WhiteHorse Finance, Inc.
Q2 2013 Earnings Call Transcript

Published: 13 Aug 2013

[Operator:]

Good morning. My name is Laurie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the WhiteHorse Finance’s Second Quarter 2013 Earnings Teleconference. Our hosts 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 1 PM Eastern Standard Time. The replay dial-in number is 404-537-3406 and the pin number is 143-42688. At this time all participants have been placed in a listen-only mode and the floor will be opened 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, operator and thank you everyone for joining us today to discuss WhiteHorse Finance’s second quarter (2013) earnings results. Before we begin, I would like to remind everyone that certain statements made during this call which 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 and thank you for joining us. As usual I'm going to make some opening remarks about current market conditions as well as our investment portfolio, investment activity and overall strategy before turning the call over to our CFO, Alastair Merrick. Once Alastair has completed his remarks on our financial result we’ll open the call to questions and we’ll be joined by COO, Ethan Underwood. I would like to start with some general comments on the market and economy. As all of you know, markets in general have been more volatile since the May comments from Federal Reserve Chairman Ben Bernanke referencing a potential tapering off bond purchases. Anticipation of interest rate hikes, the faith of U.S. economic growth and their affects of the European recession will continue to add to overall credit market uncertainty. However, we believe that these factors have marked a trend change from a low interest rate environment characterize by investors taking yield to a more stable slightly rising credit environment. While the pace of high yield [inflows] is somewhat abated over the past several weeks, the larger loan and bond markets remain relatively healthy. The supply of capital overall remain strong, which has led to a slightly tightening of spreads and loosening of credit terms. As we previously noted, these issues do not dramatically affect the small and mid-cap space where we spend most of our time, they are compressed pricing and lower credit standards have created a more competitive environment across all credit spaces. Despite these challenges, credit activity has been steady and economic confidence in general seems to be picking up. Overall, we are pleased with the more lender friendly terms we are seeing on new deals. For example, we are not seeing excessive leverage or loose covenants creep into deals on a broad basis and believe we will continue to find attractive investments for the Company. Our focus continues to be on sourcing proprietary high-quality investment opportunities in the smaller end of the capital markets across a broad range of industries. We want to be highly selective about the investments we make while consistently seeking to source and underwrite the opportunities we deem to be the most attractive. We are confident these opportunities exist given our experience over the past 12 months and the quality and quantity of deals in our pipeline. As we’ve mentioned on other calls, our pace of originating and closing loans may vary from quarter-to-quarter, but over a longer time period, we believe our sourcing capabilities will demonstrate an acceptable investment pace. During the second quarter, we invested $20.5 million in one new and three existing portfolio companies. This brings our investments to $73.5 million for the first half of the year. For the second quarter, this includes $10 million investment in a senior secured loan to an oilfield services company expanding the scope of industries within our portfolio. Proceeds from repayment this quarter totaled $14.6 million, the majority of which were related to GMT and [St. Johnson and its positions] [ph]. Regarding GMT, we amended our facility with the borrower and a positive outcome for WhiteHorse Finance. In particular, we extended the maturity on the loan by one year to June 30, 2014. We required the company to make a principal pay down on the facility, we left the interest rate unchanged and we require the Company to meet certain milestones over the next year. Given the size of the GMT position $31.1 million as of quarter end and its attractive economic terms, this extension should have a positive impact on our investment income going forward. As of June 30, the fair value of our portfolio was $237.7 million. As with the prior quarter 100% of our portfolio consisted of senior secured facilities The weighted average current cash yield on the portfolio was 14.0% down slightly from 14.6% last quarter. 80% of our portfolio is in variable-rate instruments indexed to LIBOR, which we believe positioned our portfolio well in the event of a rising interest rate environment. There were no loans on non-accrual in the second quarter, the only change we made to our ratings on loans in our portfolio was to upgrade prepaid legal services from a 2 to 1 based on an expectation of a refinancing. We were again pleased to provide cash to our shareholders in May we announced our second quarter distribution of $0.355 per share which was paid on July 3. As we have said before, while we cannot provide assurance as to timing or amounts, our current financial performance affords us the opportunity to continue regular distributions. Our goal is to provide a steady stable distribution stream to our shareholders. Before turning the call over to Alastair, I wanted to mention our recent public offering of senior notes. On July 16, we priced $30 million of 6.5% senior notes, which mature on September 30, 2020. We used those proceeds and available cash to reduce the outstanding obligations under our unsecured term loan. Alastair will provide more background on our balance sheet activities in a moment, but the issuance of the senior notes combined with the amendment and paydown on our existing unsecured facility provides us with long term flexibility in our capital structure. As we enter the second half for the year, our pipeline remains healthy and despite some intra and inter-quarter lumpiness, we expect to see continued active deal flow. With that I’ll now turn the call over to Alastair. Alastair.

[Alastair Merrick:]

Thank you, Jay. I would now take you through the financial highlights of our earnings, which we released this morning before the market opened. Before I begin due to our conversion to a BDC in December 2012 we do not have comparable year-over-year results. Looking at our results for the quarter ended June 30, 2013 we reported net investment income of $4.9 million or $0.32 per share this was an increase of 21% over the first quarter. Net realized and unrealized losses on investment were $1.7 million. These losses were primarily attributable to a reduction in the fair value of our investment in GMT Holdings driven by two main factors. First a more conservative view on the international aerospace and airplane part industries. Second, the fixed rate nature of the loan against a backdrop of a raising rate environment. For the second quarter of 2013 there was an increase in net assets from operations of $3.2 million. Expenses for the quarter totaled $4.6 million primarily consisting of interest expenses on our credit facilities of $1.3 million and base management fees and performance based incentive fees of approximately $2.4 million. Net asset value was $225.1 million as of June 30, 2013 resulting in NAV per share of $15.04 down slightly from $227.2 million an NAV per share of $15.18 as of March 31, 2013. Switching over to portfolio and investment activity, as of June 30, the fair value of WhiteHorse Finance’s investment portfolio was $237.7 million, principally invested in 15 positions across 12 portfolio companies. The fair value of the portfolio consisted of $201.5 million or 84.8% of first lien and $36.2 million of second lien secured debt investments. As of June 30, the weighted average current cash yield on the portfolio was 14.0%, compared with 14.6% reported in the quarter ended March 31, 2013. As Jay mentioned, originations this quarter were $20.5 million and repayments were $14.6 million, plus the GMT investment maturity date was extended by one-year to June 30, 2014. Turning to our balance sheet, as of June 30, 2013, we had cash resources of approximately $103.3 million, compared with a $137.7 million as reported in the previous quarter. The decrease to cash on hand is primarily due to the new originations I just mentioned and a $30 million reduction in the drawn amount of our revolving credit facility. Our cash position and credit lines continue to provide us with sufficient resources to meet our origination goals for the foreseeable future. At June 30, 2013, the Company had two credit facilities that on a combined basis were drawn by approximately $111 million. The Company’s asset coverage ratio for borrowed amounts as defined by the 40 Act was 302% at June 30, well above the statutes requirement of 200%. Let me briefly touch on our distribution. On May 22, we declared a distribution for the quarter ended June 30 of $0.355 per share for a total distribution of $5.3 million. The distribution was paid to stockholders on July 3. This marks the Company’s third distribution since our IPO in December with all distributions at a rate of $0.355 per share per quarter. Given our current cash position and performance of our portfolio, we expect to be able to continue regular distributions. As Jay mentioned in his remarks in mid-July we priced an offering of 30 million in aggregate principal amount of 6.5% senior notes. The Notes will mature on July 31, 2020 and can be redeemed in whole or in part at anytime at the Company’s option on or after July 31, 2016. We use those proceeds and available cash to reduce outstanding obligations under our unsecured term loan. On July 19 we amended the terms for our unsecured term loan to lower the interest rate to LIBOR plus 2.2%, as you may recall the prior rate was LIBOR plus 2.75% so a reduction of 55 basis points. Further we extended the maturity date by one year to July 3, 2015. We were able to take advantage of the current market conditions in order to complete the senior notes offering and amendment to our unsecured term loans and they provide us longer term financial flexibility allowing us to focus on originating and investing in loans that match our criteria. This concludes my formal remarks. I will now turn the call over to the operator. And we look forward to your questions. Operator.

[Operator:]

The floor is now open for questions. (Operator Instructions) Your first question comes from the line of Greg Mason of KBW.

[Greg Mason:]

Great thank you. Good morning gentlemen. Could you talk a little bit about any type of fee income with the prepayments, were there any accelerated fees or one-time items in the revenue line this quarter?

[Jay Carvell:]

Thanks for being on Greg. Alastair you’ve got that?

[Alastair Merrick:]

Sure, Greg, the fee income within investment income this quarter was $400,000 and it’s a combination of some prepayment fees and amendment fees, and that compares to the first quarter, because I know you’re going to ask the question which was $180,000.

[Greg Mason:]

And then, could you talk about the one new investment that you made the oilfield services, could you talk about the yield on that investment and just where did you source that, is that a non-sponsored deal or a sponsored deal, just a little more color there?

[Alastair Merrick:]

Greg, it’s a 10% fixed rate on the oilfield services company.

[Jay Carvell:]

As far as where that came from, that is not a non-sponsored deal. That’s a participation in another – in a broader facility.

[Greg Mason:]

Talk about just the pipeline that you’re seeing for new investments, you talked about overall yields were coming in a little bit, but could you just maybe give us a little more color on what you’re seeing and what the pipeline looks like?

[Jay Carvell:]

Sure. In general, we’re seeing some pretty good activity, I think that’s probably a theme across a lot of BDCs that people anticipated pretty good second half of the year. In terms of, kind of what we’re seeing it similar to what our pipeline had looked like over the last 6 months to 12 months, a variety of deals, variety of sizes. We’re trying to traffic in the same place that we always have before in originating those things and also taking advantage of other opportunities as they come forth for us. So in general, it probably looks a lot like what it has in the last six months, but a pretty healthy pipeline overall.

[Operator:]

(Operator Instructions) Your next question comes from the line of Rich Shane of JPMorgan.

[Richard Shane:]

Hi guys, thanks for taking my question. Greg had asked part of it, I want to talk about the yield compression just a little bit in terms of the portfolio rotation. You added $20 million gross, you’ve experience $14 million, just under $15 million of repayments; was the move from $14.6 million yield to $14 million yield so the 60 basis point decline entirely a function of new lower yielding assets coming on and higher yielding assets coming off, or is there something else? I just – I want to make sure given it’s a relatively small gross repayment and gross originations that there’s not something else we’re missing there?

[Jay Carvell:]

No you’ve got it. It’s a primarily due to the new things we’ve added and also that the mix of what we’re adding, we’re continuing to be focused on the top part of the cap structure on senior unsecured and so you’re seeing some compression across all markets in that. I thing we said we generally try to stay in the smaller end of capital markets where you don’t see as much compression as you do in broadly syndicated markets, but it will creep across just as a general proposition.

[Richard Shane:]

Got it, great. Thank you guys very much.

[Jay Carvell:]

Thank you.

[Operator:]

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

[Greg Mason:]

Great, thanks. I had one kind of quick follow-up on GMT, just because it’s such a large portion of your portfolio and earnings, can you talk about I believe that that company owns 10 planes and if I remember there were older planes. Can you just talk a little bit about that business and kind of your collateral coverage there in that and obviously you made a comment that you wrote it down on a more conservative use. So just maybe a little more color on that investment just because it’s so meaningful right now.

[Jay Carvell:]

Sure, Greg. You are right that is your memory is good on what that business is. What those guys are operating in is a slightly tougher environment and I think that’s why you have seen our valuation methodology kind of take that into account. So it’s both operating and leasing those planes and then the part out business you would probably recall from our discussion before, that we like the asset coverage there, but it’s clearly an operating business as well. So there is a couple of avenues there that you have for repayments and that was part of the discussion when we did the extension.

[Greg Mason:]

Thanks you guys, I appreciate it.

[Operator:]

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

[Jay Carvell:]

Thank you everyone for joining us today. I look forward to speaking to you next quarter. Operator, I’ll turn it back to you.

[Operator:]

Thank you participating in the WhiteHorse Finance second quarter 2013 earnings teleconference. You may now disconnect.