to see anything get prepaid. And yet, as I mentioned, Vessco, which is a credit that did an add-on acquisition during COVID, was performing very strongly. It was a non-COVID-affected company and was sold at a very good price. And as evidenced by our markup on the equity, we will make a gain on that investment that is a multiple of the original amount invested in the equity.

We have seen several repayments. There are not many more that we expect between now and the end of the year based on the data we have. But if the economy does remain as strong as it is outside the COVID-affected areas, based on our most recent portfolio review, we could see a number of current borrowers get sold in the first half of next year.

So we do see there's a chance for some portfolio churn. That said, the markets are strong. Our origination is strong, and we are going to strive to get to that 1.25x leverage level of outstandings.

And then, especially on our nonsponsor companies, we have very strong prepayment protection. And to the extent that these loans are repaying within 3 years of them being made, we typically do get prepayment penalties. On the deals that paid off this quarter, several of them did have prepayment penalties, including in Q4. Vessco had a prepayment penalty and Akumin, which paid off in the JV, also had a prepayment penalty.

I understand. That's interesting, Stuart. In terms of looking into next year, are there any new portfolio management themes that perhaps you're thinking about or going to start to employ now that we know there will be a new administration, and the new President may have new policies for some important segments, such as health care or alternative energy. Is that impacting how you expect to allocate capital going forward?

We had already adjusted our investing parameters 9 months ago based on the possibility of a change in administration. So anything that we've been doing in health care or infrastructure or any of the affected sectors has already been adapted to what we think the potential risks are of a democratic administration. So there's not really a change right now based on the fact that Biden has won because we've already incorporated all of that thinking into our risk downsides on our portfolios really since the beginning of the year. (inaudible)

How about upsides? How about opportunities? I mean there's the opposite as well, right? Do you think that the change in administration is going to provide you some opportunities that you can take advantage of?

Mickey, from my perspective, investing in debt is about avoiding the downside. Our upside is we are in LIBOR 7, LIBOR 8 or LIBOR 9. And so only in our equity co-investments do we see that there is some upside. And obviously, if there is a stronger economy, the equity co-investments we've made are more likely to do well.

And at the advice of, frankly, yourself and many analysts and shareholders, starting a couple of years ago, we were looking to increase the number of small equity investments we made in the BDC, with a mindset that when they go well, we make 2, 3, 4, 5x our money like we did on Vessco. And where we do poorly, based on the size of those investments, we only lose $1 million to $1.5 million, so $0.05 to $0.075 a share. So certainly, on the equity co-invest side, we see upside but that's a small piece of what we do overall, as you can see from our investment numbers.

I understand. My last question, Stuart, any comment you can make about the overhang in the stock from the affiliated shareholders, just in the context that the equity markets have been strong. There's certainly a lot more clarity today in terms of the government. And now we're getting more clarity on, hopefully, the end of the pandemic. Any thoughts or comments you can share with us about resolving that issue?

The Bayside shares are, of course, a much, much lower concentration than they were a couple of years ago. And we have an ongoing focus to try to make sure that we have stability in that situation. But there's nothing beyond the fact that we are focused on it that I can share at this time, Mickey.

your next question is from Robert Dodd of Raymond James.

So if I can go back to your prepared remarks, real quick, for AG Kings. I -- correct me if I'm wrong here, I know that you recognized $2.9 million of income and interest income on the first lien. Can you, a, tell me if I'm accurate with that remark?

And b, given that asset -- that particular line -- loan is marked below cost and on nonaccrual, can you tell us why you decided to take that into income instead of applying it all along with the bits that you did to the cost basis this quarter?

Joyson, can I pass you that question?

Sure, absolutely. Robert, so if you think about our position in Kings, a portion of the "last out" loan did convert into that superpriority DIP. So the way to think about the $2.9 million in interest payments, approximately $2.1 million of that was received prior to the bankruptcy filing as excess cash that we accounted for as interest income of the previously written-off interest that we had, again, previously accrued.

That's in connection then with about $3.5 million that we also received allocated to the portion of our "last out" debt that we had purchased in the prior quarter as a secondary purchase. That was accounted for as a reduction of our cost basis.

Got it.

Then...

Go ahead.

No, I'm sorry. So then post the pre-petition filing, we received about another $800,000 amongst both the superpriority DIP and that "last out" term loan as if interest payments.

Got it. Got it. Understood. On -- just then looking at the pipeline, you obviously closed a number of deals in Q3. Yes, a really strong pipeline, it looks like, for Q4. Can you give us any color on how you're evaluating?

Obviously, you have, perhaps, a greater exposure and pipeline access to nonsponsor deals than most other BDCs in contrast to just doing sponsor deals. How are you evaluating the risks between the 2 right now, given that things -- obviously, nonsponsored, that, that isn't the potential -- was reduced potential for equity injections, if there is trouble. And the outlook is still quite uncertain, even with this morning's news. So how are you evaluating sponsored versus nonsponsored in the environment right now?

Sure. So Robert, we've always made the case that the nonsponsor deals that we do are done on much more conservative terms, with much more conservative documents and much tighter covenants than our sponsor deals. And we've put forth to the marketplace that, in our experience, both as a firm and as individuals, that nonsponsor lending, when it's done at much, much lower leverage, results in strong performance through market disruptions.

As we've hit COVID and we've had a very severe market disruption, the only asset that is in our high-COVID-impact bucket that is nonsponsor is Grupo HIMA. And as you could tell from the mark on that asset, Grupo HIMA had issues prior to COVID.

So what's really happened is our nonsponsor book, on average, has performed more strongly than our sponsor book because the starting leverage is so much lower that, even if these companies have experienced 10%, 20%, 30%, 40% decreases in EBITDA, the leverage is still modest. The companies are able to service their debt load. And while we've had covenant violations, we've taken fees or increased the rates on these deals.

So our experience is that in the midst of a crisis, the nonsponsor loans are performing extremely well, better on average than the sponsor loans are. And our nonsponsor pipeline continues to be much less competitive than our sponsor pipeline, especially because the banks for, in many cases, have been sidelined.

And so we are working on -- as I mentioned in my prepared remarks, we're working on nonsponsor deals that are 3 to 3.5x leverage, that have pricing that ranges from L 8.50% to L 12%. And some of these deals, the leverage is so low that if the banks were operating normally, these might be bank loans at LIBOR 350. But on all of these deals, we get call protection.

And so if the banks do get back to normal in 6 months, and we get repaid, we will get very significant call penalties if these loans go away from us. So we love our nonsponsor pipeline and are aggressively trying to put more of those loans on the books if the credits are good and if the risk return is appropriate.

Got it. I really appreciate that color, and I know if you didn't get a double-digit yield on a first lien, you're doing okay. One final one, if I can. And you've put out Grupo HIMA, I mean, yes, it's had problems historically because it kept getting hit by hurricanes.

For this quarter, to your point, you put it into the high category. What can you tell us about why has that -- why is it high this quarter, but it wasn't before? Has something changed in the patient mix or, for lack of a better term, that just necessitates the switch this quarter?

COVID got worse in Puerto Rico. And the impact on the hospitals was also more severe. So the other thing that was going on is, if you go back to last quarter, the government was providing active support to hospitals across the country. And as we know, the government support of everything and everybody has been stalled.

It is our hope, and it's the hope of the owners of Grupo HIMA, that in the face of the COVID disruption, that the government will continue to support hospitals through the cash flow disruptions that they're having. But there is no certainty of that happening at this point. And therefore, we found it prudent to mark that asset down more just because there is uncertainty looking forward as to what the government will do and when the cash flows at these hospitals will normalize from typical elective procedures being at a pre-COVID pace.

(Operator Instructions) And your next question is from Rick Shane of JPMorgan.

And first of all, I do appreciate the disclosure is excellent and very helpful. I'm not sure if I missed this, but was there a reversal of interest income as nonaccruals came off? Is there anything that flows through the interest income line that we should think of as sort of nonrecurring?

Rick, there wouldn't have been anything this quarter, given that we didn't put any additional credits on nonaccrual. But in prior quarters, there could have been instances where we would have reversed out amounts that had been on the balance sheet and not received yet.

I actually meant the question in the opposite. With the nonaccruals coming down, was there anything that added to interest income this quarter that was added back?

AG Kings. The amount that I had mentioned on AG Kings would have.

Okay, great. I am sorry, I must have been...

So AG Kings -- a piece of that asset is now in the -- been rolled up in the superpriority DIP, and we are collecting ongoing cash interest on that. But there was more AG Kings interest that was accrued that was paid, that had originally been written off. And Joyson, confirm for me, that's $2.1 million plus $0.8 million were the 2 pieces that were both pre petition and post petition. Is that right?

That's correct.

Got it. Okay. That's helpful. And then, again, just love to sort of revisit the question of share repurchases. And I understand that it's a tricky issue in terms of liquidity, and there are some issues associated with that just in terms of investor -- investors wanting more float.

But at the same time, shares are trading at a 30% discount to NAV. You pointed to some places within the portfolio where you think there's opportunity for accretion back towards cost. It strikes me in the array of investments that you have that it's a highly known vehicle that you'd be investing in and with a path to realization that seems to make a lot of sense. Why not be a little bit more aggressive there?

Rick, all I can tell you is that we have had that conversation with the Board. The moment where it might have been most interesting to do it was as the stock market was going through a major correction, our shares traded to a much larger discount.

But at that point in time, as we shared with all of you and with our shareholders, we were very focused on maintaining liquidity because lenders, including JPMorgan, were marking assets down out of both a reaction to what had happened in the marketplace and frankly, out of fear. And so we wanted to make sure that no matter how severe the downturn seemed to be, that we would not create a liquidity problem for our shareholders, and we would not have a disruption in the dividend.

So when the shares were $7 or $8, we certainly had that conversation. Our hope is that as things normalize, then we share good information with the market, if the shares will trade back to a much better level. If they don't, the Board will once again convene and decide as to whether it makes sense to use up the liquidity to repurchase shares in the marketplace.

No, I appreciate that. And again, we can all look back at sort of bottom tick some stocks and wish we'd acted, but we also have to consider our own sentiment at that time and the responsibility that you guys need to maintain in terms of liquidity as well. So I appreciate that.

Your next question is from Chris Kotowski of Oppenheimer.

Yes. I just hate to go back to it, but I want to make sure I understand the AG Kings situation. And I guess, going back to the earlier question about kind of how much catch-up interest there is, I mean, so am I thinking about it correctly, if I say, okay, you took $2.9 million into income this quarter?

Kind of on a go-forward basis, if everything stays as it is, you just have the $14 million superpriority secured loan, that's got an 11% coupon, so that would be about $400,000 a quarter. So kind of the extra interest income in this quarter was somewhere around $2.5 million. Am I thinking about that right?

Joyson, does that sound right to you?

Yes, Chris. So to clarify that point, I think that is the right way to look at it.

Okay.

We have the "last out" piece on nonaccrual. That said, while it's in bankruptcy, our expectation is that would be paid interest as well in addition to the superpriority DIP. So in -- let's say, for Q4, our expectation is we would potentially recover and record additional amounts of interest relating not only again to the DIP piece, but also that remaining "last out".

Okay. All right. But yes, I mean, but the difference, delta versus just the priority piece, the DIP piece is -- yes. Okay. And then I guess, I'm kind of curious just you are much more encouraging about loan demand, and you experienced it sooner than most of the other BDCs we cover.

A lot of -- I mean most of them had either flat or down loan volumes quarter-on-quarter. And I guess, what do you attribute that? Is it your greater concentration in nonsponsor demand? Or you see -- or is it just better opportunities in general?

It's a couple of things, in our opinion. Number one, we didn't shut down. The -- I would tell you, based on what I saw, 90% to 95% of the lenders shut down in March, April, May. And even though there were people who were claiming they were in business, they were putting forth offers of financing that were illogical, like no one could take them.

So by not shutting down, we enhanced our position in the overall market. And we landed a couple of deals that were just super, super attractive. At the time, everybody was afraid, but in retrospect, they look like really good deals.

And then we have a direct origination mechanism that is in local markets that allows us to find deals that are not coming through the syndicated bank chain. And we are finding deals that have, in some cases, literally no competition.

And we're working on a deal -- well, working on several deals right now for companies that are sort of $10 million, $12 million of EBITDA that did not have banker intermediaries, that we have sourced directly. One of them is levered 3x. One of them is levered 3.5x. Both of these companies are worth 7 to 12x EV.

And we are commanding pricing that is reflective of the fact that we directly originated the deals. So our pipeline, what I heard from my compatriots in the marketplace is at the bottom of COVID, pipelines were down 80% to 95%. Our pipeline never fell more than 50%.

And when I did our transaction review this morning, we had 136 deals in our pipeline. Now, of course, a very small fraction of those closed. But last year, around the same time, I think it was around 107 deals or something like that.

So this direct origination mechanism and having stayed in the marketplace has just positioned us very well. And it's allowed us to continue to have discipline. I mentioned it in my prepared remarks, but in the sponsor market, a lot of lenders have come back. They weren't lending for 6 months, and so they're way, way behind budget.

And so we see certain lenders doing things that look, frankly, pretty desperate. And we're just able to walk away from those situations. We don't need to chase. So it's a nice luxury to have.

Again, a lot of mandated deals for the quarter. I can't be sure that any of them will close because we're in the midst of due diligence. But if we do close all of the mandated deals, or even most of the mandated deals, we'll make solid strides toward getting to the target of 1.25 leverage and having a core asset base that drives the income levels up on our portfolio.

Your next question is from Bryce Rowe of National Securities.

I wanted to ask a little bit more about the pipeline and kind of how it relates to the balance sheet leverage target. I mean, clearly, you're very encouraged by the pipeline and by the potential for some growth here in the portfolio.

So kind of with that in mind, and then with the context of the new unsecured notes offering, I'm curious what -- how you think about capital structure should you hit that 1.25 target? I mean do you want to continue to expand the unsecured notes as a percentage as you work towards that 1.25? Or are you comfortable possibly taking down the balance of the credit facility and expanding it with the accordion?

Yes. It's a great question, Bryce. We continue to evaluate the situation based on the nature of the opportunity and pricing in the marketplace. Needless to say, we are able to borrow on a secured basis at a much lower rate than on an unsecured basis, even at the very attractive 5 3/8% that we just issued.

And what we continue to do is look at downside scenarios to make sure that if you have a repeat of March, April, where, again, and hopefully, it won't be COVID, but things happen. We want to make sure, in a downside scenario, we have tons of room before there's any disruption to the dividend to our investors, which, again, we shared with investors during March, April, May period, we had successfully done. We did not run into liquidity problems. As you know, several other players in the marketplace did.

And so we do that by a mix of secured, unsecured. We do that by minimizing the amount of revolver exposure that we have. And we would take on more unsecured if we felt the pricing was right as we move towards 1.25, but we don't need to take on more unsecured. So it will really be an opportunistic decision as the deployment of the capital continues to occur.

Okay. That's helpful. And I would guess that relative to 3 or 4 months ago, to talk about getting to that 1.25, it seems like it could happen sooner now than it would have happened -- than you would have thought 3 or 4 months ago. Am I thinking about that correctly, given the pipeline discussion that we're having here?

We were absolutely delighted in August, September, October to see the surge in deal activity that we saw. And no, we did not predict that 3 to 6 months ago. We thought, frankly, that deal activity would be very limited through the balance of the year, but it has not been. It's very strong, and you're hearing that from others as well, I'm sure.

So the question becomes how many deals do you win? And I've shared with you how many mandated deals I have and, hopefully, a good percentage of those close.

But beyond the mandated deals, as we get into quasi-mid-November, there's more deal flow that could be mandated then and, frankly, could close by year-end. And if some of those things break our way or in the direction of our clients, we could make good progress towards getting to that 1.25.

Okay. Okay. That's great. I wanted to kind of...

I'd also -- just so you know, I should also mention that we don't keep all the assets directly on our balance sheet. We do use our JV. And the JV is also highly accretive to income as the junior capital in that JV returns double-digit returns. And any deals that are priced L 6.50% and below, which are generally in this market, senior secured, very good credits do go into that JV.

Okay. Yes, that was going to kind of be my next line of questioning, and trying to understand kind of what the pace of originations at the JV would be, or at least the pace of your continued investments into it. So it sounds like you'll hit that $75 million over the next 6 to 12 months, perhaps?

We certainly could hit the full utilization over the next 6 to 12 months. And depending on what the economics look like at that moment, we could make a decision to increase the allocation into the JV, if that was accretive to our shareholders.

Okay. Okay. And then one kind of, I guess, modeling question. You talked about the Arcole getting restructured into equity. So you'll take a realized loss on the debt. And I'm curious, maybe, Joyson, you can help me with this. But what the equity investment -- what the size of the equity investment might look like as we see the fourth quarter financials?

So before I pass it to Joyson, let me just share with you that the underlying company performance at Arcole is very strong. The company has not had any significant COVID effect. And we believe that there is, potentially, good equity upside in that asset over the period of time that we choose to own it. But in terms of how many dollars it turns out to be, Joyson, can you share what the numbers look like?

Yes. I think in regards to the accounting treatment, obviously, we haven't finalized the accounting for the Q4 transaction. But I think our preliminary thoughts are that it's a nontaxable transaction. And so we'll be rolling overall cost basis into the common equity shares. And so Stuart, my understanding is, I believe, overall, we would have essentially 75% -- or represented 75% ownership through kind of common in any preferred units.

We have no further questions at this time. I will now turn the call back over to management for any additional or closing remarks.

Everyone, I appreciate the time you spent with us. If there are more things that come up, we always strive to be transparent. And I encourage you, prior to our calls each quarter, if there are information flows that we can share with the marketplace and with you that are useful, please try to let us know that prior to the call so we can incorporate that into prepared remarks. But that's all we have. And again, I hope everyone does well through the rest of the COVID crisis. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.