WhiteHorse Finance, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. WhiteHorse Finance is an externally managed business development company (BDC) focused primarily on senior secured lending to lower middle-market companies. Dollar amounts are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Investment income | $25.5 | $26.2 in Q1 2023 |
| Net investment income after excise tax | $10.8; $0.47 per share | $10.7; $0.46 per share in Q1 2023 |
| Net increase in net assets from operations | $6.0; $0.26 per share | $7.5; $0.32 per share in Q1 2023 |
| Distributions declared | $0.385 per share; $8.9 total | $0.425 per share; $9.9 total in Q1 2023 |
| Net asset value (NAV) per share | $13.50 | $13.63 at December 31, 2023 |
| Investments at fair value | $697.9 | $696.2 at December 31, 2023 |
| Total assets / net assets | $735.0 / $313.8 | $730.8 / $316.8 at December 31, 2023 |
| Debt | $394.5 principal outstanding; $390.3 carrying value net of issuance costs | $391.0 principal outstanding; $386.4 net carrying value at December 31, 2023 |
| Cash, cash equivalents and restricted cash | $20.9, including restricted amounts | $24.5 at December 31, 2023 |
Cash flow from operating activities was $1.6, down from $21.8 in Q1 2023; financing activities used $5.2, compared with $25.8 used in Q1 2023. The filing does not provide a clear operating-margin measure. The reported net investment income was approximately 42% of investment income, before considering that this is a BDC rather than an operating-company margin.
Changes versus comparable periods
- Investment income declined $0.7 (about 3%) year over year. Lower portfolio size and non-recurring fees reduced direct portfolio income, partly offset by higher base rates and increased income from the STRS Ohio joint venture (STRS JV).
- Net investment income increased $0.1 as total expenses, including excise tax, fell $0.8. Lower management fees reflected a base fee reduction effective January 1, 2024, from 2.00% to 1.75%; lower interest expense also contributed.
- Net results from operations fell $1.5 year over year, principally as realized investment losses shifted to $5.6 from realized gains of $0.7, partly offset by a $0.8 unrealized gain versus a $3.9 unrealized loss in Q1 2023.
- NAV declined $0.13 per share from year-end. Declared distributions were below the Q1 2023 level.
- The portfolio had 120 positions across 71 companies, versus 116 positions across 72 companies at year-end. Its weighted-average effective yield was 12.1% (13.7% for income-producing debt investments), compared with 12.4% (13.7%) at year-end.
Portfolio, liquidity, risks and outlook
- Portfolio investments were primarily floating-rate senior secured loans, mostly indexed to SOFR. Six fixed-rate loans represented 1.1% of portfolio fair value. The weighted-average remaining debt maturity, excluding non-accrual investments, was approximately 2.8 years.
- Non-accrual loans had $22.4 of cost and $7.5 of fair value, compared with $38.3 and $14.1, respectively, at year-end. Risk ratings 4 and 5 represented 4.1% of portfolio fair value, up from 3.1%; rating 5 alone was 1.2%, down from 2.2%.
- Nearly all investments are Level 3 fair-value measurements using significant unobservable inputs. Management cautions that private-investment valuations are uncertain and may differ materially from realized sale values.
- Asset coverage for borrowed amounts was 179.5%, versus 181.0% at year-end; the disclosed minimum is 150%. The company had $135.0 available under its JPMorgan credit facility, subject to collateral and portfolio-quality tests, down from $138.5. Facility borrowings were $200.0 at March 31, with an effective rate of 7.82%; total debt also includes unsecured notes.
- Unfunded portfolio-company commitments were $20.7, down from $21.4. Management stated it believes available assets are sufficient to meet these commitments. Cash generation is affected by investment repayments, new funding, distributions, debt service and restricted cash arrangements.
- Q1 included material credit events: a January restructuring of Arcserve converted prior loans into new debt, unsecured notes and equity; Arcserve equity was valued at $9.6 at quarter-end. Realized losses included $3.1 for Aspect Software and $2.9 for Crown Brands. These items contributed to investment valuation and earnings volatility.
- Management provided no specific earnings or portfolio guidance. It noted that results can vary with investment activity, repayments, fees and realized or unrealized gains and losses. From April 1 through May 8, 2024, the company contributed three additional senior secured debt facilities to STRS JV.
- Key risks include borrower defaults and credit deterioration, the uncertain valuation and liquidity of private investments, changes in rates and credit spreads, and the company’s leverage and dependence on credit-facility borrowing-base and market-value tests. Its interest-rate sensitivity analysis estimates that a 100-basis-point increase would raise annualized net interest income by $4.5 before incentive fees, while a 100-basis-point decrease would reduce it by $4.5, assuming the portfolio and financing remain unchanged.
- The company reported no material legal proceedings, no defaults upon senior securities, and effective disclosure controls. It cautions that distributions are not assured and may include return of capital; tax characteristics are determined and reported after year-end.
Important facts for investors to verify
- Whether elevated risk-rating 4 exposures and the remaining non-accrual balances recover, and how the Arcserve, Aspect Software and Crown Brands restructurings affect future collections and valuations.
- The basis and sensitivity of Level 3 fair values, particularly given portfolio fair value below amortized cost and material unobservable valuation inputs.
- Available borrowing capacity, asset-coverage headroom, and compliance with the credit facility’s collateral, borrowing-base and market-value requirements.
- Whether net investment income and cash collections can support distributions, especially as the declared quarterly distribution exceeded reported Q1 net investment income per share.
- The filing reports expenses of $14.368 before excise tax and $14.660 including excise tax in the financial statements; verify the presentation when comparing expense totals across sections.