Business Context and Reporting Period
Company: WhiteHorse Finance, Inc. (WHF)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2020
Business Overview: 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). Its primary objective is to generate returns by originating and investing in senior secured loans to performing lower middle-market companies in the United States.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | As of Sep 30, 2020 |
|---|---|---|---|
| Total Investment Income | $16.5 million | $44.9 million | N/A |
| Net Investment Income (after excise tax) | $5.9 million | $17.3 million | N/A |
| Net Increase in Net Assets from Operations | $21.6 million | $23.5 million | N/A |
| Earnings Per Share (Basic & Diluted) | $1.06 | $1.15 | N/A |
| Total Assets | N/A | N/A | $625.8 million |
| Total Investments (Fair Value) | N/A | N/A | $595.3 million |
| Total Debt (Face Amount) | N/A | N/A | $296.2 million |
| Net Assets | N/A | N/A | $314.6 million |
| Net Asset Value (NAV) Per Share | N/A | N/A | $15.31 |
| Cash and Cash Equivalents | N/A | N/A | $8.9 million |
| Restricted Cash | N/A | N/A | $13.8 million |
Material Changes vs. Prior Comparable Period
- Investment Income: Decreased to $16.5 million for the three months ended September 30, 2020, from $17.8 million in the prior year period. The nine-month total decreased to $44.9 million from $49.7 million. This decline was primarily driven by lower non-recurring fee income, an increase in non-accrual loans, and a decrease in LIBOR.
- Net Investment Income: Declined to $5.9 million (three months) and $17.3 million (nine months) compared to $8.7 million and $23.5 million in the prior year periods, respectively.
- Expenses: Total expenses (net of waivers) increased to $10.4 million for the three months ended September 30, 2020, from $8.9 million in the prior year. This was largely due to a $1.9 million accrual of the capital gains incentive fee component driven by portfolio gains. Interest expense decreased slightly due to lower LIBOR rates.
- Realized and Unrealized Gains: The company recorded net unrealized appreciation of $15.1 million for the three months ended September 30, 2020, a significant improvement from net unrealized depreciation of $1.8 million in the prior year period. This was primarily attributable to fair value increases in investments such as AG King Holdings Inc., Vessco Holdings, and Mills Fleet Farm Group LLC.
- Non-Accrual Loans: The fair value of non-accrual loans increased to $18.7 million as of September 30, 2020, from $7.7 million as of December 31, 2019, reflecting the economic impact of the COVID-19 pandemic.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 Impact: Management states that the pandemic has adversely affected portfolio companies and the Company's results of operations. They expect continued negative impacts on net investment income and portfolio fair values in the fourth quarter of 2020. Thirteen investment positions were downgraded from a rating of 2 to 3 or 4 during the nine months ended September 30, 2020, largely due to the pandemic.
- Interest Rate Risk: Nearly all debt investments are floating-rate (indexed to LIBOR). A prolonged reduction in interest rates reduces gross investment income. As of September 30, 2020, most performing floating-rate investments had interest rate floors.
- Liquidity and Capital Resources: The Company had $18.9 million available to be drawn under its $250 million Credit Facility (JPMorgan) as of September 30, 2020. Total cash and restricted cash resources were $22.9 million.
- Subsequent Events:
- On October 9, 2020, a special distribution of $0.125 per share was declared.
- On October 20, 2020, the Company issued $40 million in aggregate principal amount of unsecured notes (2025 Private Notes) at a fixed interest rate of 5.375% due in 2025. Proceeds were used to repay a portion of the Credit Facility.
- STRS JV: The Company maintains a joint venture (STRS JV) with the State Teachers Retirement System of Ohio. As of September 30, 2020, the Company's investment in STRS JV consisted of $10.3 million in equity and $41.1 million in subordinated notes.
Important Facts for Investor Verification
- Asset Coverage Ratio: Verify the current asset coverage ratio (206.2% as of September 30, 2020) to ensure compliance with the 150% minimum requirement under the Investment Company Act of 1940, which allows for leverage up to 2.0x debt-to-equity.
- Non-Accrual Status: Monitor the trend of non-accrual loans, which rose significantly to $18.7 million, and the specific portfolio companies affected by the COVID-19 pandemic.
- Interest Rate Sensitivity: Assess the impact of low LIBOR rates on net investment income, noting that while many loans have floors, a prolonged low-rate environment compresses yields.
- Debt Maturities: Review the maturity schedule of outstanding debt, including the $231.2 million Credit Facility (maturing 2024), $30 million 2023 Private Notes, and $35 million 2025 Notes, to evaluate refinancing risks.
- Valuation Methodologies: Confirm the fair value of Level 3 investments (which comprise the vast majority of the portfolio) and the assumptions used (discount rates, exit multiples) given the lack of active markets for these private debt instruments.