WhiteHorse Finance, Inc. — Q2 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 originating and investing in senior secured loans to lower middle-market companies. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in millions except per-share data.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $25.6 | $20.0 | $51.8 | $40.0 |
| Net investment income after excise tax | $10.6 | $7.9 | $21.3 | $16.4 |
| Net realized and unrealized gains (losses), including foreign currency | $(6.7) | $(0.5) | $(9.9) | $(3.4) |
| Net increase in net assets from operations | $3.9 | $7.3 | $11.4 | $13.1 |
| Basic and diluted earnings per share | $0.17 | $0.32 | $0.49 | $0.56 |
| Distributions declared per share | $0.37 | $0.36 | $0.80 | $0.71 |
- At June 30, total assets were $772.2, investments at fair value were $728.4, and net assets were $325.3. NAV was $14.00 per share, down from $14.30 at year-end 2022; shares outstanding remained 23.24 million.
- Cash, cash equivalents and restricted cash totaled $23.1, including $12.7 of restricted cash. Six-month operating cash flow was $32.3, compared with $64.2 in the prior-year period; financing activities used $35.5, principally for debt repayments and distributions.
- Debt principal outstanding was $428.6 ($424.7 carrying value), down from $445.1 principal at year-end. The company had $96.4 available under its JPMorgan credit facility, subject to collateral and portfolio requirements. Asset coverage was 175.9%, above the 150% statutory threshold.
- Six-month interest expense increased to $14.9 from $9.7. The company reported a 7.52% weighted-average credit-facility borrowing rate for Q2 2023, versus 3.92% for Q2 2022 in the MD&A comparison of total borrowings.
- Nearly all performing floating-rate investments had interest-rate floors. The portfolio’s weighted-average effective yield was 12.5% (13.4% on income-producing debt), versus 12.2% (12.6% on income-producing debt) at year-end.
Material changes versus prior comparable periods
- Q2 investment income rose 28% year over year, while net investment income after excise tax rose 34%. Management attributed higher interest and PIK income mainly to higher base rates; higher STRS JV income also reflected base rates.
- Higher rates also drove increased borrowing costs: Q2 interest expense rose $2.4, and six-month interest expense rose $5.1 year over year. Performance-based incentive fees increased to $2.6 for Q2 and $5.3 for six months.
- Despite higher net investment income, Q2 operating results declined year over year because investment and foreign-currency valuation changes were more negative. Six-month net investment income improved, but total operating results fell to $11.4 from $13.1.
- Fair value of investments declined $31.9 from year-end, and NAV per share fell $0.30. The portfolio had 116 positions across 70 companies, versus 115 positions across 72 companies at year-end.
- Loans on non-accrual totaled $28.3 at cost and $19.0 at fair value at June 30; there were no non-accrual loans at December 31, 2022. The filing identifies certain portfolio loans as non-accrual but does not provide a single aggregate count in the presented text.
- Six-month declared distributions of $0.80 per share exceeded reported net increase in net assets from operations of $0.49 per share; net investment income was $0.92 per share. Distribution amounts and taxable character are determined by the board and may include return of capital.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings, portfolio-growth or distribution guidance. Management expects some non-recurring fee income in most quarters from prepayments, amendments and other sources, but amounts can vary.
- The $30.0 principal amount of 6.000% notes due August 7, 2023 was repaid on that date using existing cash and JPMorgan facility borrowings. This occurred after quarter-end.
- The JPMorgan facility had $238.6 outstanding at June 30, bore SOFR plus 2.50% on USD borrowings, and matured November 22, 2025. The company’s unsecured notes totaled $160.0 principal at quarter-end before the subsequent repayment of the 2023 notes.
- Investment valuations are a key uncertainty: substantially all investment fair values are Level 3 and rely on significant unobservable inputs. The filing cautions that private investment valuations are inherently uncertain and realized values may differ materially.
- Credit, market, liquidity, interest-rate, foreign-currency and portfolio-company risks remain. A hypothetical 100-basis-point rate increase was estimated to raise annualized net investment income by $4.6, before incentive-fee effects; this sensitivity assumes the balance sheet and exposure remain unchanged.
- The company highlighted banking-system volatility as a risk to it and portfolio companies, including potential loss of or delayed access to uninsured deposits. It also cites inflation, competition, economic conditions, the Russia-Ukraine war, and reference-rate transition as risks.
- Unfunded portfolio-company commitments were $38.8 at June 30, down from $56.2 at year-end; additional STRS JV commitments were partly unfunded. Commitments may not be drawn, but could create future cash needs.
- American Crafts and Starco-related investments were restructured during 2023; the Starco restructuring included conversion of debt into new debt and preferred and common equity. The filing reports no material legal proceedings, no defaults upon senior securities, and effective disclosure controls.
Important facts for investors to verify
- Performance and credit quality of the newly non-accrual loans, and the basis for their fair values and any potential further impairment.
- Whether cash interest collections support reported income, particularly given $3.7 of six-month PIK income and loans with PIK components.
- Distribution coverage, tax characterization and sustainability, including the possibility of return of capital and the effect of RIC distribution requirements.
- Borrowing costs, facility availability and asset-coverage headroom following the August repayment of the 2023 notes and increased reliance on the floating-rate credit facility.
- Portfolio valuation assumptions, concentration exposures and the performance of restructured investments, including American Crafts, Starco and the STRS JV.
- Liquidity available for unfunded commitments and whether portfolio-company credit deterioration or bank-system stress could affect access to cash.