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 U.S. companies. This report covers the quarterly period ended June 30, 2018.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $31.3 million | $27.9 million |
| Net Investment Income | $13.2 million | $13.5 million |
| Net Increase in Net Assets (Operations) | $32.9 million | $16.9 million |
| Earnings Per Share (Basic & Diluted) | $1.60 | $0.91 |
| Net Asset Value (NAV) Per Share | $14.87 | $13.83 |
| Total Investments (Fair Value) | $511.4 million | $440.7 million |
| Total Debt Outstanding | $217.8 million | $185.0 million |
| Cash and Cash Equivalents | $18.6 million (incl. restricted) | $38.9 million (incl. restricted) |
| Asset Coverage Ratio | 240.2% | N/A |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $70.7 million (16%) from $440.7 million to $511.4 million, driven by $164.5 million in new investments partially offset by $116.2 million in repayments and sales.
- Profitability: Net increase in net assets from operations rose 95% year-over-year, primarily due to a significant increase in net unrealized appreciation ($19.6 million vs. $3.4 million in the prior year).
- Expense Increases: Total expenses increased to $18.1 million from $14.4 million. This was driven by higher interest expense due to increased LIBOR and higher borrowing balances, as well as a rise in performance-based incentive fees ($6.0 million vs. $3.4 million) due to unrealized gains.
- Debt Levels: Total debt increased by $32.8 million to $217.8 million, reflecting higher utilization of the revolving credit facility.
Guidance, Outlook, and Risks
- Subsequent Debt Refinancing: In August 2018, the company redeemed its $30 million Senior Notes (due 2020) and issued $30 million of new Private Senior Notes due 2023 at a 6.00% fixed rate.
- Asset Coverage Change: Stockholders approved a reduction in the asset coverage requirement from 200% to 150% effective August 2, 2018, allowing for increased leverage capacity.
- Interest Rate Sensitivity: The portfolio is heavily weighted toward floating-rate loans indexed to LIBOR. A 100 basis point increase in rates would result in a net increase in income of approximately $3.8 million annually, assuming no portfolio changes.
- Risk Factors: The company faces credit risk from portfolio company defaults and market risk from interest rate fluctuations. Leverage magnifies potential gains and losses. The company relies on its credit facility for liquidity, which is subject to collateral requirements.
Investor Verification Checklist
- Unrealized Gains: Verify the sustainability of the $19.6 million unrealized appreciation, which was a primary driver of earnings and incentive fees, specifically regarding the valuation of Aretec Group, Inc.
- Debt Refinancing Terms: Confirm the impact of the new 6.00% Private Senior Notes on future interest expense compared to the redeemed 6.50% Senior Notes.
- Leverage Utilization: Monitor the company's utilization of the new 150% asset coverage threshold and its effect on future borrowing capacity and risk profile.
- Non-Accrual Status: Review the status of the $103,000 in non-accrual loans (Grupo HIMA San Pablo, Inc.) and potential write-downs.
- Distribution Coverage: Assess whether net investment income ($13.2 million) sufficiently covers the declared distributions ($14.6 million) for the period to avoid return of capital.