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 invests primarily in senior secured loans to lower middle-market companies in the United States. This report covers the quarterly period ended September 30, 2018.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | As of Sep 30, 2018 |
|---|---|---|---|
| Total Investment Income | $15.3 million | $46.6 million | - |
| Net Investment Income | $3.8 million | $17.0 million | - |
| Net Increase in Net Assets (Operations) | $19.5 million | $52.4 million | - |
| Earnings Per Share (Basic & Diluted) | $0.95 | $2.55 | - |
| Total Assets | - | - | $541.8 million |
| Total Investments (Fair Value) | - | - | $509.6 million |
| Total Debt | - | - | $195.7 million (net of issuance costs) |
| Cash and Cash Equivalents | - | - | $11.5 million |
| Restricted Cash | - | - | $15.1 million |
| Net Asset Value (NAV) Per Share | - | - | $15.46 |
| Asset Coverage Ratio | - | - | 260.0% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased to $15.3 million for the quarter (from $13.0 million in Q3 2017) and $46.6 million for the nine-month period (from $40.9 million in 2017). This was driven by higher interest rates (LIBOR increases) and increased fee income from prepayments.
- Expense Increases: Total expenses rose to $11.5 million for the quarter (from $7.1 million in Q3 2017). Interest expense increased due to higher LIBOR rates and accelerated amortization of deferred financing costs related to debt refinancing. Performance-based incentive fees increased significantly to $4.9 million (from $1.5 million) due to higher net investment income and a $5.3 million accrual for capital gains incentive fees.
- Unrealized Gains: Net unrealized appreciation was $15.7 million for the quarter and $35.3 million for the nine-month period, a significant increase compared to the prior year. This was primarily attributable to fair value increases in the investment in Aretec Group, Inc., partially offset by markdowns on Grupo HIMA San Pablo, Inc. and AG Kings Holdings, Inc.
- Debt Refinancing: The company redeemed its $30 million Senior Notes in August 2018 and issued $30 million in Private Notes due 2023 at a 6.00% fixed rate.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the portfolio yield remains attractive, with a weighted average effective yield of 11.9% on income-producing investments. The company is exploring a joint venture with an institutional investor to invest in senior secured credit assets, though no assurance of formation exists.
- Fee Structure Change: Effective November 1, 2018, the Investment Advisory Agreement was amended to reduce the base management fee on assets financed using leverage over 200% asset coverage (over 1.0x debt-to-equity) from 2.0% to 1.25%.
- Leverage and Asset Coverage: Following stockholder approval in August 2018, the company reduced its asset coverage requirement from 200% to 150%, allowing a maximum debt-to-equity ratio of 2.0x. As of September 30, 2018, the company maintained an asset coverage of 260.0%.
- Risks: Key risks include interest rate sensitivity (though most loans have floors), credit risk of portfolio companies, and the impact of leverage which magnifies potential losses. The company has $2.0 million in unfunded commitments.
- Subsequent Events: In October 2018, the company sold all shares of its investment in Aretec Group, Inc., realizing the investment.
Investor Verification Checklist
- Aretec Group Realization: Verify the final realized gain/loss on the October 2018 sale of Aretec Group, Inc. shares, which drove a significant portion of the unrealized appreciation in Q3.
- Non-Accrual Status: Confirm the status of the $103,000 investment in Grupo HIMA San Pablo, Inc. that is on non-accrual status.
- Debt Covenants: Review the specific covenants of the new Private Notes and the Credit Facility to ensure compliance with the new 150% asset coverage threshold.
- Fee Waivers: Monitor the impact of the management fee waiver on cash and restricted cash for the quarters ended September 30, 2018, December 31, 2018, and March 31, 2019.
- Joint Venture Progress: Track the development of the potential joint venture with an institutional investor mentioned in recent developments.