WhiteHorse Finance, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed March 5, 2024. This is an annual report, not a standalone fourth-quarter earnings release. WhiteHorse is an externally managed BDC and RIC that primarily originates senior secured loans to U.S. lower-middle-market companies.
Financial and portfolio highlights
| Metric | 2023 | 2022 |
|---|---|---|
| Total investment income | $103.3 million | $87.5 million |
| Total expenses, including excise tax | $60.5 million | $50.3 million |
| Net investment income after excise tax | $42.7 million | $37.3 million |
| Net realized gains (losses), including foreign currency | $0.9 million | ($14.3 million) |
| Net unrealized depreciation | ($23.2 million) | ($7.3 million) |
| Increase in net assets from operations | $20.4 million | $15.7 million |
| Earnings per share | $0.88 | $0.68 |
| Distributions declared per share | $1.55 | $1.47 |
- Income and expenses: Investment income rose 18%, primarily as higher base rates lifted interest and PIK income. Interest expense increased $8.0 million, reflecting higher average borrowing costs; average outstanding borrowings were $427.2 million at a 6.39% weighted-average rate for the year. Total expenses rose 20%. Net investment income was about 41% of investment income (calculated).
- Cash flow: Operating activities provided $90.4 million; financing activities used $92.1 million, mainly for debt repayments and distributions. Cash, cash equivalents and restricted cash totaled $24.5 million at year-end, including $12.5 million restricted cash.
- Portfolio: Fair value was $696.2 million across 116 positions in 72 companies, down from $760.2 million across 115 positions in 72 companies. Weighted-average effective yield was 12.4%, versus 12.2% in 2022; yield on income-producing debt was 13.7%, versus 12.6%. Nearly all performing floating-rate investments were variable-rate, primarily SOFR-linked.
- Asset quality: Investments rated 4 or 5 totaled 3.1% of portfolio fair value; rating-5 holdings were 2.2%, versus none in 2022. Non-accrual loans had $38.3 million cost and $14.1 million fair value at year-end; there were none in 2022.
- Balance sheet and liquidity: Total assets were $730.8 million and net assets $316.8 million, versus $796.5 million and $332.4 million, respectively, in 2022. NAV per share fell to $13.63 from $14.30. Principal debt was $391.0 million ($386.4 million carrying value, net of issuance costs); asset coverage was 181.0%, above the 150% statutory minimum. The credit facility had $138.5 million available to draw, subject to collateral and portfolio tests.
Material changes and unusual items
- Net unrealized depreciation increased materially to $23.2 million. The filing describes 2023 restructurings involving American Crafts and Starco, and reports substantial valuation reductions in certain holdings.
- WhiteHorse issued $34.5 million of 7.875% notes due 2028 in August 2023 and repaid the $30 million 6.000% notes that matured that month. Year-end debt was lower than 2022, partly reflecting repayments under the revolving facility.
- New and existing investments totaled $145.0 million; repayments and sales totaled $197.6 million. Unfunded commitments declined to $21.4 million from $56.2 million.
- STRS JV, a separately reported joint venture in which WhiteHorse held 65.71% of equity interests, had $332.2 million of assets and a 12.4% weighted-average effective portfolio yield at year-end, up from $305.3 million and 11.3% in 2022.
Outlook, risks and contingencies
- The filing provides no numerical earnings or portfolio guidance. Management intends to continue quarterly distributions, subject to board discretion, earnings, liquidity, regulatory requirements and debt covenants. 2023 distributions totaled $1.55 per share; the filing reports they were ordinary income for tax purposes, with no return of capital.
- The board approved a reduction in the base management fee from 2.00% to 1.75%, effective January 1, 2024. The filing also highlights that higher rates can increase income on floating-rate loans but raise borrowing costs and borrower stress; a hypothetical 100-basis-point rate increase was estimated to increase annual net interest income by $4.6 million before incentive fees, assuming balances and exposures stay constant.
- Key risks include borrower defaults and refinancing difficulty, inflation and economic weakness, leverage and covenant constraints, portfolio illiquidity and subjective Level 3 valuations, PIK income that may not generate cash, and dependence on the external adviser and affiliated deal sourcing. $673.4 million of investments were Level 3; valuation was the auditor’s critical audit matter. The auditor issued an unqualified opinion on the financial statements; management assessed disclosure controls and internal control over financial reporting as effective, while the auditor did not audit ICFR.
- After year-end, Nasdaq notified the Company that the January 2024 death of an independent director left the board short of the required independent-director majority. The Company was evaluating candidates within Nasdaq’s cure period, which runs to the earlier of its next annual meeting or January 16, 2025, subject to the stated July 15, 2024 deadline if the meeting occurs before then.
- The filing reports no material legal proceedings. It states that no cybersecurity risks or incidents were identified as materially affecting, or reasonably likely to materially affect, the Company during the reporting period.
Important facts for investors to verify
- Whether the $14.1 million year-end fair value of non-accrual loans and the $15.1 million of rating-5 positions have changed, and what recoveries or further markdowns occur.
- How the Level 3 valuations—particularly restructured and impaired investments—compare with subsequent borrower performance, cash collections and realizations.
- Available borrowing capacity and compliance with asset-coverage, borrowing-base, market-value and other debt covenants; also review maturities, including the credit facility and $40 million of notes due in 2025.
- Whether net investment income and cash receipts adequately support distributions, given 2023 distributions of $1.55 per share versus $0.88 GAAP earnings per share and the portfolio’s PIK exposure.
- Whether the Company regained Nasdaq’s independent-director compliance and how the 2024 management-fee reduction affects expenses.