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 focuses on originating and investing in senior secured loans to performing lower middle market companies in the United States. This filing covers the quarterly period ended June 30, 2019.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Investment Income | $31.9 million | $31.3 million |
| Net Investment Income (after excise tax) | $14.8 million | $13.2 million |
| Net Increase in Net Assets from Operations | $15.2 million | $32.9 million |
| Net Realized Gains (Losses) | ($2.0 million) | $0.1 million |
| Net Unrealized Appreciation (Depreciation) | $2.4 million | $19.6 million |
| Earnings Per Share (Basic & Diluted) | $0.74 | $1.60 |
| Net Asset Value (NAV) Per Share | $15.38 | $14.87 |
| Total Debt Outstanding | $249.4 million | $180.0 million |
| Asset Coverage Ratio | 226.7% | N/A |
| Cash and Cash Equivalents (Total) | $50.4 million | $18.6 million |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased to $534.8 million from $469.6 million at year-end 2018. The company invested $126.2 million in new and existing portfolio companies during the six-month period.
- Debt Expansion: Total debt increased by approximately $69.4 million, driven primarily by increased utilization of the JPM Credit Facility (outstanding borrowings rose from $115.0 million to $184.4 million) to fund new investments.
- Profitability Decline: Net increase in net assets from operations decreased significantly to $15.2 million from $32.9 million in the prior year. This was primarily due to a substantial reduction in net unrealized appreciation ($2.4 million vs. $19.6 million) and a net realized loss of $2.0 million compared to a small gain in the prior year.
- Expense Reduction: Total expenses decreased to $16.6 million from $18.1 million, largely due to a decrease in performance-based incentive fees ($3.8 million vs. $6.0 million) following the reversal of prior accruals related to unrealized appreciation.
Guidance, Outlook, and Risks
- LIBOR Transition Risk: The filing highlights the risk associated with the phase-out of LIBOR by the end of 2021. As most portfolio loans are floating-rate based on LIBOR, the company may need to renegotiate credit agreements to adopt a new reference rate, which could impact net investment income.
- Leverage and Asset Coverage: The company operates with leverage, having increased its maximum debt-to-equity ratio to 2.0x (150% asset coverage) following shareholder approval. While current asset coverage is 226.7%, a decline below 150% would restrict further borrowing and could force asset sales.
- Portfolio Quality: As of June 30, 2019, non-accrual loans totaled $21.3 million. The portfolio risk rating distribution shows 4.0% of the portfolio at "Rating 4" (material risk of not being fully repaid), up from 0.0% at year-end 2018.
- Recent Developments: In July 2019, the company launched a joint venture with the State Teachers Retirement System of Ohio (WHF STRS Ohio Senior Loan Fund LLC) by contributing assets comprising five issuers.
Investor Verification Checklist
- Non-Accrual Status: Verify the specific portfolio companies contributing to the $21.3 million in non-accrual loans and the likelihood of recovery.
- LIBOR Hedging Strategy: Confirm management's specific plan for transitioning floating-rate loans to a new benchmark post-2021.
- Debt Covenants: Review the specific borrowing base and market value tests under the JPM Credit Facility to ensure continued compliance given the increased leverage.
- Realized Loss Drivers: Investigate the details of the $2.0 million realized loss, specifically the sale of the remaining position in Outcome Health.
- Fee Waivers: Note that the investment adviser waived $0.4 million in base management fees for the six-month period; verify if this is a recurring practice or a one-time adjustment.