WhiteHorse Finance, Inc.
Q1 2013 Earnings Call Transcript

Published: 14 May 2013

[Operator:]

Good morning. My name is (Laurie) and I will be your conference operator today. At this time I would like to welcome everyone to WhiteHorse Finance’s First Quarter 2013 Earnings Teleconference. Our host for today’s call are Jay Carvell, Chief Executive Officer, Ethan Underwood, Chief Operating Officer, and Alastair Merrick, Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 12 0’ clock P.M. Eastern Standard Time. The replay dialing number is 404-537-3406 and the pin number is 418-23606. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions) It is now my pleasure to turn the floor over to Brian Schaffer of Prosek Partners.

[Brian Schaffer:]

Thank you, Laurie and thank you everyone for joining us today to discuss WhiteHorse Finance’s first quarter (2013) earnings results. Before we begin I would like to remind everyone that certain statements made on this call are not based on historical facts including any statements relating to financial guidance maybe 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. With that allow me to introduce WhiteHorse Finance’s CEO Jay Carvell. Jay, you may begin.

[Jay Carvell:]

Good morning everyone. Thank you for joining us today. I’ll make some opening remarks before turning the call over to our CFO, Alastair Merrick to discuss our financial results. Once Alastair is done we’ll open the call to questions and will be joined by our COO, Ethan Underwood. As a reminder WhiteHorse Finance is a direct lender targeting debt investments with attractive risk adjusted returns and privately held small and midcap companies located in North America. Both our conversion to a BDC and our IPO took place last December. As such we do not have comparable year-over-year financial results to discuss. I would also like to mention that at the end of the first quarter WhiteHorse Finance was added to the Russell 2000 and 3000 indices which we believe provides us additional exposure to institutional investors. I’m pleased to report that during the first quarter we are able to generate more than $50 million in new investments. We believe that our strategy of sourcing proprietary high quality investment opportunities in the smaller end to the capital markets was a major contributor to this quarter’s success. During the quarter we invested in a $16 million participation in a loan to the largest private network of tertiary care hospitals in Puerto Rico, a $17 million senior secured loan to a (package) and provider of wound care supplies and a $16 million senior secured term loan to a regional home builder. Our commitment to sourcing proprietary investment opportunities and the less efficient small inn at the capital markets helped us to achieve a strong quarter in terms of growing our portfolio. We remain focused on generating attractive risk adjusted returns by originating and investing in senior secured loans to performing small and midcap companies across a broad range of industries. Despite this strong quarter and originations I’d like to remind you of our comments during the IPO roadshow and our experience originating loans in the lower end of the capital markets. Our origination pace will be lumpy. While we are constantly working to source and underwrite attractive opportunities the pace of closing then can vary from quarter-to-quarter. Speaking of current market conditions as everyone on the call is aware the broader credit markets were extremely active during the first quarter. Investors continue to seek yield and in place to the CLO market, prime funds and loan funds have grown steadily for the last several months. This supply of the credit markets is related to a general timing of spreads and loosening of credit terms. We’ve previously noted that this smaller end of capital markets typically do not experience these issues as quickly or as profoundly as the more broadly syndicated markets. Nevertheless we are seeing some of these effects into the edges of our market. Credit market activity and general economic confidence are bringing more companies to the table creating more opportunities for us. At the same time however the tighter spreads and lower credit standards make it a more competitive environment for us to find investments suitable for our portfolio. As of March 31st the fair value of our portfolio was $233.2 million, at quarter end when 100% of our portfolio consisted of senior secured loans. The weighted average current cash yield on the portfolio was 14.6% compared to 14.2% last quarter. We remain closely aligned with H.I.G. Capital given their expertise in identifying sourcing and analyzing investments in the small cap market. We believe this relationship to be instrumental in identifying new originations that complement our investment strategy in an increasingly competitive market. During the quarter we had no unscheduled repayments, there were no loans on non-accrual. Looking ahead GMT Global’s loan facility matures on June 30, 2013. Other than to say we are in discussion with the company about a wide range of options we will not have any commentary on that investment today, primarily because of the impending maturity we downgraded GMT on our rating scale from a 2 to a 3 this quarter. We also downgraded the AGS loan from a 2 to a 3 based on slightly lower than expected performance. That being said we are comfortable with our investments in these two borrowers. We were again pleased to return cash to our shareholders. In early March we announced our first quarter distribution of $0.355 per share which was paid on April 3rd. This marks our second distribution since our IPO in December. And although we cannot provide assurance as to timing or amounts we believe our recent financial performance provides the basis for continuing our regular payouts. I also want to bring your attention to the N-2 we filed with the SEC on April 8th. This filing is in relation to a potential issuance of unsecured fixed rate notes which we will use to offset the outstanding obligations under our unsecured term loan and for other general corporate purposes. We believe the current market environment provides a favorable opportunity to address our credit facilities. Our pipeline is helping and our focus remains on sourcing and evaluating opportunities that we identify in conjunction with HIG as we seek establish positioned in companies that meets our investment objective. With that I’ll now turn the call over to Alastair. Alastair?

[Alastair Merrick:]

Thank you Jay. I will take you through the financial highlights of our earnings which we released this morning before the market opened. Before I begin I would like to point out that this is our first full year that we operated as a BDC comparisons to the prior quarter are difficult because of the conversion to a BDC on December 5, 2012. Once we have a full year operating history as a public company we will provide sequential and year-over-year comparisons as appropriate. With that let me review our financial results. Looking at the results for the quarter ended March 31, 2013 we reported net investment income of $4 million, net realized and unrealized losses on investments of $500,000. These losses were primarily attributable to fair value adjustments on two of our investments. For the first quarter 2013, there was an increase in net assets from operations of $3.5 million. Expenses for the quarter totaled $4.4 million primarily consisting of interest expense on our credit facilities of $1.4 million and base management fees and performance based incentive fees of approximately $2 million. Last, net asset value was $227.2 million as of March 31, 2013 resulting in an NAV per share of $15.18 down slightly from $229 million and NAV per share of $15.30 as of December 31, 2012. Switching over to portfolio and investment activity as of March 31, the fair value of WhiteHorse Finance’s investment portfolio was $233.2 million principally invested in 14 positions across 12 portfolio companies an increase of $53 million compared to the previous quarter. The increase is primarily attributable to three new loans Jay mentioned. As of March, 31, the weighted average current cash yield on the portfolio was 14.6% compared with 14.2% reported in the quarter ended December 31, 2012. As Jay mentioned before originations this quarter was strong and there were no unscheduled repayments made on any existing loans. Turning to our balance sheet, as of March 31, 2013 we had cash resources of approximately $137.7 million compared with a $187.8 million as reported in the previous quarter inclusive of restricted cash and cash equivalence. The decrease in cash on hand is primarily due to the company’s origination of $53 million in new investments during the quarter. Our cash position and credit volumes continue to provide us sufficient resources to meet our origination goals for the foreseeable future. The company has two credit facilities that on a combined basis withdrawing by approximately a $141.3 million as of March 31st. The company’s asset coverage ratio for borrowed amounts as defined by the 40 Act was 261% at March 31st well above the statutes requirement of 200%. Let me touch briefly on our distributions, on March 11th we declared a distribution for the quarter ended March 31st of $35.5 per share for total distribution of $5.3 million, the distribution was paid to stockholders on April 3rd, this marks the company’s second distribution given our current cash position and performance of our portfolio we expect to be able to continue regular distributions. This concludes my formal remarks. I will now turn the call over to the operator. And we look forward to your questions. Operator?

[Operator:]

Thank you, Merrick. Now we’ll open for questions. (Operator Instructions) Your first question comes from the line of Greg Mason of KBW.

[Greg Mason:]

Right, good morning gentlemen. Could you talk a little bit about the three new investments you made. What were the yields on each of those three investments and I know historically you target the smaller type of companies, what was kind of the average EBITDA of those businesses.

[Jay Carvell:]

Sure. I’ll let Alastair give you the yields and then I’ll talk a little bit about the investments there.

[Alastair Merrick:]

Yes. The – Greg the homebuilder cash yield is 12.5%, the hospital company Puerto Rican hospital company is in 8.5% and then the third one Advanced Tissue is 13.5% cash yield.

[Jay Carvell:]

Alright. Thanks Alastair. So Greg the – I would appreciate the question. These are three that again we feel like we have a – some insight in to if it given the background we have in some of the other area that H.I.G whether again it was someone that we spoken to before on the credit side or on the equity side. The yields are a reflective of what we feel like is a good risk return they all knows and that they’re – in general you find this trafficking in things where we feel like we’ve got a little bit of an advantage.

[Greg Mason:]

Okay, great. And can you talk about the reason for the increase in the portfolio yield this quarter to 14.6 versus last quarter?

[Jay Carvell:]

Yeah, that’s primarily due to one of our deals we moved from a portion of their interest was in PIK and they tripped a covenant during the quarter and we moved a portion of that interest from PIK to cash pay so that’s the increase you see in the cash pay.

[Greg Mason:]

And then on GMT and AGS I know you can’t talk about what’s going on but can you at least give us the fair values as of last quarter hence that will show up in the queue when you guys file it?

[Jay Carvell:]

I do have that, give me one minute we’ll it and get it back to you.

[Greg Mason:]

Okay, great. And then one last question well you’re looking at up can you – in the press release you talk about you filed for a senior notes offering given that you kind of have net cash of $85 million on the balance sheet. Your thoughts on the timing of doing one of those versus deploying the cash and utilizing the credit facilities on hand, can you just talk about your thought process there really with cash utilization and leverage utilization going forward.

[Jay Carvell:]

Alright. So the timing will be primarily dependent on the filing and the process with the SEC and other than to say I think you’re familiar with that process, I can’t comment further on the timing on that. That the use of proceeds as I mentioned last more related to replacing some of our unsecured debts and taking rents at credit markets now that are pretty favorable overall so it’s not really a cash generative thing it’s more taking advantage of the markets to optimize our balance sheet. Alastair, you have these numbers?

[Alastair Merrick:]

Yeah. The – Greg, the mark on GMT went from 100 to 99.8 so very slight reduction. The mark on AGS previous quarter was 93 and it moved to 90.5 so that was the majority of the unrealized loss that flow through the P&L the 500,000.

[Greg Mason:]

Great. Thank you guys.

[Jay Carvell:]

Thanks Greg.

[Operator:]

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

[Rick Shane:]

Hey, thanks guys for taking my questions this morning. You talked a little bit about the competitive environment, one of the things that you guys have highlighted in the past is the difference in your origination channel that you see a lot more deals directly as oppose to auctions through sponsors. I’m curious in the current environment how that’s playing out I mean for example we saw a lot of big pickup in volumes at the end of last year as sponsors were doing dividend recaps, I’m curious if you think that your originations were less cyclically impacted by that. And also how much pricing protection you are getting because you are not seeing the sponsor deals?

[Jay Carvell:]

Thanks, Rick, thanks for being on the call. In general as we said the phenomena that you see in the broader credit markets will creek down into the area where we are trafficking in the smaller end and the less efficient part of the market. You’re going to see spread compression there and some of the other things that you are seeing in the broader markets. But in general like you pointed out we’re trying to play in deals that we can avoid those phenomena whether its credit terms or spread et cetera. So if we can find those things on the non-sponsored or likely sponsored deals that’s probably where you will see us try to grow the portfolio. That being said we want to be opportunistic and if there is something on the sponsored deal that makes sense to us from a risk adjusted return we won’t shy away from that.

[Rick Shane:]

Got it. And when you think about what the mix and again I realize you guys the originations are lumpy quarter-to-quarter and it’s hard to be that forward-looking. But when you think about what your target ratio is between sponsored and non-sponsored or unsponsored, where do you think that is?

[Jay Carvell:]

In general we’re going to push towards the non-sponsored deals, but like I said we want to be opportunistic and we don’t want to take ourselves out of deals by trying to draw a bright line and make sure that we got a certain percentage of deals when we come to (taught) you every quarter. So if we have something that makes sense you will see us involved in it and as I mentioned – as you mentioned that it is lumpy and it’s hard to predict and so there maybe quarters where you see more sponsored than non and there is going to be some when we see no sponsored deals.

[Rick Shane:]

Fair enough. Okay, thank you, guys.

[Jay Carvell:]

Thanks, Rick.

[Operator:]

Your next question comes from the line of Dan Nicholas of Robert W. Baird.

[Dan Nicholas:]

Hey good morning guys. Just following up on a couple of Greg’s questions. Just trying to get a sense of the timing of the investment activity in the quarter, if it was more front-end loaded or if it was kind of evenly dispersed in the quarter?

[Jay Carvell:]

It was pretty even.

[Dan Nicholas:]

Okay, right. And just in terms of the yield now creeping up to 14.6 in the quarter, I know it’s another thing that’s kind of hard to gauge and predict. But in terms of the defendability of that, what kind of sense do you have now in the market of where that can trend?

[Jay Carvell:]

Right. So – like we pointed out I think you’re going to see spread compression on the edges of our market and just given where credit markets are in general it’s really tough to avoid. And the things that we put in the portfolio this quarter were slightly lower yielding on a current cash basis than the prior portfolio I think that’s more reflective of the risk return we felt we were getting on those deals as opposed to the market really forcing us that direction. But I do think you’re going to see that going forward, it’s hard – to your point it is hard to defend when you’ve got so much noise going on in all of credit markets, but it is something that we’re working hard every day to go out and find those deals where we can get that attractive risk adjusted return and keep that yield up.

[Dan Nicholas:]

Okay, great. That’s helpful. Thanks, Jay.

[Jay Carvell:]

Sure, thanks, Dan.

[Operator:]

Your next question comes from the line of Jeff (Warner) of UBS.

[Unidentified Analyst:]

Good morning gentlemen and thank you for taking my question. Alastair you had talked about the $0.355 distribution that was made for the previous quarter and indicated that going forward you had investments and cash on hand to continue distributions. The investment income however did not cover the distribution which is understandable, but are you able to make a guess either you or Jay as to when the investment income will be able to cover the distribution?

[Jay Carvell:]

Right. Sorry Jeff (adjourn) me for a second.

[Unidentified Analyst:]

Yeah.

[Jay Carvell:]

Good question. As we put cash to work I think you will see that kind of even out over time, it’s awfully early in the bargain (indiscernible) doing that.

[Unidentified Analyst:]

Right, I understand that.

[Jay Carvell:]

But I think over time you will see that kind of even out.

[Unidentified Analyst:]

Is it fair to anticipate that by the end of the year the calendar year that the investment income will cover the distribution or is that something you get comment or just a bit of a stretch?

[Jay Carvell:]

It’s a stretch for me to comment on that.

[Unidentified Analyst:]

Okay.

[Jay Carvell:]

You got a lot of time left on this.

[Unidentified Analyst:]

Okay. Thanks very much gentlemen.

[Jay Carvell:]

Thanks, Jeff.

[Operator:]

Your next question comes from the line of Greg Mason of KBW.

[Greg Mason:]

Great, thanks guys. Could you also talk a little bit about the pipeline that you are seeing today and I know you don’t want to give origination guidance, but just what are the opportunities in the market you’re seeing today and are those relatively far along in the process of your underwriting?

[Jay Carvell:]

Thanks, Greg. I think I mentioned we feel pretty strong about our pipeline. There are various opportunities in there that we feel like are attractive for the portfolio and there are various stages, there is a few that you would say are far along towards the diligence end and there is a few that are still kind of kicking around trying to figure out if it’s worth doing the work on I’d say that’s probably going to be the case almost day in and day out where you look at the pipeline it’s hard to say to put a number on exactly how many days out you are from closing deals, there always going to be in various stages and things will close and things will drop out at various stages of that underwriting process.

[Greg Mason:]

Great. And then a couple of just accounting questions. Alastair on the incentive fee I know you have a deferral cap for any net unrealized or realized depreciation. How does the accounting work for recording the incentive fee this quarter. Do you accrue the whole thing or how does that work given that you had some minor unrealized depreciation in the quarter?

[Alastair Merrick:]

Yeah, we accrue it, but we only pay the amount that relates to cash income, so where there was PIK in the portfolio that portion of the investment incentive fee is not paid until we collect the PIK. And on the capital gains there were no recognized gains this quarter so that part of the fee, the incentive fee didn’t kick in.

[Greg Mason:]

And so just for – kind of theoretically speaking going forward say nothing else ever changes in the marks of the portfolio. When does that deferral that subject to the cap actually get reversed out in the GAAP income if say that’s not recovered in future quarters, how does that ever get reversed out or when does it?

[Alastair Merrick:]

Well we don’t anticipate that happening Greg because…

[Greg Mason:]

Sure.

[Alastair Merrick:]

We expect to collect the PIK, but ultimately if we didn’t collect the PIK that would be the conclusion of the loan where the loan was repaid or not repaid at that point you would reverse out the accrual but assuming the loan repays in full then obviously the PIKs repaid and then that portion of the incentive fees goes to the manager.

[Greg Mason:]

One last modeling question. The credit facility the $51 million was that outstanding for the whole quarter or do you just draw that to kind of write at the end of the quarter for the diversification test is how should we be thinking with the interest expense on that throughout…

[Alastair Merrick:]

It was drawn for the full quarter but and you are right we focus on that relative to the (rich) diversity test, but we’re looking at that going forward Greg if I could just say it that way.

[Greg Mason:]

Okay.

[Alastair Merrick:]

As the portfolio changes then we look carefully at the diversity test and what we could do with the revolver.

[Greg Mason:]

Great. Thank you guys.

[Operator:]

At this time there are no further questions. I would now turn the call back to Jay Carvell for any additional or closing remarks.

[Jay Carvell:]

Alright, thank you everyone for joining us today. We look forward to speaking to you next quarter. Laurie, we’ll turn it back to you now.

[Operator:]

That does conclude today’s conference call. Thank you for your participation. All participants may disconnect at this time.