Whitehorse Finance, Inc. - 10-Q Summary (Period Ended June 30, 2017)
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, 2017, and the six-month period ended on the same date.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Total Investment Income | $27.86 million | $26.46 million |
| Net Investment Income | $13.46 million | $13.19 million |
| Net Increase in Net Assets from Operations | $16.90 million | $13.66 million |
| Earnings Per Share (Basic & Diluted) | $0.91 | $0.75 |
| Net Asset Value (NAV) Per Share | $13.83 | $13.37 |
| Total Investments (Fair Value) | $437.89 million | $411.71 million |
| Total Debt Outstanding | $188.99 million | $182.34 million |
| Cash and Cash Equivalents | $39.73 million | $17.04 million |
| Asset Coverage Ratio | 247.6% | N/A |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $26.2 million (6.4%) compared to December 31, 2016, driven by $86.5 million in new investments partially offset by $65.7 million in repayments and sales.
- Income Growth: Net investment income rose 2.0% year-over-year, primarily due to a larger average balance of earning investments and increased fee income ($1.83 million vs. $0.93 million in the prior six-month period).
- Expense Increases: Total expenses increased to $14.40 million from $13.27 million. Interest expense rose to $5.00 million (from $3.87 million) due to higher interest rates and spreads on the revolving credit facility.
- Capital Raise: The company completed a public offering of 2.2 million shares on June 30, 2017, raising net proceeds of approximately $30.3 million.
- Debt Facility Amendment: On June 29, 2017, the company amended its credit facility to extend the maturity to December 2021, increase the accordion feature to $235 million, and reduce the interest rate spread to 2.75%.
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus on originating senior secured loans to lower middle-market companies. The portfolio yield remains attractive with a weighted average effective yield of 11.9% as of June 30, 2017. The company maintains an "opt-out" distribution reinvestment plan.
Risks and Contingencies:
- Interest Rate Risk: Approximately 99.9% of the portfolio consists of variable-rate investments indexed to LIBOR. While the company benefits from rising rates, it also faces increased borrowing costs. A 100 basis point increase in rates would result in a net increase in income of approximately $4.0 million annually.
- Credit Risk: The portfolio includes investments in lower middle-market companies which may be more susceptible to economic downturns. As of June 30, 2017, there were no non-accrual loans.
- Liquidity: The company relies on its revolving credit facility and equity offerings to fund investments. It had $37.75 million undrawn and available under its credit facility as of the reporting date.
Investor Verification Checklist
- Verify the impact of the recent credit facility amendment on future interest expense and borrowing capacity.
- Review the composition of the portfolio, specifically the 11.7% of assets rated "3" (increased risk of loss) and the 0.1% rated "4" (material risk of principal loss).
- Confirm the sustainability of the dividend payout ratio given the company's status as a RIC and the requirement to distribute 90% of ordinary income.
- Monitor the level of non-qualifying assets (currently 16% of total assets) to ensure compliance with the 1940 Act's 70% qualifying asset rule.
- Assess the valuation of Level 3 assets (100% of the portfolio), which rely on significant unobservable inputs and management judgment.