Whitehorse Finance, Inc. quarterly report, Q2 FY2014

Whitehorse Finance, Inc. 10-Q Summary

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 invests primarily in senior secured loans to performing small-cap companies in North America. This report covers the quarterly period ended June 30, 2014.

Key Financial Metrics

Metric Six Months Ended June 30, 2014 Six Months Ended June 30, 2013
Total Investment Income $17.27 million $17.88 million
Net Investment Income $7.98 million $8.86 million
Net Increase in Net Assets (Operations) $11.39 million $6.68 million
Earnings Per Share (Basic & Diluted) $0.76 $0.45
Net Asset Value (NAV) Per Share $15.21 $15.04
Total Assets $363.89 million $374.15 million (Dec 31, 2013)
Total Liabilities $136.05 million $147.15 million (Dec 31, 2013)
Debt Obligations $127.00 million $110.00 million (Dec 31, 2013)
Cash and Cash Equivalents $6.73 million $92.91 million (Dec 31, 2013)
Asset Coverage Ratio 279.4% N/A

Material Changes vs. Prior Period

  • Portfolio Growth: The investment portfolio expanded significantly, with fair value increasing from $272.4 million at year-end 2013 to $347.1 million at June 30, 2014. The number of positions grew from 21 to 30.
  • Investment Activity: The company invested approximately $105.3 million in 10 new portfolio companies during the six-month period, offset by net repayments of $35.1 million.
  • Liquidity Position: Cash and cash equivalents decreased substantially from $92.9 million to $6.7 million as capital was deployed into new loans. However, the company maintains $108.0 million in undrawn capacity under its Credit Facility.
  • Debt Utilization: Borrowings under the Credit Facility increased from $25.0 million to $42.0 million. Total debt obligations rose to $127.0 million.
  • Unrealized Gains: The company recorded net unrealized appreciation of $3.4 million for the six months ended June 30, 2014, compared to net unrealized depreciation of $2.2 million in the same period in 2013.

Guidance, Outlook, and Risks

  • Interest Rate Sensitivity: Approximately 93.5% of the portfolio consists of variable-rate investments indexed to LIBOR. While this positions the company for a rising rate environment, most loans have interest rate floors. A 100 basis point increase in rates would result in a net decrease in income of $0.4 million due to higher borrowing costs, while a 200 basis point increase would yield a net increase of $1.3 million.
  • Credit Facility Reinvestment Period: The reinvestment period for the Credit Facility expires on September 27, 2014. Upon expiration, the interest rate on borrowings will increase by 0.50%. Management is discussing refinancing options.
  • Distributions: The company declared distributions of $0.71 per share for the six months ended June 30, 2014. A portion of these distributions is estimated to be a return of capital for tax purposes.
  • Regulatory Compliance: The company received an exemptive order from the SEC on July 8, 2014, permitting negotiated co-investments with funds managed by H.I.G. Capital.
  • Risk Factors: Primary risks include credit risk (borrower default), market risk (interest rate fluctuations), and liquidity risk. The company maintains an asset coverage ratio well above the 200% minimum required by the 1940 Act.

Investor Verification Checklist

  • Fee Waivers: Verify the impact of the $0.45 million in base management fees waived by the adviser during the six-month period on expense ratios.
  • Return of Capital: Confirm the specific tax characterization of distributions (ordinary income vs. return of capital) via the upcoming Form 1099-DIV.
  • Credit Facility Terms: Monitor the status of refinancing discussions for the Credit Facility ahead of the September 2014 reinvestment period expiration.
  • Portfolio Concentration: Review the top 10 portfolio companies, which represent a significant portion of the $347.1 million portfolio, to assess concentration risk.
  • Level 3 Valuations: Note that $325.7 million (93.8%) of the portfolio is classified as Level 3 fair value, relying on unobservable inputs and management judgment.