WhiteHorse Finance, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
WhiteHorse Finance is an externally managed business development company and regulated investment company that primarily originates and holds senior secured loans to lower middle-market businesses. This unaudited quarterly report covers the three months ended March 31, 2023; financial comparisons are to Q1 2022 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Investment income | $26.164 | $20.034 in Q1 2022 |
| Expenses before excise tax | $15.210 | $11.271 in Q1 2022 |
| Net investment income after excise tax | $10.704; $0.46 per share | $8.539; $0.37 per share in Q1 2022 |
| Net realized gains (losses) | $0.685 | $(18.465) in Q1 2022 |
| Net unrealized appreciation (depreciation) | $(3.883) | $15.633 in Q1 2022 |
| Net increase from operations | $7.506; $0.32 per share | $5.707; $0.25 per share in Q1 2022 |
| Distributions declared | $0.425 per share; $9.878 total | $0.355 per share; $8.234 total in Q1 2022 |
| Investments at fair value | $749.223 | $760.228 at December 31, 2022 |
| Net assets / NAV per share | $330.015 / $14.20 | $332.387 / $14.30 at December 31, 2022 |
| Debt | $427.990 principal; $423.663 carrying value | $445.145 principal at December 31, 2022 |
| Asset coverage | 177.1% | 174.7% at December 31, 2022; 150% statutory minimum |
| Operating cash flow | $21.762 | $15.075 in Q1 2022 |
Investment income increased $6.130, principally because higher benchmark rates lifted portfolio interest income. Interest expense rose $2.751 as average borrowing rates increased, partly offset by lower average borrowings. Reported total expenses including excise tax were $15.460. Net unrealized depreciation offset part of the improvement in investment income and realized results.
At quarter-end, cash and cash equivalents were $11.748; restricted cash and cash equivalents were $9.921 and restricted foreign currency was $0.579. Together, cash, cash equivalents and restricted cash totaled $22.248. The company reported $97.010 available under its credit facility, subject to collateral and portfolio requirements. Financing activities used $25.766 of cash, mainly for debt repayments and distributions.
Material changes and portfolio developments
- The portfolio comprised 116 positions across 70 companies, with fair value of $749.2 and weighted average effective yield of 12.6% (13.2% on income-producing debt). Nearly all performing debt investments were floating rate.
- During Q1, the company invested $37.3 in new and existing portfolio companies; repayments and sales totaled $48.2. Investment fair value declined $11.005 from year-end.
- One loan was on non-accrual at March 31, with fair value of $2.661; there were no non-accrual loans at year-end. The filing’s portfolio risk ratings show 25.0% at rating 3 and 1.8% at rating 4; none were rated 5.
- In March, American Crafts investments became controlled-affiliate investments following a restructuring. A restructuring of Sklar Holdings converted its first-lien loan into a new first-lien loan and equity interests in Pressurized Holdings.
- The company increased its STRS JV commitment by $15.0 in February. Its total commitment became $115.0, of which $15.0 was unfunded at quarter-end. The JV had $324.6 of assets, 30 portfolio companies and an 11.8% weighted average effective yield.
- The company launched a new at-the-market offering on March 31, permitting up to $35.0 of common stock sales; no shares were issued in Q1 2023. The prior ATM agreement ended in March.
Outlook, risks and unusual items
Management attributed higher income mainly to rising base rates and noted higher non-recurring fee income; it expects some non-recurring fee income in most quarters but provided no specific earnings or distribution guidance. The April 12, 2023 credit-facility amendment, disclosed as a subsequent event, sets SOFR plus 2.50% for borrowings thereunder effective June 6, 2023. The $30.0 of 6.00% notes mature August 7, 2023.
Key risks include borrower credit deterioration, portfolio valuation uncertainty, leverage and refinancing needs, rising funding costs, and liquidity constraints under borrowing-base and asset-coverage tests. The company warns that banking-system strain could affect its own and portfolio companies’ bank relationships and access to uninsured deposits. It also identifies inflation, economic and market conditions, foreign currency exposure, and the transition from LIBOR as risks. Nearly all investments are Level 3 fair-value measurements based on significant unobservable inputs; values may differ from amounts ultimately realized. The company reported no material legal proceedings, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the $2.661 non-accrual investment, restructurings and rating-4 exposures lead to further credit losses or valuation changes.
- How rising rates affect net investment income after accounting for higher borrowing costs, incentive fees and the April credit-facility repricing.
- Repayment or refinancing plans for the $30.0 notes due August 2023 and compliance with the 150% asset-coverage minimum and credit-facility tests.
- Cash available for operations after excluding restricted amounts, and the timing and likelihood of $46.325 in portfolio-company unfunded commitments and $15.0 in unfunded STRS JV commitments.
- Whether distributions remain supported by taxable earnings and cash generation; declared distributions exceeded Q1 net investment income per share.
- Valuation assumptions for the predominantly Level 3 portfolio and the implications of the STRS JV’s leverage and investment concentration.