Business Context and Reporting Period
WhiteHorse Finance, Inc. (WHF) is an externally managed, 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 companies in the United States. This summary covers the quarterly period ended September 30, 2021.
Key Financial Metrics
| Metric | Value (in thousands) |
|---|---|
| Total Assets | $729,583 |
| Total Investments (Fair Value) | $687,123 |
| Total Debt | $379,757 |
| Total Net Assets | $323,724 |
| Net Asset Value (NAV) per Share | $15.46 |
| Net Investment Income (9 months) | $21,336 |
| Net Increase in Net Assets from Operations (9 months) | $26,951 |
| Net Cash Provided by Operating Activities (9 months) | $22,550 |
| Asset Coverage Ratio | 184.2% |
Material Changes vs. Prior Period
- Investment Income: Total investment income for the nine months ended September 30, 2021, was $53.7 million, an increase from $44.9 million in the same period in 2020. This growth was driven by higher accelerated accretion income due to repayment activity and increased income from the STRS JV joint venture.
- Expenses: Total expenses (excluding excise tax) rose to $31.5 million for the nine months ended September 30, 2021, compared to $27.1 million in 2020. Interest expense increased to $11.5 million (from $9.7 million) due to a higher borrowing base, partially offset by lower LIBOR rates. Base management fees increased to $10.2 million (from $9.1 million) due to higher gross assets.
- Realized Gains: Net realized gains for the nine months ended September 30, 2021, were $7.5 million, significantly higher than the $1.1 million recorded in the prior year period, largely due to the realization of gains on AG Kings Holdings Inc.
- Unrealized Gains/Losses: The company recorded a net unrealized depreciation of $1.9 million for the nine months ended September 30, 2021, compared to a net unrealized appreciation of $5.1 million in the prior year period.
Guidance, Outlook, and Risks
- Subsequent Equity Offering: Following the quarter end, on October 25, 2021, the company completed an offering of 1.9 million shares at $15.81 per share, raising approximately $29.4 million in net proceeds. An additional $4.3 million was raised in November 2021 via the overallotment option.
- Special Distribution: On October 14, 2021, the company declared a special distribution of $0.135 per share, payable December 10, 2021.
- Credit Facility Upsize: On October 4, 2021, the company amended its Credit Facility to temporarily upsize borrowing capacity to $335 million for a three-month period.
- Portfolio Valuation Risk: Subsequent to the quarter, the company received information regarding its investment in Grupo Hima San Pablo, Inc., and expects to reduce the fair value mark of its first lien secured term loan from 50% to a range of 35% to 45% of face value in the fourth quarter.
- COVID-19 Impact: Management continues to monitor the pandemic's impact on portfolio companies, noting that while some have experienced distress, the company maintains a conservative liquidity position and works closely with borrowers.
- Interest Rate Sensitivity: The company is exposed to interest rate risk. A 100 basis point increase in rates would result in a net decrease in net investment income of approximately $1.1 million due to the mismatch between floating-rate assets (many with floors) and liabilities.
Investor Verification Checklist
- Grupo Hima San Pablo Impairment: Verify the final fair value adjustment for the Grupo Hima San Pablo, Inc. investment in the Q4 2021 filing, as a significant write-down is anticipated.
- Asset Coverage Ratio: Monitor the asset coverage ratio (currently 184.2%) to ensure it remains above the 150% threshold required by the 1940 Act to maintain leverage capacity.
- Debt Maturities: Review the maturity schedule of the $384.6 million in outstanding debt, noting the 2023 Private Notes ($30 million) maturing in August 2023.
- Unfunded Commitments: Assess the $33.1 million in unfunded commitments to portfolio companies and the company's liquidity position to fund these obligations.
- Equity Issuance Impact: Evaluate the dilution or accretion impact of the subsequent $33.7 million equity raise on the Net Asset Value per share.