Release Date: May 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- WhiteHorse Finance Inc reported a GAAP net investment income and core NII of $10.8 million, or $0.465 per share, which covered the quarterly dividend of $0.385 per share.
- The company's investment portfolio remained strong with 99% of the debt portfolio being first lien senior secured.
- The JV with Ohio STRS generated investment income of approximately $4.8 million in Q1, reflecting a productive use of the JV structure.
- WhiteHorse Finance Inc successfully managed its portfolio, with total repayments and sales amounting to $43.4 million, driven by five complete realizations and one partial realization.
- The company maintained a robust sourcing model, allowing access to less competitive markets, which supports higher pricing and better terms.
Negative Points
- NAV per share decreased by 1% due to net markdowns on the portfolio totaling $5.2 million, primarily from a markdown in equity warrants in Seagate Corporation.
- The broader lending market has become more aggressive, with deteriorating credit documents and lower pricing, which could impact future earnings.
- There were some portfolio markdowns, including a significant $3.5 million markdown to the equity investment in Seagate Corporation.
- Investments on nonaccrual increased to 1.3% of the debt portfolio at fair value, indicating potential default risks.
- Economic forecasts suggest slower growth, with inflation expected to continue above the Federal Reserve's target, posing challenges for the broader market and investment returns.
Q & A Highlights
Q: With the movements in non-accruals this quarter, was there any impact on interest income in terms of recaptures or reversals of previous interest income?
A: (Joyson Thomas, CFO) - We did not reverse out any income accruals during the period. We just ceased from recognizing any additional accruals during Q1.
Q: What would keep you in a credit and what kind of pricing deterioration would you see relative to what's on the books right now?
A: (Stuart Aronson, CEO) - Decisions are primarily driven by credit concerns and market aggressiveness. For strong performing, noncyclical, low CapEx assets, we might accept lower pricing to retain the asset, despite market pressures.
Q: Could you discuss the internal risk rating system and what you are seeing internally to move credits around within that system?
A: (Stuart Aronson, CEO) - The higher rate environment hasn't caused much concern due to modest average leverage on deals. Credits are rated based on performance relative to original plans, with specific issues leading to downgrades rather than broad economic trends.
Q: Could you remind me of the characteristics considered for transferring an investment into the JV, and what is your comfort range with the size of that relative to the total investment portfolio?
A: (Stuart Aronson, CEO) - The JV has reached an appropriate size relative to the BDC. Higher priced deals remain on the BDC balance sheet, while lower priced deals go into the JV. The JV will not likely increase in size, maintaining a balance that reflects current market conditions.
Q: Has the average investment size in the portfolio continued to decrease, and have you lowered the target allocation range going forward?
A: (Stuart Aronson, CEO) - The decrease in average investment size is due to the nature of non-sponsored deals which are typically smaller. The expected average size of an asset going into the BDC should be in the $8 million to $10 million range under normal market conditions.
Q: Can you talk about how you handle situations where a sale process results in a valuation lower than expected?
A: (Stuart Aronson, CEO) - In cases where offers are less than the debt value, the best approach is to wait for the sale of the company and collect what can be collected, which is expected to align with the asset's marked value.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
