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 and investing in senior secured loans to performing lower middle market companies in the United States. This report covers the quarterly period ended September 30, 2019.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | As of Sep 30, 2019 |
|---|---|---|---|
| Total Investment Income | $17.8 million | $49.7 million | - |
| Net Investment Income (after excise tax) | $8.7 million | $23.5 million | - |
| Net Increase in Net Assets from Operations | $6.9 million | $22.1 million | - |
| Earnings Per Share (Basic & Diluted) | $0.34 | $1.08 | - |
| Total Assets | - | - | $566.0 million |
| Total Investments (Fair Value) | - | - | $527.5 million |
| Total Debt | - | - | $235.3 million |
| Net Assets | - | - | $315.5 million |
| Net Asset Value (NAV) per Share | - | - | $15.36 |
| Cash and Cash Equivalents | - | - | $9.8 million |
| Asset Coverage Ratio | - | - | 234.1% |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total investment income increased to $17.8 million for the quarter ended September 30, 2019, compared to $15.3 million in the same period in 2018. This was driven by higher interest income and increased fee income ($2.2 million vs. $0.9 million).
- Expense Reduction: Total expenses decreased to $8.9 million for the quarter (vs. $11.5 million in 2018), primarily due to a significant reduction in performance-based incentive fees ($1.7 million vs. $4.9 million). The decrease in incentive fees was attributed to the reversal of capital gains accruals recorded in the prior year.
- Net Income Volatility: While net investment income improved, the net increase in net assets from operations dropped to $6.9 million for the quarter, compared to $19.5 million in the prior year. This decline was caused by a shift from net unrealized appreciation of $15.7 million in 2018 to net unrealized depreciation of $1.8 million in 2019.
- Debt Levels: Total debt increased to $235.3 million as of September 30, 2019, from $180.0 million at December 31, 2018, reflecting increased utilization of the revolving credit facility to fund new investments.
Guidance, Outlook, Risks, and Unusual Items
- Joint Venture (STRS JV): The company launched a joint venture, WHF STRS Ohio Senior Loan Fund LLC, in July 2019. As of September 30, 2019, the JV held $54.9 million in investments. The company has unfunded commitments of approximately $50.6 million to this venture.
- Subsequent Event - Credit Deterioration: Following the quarter-end, the company received information indicating a decline in the performance of Grupo Hima San Pablo, Inc. Management expects to reduce the fair value mark of its first lien secured term loan investment from 85% to 80% of face value in the fourth quarter.
- LIBOR Risk: The company notes the potential phase-out of LIBOR by the end of 2021, which may require renegotiation of credit agreements for loans extending beyond that date.
- Leverage: The company maintains a maximum debt-to-equity ratio of 2.0x (150% asset coverage). As of September 30, 2019, the asset coverage ratio was 234.1%, providing a buffer against leverage restrictions.
- Unusual Items: The company recorded a net realized loss of $2.0 million for the nine months ended September 30, 2019, primarily driven by the sale of its remaining position in Outcome Health.
Investor Verification Checklist
- Portfolio Valuation: Verify the impact of the subsequent fair value reduction on Grupo Hima San Pablo, Inc. and other Level 3 assets, which comprise the majority of the portfolio.
- Debt Covenants: Confirm continued compliance with the 150% asset coverage ratio and borrowing base tests under the JPM Credit Facility, especially given the increase in outstanding borrowings.
- Incentive Fee Structure: Review the volatility of performance-based incentive fees, which fluctuated significantly due to unrealized capital gains/losses, impacting net income.
- Joint Venture Commitments: Assess the liquidity impact of the $50.6 million in unfunded commitments to the STRS JV.
- LIBOR Transition: Evaluate the exposure of the loan portfolio to the transition away from LIBOR and the potential costs associated with renegotiating terms.