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 invests primarily in senior secured loans to lower middle-market companies. This Form 10-Q covers the quarterly period ended June 30, 2020.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total Investment Income | $28.4 million | $31.9 million |
| Net Investment Income (after excise tax) | $11.3 million | $14.8 million |
| Net Increase in Net Assets from Operations | $1.9 million | $15.2 million |
| Net Realized Gains (Losses) | $0.5 million | ($2.0 million) |
| Net Unrealized Appreciation (Depreciation) | ($10.0 million) | $2.4 million |
| Total Assets | $574.9 million | $631.2 million (Dec 31, 2019) |
| Total Debt (Face Amount) | $257.2 million | $303.9 million (Dec 31, 2019) |
| Cash and Cash Equivalents (Total) | $20.9 million | $27.5 million (Dec 31, 2019) |
| Net Asset Value (NAV) per Share | $14.61 | $15.23 (Dec 31, 2019) |
| Earnings Per Share (Basic & Diluted) | $0.09 | $0.74 |
Material Changes vs. Prior Period
- Decline in Net Assets: NAV per share decreased from $15.23 at year-end 2019 to $14.61 at June 30, 2020. This decline was primarily driven by a $10.0 million net unrealized depreciation on investments, attributed to the adverse economic effects of the COVID-19 pandemic and credit risk re-pricing.
- Investment Income Reduction: Total investment income decreased by approximately $3.5 million compared to the prior year period. This was due to a decrease in non-recurring fee income, an increase in non-accrual loans, and lower LIBOR rates.
- Debt Reduction: Total debt outstanding decreased by approximately $46.7 million (from $303.9 million to $257.2 million) as the company repaid borrowings under its Credit Facility.
- Non-Accrual Status: The fair value of non-accrual loans increased significantly to $39.0 million as of June 30, 2020, compared to $7.7 million at December 31, 2019.
- Portfolio Composition: The company invested $66.9 million in new and existing portfolio companies, offset by $101.3 million in repayments and sales.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management expects the pandemic to continue having a material adverse impact on future net investment income, the fair value of portfolio investments, and the financial condition of portfolio companies. Some portfolio companies have experienced financial distress, defaults, or operational curtailments.
- Interest Rate Sensitivity: Nearly all debt investments are floating-rate (indexed to LIBOR). A prolonged reduction in interest rates reduces gross investment income. However, most loans have interest rate floors.
- Liquidity and Leverage: As of June 30, 2020, the company had $57.8 million available to be drawn under its $250 million Credit Facility. The asset coverage ratio was 216.7%, well above the 150% minimum required by the 1940 Act.
- Distributions: The company declared distributions of $0.71 per share for the six months ended June 30, 2020. Management intends to maintain quarterly distributions but noted that future results may not support specific distribution levels.
- STRS JV: The company continues to co-manage a joint venture with STRS Ohio. As of June 30, 2020, the company had unfunded commitments of $23.7 million to this joint venture.
Investor Verification Checklist
- Non-Accrual Exposure: Verify the specific portfolio companies moved to non-accrual status and the likelihood of recovery given the $39.0 million exposure.
- LIBOR Floor Impact: Assess the percentage of the portfolio subject to interest rate floors and the potential for income compression if LIBOR remains low.
- Asset Coverage Covenants: Monitor the asset coverage ratio to ensure it remains above the 150% threshold required to incur additional debt or make distributions.
- Unfunded Commitments: Review the $2.4 million in unfunded commitments to portfolio companies and the $23.7 million in commitments to the STRS JV to understand future capital deployment needs.
- Valuation Methodology: Note that the majority of investments are Level 3 fair value measurements, relying on significant unobservable inputs and management judgment, which introduces valuation uncertainty.