WhiteHorse Finance, Inc.
Q3 2013 Earnings Call Transcript

Published: 12 Nov 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 Third 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 779-70231. 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 third 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:]

Thank you, Brian. Thanks everyone for joining us today. As you saw in our press release we issued before the market opened, we had a busy quarter on a number of fronts. I am going to take you to the highlights before turning the call over to Alastair to walk you through the financial results. We had a strong quarter as evidenced by the amount of capital deployed and NII being up 30% over the second quarter. We also continued our focus on protecting shareholder capital by keeping 100% of the portfolio in senior secured loans. And similar to our comments on our second quarter call our pipeline remains healthy, which contributed to a strong third quarter of investment activity. The third quarter continued many of the trends we have witnessed in the previous six months. Our results year-to-date reflect the intra and inter-quarter lumpiness that we have seen throughout 2013 and that we expect to continue. Indicative of this lumpiness was the announcement we made in September that our position in Acella was repaid. This was the primary contributor to our investment portfolio declining by $23 million in the third quarter despite a significant amount of new investments. Let’s focus for a moment on the change in our investment portfolio. The $23 million decrease is comprised of new investments of $31 million offset by net repayments of $54 million. Starting with new investments, during the third quarter, we continued our focus on middle market loans to high-quality borrowers at attractive risk adjusted rates of return. In this regard, leveraging the platform of our investment manager to source and underwrite, we invested $31 million in the quarter, $28.5 million of investments in four new borrowers and approximately $2.5 million in additions to existing positions. The new investments are in the defense, consumer finance, industrial supply and corporate services industries and carry a weighted average yield of 10.4% and our senior in that respective capital structures. Given the current credit environment, we were pleased to be able to invest capital at attractive yields at reasonable risk levels. Despite these new investments, we still experienced net repayments of approximately $54 million. When we say net repayments, this is comprised of gross schedule and unscheduled repayments of $98 million less $44 million we redeployed in new facilities at some of those companies. In particular, prepaid legal secures technologies, smile brands and proprietary services all completed refinancing processes in the quarter. Our June 30 exposure to these companies was $25 million. But because of the relationships we developed with these companies, executives and owners we are able to increase our position in these companies to approximately $44 million. As you might expect the refinancing process slightly reduced the average cash yield on these investments by approximately 100 basis points. However, we are pleased with the outcome of the refinancing process both from the yield and redeployment of capital standpoint where we are able to invest in companies that we know well and have proven to be solid companies led by strong management teams. We believe our relationships with borrowers, advisers and sponsors continued to enhance our ability to deploy capital. Gross repayments of $98 million this quarter consisted of $25 million in refinancings that we just highlighted. $6 million of scheduled repayments and $66 million of unscheduled pay downs primarily related to the previously disclosed Acella repayment. Clearly, the unexpected repayment of Acella was the primary driver for the decline in the balance of our portfolio. Nevertheless, the Acella loan is a very positive investment. First, we sourced the loan through our proprietary network and we are asked to work with the company because of our prior our experience in the space and our ability to close the deal in an expedited timeframe. Portfolio diversification improved, now that Acella has repaid, our largest position declines from 25.1% of the total portfolio to 14.4%. This is beneficial from the standpoint of risk in portfolio construction as well as regulatory diversification. The repayment further balances our exposure to the healthcare and pharmaceutical space. And finally overall, Acella was a very profitable loan for us including the prepayment fee that contributed towards our strong third quarter income. When you look at our repayment activity on the year-to-date basis, excluding Acella we are at a pace that is consistent with our historical repayment experience. On the year-to-date basis our portfolio was up $36 million. This is comprised of new investments of $104 million and net repayments of $69 million. The weighted average cash yield on our portfolio was now 12.2%, down slightly from last quarter. Before turning the call over to Alastair, let me conclude my formal remarks by noting that as we enter the fourth quarter, we believe our portfolio is well-positioned for continued growth and performance. We have ample capital to make new investments with $130 million of cash in addition to availability on our line of credit. We believe we can continue to invest this capital to generate additional earnings for the company. Finally, in light of a significant amount of cash we have received from the repayment of the Acella investment and the cash on the balance sheet at September 30, 2013, our adviser H.I.G. WhiteHorse Advisers has agreed to extend the waiver of that portion of the base management fee payable on cash for the fiscal quarters ended December 31, 2013 and March 31, 2014. This will be more fully explained in the 10-Q, which will be filed in the next day or so. With that I will now turn the call over Alastair. Alastair?

[Alastair Merrick:]

Thank you, Jay. I will now take you through the financial highlights of our earnings which we released this morning before the market opened. As I have mentioned in previous quarters 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 third quarter ended September 30, 2013, we reported net investment income of $6.3 million or $0.419 per share. This was an increase of $1.4 million or 29.5% from the previous quarter. This includes one-time fee income primarily from the Acella repayment of $1.9 million, fee income in the second quarter was $400,000. Net realized and unrealized losses on investments were $300,000. These losses were primarily attributable to positions that paid down during the quarter. For the third quarter 2013 there was an increase in net assets from operations of $6 million. Expenses for the quarter totaled $4.9 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 $2.8 million. Net asset value was $226 million as of September 30, 2013 resulting in NAV per share of $15.09, up slightly from $225.1 million and NAV per share of $15.04 at June 30, 2013. Switching over to portfolio and investment activity, at September 30, the fair value of WhiteHorse Finance’s investment portfolio was $214.7 million, principally invested in 17 positions across 15 portfolio companies and is comprised of 100% senior secured debt investments. At September 30, the weighted average current cash yield on the portfolio was 12.2%. There were no changes in the ratings of the portfolio this quarter and there were no non-accrual loans at September 30, 2013. Turning to our balance sheet, as of September 30, 2013, we had cash resources inclusive of restricted cash of approximately $132.4 million, compared with $103.3 million as reported in the previous quarter. Our cash position and credit lines continue to provide us with sufficient resources to meet our origination goals for the foreseeable future. At September 30, 2013, the company had three credit facilities that on a combined basis were drawn by approximately $85 million. The company’s asset coverage ratio for borrowed amounts as defined by the 40 Act was 366% at September 30 well above the statutes requirement of 200%. Let me touch briefly on our distributions. On August 22, we declared a distribution for the quarter ended September 30 of $0.355 per share for a total distribution of $5.3 million. This distribution was paid to stockholders on October 3. This marks the company’s fourth distribution since our IPO in December with all distributions at the rate of $0.355 per share per quarter. Given our current cash position and historical performance of our portfolio, we would expect to be in a position to continue our 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:]

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

[Greg Mason:]

Hey, good morning gentlemen. First, could you talk about you mentioned some loans that you reinvested in the quarter that were existing, I know prepaid legal smile, what were the other I believe two more?

[Jay Carvell:]

Hi Greg. You have got Securus and (indiscernible).

[Greg Mason:]

And then as you view diversification, obviously the Acella investment was great, but it was huge, as you are redeploying that capital, what are you thinking about average hold sizes that you are focused on as you redeploy that capital in new investments going forward?

[Jay Carvell:]

Right. So the 5% would take us to about between $17 million and $18 million, Greg and so that would be kind of at the upper end of the range. You would – so we would expect to try to be somewhere between say $5 million in that. That’s not to say that if we saw an opportunity that made sense from a portfolio standpoint and risk return standpoint for something larger that we wouldn’t do that, but in general, that’s probably where we are targeting right now.

[Greg Mason:]

Great. And then could you talk a little bit about since we don’t have the queue, you couldn’t look at this, GMT Holdings last quarter had a slight decline to 95% of par, could you talk about where that’s held right and if there are any changes with that business this quarter?

[Jay Carvell:]

Yes, Greg. That is at 90% this quarter. That’s where the market is. And that’s reflective mostly of and we have discussed this before kind of our conservative view on the industry as a whole. So you have got different valuation methods going on there, but that’s the driving factor for that. We mentioned last quarter that we extended that loan through June of next year and that we had some hurdles that we wanted management to meet including a pay down, we have made that and they have met the other hurdles so far.

[Greg Mason:]

Right. Since that was written down a little bit given that portfolio depreciation was essentially flat, did you have some positive marks elsewhere in the portfolio?

[Jay Carvell:]

We did. AGS moved up slightly as well, which essentially offset that. I mean, it’s not exact, but that’s close.

[Greg Mason:]

And then finally last question, you are sitting on a lot of cash, could you talk about the pipeline you talk about the pipeline you are seeing, what the deals look like and opportunities here for deployment in the fourth quarter?

[Jay Carvell:]

Yes, we are – as I had said we are pretty happy with where the pipeline is. Its compared to a year ago you are probably slightly smaller and I think that’s across the entire market, things are little bit tighter. But we are seeing good opportunities and the things that are in there now at various stages are kind of what I just described in terms of size and they look a lot like the portfolio now you are a bit smaller companies in the middle market at the yields that we are looking at in the portfolio today across the handful of different industries. So that’s the general view on where the pipeline is.

[Greg Mason:]

And then are there any other kind of expected repayments in the fourth quarter that you know about right now?

[Jay Carvell:]

Nothing we know about right now.

[Greg Mason:]

Alright, great, thanks guys.

[Jay Carvell:]

Thanks Greg.

[Operator:]

(Operator Instructions) At this time, there are no further questions. I will now turn the call to Jay Carvell for any additional or closing remarks.

[Jay Carvell:]

Alright, thanks everyone for joining us today. We look forward to speaking to you next quarter. Operator, back to you.

[Operator:]

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