WhiteHorse Finance, Inc. (NASDAQ:WHF) Q3 2018 Effects Profits Convention Name November 6, 2018 10:00 AM ET
Stuart Aronson – CEO
Ed Giordano – Meantime CFO
Sean Silva – IR, Prosek Companions
Tim Hayes – B. Riley FBR
Mickey Schleien – Ladenburg
Chris Kotowski – Oppenheimer
Just right morning. My title is Lori, and I’ll be your convention operator lately. Right now, I wish to welcome everybody to the WhiteHorse Finance 3rd Quarter 2018 Profits Convention Name. Our hosts for lately’s name are Stuart Aronson, Leader Govt Officer; and Ed Giordano, Meantime Leader Monetary Officer. As of late’s name is being recorded and might be to be had for replay starting at 1:00 p.m. Japanese. The replay dial-in quantity is (404) 537-3406 and the PIN quantity is 9978567. Right now all members had been positioned in a pay attention simplest mode and the ground might be open on your questions following the presentation. [Operator Instructions]
It’s now my excitement to show the ground over to Sean Silva of Prosek Companions.
Thanks, Lori, and thanks, everybody, for becoming a member of us lately to speak about WhiteHorse Finance’s 3rd Quarter 2018 Profits Effects. Earlier than we commence, I wish to remind everybody that positive statements, which don’t seem to be in accordance with ancient information made all over this name, together with any statements in relation to monetary steering, could also be deemed forward-looking statements throughout the which means of the Non-public Securities Litigation Reform Act of 1995. As a result of those forward-looking statements contain identified and unknown dangers and uncertainties, those are essential elements that would reason exact outcomes to fluctuate materially from the ones expressed or implied via those forward-looking statements. WhiteHorse Finance assumes no legal responsibility or duty to replace any forward-looking statements.
With that, permit me to introduce WhiteHorse Finance’s Leader Govt Officer, Stuart Aronson. Stuart, you might start.
Thanks, Sean. Just right morning, and thanks for becoming a member of us lately. As you’re mindful, we issued our press liberate this morning previous to marketplace open, and I am hoping you’ve had an opportunity to check our outcomes, which can be additionally to be had on our site. I’m going to take you thru our 3rd quarter running efficiency after which Ed will overview our monetary outcomes, and then we’re satisfied to take your questions. All over the 3rd quarter, we endured our robust momentum, and I’ve a chain of very certain pieces to percentage with you this morning. First, we greater NAV according to percentage to $15.46, a 59% development from the second one quarter of 2018 and an build up of $1.54 from the 3rd quarter of 2017. Core internet passion source of revenue used to be $0.349 according to percentage, fairly underneath our quarterly dividend of $0.355, which we proceed to be expecting to earn on an annualized foundation. Core internet passion source of revenue comprises — excludes 2 pieces that I can in brief summarize and which Ed will element.
First, the sale of Aretec closed the day after the quarter ended. Given the top stage of visibility into ultimate of the transaction, we marked the asset on the finish of the 3rd quarter for the total worth of the anticipated proceeds. In reference to this markup, we known an extra capital gains-based incentive charge accrual of roughly $3.1 million this is deducted from GAAP source of revenue. 2d, all over the quarter, we incurred a onetime noncash internet refinancing value related to the redemption of our 6.5% child bonds again in August. Ed will supply additional element on core as opposed to GAAP internet passion source of revenue. However first, I’ll element key highlights from our quarter, which along with our robust efficiency, used to be marked via Four important tendencies.
First, as I’ve discussed, on the finish of the 3rd quarter, we marked our place in Aretec as much as the anticipated worth of the acquire, expanding our place to $53.Eight million from $37.Four million and riding a mark-to-market acquire of slightly below $16.Five million. We can organize the acquire on Aretec in a way that we imagine is perfect for shareholders via conserving a majority of the ones good points as investable capital for our portfolio, whilst tracking the tax implications of conserving this capital and probably paying out a distinct dividend to shareholders someday.
2d, since the proceeds of Aretec sale have meaningfully increased our money ranges, our guide, H.I.G. WhiteHorse Advisers, has agreed to waive control charges on money for the 3rd and fourth quarters of 2018 in addition to for the primary quarter of 2019 so that you could no longer downside our shareholders whilst proceeds are reinvested.
3rd, along with our brief move charge waiver, we’ve additionally adjusted our control charge construction. At an in-person board assembly closing week, our Board of Administrators voted to cut back charges via 75 foundation issues on assess — property in far more than one occasions leverage from 2% down to one.25%. If the BDC operates at 1.25% leverage, the advantage of this charge relief might be with reference to $0.03 according to percentage according to 12 months to shareholders.
Fourth, to be able to fortify our skill to spend money on lower-risk senior secured property, we’ve got submitted a request to the SEC along side the State Lecturers Retirement Device of Ohio, or STRS Ohio, to ascertain a three way partnership offering as much as $125 million of capital on a blended foundation with $75 million to be supplied via WhiteHorse Finance. If licensed, the JV will make investments not directly originated senior secured property priced basically between LIBOR 500 to LIBOR 650 which can be sourced via our present sponsor and nonsponsor originations infrastructure. This JV would function with 1.5x or larger leverage in the ones senior secured — on the ones senior secured property with the purpose of returning mid-teens returns to the capital invested via WhiteHorse Finance.
We imagine this three way partnership will build up diversification and deal drift, whilst keeping up the risk-adjusted go back traits of the full portfolio as sourcing and underwriting requirements will stay unchanged. I can caveat, on the other hand, that the JV has no longer but been licensed via the Securities and Trade Fee and there can also be no assurance that they are going to approve. Control additionally continues to behave until we overview the legal responsibility aspect of the stability sheet. We’re lately in discussions with JPMorgan to put into effect an modification to our credit score facility that might enhance greater leverage in change for diminished focus of second-lien loans.
Turning now to our funding portfolio. As of September 30, 2018, the truthful worth of the portfolio used to be $509.6 million in comparison to $511.Four million reported on the finish of the second one quarter and is composed basically of senior secured loans to decrease mid-market debtors which can be variable-rate investments, basically listed to LIBOR.
All over the quarter, we generated one new origination for $7.Four million and added a $11 million place on a secondary foundation. We additionally funded two add-ons all over the quarter, totaling roughly $10.Five million. We additionally participated in a refinancing for our present portfolio corporate, Golden Pear, which used to be got via a non-public fairness company. We reinvested $17.2 million of the $25 million of refinancing proceeds within the new transaction.
Repayments in gross sales, with the exception of this refinancing had been $38.Nine million, pushed via a complete pay down on Intermedia Holdings of $18 million, a complete pay down on Sitel of $8.7 million and a partial compensation of our place in Crews of California of $7.7 million.
The portfolio had a median funding measurement of $10.Four billion in accordance with truthful worth, whilst we did have 3 portfolio corporations above the higher vary of our goal funding measurement of 20 million, together with Aretec, CA and FPT, we stay thinking about lowering our publicity on the ones positions and be expecting to have lowered two of the 3 of the ones via year-end.
Our leverage ratio diminished all over the 3rd quarter to 62%, falling underneath our ancient goal vary of 70% to 80% and underneath the 71% recorded on the finish of the second one quarter. As shared closing quarter, we do intend to rigorously ramp up investments and organize WhiteHorse Finance at a leverage of one to one.25 occasions someday.
Turning now to our This fall pipeline. So far, within the fourth quarter, we’ve got closed two transactions with an extra six transactions which can be mandated, seven of the ones 8 transactions are first lien and 4 of them are nonsponsor. As all the time, there can also be no assurance that any mandated transaction will shut as there stays a lot due diligence to be executed on a lot of the ones scenarios.
I’d love to take a second to place our pipeline in our portfolio in ancient context as I feel it supplies robust standpoint on what we’ve been in a position to perform. As you’ve heard in our income calls, we’ve taken a prudent and disciplined strategy to sourcing an origination. We reviewed 1000’s of offers yearly and became down over 98% of the ones. We stroll clear of any dialog after we’re requested to inappropriately decrease and are dropping our requirements. And because of this, our ancient conversion ratio and deal drift is beneath 2%. And we proceed to prioritize high quality over yield and long-term shareholder worth over temporary good points. To that finish, 12 months in the past, 57% of our credit score portfolio used to be constructed from first-lien secured loans, which used to be in step with our ancient moderate. Whilst aggressive on a relative foundation, we needed to do higher and set a purpose to meaningfully reinforce upon this metric.
As of September 30, 2018, our portfolio is now constructed from 74.5% first-lien senior secured loans. All over that very same duration, we’ve greater NAV from $13.92 to $15.46, added 11 new positions on a internet foundation to our portfolio, minimized our mortgage publicity to loans that had been on nonaccrual, and we reached an overly certain answer on Aretec, all whilst keeping a weighted moderate efficient yield of roughly 12%. All over that point, kind of two thirds of our portfolio has been nonsponsor, illustrating our robust direct origination infrastructure sponsored via the 3 tiered sourcing structure at H.I.G.
With that context, and when additionally taking into account the quite a lot of projects undertaken this quarter that I referenced previous in my remarks, we’re obviously positive about the way forward for WhiteHorse Finance. That optimism could also be fueled partly via our long-term outlook at the composition of our shareholder base. As is publicly identified, 51% of the whole stocks of WhiteHorse Finance are lately owned via the Bayside price range, which can be affiliated with H.I.G. It’s affordable to think that those H.I.G. price range as they succeed in their latter phases in their existence will cut back their publicity and guarantees the WhiteHorse Finance in some way that maximizes worth and minimizes disruption to the buying and selling of stocks of the corporate.
That is evidenced via H.I.G.’s contemporary $13.Five million block business sale finished in August. To be transparent, we watch for that any long run gross sales of stocks might be controlled in an orderly procedure over a number of years, working out that the timing of gross sales might be decided via many elements past our regulate. We can proceed to be as communicative as conceivable about those ongoing tendencies as our shareholder base change into extra worse assorted and liquid through the years.
And with that, I’ll now flip the decision over to Ed.
Thank you, Stuart. I’ll first cope with the nonrecurring pieces for the 3rd quarter after which amplify to the remainder of the 3rd quarter outcomes. As Stuart discussed the sale of Aretec shut within the fourth quarter, on the other hand, as a result of we had readability that the transaction used to be ultimate, we marked the asset on the finish of the 3rd quarter to the total worth of the acquire. This ended in a $3.1 million accrual within the type of a capital good points incentive charge. To summarize, we marked the asset up on the finish of the 3rd quarter and we gained the true money all over the fourth quarter.
All over the quarter, we additionally incurred the web affect of speeded up amortization of deferred debt issuance prices related to the refinancing of our child bonds, which totaled roughly $300,000. As such, we reported GAAP internet funding source of revenue of $3.Eight million or $0.184 according to percentage. This compares to $4.6 million or $0.224 according to percentage within the prior quarter. Core NII, which excludes the non-recurring pieces I simply discussed, used to be $7.2 million for the quarter or $0.349 according to percentage. This compares to $6.Eight million or $0.331 according to percentage within the prior quarter.
Our funding source of revenue continues to consist basically of routine money passion. We reported a internet build up in internet property on account of operations of roughly $19.Five million or $0.95 according to percentage for the 3rd quarter, which incorporates a $16.Five million markup of Aretec. As of September 30, 2018, the web asset worth used to be $317.7 million or $15.46 according to percentage, up from $305.Three million or $14.87 according to percentage as recorded — as reported for Q2. Because it relates to our portfolio and funding task, the danger rankings of our portfolios noticed modest enhancements with Three of our positions being upgraded to a 2 or a 1 score.
Turning to our stability sheet, we had money assets of roughly $26.6 million as of September 30, 2018, together with $15.1 million of limited money and roughly $31.Five million of undrawn capability beneath our revolving credit score facility. Professional forma for the gross sales proceeds from Aretec sale and a pay down of our revolving credit score facility to the minimal required ranges, our money assets could be roughly $66.Nine million. We proceed to carefully track our asset protection ratio and really feel ok with our leverage as of September 30, 2018.
The corporate’s asset protection ratio for borrowed quantities as outlined via the 1940 Act used to be 260% on the finish of the 3rd quarter, smartly above our newly lowered requirement beneath the statute of 150%. The web impact of debt to fairness ratio after adjusting for money readily available used to be 0.54x as of the top of the quarter.
Subsequent, I’d like to spotlight our quarterly distribution. On September 7, we declared a distribution for the quarter ended September 30, 2018, of $0.355 according to percentage for a complete distribution of $7.Three million to stockholders of document as of September 18, 2018. The distribution used to be paid to stockholders on October 3. This marks the corporate’s 24th distribution since our IPO in December 2012 with all distributions at a charge of $0.355 according to percentage according to quarter. We predict to be able to proceed our common distributions.
I’ll now flip the decision over to the operator on your questions. Operator?
[Operator Instructions] Your first query comes from the road of Tim Hayes of B. Riley FBR.
My first query, have you ever begun redeploying the proceeds from Aretec but? After which does the price waiver announcement indicate that you are expecting the entire Aretec proceeds to be redeployed via the second one quarter of 2019?
So This fall is typically a robust quarter for asset deployment on the market. The truth that we’ve got numerous mandated offers will give us a chance to deploy one of the vital money that has been generated via the Aretec sale. And it’s our want that each one of that money or the vast majority of that money could be invested prior to the already introduced charge waiver on money is expiring. That stated, we will be able to proceed to observe the money state of affairs, and if it used to be deemed suitable, that charge waiver might be prolonged, if wanted, once more, matter to approvals on the time.
And then you definately’d point out that you simply’re lately comparing or might be comparing whether or not to pay a portion of the acquire from Aretec as a onetime dividend. Simply questioning, when you are expecting the timing round a call or a press release could be made?
So we be able to roll ahead a lot of that acquire with the fee of just a 4% excise tax on an annual foundation. We view that skill to roll ahead acquire as very accretive to shareholders in the case of developing investable capital to the level that there’s a portion of the acquire that isn’t certified for that 4% excise tax roll ahead that might another way be matter to complete taxation, we might imagine doing a distinct distribution or particular dividend of the ones quantities versus paying the total tax rate. It isn’t anticipated that, that may occur within the close to long run because the efficiency of the corporate over the following quarters will dictate what portion of that acquire can also be rolled ahead. So we’ll supply extra records on that as extra records is to be had. However it could no longer be — we don’t be expecting that it could be in the following couple of quarters.
After which, Stuart, as you discussed, your regulatory leverage ratio is definitely underneath your goal vary. How do you propose to extend leverage through the years? I do know you discussed more or less the discussions you’re having with — at the JPMorgan facility. And the way lengthy do you suppose it’ll take you to get to that concentrate on vary, particularly with the entire proceeds of Aretec coming again so that you can make investments?
Sure. Now we have an overly massive amount of cash for the BDC to take a position. And Tim, an important factor is that we make investments prudently. I might fairly be underinvested and I might fairly take a seat on money than put the cash into investments that I imagine would undergo all over a downturn. We don’t know when a downturn is coming, however we need to be ready and prudent. That stated, we’ve got an overly robust originations workforce. The BDC advantages from an overly important structure, which contains 34 funding execs within the WhiteHorse Direct Lending group and that’s in reality going to extend. We’re hiring extra other folks as we talk, and that provides us the facility to force deployment in a accountable way. It’s my expectation that obtaining to complete deployment will take almost certainly a few 12 months, but when it might occur faster, that might be nice. And if it takes longer, then we will be able to ask our shareholders to be affected person with us. However we’ve got a forged pipeline, and we do intend to develop to the total measurement of the BDC as briefly as conceivable. I’ll additionally spotlight that via opening the JV with Ohio STRS, we’re developing an outlet for property that another way didn’t are compatible within the BDC. So we’ve got some superb senior secured property that we supply within the WhiteHorse platform which can be priced at LIBOR 500 to LIBOR 650. Traditionally, anything else priced beneath a LIBOR 650 would no longer cross into the BDC, however within the JV construction, with the leverage that comes from the JV construction, the ones property can also be profitably invested. And in order that provides us an making an investment outlet for the BDC that — will give us, if it will get licensed, an making an investment outlet for the BDC that we didn’t have prior to that may permit extra property, extra range and extra senior secured loans to return into the full portfolio.
Ok. Sure, that certainly is smart. After which only one extra for me prior to I’ll hop again within the queue. You’re already at that 75% first-lien goal combine. However you more or less discussed the discussions you’re having with JPMorgan about possibly taking over extra leverage on that facility as you reinforce your portfolio combine. Simply questioning, for those who see that quantity migrating materially upper from 75% going ahead? Or if that’s nonetheless more or less a goal for the BDC?
I might let you know that I might set a cushy goal of 75% first lien plus or minus 5%, matter to the character and the standard of the offers we see. Some second-lien property are levered 6.Five occasions with a 4.Five occasions attachment level and a few second-lien property are levered 4.25 occasions with a 1.Five occasions attachment level and the ones two threat profiles assuming the corporations with the similar or utterly other threat profile. And so second-lien property can also be very, very horny. So I will’t set a company quantity, however directionally talking, the place we’ve got long gone is the place we intend to be, and directionally talking, we might transfer our most focus of second-lien property down within the JPMorgan facility to one thing this is extra aligned to what we predict to do ongoing.
Your subsequent query comes from the road of Mickey Schleien of Ladenburg.
I sought after to simply observe up at the three way partnership challenge. We’ve noticed different BDCs in reality unwinding the ones JVs as a result of now you’re allowed upper on stability sheet leverage. So what sides of this JV are riding you to move that course versus simply the usage of the upper allowed leverage beneath the modification to the ‘40 Act?
So Mickey, and it’s a perfect query. The economics of placing a LIBOR 600 deal at the stability sheet of the BDC are such that the costs of the BDC are then charged without delay at the asset. Within the JV construction, the costs of the BDC are simplest charged at the invested capital and no longer at the underlying asset. So within the JV construction, a LIBOR 600 asset that might no longer be in particular accretive, it could be simplest gently accretive at the direct stability sheet, turns into a lot more accretive since you’re simplest paying the costs at the invested capital on the backside of the JV. So the JV lets in us to take those LIBOR, once more, 500 to LIBOR 650 loans, however I might estimate that the common pricing might be LIBOR 575 to 600 and to incorporate them at the BDC stability sheet in a way which is extremely accretive to source of revenue and a lot more accretive to source of revenue than it could be if the ones property had been put without delay at the stability sheet, no longer within the JV.
And simply conceptually, it could appear with the entire money that you’ve got for your stability sheet now, no less than in concept, you must fund or in part fund the JV with money, is that within the works otherwise you don’t have loans to give a contribution, so I’m simply curious the way you’re enthusiastic about investment?
Sure. So through the years, because the JV is deployed, we predict that we will be able to have a a lot of availability to fund it. It’s funded beneath the 30% bucket. When absolutely deployed, the BDC could have about 700 million of property, in order that bucket could be over $200 million, and we simplest plan on the usage of, this present day, 75 million of that for the JV. So there will have to be abundant capital to be had each widely and beneath the 30% bucket for the JV funding.
And only a couple extra questions, if I may. Exits had been moderately significant this quarter, I will have to say, exits and repayments. I’m curious whether or not the upper LIBOR is riding your debtors to time period out their borrowings, most likely someplace rather then within the BDC sector. Have you ever noticed that development going on but? And who will be the lenders if that is going on?
No. The upward thrust in LIBOR isn’t riding the trade. The most important compensation we had used to be Intermedia. Intermedia used to be a mortgage that used to be repaid since the second-lien mortgage that used to be priced at LIBOR 950 used to be refinanced into our first-lien mortgage that used to be priced, I feel, at LIBOR 600. So it’s the overall aggressiveness of the marketplace that results in a few of these loans getting repaid. We, normally, no longer all the time, however normally, are reserving without delay originated property and the good factor concerning the decrease mid-market without delay originated property is they’re much much less matter to the massive marketplace developments. So Intermedia used to be a second-lien mortgage in a bigger corporate. It used to be a mid-market corporate, no longer a decrease mid-market corporate. And any of the offers that we have got within the mid-market versus the decrease mid-market are extra matter to the danger of refinancing in accordance with the speed of transactions in that marketplace.
That stated, the vast majority of offers on our portfolio, the majority of offers which can be in our pipeline, the mandated pipeline, our transactions which can be decrease mid-market, we outline decrease mid-market as 40 million of EBITDA and underneath, and that decrease mid-market has a lot much less compensation power than the mid-market does.
My closing query is expounded to rates of interest. Do you’ve gotten a way of the way a lot rates of interest — what number of extra Fed charge will increase can the decrease center marketplace deal with prior to you begin to get occupied with your debtors capability to carrier their debt?
Mickey, for my part, the largest threat of rates of interest are extremely leveraged transactions, appropriate. In case you’re levered 6, 7 and even 8x, a upward push in LIBOR has an overly subject matter affect for your borrowing prices and a upward push in LIBOR that may be past what persons are anticipating will have unfavourable — very unfavourable penalties. We truly attempt to stay leverage ranges on each our non-sponsor and sponsor transactions in test. I can let you know that, normally, on our non-sponsor transactions, leverage is between 2 and 4x and numerous the transactions are levered, name it, 2 or Three quarters at 3.5x. And within the subsidized mid-market the place leverage is usually 5.Five to 7.5x, we don’t usually play and as a substitute center of attention at the off-the-run decrease mid-market the corporations that have a tendency to be much less coated via the bigger financing entities in the market. And because of this, the leverage on our sponsor transactions generally tend to run between 3.5x and 5.5x. So via retaining leverage multiples in test, I feel it’s public data that the common leverage more than one of the offers that experience long gone into the BDC is simplest 3.2x. However via retaining leverage multiples in test, we stay the sensitivity of our portfolio to emerging rates of interest at a miles decrease degree than many people on the market.
[Operator Instructions] Your subsequent query comes from the road of Chris Kotowski of Oppenheimer.
I used to be — whilst you stated it could take a complete kind of a 12 months to totally deploy the capital, had been you regarding the money that you’ve got from the Aretec sale and the pay downs or had been you regarding attending to the total 1 to one.25 leverage?
I’m regarding attending to the total 1.25x leverage. There’s about $200 million of capital that must be deployed. If we elevate, and via the best way, I’m open to paying attention to what buyers and analysts suppose, but when we elevate the utmost quantity of the deal that we put within the BDC, which is now kind of focused at a max of $20 million with a tougher max of $25 million, if we elevate that, shall we deploy the capital extra briefly. However I nonetheless imagine that probably the most prudent factor to do for the BDC is to make use of this money and this build up leverage to proceed to extend range. And so I don’t intend to modify the funding coverage of the BDC. So whilst you think about customary compensation together with the truth that we’ve got name it $200 million of money roughly to deploy, we’re estimating that, that may happen over the following 12 months.
Ok. And also you referenced the potential of having to make use of one of the vital Aretec acquire for a distinct dividend. And I suppose, I’d say, given your NAV preservation observe document and protection of dividends, one would typically be expecting to peer your inventory buying and selling at a top rate to NAV, however it’s buying and selling at a fairly important cut price, and I used to be questioning, may — would you imagine the usage of any of that extra capital for percentage repurchases fairly than dividend — particular dividends?
I do not know why our stocks business on the degree they do given the underlying factual records about NAV preservation and the income of the dividend. But when our stocks did proceed to business at a subject matter cut price to NAV, the executive and the Board of Administrators would imagine allocating capital to repurchase stocks at that discounted worth.
Sure. I imply, simply from my perspective, that will be the present that assists in keeping on giving versus a onetime dividend as a onetime dividend.
Sure. I perceive, and we will simplest react to what we see cross on on the market. However not too long ago — fairly not too long ago, the stocks had been at greater than a 15% cut price to NAV. Once more, I don’t know any explanation why they’re buying and selling at that degree, but when they proceed to business at that form of cut price, there could be dialogue. I will’t expect how that dialogue would pop out, however there could be dialogue round allocating capital to the repurchase of stocks.
Right now, there aren’t any additional questions. We thanks for taking part in WhiteHorse Finance’s 3rd Quarter 2018 Profits Convention Name. You might now disconnect your strains, and feature a gorgeous day.