WhiteHorse Finance Inc (WHF) 2020 Q2 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second 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. The replay dial-in number is (404) 537-3406 and the pin is 3181299.

(Operator Instructions) It is now my pleasure to turn the floor over to Sean Silva of Prosek Partners.

Thank you, Lisa, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Second 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 certain 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 materials from the WhiteHorse Finance second 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, 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. 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 results relative to market conditions, Joyson will then discuss our performance in more detail, after which we will open the line for questions.

We're pleased to report that second quarter results demonstrated a strong rebound from the lows experienced in mid-March. First, I would like to share that NAV increased materially to $14.61 per share compared to $13.86 per share in Q1. This 5.4% increase resulted from several factors: increased marks on assets resulting from price improvements in the market; credit improvements on COVID-19 impacted loans; our work with our borrowers and sponsors; and an opportunistic secondary market purchase. Second, we have dramatically improved the liquidity in the BDC, with approximately $75 million of available capital under our secured credit line as of today, excluding our $100 million accordion facility.

This materially lowers downside risk relative to the prior quarter, should market volatility return, while providing the opportunity to take advantage of more attractive terms in the marketplace, which include lower leverage and higher prices on loans.

During the quarter, there were no adjustment items to core NII. So we are reporting second quarter GAAP net investment income of $5.2 million or $0.255 per share. This compares to first quarter GAAP NII of $6.1 million or $0.297 per share and first quarter core NII of $5.5 million or $0.267 per share.

The NII level this quarter resulted from a combination of lower asset balances driven by repayments, interest rate declines, lower amendment and prepayment penalties compared to our historical trends and the income impact of assets that are on nonaccrual.

Despite our increase in NAV, we would have liked to have seen stronger net investment income.

Deal activity was muted for the greater part of Q2. And while the market exhibited high volatility, we focused on making sure the BDC was safe with maximum liquidity.

In our investor presentation, we shared an estimate of the level of COVID-19 risk exposure across our portfolio. When we produce these reports, we take into account the most recent data on each company, including feedback from management about real-time performance and their best projections to what will occur going forward. We've had a strong portfolio of focus since COVID hit, and we speak to management teams of impacted borrowers as frequently as every week.

As you can see in the presentation, accounts which are classified as either very high or high exposure, collectively represent approximately 7% of our portfolio, which we believe is manageable considering the extreme disruption across the economy.

I am pleased to share that across our portfolio, companies that were impacted by COVID-19 received consistent support from sponsors and private owners through equity injections and cost containment measures. We are working with owners of these companies to ensure that equity injections of liquidity are sufficient to bridge the companies into 2021.

During the quarter, we entered into 3 new positions and 3 add-ons, totaling $39.4 million in gross deployments. Of our 3 new positions, which totaled $33.6 million, 2 were non-sponsor. All portfolio additions during the quarter were first lien, and our weighted average effective yield on income-producing investments for Q2 was 9.6% compared to 9.9% during Q1. Total repayments and sales were $36.6 million, including a $24.8 million paydown on Sigue, which was our largest and oldest active loan. This paydown meaningfully enhances our liquidity, reduces second-lien portfolio concentration and improves our credit quality.

As I've shared, we've made tremendous progress in improving our liquidity and outstanding borrowings. Our JPMorgan facility has a maximum borrowing limit of $250 million, with an additional $100 million accordion feature and a minimum borrowing amount of $175 million.

At the end of the first quarter, we had outstanding balance of $231 million. At the end of the second quarter, our outstanding balance decreased to $192 million. And as of today, our outstanding balance has reached the minimum borrowing amount of $175 million. This influx of liquidity, when combined with our disciplined approach to sourcing, will allow us to rebuild our pipeline and take advantage of the better deals now available in the marketplace. The deals we pursue will be the companies that are not distressed, have low COVID-19 and show low-to-moderate cyclicality risk, as we believe there is a high risk of recession in 2021.

At the end of the second quarter, the fair value of our portfolio decreased to $547.4 million compared to $557.1 million in Q1. Gross deployments of $39.4 million were fully offset by a transfer of $36.6 million in assets to our JV in addition to the $36.6 million of repayments and sales. However, we also recorded $17.8 million in mark-to-market gains during the quarter, which meaningfully improved NAV.

During the quarter, we reached an agreement to restructure one of our credits in the fitness industry, which was an area we had identified in prior quarters as high risk. While all involved lenders will encounter a partial and hopefully temporary loss on their debt positions, the owner has injected material new equity into the company, and we are replacing the restructured loan back on accrual in Q3. We received equity as a part of the restructuring, creating an opportunity for performance-based upside over time as the COVID-19 issue is resolved.

Second, as has been publicly disclosed, we restructured our debt position for our credit in the financial services space and have taken ownership of its operating subsidiary, pending regulatory approval. The loan has been marked at $0.80. As the investment is expected to convert into new equity ownership after quarter end, we will have the possibility for upside based on the firm's future performance, and that firm is performing very, very well right now in the midst of COVID.

Third, NAV benefited from improvements in the situation on our nonaccrual account AG Kings. As you would expect, one outcome from COVID-19 is stronger demand for groceries, which has been the case at AG Kings. And we also added to this position in a secondary trade, temporarily affecting our reported nonaccrual levels. We do have one small new account on nonaccrual, which was marked down from $0.93 to $0.81. We are in active dialogue with the sponsor on this credit, as the borrower works to improve its current situation.

In total, the nonaccrual percentage of assets at WHF will be 3.3%, after giving effect to the aforementioned restructured credit going back on accrual and excluding the effect of our secondary market purchase of Kings during the quarter.

We have had ongoing success in improving portfolio diversification, and our portfolio had a fair value average debt investment size of $8.8 million. Within our debt portfolio, 93.8% of our investments are now first lien, driven by the Sigue repayment, and 50.7% of our portfolio is sponsor-backed.

Leverage decreased to 0.86x during the second quarter compared to 1.04x at the end of Q1, as we focused on improving liquidity during the quarter. Having accomplished that goal, we are optimally positioned to deploy capital into high-quality loans as market conditions have begun improving. Thus far, in Q3, we have 7 deals mandated as well as 2 potential add-ons, all of which are first-lien opportunities and all of which will be priced at post-COVID levels, and all of these deals are first-lien.

Unfunded commitments at quarter end were $2.4 million. In terms of the macro outlook, during April and May, we saw very limited competition in our key markets as pricing surged significantly, but deal activity was very muted as most M&A activity was canceled or delayed. Those trends reversed in June and July, as a number of competitors re-entered the market. Pricing has now moderated to levels that are 75 to 150 basis points higher than pre-COVID levels. And deal activity, at least for us, has recovered to about 80% to 90% of pre-COVID levels.

In general, our opinion is that deals we're working on now are more attractive in terms of risk/return than what we have seen since the 2012 to 2013 vintages. Now many COVID-impacted companies are raising money to enhance liquidity, but we have not participated in those distressed or stressed financings nor do we plan to.

Our focus is financing opportunities for those companies that have low COVID impact and low-to-moderate cyclicality with the goal of keeping our portfolio as stable and consistent as possible. Regarding portfolio performance, because the lower leverage and lower LTVs, on average, our non-sponsored portfolio has performed better than our sponsor portfolio, as evidenced by the mark on the non-sponsored deals versus the sponsor deals. All 5 of our highest COVID-impacted loans are owned by PE firms, and thankfully, all those PE owners have been supportive so far.

In summary, while NII for the quarter was below our goal, NAV has materially improved and liquidity is strong. Our goal is to carefully deploy capital on the improved market terms and position WhiteHorse Finance to be able to earn its dividend on a quarterly basis.

I'll now turn the call to Joyson for more detail on our financials.

Thanks, Stuart, and thank you all for joining today's call.

During the second quarter, we recorded GAAP net investment income of $5.2 million or $0.255 per share. There are no adjustment items to Q2 core NII, so these results compared to Q1 GAAP NII of $6.1 million or $0.297 per share and Q1 core NII of $5.5 million or $0.267 per share.

During the quarter, we recorded net unrealized gains in our portfolio of $17.8 million, primarily driven by markups on 4 positions, including our investment in the STRS JV.

Our investment in the STRS JV increased by $6.8 million, of which $5.7 million can be attributed to new positions and $1.1 million resulted from unrealized appreciation.

For the BDC, fee income during the quarter was $0.5 million, which, while lower than historical trends, was approximately $200,000 higher than the prior quarter.

After considering our net realized and unrealized gains, we reported a net increase in net assets resulting from operations of approximately $22.8 million. As of June 30, 2020, net asset value was approximately $300.2 million or $14.61 per share, which compares to $284.7 million or $13.86 per share in Q1, primarily driven by the markups and the opportunistic secondary purchase referenced earlier.

As it pertains to our portfolio and investment activity, nearly 64.2% of our portfolio carries either a 2 or 1 risk rating on a scale of 1 to 5, where an asset rated 2 is performing according to our initial expectations and an asset rated 1 has performed better, such that the risk of loss has been reduced relative to those initial expectations.

Turning to the balance sheet. We had cash resources of approximately $20.9 million as of June 30, 2020, including $18.6 million of restricted cash and approximately $57.8 million of undrawn capacity under our revolving credit facility, excluding the $100 million accordion under the revolver.

As of June 30, 2020, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 216.7% at the end of the second quarter, well above our requirement under the statute of 150%. Our net effective debt-to-equity ratio after adjusting for cash on hand was 0.79x as of the end of the quarter.

Next, I'd like to highlight our quarterly distribution. On June 2, we declared a distribution for the quarter ended June 30, 2020, of $0.355 per share for a total distribution of $7.3 million to stockholders of record as of June 19, 2020. The distribution was paid to stockholders on July 3, 2020. This marks the company's 31st 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 third quarter distribution of $0.355 per share to be payable on October 2 to stockholders of record as of September 21. Consistent with what we've 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 over to the operator for your questions.

(Operator Instructions) Your first question comes from the line of Mickey Schleien with Ladenburg.

Stuart, with respect to fee income, it was weaker than I had expected and looks like weaker than the consensus. I think a lot of us were expecting amendment fees given the COVID pandemic to sort of buoy that line. And I think, in your prepared remarks, you mentioned that deal volume is close to pre-COVID levels. Can you give us a sense whether fee income can regress back to its sort of historical, call it, $2 million a quarter? Or should we expect it to remain suppressed sort of at these levels for some time?

So Mickey, good day, and great questions. We went through a number of significant modifications during the quarter. We were very focused on maximizing the equity injections to stabilize the credits as much as possible. And because for COVID-impacted credits, cash is short. In general, we focused on pricing increases on the deal more than we focused on amendment fees. So we did get pricing increases in 5 of the 8 major modifications we did, and we are working on some other modifications or more price increases, but the waiver and amendment fees were lower.

And on the loan that we paid Sigue, it was a very old loan, so there were no prepayment penalties on that. In general, waiver and amendment fees will be collected. I don't expect a lot of prepayments between now and year-end on accounts, and those prepayment penalties are typically a source of significant income for us. So I think fee income will be consistent, but not at the peak levels that we saw for several quarters last year.

As an offset to that, as you mentioned, deal volume is strong. And pricing on the deals that we are closing, all of them being first-lien deals, are much higher than we were getting pre-COVID. And as we deploy more capital at these higher returns, that should set us up to move towards a sustainably higher NII number with the goal once again of being at about 1.25x leverage. So we're fairly far from that goal at the moment. But with the pipeline of 7 mandated deals and 2 add-ons, we should be able to move significantly in the right direction during this quarter.

That's very helpful, Stuart. And in terms of deal terms, your comments are certainly consistent with what we're hearing across the space. But obviously, LIBOR is much lower than it was a few quarters ago. So there's continued pressure on portfolio yield. And I suspect there's also demand for good deals, which could limit upside in those credits as well. So to help offset potential pressure on the portfolio yield, what is the outlook for your company to tap into the investment-grade debt market to help reduce your cost of capital, particularly since you're part of such a large credit platform in the first place?

At the moment, the most attractive capital from a pricing perspective is our secured credit line at LIBOR [250]. While we do have an investment-grade rating on our unsecured debt, unsecured debt prices in the marketplace right now, while the absolute levels aren't bad, the spread to treasuries is very high. And so we continue to monitor the opportunity to diversify our funding base into more unsecured, Mickey. But candidly, we're going to wait until market conditions are such that we can add that unsecured debt at an attractive spread, and until that time, are most likely to rely on our secured credit line where, candidly, we have tons of untapped liquidity. And if we needed to, we could trigger additional borrowing capacity under the accordion line. And we've confirmed that with JPMorgan very recently that they would increase the accordion and they would do so at a price that is, at the moment, much more attractive than unsecured borrowing would be.

Okay. I understand. One last question for me, maybe for Joyson. Could you update us on the amount of undistributed taxable income, and in particular, the deadline to distribute whatever that amount is?

Yes. Mickey, so if you recall from last quarter's earnings call, I believe we had mentioned that the undistributed amount was approximately $17 million at that point in time. Taking into account the distribution that we had just paid in July, that number is now under $10 million and does not factor in obviously this upcoming distribution that we will make.

Okay. And is there a -- what's the timeframe for -- under RIC requirements fee to distribute the undistributed taxable income?

The distribution requirements are just at the end of the year. Obviously, in terms of any declaration, there is a timeframe in Q4, but the actual distribution just needs to be made before the fourth quarter.

Your next question comes from the line of Tim Hayes with B. Riley.

My first question here. Just I want to kind of piggyback on Mickey's question here about earnings power and just in the context of the dividend. What went into the Board's decision to maintain the dividend here? I know you mentioned that the deal pipeline is picking up and spreads are better today than what you were seeing several months ago. But it seems like it's going to take some time for you to grow the portfolio and increase your leverage in a prudent manner while getting NII back up to a level that's consistent with where the dividend is. So just wondering, again, like kind of what went into this Board decision, if there's kind of a time line that the Board has in mind that they'd like to see you get back to a level commensurate with the dividend or anything else? Any other context you can provide around that?

Sure. The starting point, Tim, is whether or not we feel we have the resources to be able to earn the dividend on an ongoing basis. In Q1, there were a huge number of questions about what was going on in the economy and what would go on in the economy. And candidly, there was at the time a lot of clarity not only as to what NII would look like but what the value of the portfolio would be, and therefore, the sustainability of earnings power of the BDC.

With the increase in NAV in the quarter, looking at the amount of money we have to deploy and looking at pricing in the marketplace, we see a path that is available to us to be able to invest in a manner that we can consistently earn the dividend. And that was what led the Board in part to make the decision to pay a full dividend despite the fact that the NII was lower.

And then the second piece is, as Mickey made reference, our taxable income situation is such that if we did not distribute this money, we would be subject to significant income taxes, which would be inefficient for our shareholders. So it's the combination of the tax situation and the fact that we believe that we are in a position to redeploy into a mix of mostly first-lien, but maybe some second-lien assets and to be able to earn the dividend as we reinvest. Now obviously, in Q3, we're in the process of doing that reinvestment. So it will be into Q4 and Q1 before we see that improvement in the NII.

That's helpful. And I guess just on that last point there, the Q3 investment activity so far, I think you said that was all first lien, if I remember correctly. Could you maybe just give us -- would you be able to size maybe how much wider spreads are on these deals versus what you were doing earlier in the first quarter? If these are all sponsored deals or non-sponsored deals and any other kind of characteristics you might be able to share?

Of the 7 mandated deals, about half of the -- well, 3 of them are non-sponsor, 4 them are sponsor. And most of the deals carry spreads that range from [750] to [900]. So if you think about where pricing was pre-COVID, which was much more sort of between [600] and [700], there is a clear premium price.

Also, please note, we now have 20 originations, professionals in 12 cities across North America, who are directly originating business. So we are not beholden to the large banks or even the midsized banks who are syndicating assets in order to find flow. We are directly originating flow. And even though there are more people back in the market who are actively originating deals, there are still a number of competitors who have severely impaired portfolios who are out of the market. And so a lot of the crazy behavior that we had seen pre-COVID in terms of people lending off of adjusted, adjusted, adjusted, synergized EBITDA has gone away. And we're seeing, in general, tighter documents, tighter covenants and lower leverage. Leverage on average is down, half a turn to a turn, which is why I was able to say that, overall, the deals that we are working on and trying to close are as attractive as anything that I've seen since the 2012 or 2013 vintage.

Got it. That's good color. I appreciate that, Stuart. And then maybe just on the new credit that was added to nonaccrual, the Sure Fit Home Products. There's some other home good stores out there that seemingly have performed well through this crisis. Just wondering if you can give us an update there, if that's a sponsored credit and any other -- I know you're limited in what you could say since it's a private company, but just any other kind of tidbits you can share would be helpful?

It is a sponsor credit. And the sponsor has injected equity into the credit, but the venues, which are largely brick-and-mortar that the company sells through have -- had COVID impact. And the COVID impact, frankly, has gotten more severe, not less severe. And we are working with the sponsor to figure out how to address that. It is a small position, but based on how the company is doing right now, we felt it was prudent to take it on nonaccrual as of the end of the quarter.

Your next question comes from the line of Chris Kotowski with Oppenheimer.

When I look at the AG Kings position, I see the cost went up about $4.9 million and the par went up[13.25]. So that tells me you bought that position at around 37% of par. Am I doing my math right there?

I can't -- again, the numbers are out, but I really can't comment or won't comment on exactly where we bought, other than it was a situation where we felt there was significant value to our shareholders in executing the secondary market trade. And so we did -- and as that account moves to a resolution, based on the fact that, as I've already shared, grocery stores across the country, across the world are doing much, much better in the face of COVID. I'm hoping that we will demonstrate to our investor base that, that was a wide secondary trade even though it temporarily increases our reported nonaccrual. So it's a catch-22. When we made that trade, we knew that the optic would be not great for some period of time, but we believe that, that is a value-enhancing move for our shareholders.

Okay. And then your -- I didn't catch it quite when you first started talking about your nonaccruals. And I think I assume it was Lift Brands that you were talking about. You said that -- I mean, I guess that, that credit looks like it's been restructured. I mean it looks like your cost, and it went from $10-plus million to $8-plus million. Is that the one where you said that you thought there was a resolution after the quarter? Or I'm not sure I caught exactly what you said?

There is a resolution. The owner of that company has injected a very significant equity check into the company. And the restructured debt goes back on accrual as of the beginning of Q3. So in Q2, it was still on nonaccrual because we were doing the workout, but as of the beginning of Q3, that will go back on accrual, our restructured debt will go back on accrual, and that will improve our nonaccrual number going forward.

Okay. Perfect. And that was Lift, right? I mean I'm right on that, right? Or...

Yes.

Your next question comes from the line of Rick Shane with JPMorgan.

This is Melissa, on for Rick today. A couple of questions for you. Around the originations, definitely hear your point about some new deals being mandated in this quarter. And with a fair amount of uncued, it sounds like new portfolio companies. Can you talk about how your due diligence process has evolved in this environment when it's much harder to do on-site due diligence?

Absolutely, and it's a great question. It was very unclear when COVID hit, how the business would operate with everyone being remote. And what we have found and what I've heard from my peers across the industry is that people have been amazed at how well technology has resolved issues of an inability to travel and to be with folks. We executed the restructuring of Lift Brands, which normally would have involved many in-person meetings through Zoom. And we have been doing our management meetings and even plant tours by use of video technology. And while I certainly miss the ability to physically be with management teams, and our team does as well, we have found that it works quite well to use modern technology to substitute for in-person meetings and discussions, and while things are slower, there is certainly a pacing that has been different, especially during the COVID period. We have recently seen a very significant surge in our deal flow. In fact, at the bottom of the COVID period, we were down about 40% or 50%. And at the moment, the most recent week, post quarter end, maybe we're down 10%, and deals are happening.

There are a number of theories as to why transactions are suddenly popping back up on the radar screen. Some of them have to do with the election and the potential for higher taxes next year. But the good news is that those deals are consistently being done on terms that are much easier to get comfortable with than what we were seeing in 2018 and 2019.

Got it. And my follow-up question is around the issue of sponsored versus non-sponsored deals. I think, until recent history, the idea of -- the benefit of going a non-sponsored path was that it was easier, better terms in a lot of cases. And given the environment that we're in now and what you've seen on some of the modifications that you've talked about, you've seen equity support come in, has that changed your thinking about what makes an attractive investment right now, whether it's sponsor versus non-sponsor?

It doesn't. I will tell you that a lot of people who engage in the sponsored business exclusively point to the non-sponsor business and say that it's riskier. And yet, I wanted to make a point in my prepared remarks, and I'll follow-up on that point that if you do the non-sponsor business properly it is done at very low leverage multiples, much lower than sponsor at lower LTV with tighter documents and tighter covenants.

And as a result, as we've hit a very significant economic correction, if you go through our accounts, you'll see that the average mark on the non-sponsor deals is better than the average mark on the sponsor deals. And so while it's great that sponsors inject equity and support their companies, that's needed because the structure on the sponsor deals is more aggressive to start with. And directionally speaking, when you do a sponsor deal, if you lose 30%, 40%, 50% of your EBITDA, you need an equity injection. When you do a non-sponsor deal, the leverage is so low that even if you lose 30% or 40% or 50% of your EBITDA, in many cases, you're still okay. So we think, and I think, that both markets are potentially very attractive, but I think it's really noteworthy that our non-sponsor loan book has held up so solidly during this COVID period.

Your next question comes from the line of Robert Dodd with Raymond James.

On -- first, I've got a few questions, as always. AG Kings, and you've talked about a couple of the issues that occurred during the quarter, where you did the secondary market purchase. A fair value to cost, obviously, is 120%. So if you collected that mark, I think people will be pretty happy with the secondary purchase, provided that happens in the not-too-distant future. Obviously, it's a $20 million numbers fair value investment that's not producing income right now. Last quarter, you talked about a potential resolution maybe this year. Can you give us any more color on that? And what impact, if any, that did have into expectations, for example if that be a dividend catching up maybe to -- let's say, NII catching up to the dividend late this year, maybe early next year?

Our activities on that account are in a highly delicate moment, which prevents me from providing any detail on it. But I can say that we, of course, were in possession of a lot of knowledge about the situation and about the performance of the company that allowed us to make what we believe was a well-informed decision about that secondary purchase, and we would never have added to a nonaccrual account unless we believed that, that was a smart thing to do for our investors. And hopefully, before too long, it will become evident that, that was a good decision.

Got it. Got it. I appreciate that. Always delicate situation. On the JV, the target ROIC is 12% to 15%. You've talked about it in prior quarters, about how to get there. It needed more scale, more diversification in the portfolio to optimize the leverage structure within that facility and how that can be utilized. Obviously, it's grown. Where would you say that stands now in terms of the diversification within that JV portfolio necessary to fully utilize the credit facility structure within it?

We've made great progress. There is more diversity. We are using more leverage in that structure. There is still another tick of leverage that we will be able to access as we continue to improve the diversity in that portfolio. But we remain confident that we will be able to generate the returns that were projected, and in fact, with higher-priced deals available to go into the JV now and with a very competitive leverage price, so I think our leverage price is LIBOR 255. We could easily end up at the high end of the range in terms of the economics of the JV assuming we hit the original projected leverage.

Got it. Got it. I appreciate that. And then just one more on the dividend. Obviously, heading into -- and you currently expect to catch earnings up to the dividend level. But, in the prior quarters, you've talked about the temporary alignment this year not really feasible given the spillover rules, but going into 2021, once the full distributions are made this year, the spillover heading into next year is obviously going to be materially lower and won't be having quite the influence on determining or directing where the dividend comes out.

So can you give us any color about whether that was taken into account as well? And should we -- is there any reason to think that once we kind of trip over into the new spillover year, so to speak, that the dividend view has any material risk of changing?

So Robert, when I shared with the market the risk of realigning the dividend, it was twice at moments in time when there was a massive amount of uncertainty about the future. We did our best to mark our assets realistically at the end of Q1, but Q2 was a huge question mark. Obviously, the stock market thinks that there's no issue at all, but we're working through a significant reality of impact on a bunch of COVID-impacted names and the risk of recession in 2021, but the best data that we have now says that our NAV is $14.61. And if you make a projection that we resolve our nonaccrual accounts, and that we invest our available capital at current market returns, depending on what your model generates, there is every ability of the BDC to get to a position where it earns its dividend. And so we certainly feel better -- I mean, just evidenced by the NAV, we feel much better about our ability to get back into a position of earning the dividend now than we did 3 months ago with a caveat that there's still uncertainties in regards to COVID and a second wave and a recession in 2021 and '22. And so we've kept the language in our comments, but things clearly better now than they were 3 months ago in terms of credit quality and in terms of liquidity.

(Operator Instructions) Your next question comes from the line of Bryce Rowe with National Securities.

I wanted -- Stuart, your comments about the direct origination network and the boots on the ground so to speak. And I've kind of gone back and looked, and it's interesting to see that you've been adding some folks, maybe a couple of folks in that function over the last -- even just 6 months. So just kind of wanted to get a feel for what you're doing to attract those folks? And how you're going about adding and where? What markets you're looking to add people in?

Sure. We have added in both the non-sponsor local market and also in the sponsor market. And our goal is to not have to rely on major financial institutions to deliver us deal flow. We want to find our own deal flow. And we have now found consistently for years that directly originating away from the competition allows us to command higher fees, lower leverage and just better overall price.

We are up to 20 originators in 12 markets across North America. Our most recent addition is a principal hire focused on the sponsor space. One of the reasons we're increasing our focus on the sponsor space is because the on-the-run sponsors who we really hadn't done a ton with over the past couple of years are now doing deals on terms that are much more realistic and much more balanced in terms of risk/reward. And so we have seen a significant increase in access to the sponsor market, driven by the fact that WhiteHorse Direct Lending, as an overall organization, can now deliver $200 million commitments and hold positions as high as $150 million, which allows us to be a real solutions provider in the mid-market and lower mid-market. And that benefits very significantly the BDC that takes its pro rata share of each one of those deals. But it's because of that increased flow that we've been able to increase diversity significantly. I've shared with the market that the typical asset we put in is $5 million to $20 million. And in fact, it's really been more like $5 million to $15 million on most.

So over the last 3 or 4 years, you've seen the BDC get a much more diversified portfolio, and then shift from about 40% or 45% second lien to now being 94% first lien. Now that's a -- there's almost too much first lien in the portfolio right now. I'd like to find a good couple of second-lien loans, but as much as we've hunted, we have not yet found those to add to the portfolio.

Okay. Wanted to ask about maybe another topic. And similar to what -- or maybe in line with what you're just talking about there, second lien versus first lien. So you've clearly shifted away from that second-lien exposure, and we've seen the portfolio yield come down with that shift and with the move lower in rates. So now that we're at a portfolio yield -- weighted average yield of 9.6%, does it feel like we've reached a point of stability, especially with pricing post-COVID being as high as it is?

There are going to be 2 things that are going to bias yield upward. One is that on accounts that have had covenant defaults, even if liquidity has been injected, we've increased price on all the deals. Or actually, 5 of the 8 so far have had increased price. All 8 of the 8 that we modified had new equity injected. So first, you're going to see existing deals start to have higher yield. And then, in the current market environment, all the deals that we're adding in are higher priced by 75 to 150 basis points than they would have been pre-COVID.

In addition, we're getting LIBOR floors on all the deals we do. So while LIBOR is hovering around 25 basis points, we have very few accounts in our portfolio that don't have LIBOR floor protection. So LIBOR, whether it's at 50, 25 or 0, will have very little impact on our portfolio. I will also say that the low LIBOR does have a side benefit vis-à-vis our LIBOR floors, where our leverage line does not have a LIBOR floor. So we are borrowing LIBOR plus 250, which is about 2.75% and a deal that will be priced at LIBOR 750 has a LIBOR floor of 1%, so we're getting 850. So we're going to get extra play out of that leverage. And then, as we bring our leverage back above 1x, as I think you all recall, we've lowered our fees on assets beyond 1x leverage. So when you look at the earnings power of what can be generated by booking assets in today's environment, it is quite significant in terms of what gets generated down to the bottom line.

Your next question comes from the line of Andrew Cestone with Cestone Investments.

I appreciate your comments on the non-sponsor book relative to the sponsor book, and also appreciate the opportunistic nonaccrual purchase. I apologize if I missed it, but could you provide a further breakdown on the risk rating buckets and just clarify that those are forward-looking ratings as opposed to just backward historical?

We do a risk rating on each asset based on everything we know at the end of the quarter. If we have information looking forward that would cause it to be worse than it has been historically, we take that into account in assigning the risk rating. Joyson, do you happen to have handy the breakdown of the risk ratings?

We do. And just as a note to what Stuart had just said, right, so obviously, this is as of 06/30. And so it takes into account the performance subsequent to the original underwriting, as he had mentioned. So as of 06/30, we had $12.7 million of the portfolio rated [a 1]; $338.7 million rated [at 2]; $160.7 million rated [at 3]; $14 million rated [a 4;] and then $21.3 million rated [a 5]. And as we said in our prepared remarks, in the aggregate, 64.2% of the portfolio is either a 2 or a 1.

Your next question comes from the line of Tim Hayes with B. Riley.

Just a couple of quick follow-ups. Stuart, I think you threw out a couple of data points out there. Just the unfunded commitments and the nonaccruals as a percentage of the portfolio ex the new AG Kings investment and the Lift Brands being removed from nonaccrual as well.

The question being what, Tim?

Sorry, I'm just looking to confirm a couple of data points you threw out there. I think you mentioned the unfunded commitments. I think it was $2.4 million, but I just wanted to confirm that.

And then the other data point was just what you -- just the pro forma nonaccrual as a percentage of the portfolio.

Yes. The -- I believe the pro forma nonaccrual, if you adjust for Lift and you adjust for Kings, was 3.3%. Is that right, Joyson?

That's correct, if you factor out the secondary purchase of Kings, 3.3%, and then the unfunded commitments, $2.4 million, of which only $1.1 million relates to revolvers.

So you know, we've had an ongoing focus that predates the COVID situation that unfunded revolvers are a risky liability during a downturn. And as you saw in the public market, several people got caught with those revolver fundings. So we have actively sought to minimize both the size of the revolvers and our exposure to them. Banks are much better situated to provide those. And in as many cases as possible, we either don't have revolvers in our deals or we outsource those revolvers to banks.

And at this time, there are no further questions. I would now like to turn the call back over to management for closing remarks.

Thank you. Really simply put, we are going to do our very best to reinvest in a series of assets that we have both mandated and in pipeline during Q3 and Q4. I would like the BDC to be operating at approximately 1.25x leverage. And I invite any of our shareholders or analysts to run the math based on current market conditions to assess what that should allow us to do. We can't project what will happen in the coming months. But certainly, based on current market conditions, we are seeing a really steady flow of very attractive first-lien deals. And I hadn't shared yet, but I will share, we're getting good prepayment penalties on those deals. So if we book them now and if they go away next year, which is always a risk, we will get paid nice fees on the exit for those deals, given that we have provided liquidity to companies during a more volatile moment in the economy.

If other questions arise, please send them through, and we look forward to talking to you next quarter.

This concludes today's conference. You may now disconnect.