Business Context and Reporting Period
WhiteHorse Finance, Inc. (WHF) is an externally managed, non-diversified, closed-end management investment company operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company targets debt investments in privately held, lower middle-market companies in the United States. This report covers the quarterly period ended June 30, 2021.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|
| Total Investment Income | $35.3 million | $28.4 million |
| Net Investment Income (after excise tax) | $13.7 million | $11.3 million |
| Net Increase in Net Assets from Operations | $18.7 million | $1.9 million |
| Net Asset Value (NAV) per Share | $15.42 | $14.61 |
| Total Assets | $699.7 million | $719.0 million (Dec 31, 2020) |
| Total Debt Outstanding | $363.5 million | $390.2 million (Dec 31, 2020) |
| Cash and Cash Equivalents | $17.8 million (incl. restricted) | $15.9 million (Dec 31, 2020) |
| Asset Coverage Ratio | 187.9% | 180.2% (Dec 31, 2020) |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by approximately 24% year-over-year, driven by higher accelerated accretion income from repayment activity and increased income from the STRS JV joint venture.
- Profitability: Net increase in net assets resulting from operations improved significantly to $18.7 million from $1.9 million in the prior year period, primarily due to net realized gains of $7.6 million (compared to $0.5 million in 2020) and higher net investment income.
- Expense Increases: Total expenses rose to $21.0 million from $16.6 million. Interest expense increased due to a higher borrowing base, while performance-based incentive fees more than doubled to $4.7 million due to higher pre-incentive fee net investment income and capital gains accruals.
- Portfolio Composition: The portfolio fair value decreased slightly to $670.5 million from $690.7 million at year-end 2020. The weighted average effective yield on the portfolio increased to 9.7% from 9.4%.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management notes that the pandemic continues to adversely affect certain portfolio companies, potentially leading to financial distress, defaults, or restructuring. This may negatively impact future net investment income and fair values.
- Interest Rate Sensitivity: Nearly all debt investments are floating-rate (indexed to LIBOR). A prolonged reduction in interest rates could reduce gross investment income unless offset by spread increases or expense reductions.
- Liquidity and Capital: As of June 30, 2021, the company had $46.5 million available to be drawn under its Credit Facility. The company maintains an "opt-out" dividend reinvestment plan (DRIP).
- Subsequent Events: On July 15, 2021, the company amended its Credit Facility to reduce interest rate margins to 2.35% and extend the termination date to November 22, 2025. Similar amendments were made to the STRS JV Credit Facility.
- Unfunded Commitments: The company has approximately $23.8 million in unfunded commitments to extend credit to portfolio companies as of June 30, 2021.
Investor Verification Checklist
- Asset Coverage Ratio: Verify the current ratio remains above the 150% threshold required by the 1940 Act to maintain leverage capacity.
- Non-Accrual Status: Review the specific portfolio companies placed on non-accrual status (totaling $9.7 million fair value) and the likelihood of recovery.
- Realized Gains Sustainability: Assess whether the $7.6 million in realized gains for the six-month period is sustainable or driven by one-time events (e.g., AG Kings Holdings Inc. realization).
- LIBOR Transition: Monitor the company's progress in transitioning away from LIBOR as referenced in the credit facility amendments.
- Dividend Coverage: Confirm that net investment income continues to cover the quarterly distribution rate of $0.355 per share to maintain RIC tax status.