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 companies in the United States. This report covers the quarterly period ended March 31, 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net Asset Value (NAV) per Share | $13.86 | $15.33 |
| Total Net Assets | $284.7 million | $315.0 million |
| Total Investments (Fair Value) | $557.1 million | $589.7 million |
| Investment Income | $14.5 million | $15.9 million |
| Net Investment Income (after excise tax) | $6.1 million | $7.6 million |
| Net Realized Gains/Losses | $0.5 million gain | $(2.0) million loss |
| Net Unrealized Appreciation/Depreciation | $(27.6) million | $1.4 million |
| Net Increase/(Decrease) in Net Assets | $(21.0) million | $7.0 million |
| Earnings Per Share (Basic & Diluted) | $(1.01) | $0.34 |
| Total Debt Outstanding | $295.9 million | $303.9 million |
| Cash and Cash Equivalents | $16.5 million | $30.7 million |
| Asset Coverage Ratio | 196.2% | N/A |
Material Changes vs. Prior Period
- Significant NAV Decline: NAV per share decreased by approximately 9.0% from $15.23 at the end of 2019 to $13.86 at March 31, 2020. This decline was primarily driven by a net unrealized depreciation of $27.6 million.
- COVID-19 Impact: Management attributes the decrease in fair value of portfolio investments to the immediate adverse economic effects of the COVID-19 pandemic and the re-pricing of credit risk. Twelve investments were downgraded from a risk rating of 2 to 3 during the quarter.
- Investment Income: Total investment income decreased by $1.4 million (8.8%) compared to Q1 2019, due to lower non-recurring fee income, an increase in non-accrual loans, and a decrease in LIBOR.
- Expense Fluctuations: Performance-based incentive fees dropped significantly to $0.4 million from $1.8 million in the prior year, largely due to a $0.6 million reversal of previously accrued capital gains incentive fees driven by portfolio losses.
- Non-Accrual Loans: The fair value of non-accrual loans increased to $20.7 million from $7.7 million at December 31, 2019.
Guidance, Outlook, and Risks
- Outlook: Management expects the adverse effects of the COVID-19 pandemic to continue for the duration of the outbreak and potentially beyond. They anticipate a negative impact on cash flows in the second and third quarters of 2020, which could materially affect future net investment income and the fair value of portfolio investments.
- Liquidity: As of March 31, 2020, the company had $28.1 million in total cash resources (including restricted cash) and approximately $19.1 million available to be drawn under its Credit Facility. The company remains in compliance with all covenants.
- Interest Rate Risk: Nearly all debt investments are floating-rate (indexed to LIBOR). A prolonged reduction in interest rates, as seen during the pandemic, reduces gross investment income. However, the company's debt costs are also tied to LIBOR, providing some natural hedge.
- Joint Venture: The company continues to fund its joint venture with STRS Ohio (STRS JV), which had total assets of $126.4 million as of March 31, 2020. The company has unfunded commitments of approximately $29.3 million to this venture.
Investor Verification Checklist
- Non-Accrual Status: Verify the specific portfolio companies moved to non-accrual status and the likelihood of recovery given the pandemic environment.
- Asset Coverage Covenants: Monitor the asset coverage ratio (currently 196.2%) to ensure it remains above the 150% threshold required by the 1940 Act to avoid restrictions on borrowing and distributions.
- LIBOR Sensitivity: Assess the impact of continued low interest rates on the spread between asset yields and borrowing costs, noting that many loans have interest rate floors.
- Valuation Methodology: Review the Level 3 fair value inputs (discount rates, exit multiples) used to value the portfolio, as these are highly sensitive to market volatility.
- Distribution Sustainability: Confirm whether the declared distribution of $0.36 per share is fully covered by taxable ordinary income or if it includes a return of capital, given the net loss for the quarter.