WhiteHorse Finance, Inc. — FY2022 Form 10-K
Business context and reporting period. WhiteHorse Finance is an externally managed business development company and regulated investment company that primarily originates senior secured loans to U.S. lower-middle-market businesses. This filing covers the fiscal year ended December 31, 2022, with comparisons to 2021. Amounts are U.S. dollars unless noted.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Total investment income | $87.5 million | $72.1 million |
| Total expenses, including excise tax | $50.3 million | $43.4 million |
| Net investment income after excise tax | $37.3 million | $28.8 million |
| Net realized gains (losses) | $(14.3) million | $8.8 million |
| Net change in unrealized appreciation (depreciation) | $(7.3) million | $(7.5) million |
| Net increase in net assets from operations | $15.7 million | $30.1 million |
| Basic and diluted earnings per share | $0.68 | $1.42 |
| Distributions declared per share | $1.47 | $1.555 |
- Income and margins: Investment income increased 21%, mainly due to higher benchmark rates, a larger STRS joint-venture portfolio and higher JV ownership. Net investment income increased 29%; net investment income was approximately 42.6% of investment income, versus 39.9% in 2021.
- Portfolio and yield: Portfolio fair value was $760.2 million across 115 positions in 72 companies, down from $819.2 million across 127 positions in 76 companies. Weighted average effective yield rose to 12.2% from 9.0%; yield on income-producing debt was 12.6% versus 9.1%.
- Portfolio risk ratings: Investments rated 3 or 4—where risk of loss has increased, or principal repayment is materially at risk—rose to 25.2% of portfolio fair value from 9.9%. No investments were rated 5, the filing’s payment-default category. No loans were on non-accrual at December 31, 2022.
- Assets, debt and liquidity: Total assets were $796.5 million and net assets were $332.4 million, compared with $851.0 million and $349.8 million a year earlier. NAV per share fell to $14.30 from $15.10. Principal debt outstanding was $445.1 million, versus $481.6 million; reported debt net of issuance costs was $440.4 million. Asset coverage was 174.7%, above the 150% statutory minimum. Cash, cash equivalents and restricted cash totaled $26.3 million, including $14.7 million restricted cash; $79.9 million was available under the credit facility, subject to collateral and portfolio requirements.
- Cash flow and investment activity: Operating activities provided $72.0 million, compared with using $90.2 million in 2021; financing activities used $68.5 million, versus providing $97.0 million. The company invested $280.1 million in new and existing portfolio companies and reported $323.1 million of repayments and sales during 2022.
- Distributions: The company declared $34.2 million of distributions in 2022, versus $33.4 million in 2021. The 2022 distribution was reported as ordinary income for tax purposes, with no return of capital.
Material changes, outlook and risks
- Realized investment results swung from an $8.8 million gain in 2021 to a $14.3 million loss in 2022. A significant item was an $18.3 million realized loss on Grupo HIMA San Pablo. Unrealized depreciation was also recorded in both years.
- Interest expense rose to $21.9 million from $16.6 million as average borrowings increased to $454.4 million from $379.3 million and average borrowing rates rose to 4.35% from 3.70%. At year-end, the effective rate on outstanding credit-facility borrowings was 7.11%; total debt’s weighted average interest rate was 6.12%.
- Most debt investments are floating-rate. The filing’s sensitivity analysis estimates that a 100-basis-point increase in base rates would increase annual net investment income by about $5.0 million before incentive fees, assuming the balance sheet remains unchanged. Higher rates may also pressure borrowers’ ability to pay.
- In February 2023, the company increased its STRS JV commitment by $15 million; STRS Ohio added $10 million. The company’s total commitment became $115 million, and its amended economic ownership was approximately 65.71%. The filing also says that, based on information received after year-end, the company expected to place its Playmonster Group first-lien term loan on non-accrual during Q1 2023; this assessment could change with additional information.
- The company identified inflation, rising rates, recession risk, portfolio-company credit deterioration, leverage, illiquid Level 3 valuations, funding and refinancing access, LIBOR transition, and conflicts inherent in external management as material risks. Its largest near-term note maturity disclosed is $30 million of 6.00% notes due August 7, 2023. The filing provides no specific earnings or distribution guidance.
- The independent auditor issued an unqualified opinion on the financial statements. Valuation of Level 3 investments was identified as a critical audit matter; $740.1 million of the $760.2 million investment portfolio was Level 3 at year-end. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Review the latest disclosures on Playmonster’s expected non-accrual status, recovery prospects and any effect on reported interest income and portfolio valuations.
- Assess the worsening portfolio risk-rating mix, including the increase in ratings 3 and 4, and monitor subsequent defaults, restructurings and non-accruals.
- Check refinancing or repayment plans for the $30 million 2023 notes and monitor credit-facility availability, covenant compliance and asset coverage.
- Evaluate whether higher floating-rate income is sufficient to offset rising financing costs and increased stress on borrowers.
- Review the assumptions underlying Level 3 valuations and the significant 2022 realized loss on Grupo HIMA, as well as the basis for NAV and distribution sustainability.