Whitehorse Finance, Inc. Q1 2021 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2021. 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.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net Investment Income (after excise tax) | $7.6 million | $6.1 million |
| Net Increase in Net Assets from Operations | $8.2 million | $(21.0) million |
| Earnings Per Share (Basic & Diluted) | $0.40 | $(1.01) |
| Net Asset Value (NAV) per Share | $15.27 | $13.86 |
| Total Investments (Fair Value) | $617.0 million | $690.7 million |
| Total Debt Outstanding | $339.6 million | $390.2 million |
| Asset Coverage Ratio | 192.6% | 180.2% |
| Cash and Cash Equivalents (Total) | $24.5 million | $28.1 million |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net increase in net assets of $8.2 million, a significant improvement from a net decrease of $21.0 million in Q1 2020. This was driven by a $7.6 million net realized gain (compared to $0.5 million in Q1 2020) and higher net investment income.
- Portfolio Reduction: Total investments at fair value decreased by approximately $73.7 million (from $690.7 million to $617.0 million) due to repayments and sales exceeding new originations. The company invested $72.4 million in new/existing companies while receiving $149.6 million in repayments and sales proceeds.
- Debt Reduction: Total debt decreased by approximately $50.6 million as the company repaid $85.8 million of debt while borrowing $35.0 million.
- Expense Increase: Total expenses rose to $10.2 million from $8.3 million, primarily due to a significant increase in performance-based incentive fees ($2.0 million vs. $0.4 million) driven by higher pre-incentive fee net investment income and capital gains accruals.
Outlook, Risks, and Management Commentary
- COVID-19 Impact: Management notes that the pandemic continues to adversely impact certain portfolio companies, potentially leading to financial distress, defaults, or restructuring. While the company is working with borrowers to support them, there is uncertainty regarding the full extent of future impacts on net investment income and fair value.
- Interest Rate Sensitivity: Nearly all debt investments are floating-rate (indexed to LIBOR). A prolonged reduction in interest rates could reduce gross investment income. However, most loans have floors that mitigate this risk.
- Liquidity: The company maintains a $285 million credit facility with JPMorgan Chase. As of March 31, 2021, $214.6 million was outstanding with $70.4 million available to be drawn. The company also has an At-The-Market (ATM) equity offering program with up to $35 million available.
- STRS JV: The company continues to co-manage a joint venture with the State Teachers Retirement System of Ohio (STRS JV), which held $193.7 million in assets as of March 31, 2021.
Investor Verification Checklist
- Non-Accrual Loans: Verify the fair value of non-accrual loans, which stood at $14.3 million as of March 31, 2021 (up from $11.6 million at year-end 2020).
- Incentive Fee Accruals: Review the composition of the $2.0 million incentive fee expense, specifically the portion attributable to unrealized capital gains accruals under GAAP, which may reverse if gains are not realized.
- Asset Coverage Compliance: Confirm the company remains in compliance with the 150% asset coverage requirement under the 1940 Act (currently at 192.6%) to ensure continued ability to borrow and distribute.
- Portfolio Concentration: Assess the impact of the top five portfolio companies, which represented a significant portion of the portfolio, and monitor for any concentration risk in specific industries.
- LIBOR Transition: Monitor disclosures regarding the transition away from LIBOR and the implementation of alternative reference rates in the credit facility and portfolio loans.