WhiteHorse Finance, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
WhiteHorse Finance is an externally managed business development company (BDC) and regulated investment company (RIC) focused primarily on floating-rate senior secured loans to lower middle market companies. This unaudited filing covers the quarter and nine months ended September 30, 2023. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $25.9 | $21.6 | $77.6 | $61.6 |
| Net investment income after excise tax | $10.8 | $9.8 | $32.1 | $26.2 |
| Net increase in net assets from operations | $5.6 | $3.8 | $17.0 | $16.9 |
| Net realized and unrealized gains (losses) | ($5.2) | ($5.9) | ($15.1) | ($9.3) |
| Basic and diluted earnings per share | $0.24 | $0.17 | $0.73 | $0.73 |
- At September 30, total assets were $746.5, investments at fair value were $706.8, and net assets were $322.3. NAV was $13.87 per share, down from $14.30 at December 31, 2022.
- Total debt principal outstanding was $403.1 ($398.1 carrying value, net of issuance costs), compared with $445.1 principal at year-end 2022. Asset coverage for borrowed amounts was 179.9%, versus 174.7% at year-end.
- Cash, cash equivalents and restricted cash totaled $29.8, including $19.2 restricted. The company reported $126.4 available under its revolving credit facility, subject to collateral and portfolio requirements.
- Operating activities provided $74.6 cash in the first nine months; financing activities used $71.0. Cash interest paid was $20.1.
- Q3 distributions declared were $0.37 per share, compared with $0.24 earnings per share. Nine-month distributions were $1.17 per share versus $1.38 net investment income per share.
Material changes versus comparable periods
- Investment income rose 20% in Q3 and 26% in the nine-month period, primarily from higher base rates. Interest and PIK income excluding the joint venture increased $3.9 and $13.2, respectively, year over year.
- Higher borrowing costs partly offset income growth: interest expense increased $1.9 in Q3 and $7.1 for the nine months. Reported average borrowing rates for the nine months were 6.33%, up from 3.99% in 2022.
- Nine-month unrealized depreciation was $15.7, compared with $6.6 unrealized appreciation in 2022. Net realized results improved to a $0.6 gain from a $15.9 loss in 2022, when a substantial loss related to Grupo HIMA San Pablo affected results.
- Portfolio fair value declined to $706.8 from $760.2 at year-end 2022. The portfolio had 109 positions across 69 companies, compared with 115 positions across 72 companies at year-end.
- During 2023, the company issued $34.5 principal of 7.875% notes due 2028 and repaid $30.0 of 6.000% notes at maturity. The new notes are unsecured and structurally subordinate to the credit facility.
Outlook, commentary, risks and unusual items
- No numerical earnings or investment guidance is provided. Management notes that future results can vary with new investments, repayments, realized gains or losses, and valuation changes.
- Effective January 1, 2024, the base management fee rate will decrease from 2.00% to 1.75% under an amended advisory agreement.
- At quarter-end, the portfolio’s weighted average effective yield was 12.4% (13.6% on income-producing debt); nearly all performing debt investments were floating-rate. Management’s sensitivity analysis estimated that a 100-basis-point rate increase would raise annualized net interest income by approximately $4.5, while a 100-basis-point decrease would reduce it by the same amount, before incentive-fee effects and other changes.
- Credit quality warrants attention: investments on non-accrual had $38.4 cost basis and $20.0 fair value; there were no non-accrual loans at year-end 2022. The risk-rating table shows 3.0% of portfolio fair value rated 4 and 0.4% rated 5.
- Valuation uncertainty is material: $684.4 of investments were Level 3, using significant unobservable inputs. Management identifies credit, market, liquidity, interest-rate and foreign-currency risks. The filing also highlights potential effects of banking-system strain on the company and portfolio companies.
- Restructurings changed exposure to American Crafts and Starco: American Crafts investments became controlled affiliates, while Starco debt was restructured into a new loan and equity interests. The filing reports no material legal proceedings.
- Unfunded portfolio-company commitments were $26.9, down from $56.2 at year-end. The company also had $1.9 of unfunded STRS JV equity commitments and $7.6 of unfunded subordinated-note commitments.
Most important facts for investors to verify
- Whether the non-accrual exposures and lower-valued restructured investments recover, and whether further impairments are required.
- Whether portfolio income and cash collections support distributions, especially given Q3 distributions exceeded Q3 earnings per share.
- Whether borrowing costs, asset coverage and credit-facility collateral tests remain manageable; reported available capacity depends on those tests.
- The assumptions behind Level 3 fair values, including discount rates, market quotes and exit multiples, and the concentration and performance of STRS JV exposures.
- The actual impact of the 2024 management-fee reduction and whether future changes to interest rates or portfolio repayments alter net investment income.