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, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Assets | $521.5 million | $514.1 million |
| Total Investments (Fair Value) | $468.4 million | $469.6 million |
| Net Assets | $315.0 million | $293.5 million |
| Net Asset Value (NAV) per Share | $15.33 | $14.30 |
| Investment Income | $15.9 million | $16.6 million |
| Net Investment Income (after excise tax) | $7.6 million | $8.6 million |
| Net Increase in Net Assets from Operations | $7.0 million | $13.9 million |
| Earnings Per Share (Basic & Diluted) | $0.34 | $0.68 |
| Total Debt Outstanding | $180.0 million | $180.0 million |
| Cash and Cash Equivalents | $36.9 million (incl. restricted) | $18.6 million (incl. restricted) |
| Asset Coverage Ratio | 275.0% | N/A |
Material Changes vs. Prior Period
- Net Income Decline: Net increase in net assets resulting from operations decreased by approximately 49% to $7.0 million from $13.9 million in Q1 2018. This was driven by a net realized loss of $2.0 million (vs. $0 in prior year) and lower net unrealized appreciation ($1.4 million vs. $5.3 million).
- Realized Losses: The company incurred a net realized loss of $2.0 million, primarily due to the sale of its remaining position in Outcome Health.
- Investment Income: Total investment income decreased slightly to $15.9 million from $16.6 million, largely due to a reduction in non-recurring fee income ($1.0 million vs. $2.2 million) caused by fewer full prepayments.
- Expense Increase: Interest expense rose to $3.1 million from $2.6 million, attributed to the issuance of $35 million in 6.5% Notes due 2025 in November 2018.
- Portfolio Composition: The portfolio consists of 56 positions in 41 companies. The weighted average effective yield was 11.6%.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management noted that the decrease in performance-based incentive fees was due to lower pre-incentive fee net investment income and a reversal of previously accrued capital gains incentive fees. The company waived $177,000 in base management fees for the quarter.
- Liquidity and Capital Resources: As of March 31, 2019, the company had $85.0 million available under its $200 million revolving credit facility with JPMorgan Chase. The facility matures in December 2021.
- Debt Structure: Total debt includes $115 million under the Credit Facility, $30 million in Private Notes (6.0% due 2023), and $35 million in 2025 Notes (6.5% due 2025).
- Risks: The company faces interest rate risk, as most portfolio loans are floating-rate (LIBOR-based). Leverage magnifies potential gains or losses; a decline in asset values would cause NAV to decline more sharply than without leverage. The company must maintain an asset coverage ratio of at least 150% to incur additional debt.
- Unusual Items: The company accrued $237,000 in excise tax expense for the quarter to avoid U.S. federal income tax on retained earnings.
Investor Verification Checklist
- Realized Loss Impact: Verify the specific details and future implications of the $2.0 million realized loss from the Outcome Health sale.
- Fee Waivers: Confirm the sustainability of the $177,000 base management fee waiver and its impact on future expense ratios.
- Debt Covenants: Review the asset coverage ratio (currently 275%) against the 150% minimum requirement to ensure continued borrowing capacity.
- Interest Rate Sensitivity: Assess the impact of rising LIBOR rates on net investment income, noting that many loans have interest rate floors.
- Portfolio Quality: Monitor the "watch list" positions and the $103,000 in non-accrual loans (Grupo HIMA San Pablo, Inc. second lien) for potential credit deterioration.