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 focuses on originating senior secured loans to performing small-cap companies in the United States. This report covers the quarterly period ended June 30, 2016.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Investment Income | $26.46 million | $23.43 million |
| Net Investment Income | $13.19 million | $11.22 million |
| Net Increase in Net Assets from Operations | $13.66 million | $10.52 million |
| Earnings Per Share (Basic & Diluted) | $0.75 | $0.70 |
| Net Asset Value (NAV) Per Share | $13.37 | $15.03 |
| Total Debt Outstanding | $191.41 million | $183.48 million |
| Cash and Cash Equivalents | $18.95 million | $22.77 million |
| Restricted Cash | $25.20 million | $0 |
| Portfolio Fair Value | $400.86 million | $415.34 million |
Material Changes vs. Prior Period
- Revenue Growth: Investment income increased by approximately 13% year-over-year, driven by a higher average balance of earning investments.
- Expense Increases: Total expenses rose to $13.27 million from $12.21 million. Interest expense increased due to higher outstanding balances on revolving credit facilities and higher spreads. Incentive fees also increased due to higher net investment income.
- Portfolio Composition: The portfolio fair value decreased by $14.48 million compared to year-end 2015. The company invested $41.1 million in new/existing companies, offset by $57.7 million in repayments and sales.
- Debt Structure: The company repaid its $55 million unsecured term loan in full on June 30, 2016. Outstanding borrowings under the JPM Credit Facility increased to $164.5 million from $102 million at year-end 2015.
- Realized Losses: The company incurred net realized losses of $1.14 million for the six-month period, compared to $0.38 million in the prior year, primarily due to opportunistic sales.
Guidance, Outlook, and Risks
- Liquidity: As of June 30, 2016, the company had $44.1 million in total cash resources (including restricted cash). Approximately $11.1 million was available to be drawn under the JPM Credit Facility based on collateral requirements.
- Dividends: The company declared distributions of $0.71 per share for the six months ended June 30, 2016. Management estimates these distributions did not include a return of capital for tax purposes.
- Interest Rate Sensitivity: Approximately 97% of the portfolio consists of variable-rate investments. A 100 basis point increase in interest rates would result in a net increase in income of approximately $1.0 million annually, assuming a constant portfolio.
- Risks: Key risks include credit risk (default on investments), market risk (interest rate fluctuations), and the concentration of the portfolio in small-cap companies. The company has one investment (Fox Rent A Car, Inc.) on non-accrual status with a fair value of $7.0 million.
- Recent Developments: On August 2, 2016, the board appointed Rick P. Frier as an independent director. Stockholders also approved a proposal to sell shares below NAV during the next 12 months.
Investor Verification Checklist
- Asset Coverage Ratio: Verify the current asset coverage ratio (226.0% as of June 30, 2016) to ensure compliance with the 1940 Act requirement of at least 200%.
- Credit Facility Availability: Confirm the remaining borrowing capacity under the JPM Credit Facility, which was limited to $11.1 million due to collateral requirements.
- Non-Accrual Status: Review the status of the Fox Rent A Car, Inc. investment ($7.0 million fair value) and any potential impact on future income.
- Expense Ratios: Monitor the ratio of total expenses to average net assets (10.84% annualized) to assess the impact of leverage and management fees on net returns.
- Dividend Sustainability: Assess whether net investment income continues to cover the quarterly distribution rate of $0.355 per share.