WhiteHorse Finance, Inc. (NASDAQ:WHF)
Q4 2013 Results Earnings Conference Call
February 27, 2014 10:00 AM ET
Jay Carvell - Chief Executive Officer
Ethan Underwood - Chief Operating Officer
Alastair Merrick - Chief Financial Officer
Brian Schaffer - Prosek Partners
Ryan Lynch - KBW
Bryce Rowe - Robert W. Baird
Good morning. My name is Laurie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter and Full Year 2013 Earnings Teleconference. Our hosts for today’s call are Jay Carvell, Chief Executive Officer; Ethan Underwood, Chief Operating Officer; and Alastair Merrick, Chief Financial Officer.
Today’s call is being recorded and will be available for replay beginning at 1 pm Eastern Standard Time. The replay dial-in number is 404-537-3406 and the pin number is 35793303. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions).
It is now my pleasure to turn the floor over to Brian Schaffer of Prosek Partners.
Thank you Laurie and thank you everyone for joining us today to discuss WhiteHorse Finance’s fourth quarter and year-end 2013 earnings results. Before we begin, I would like to remind everyone that certain statements made during this call, which are not based on historical facts including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statements.
With that, allow me to introduce WhiteHorse Finance’s CEO, Jay Carvell. Jay, you may begin.
Thanks, Brian. Good morning and thank you everyone for joining us today. Hopefully you have had a chance to review our press release which was issued before market open this morning. This quarter marks our first full year as a public company and we are pleased to report a very successful fourth quarter.
I am going to take you through some highlights for the quarter and the year before turning the call over to Alastair to walk you through the financial results. Before we talk about the quarter I wanted to quickly summarize our year as a public BDC since our IPO in December 2012.
We view two of our priorities as a manager to be deployment of capital and preservation of capital and are pleased with the performance of the fund on those fronts during our first year. Looking at deployment of capital; in the last 12 months we’ve invested $264 million in new loans and refinancing of existing positions ahead of the goals we laid out during the IPO roadshow. We successfully drawn on the capabilities in network of professional at HIG Capital to source our opportunities and expanded our direct origination effort of hires across the country.
Our pipeline remained active throughout the year. As we have stated on previous calls we do expect intra and inter-quarter lumpiness. However with the benefit of now having a full year to look back upon, we can see that we met or exceeded our goals in terms of putting capital to work over the longer time frame.
In general we have experienced what we consider an unusually high rate of refinancings and repayments in the portfolio last year the total of 78% of the beginning principal balance of the portfolio. While much of this can be attributed to general credit conditions, we’re pleased with our ability to deal with this and would expect the portfolio we now have to experience a much lower rate of turnover for the coming periods.
Despite those challenging conditions we are able to grow the portfolio, diversify and mitigate our overall risk and end the year with strong pool of credits and healthy pipeline.
Looking at preservation of capital; our portfolio remains 100% invested in senior and secured positions. We reduced overall risk by increasing diversification in the portfolio. We are able to replace larger positions including a selloff which was 25% of our portfolio at the time repayment. With smaller investments we still made our risk and return objectives.
And now we are evaluating across and admittedly shorter timeframe, we are pleased to report that we had non-performing credits or payment faults. We were successful in completing the company’s first offering of a debt security placing $30 million of 6.5% senior notes in July of last year and using the proceeds to reduce outstanding obligations under our unsecured term loan.
We believe the successful offering reconfirms the market’s confidence in our performance and positions us well for future offerings as we grow. Finally, despite the lumpiness we saw across the entire BDC spectrum and overall macroeconomic volatility. We are able to return capital to our shareholders delivering a consistent distribution at the rate of $0.355 per share each quarter. We reduced our payout ratio from $133% at the first quarter of 2013 to a full year payout ratio of 110%. We expect this to continue to decline as we grow the portfolio.
Let me now spend a moment on Q4, starting first with our investment portfolio, fair value of the portfolio at December 31 was approximately $272 million an increase of $58 million from the previous quarter.
As you know our focus is on small and mid market loans to high quality borrowers. To that end we invested $130 million in the quarter. Some of the highlights include $97 million invested in five new borrowers, a significant increased over the previous quarter’s $31 million. The new investments are on the education services, internet retail, data processing and outsource providers, healthcare distributors and consumer finance industries.
American Gaming Systems refinanced its credit facility this quarter resulting in a $19.6 million pay down of our position. We subsequently invested $10 million in the AGS's new facility, which is now known as AP Gaming. This is the only position in which we participated in a refinancing in Q4.
Our total repayment activity for the quarter came in at $56 million compared to $98 million last quarter. In addition to the AGS, the repayment of our general healthcare position was a major contributor to the $56 million number.
The market team has been fairly consistent through the year, strong investor appetite for greater products that produce current income with a particular waiting towards splitting right products. This investor demand helps fuel supply on the manager side, leading to the environment we've been experiencing where spreads are tightening even as credit terms loosen.
As we stated on previous calls, though this does not affect us dramatically in the smaller end of the market as in broader credit markets, it does took a bounce somewhat and certainly adds competition in regards to existing competitors and some new entrance.
Our priority remains sourcing high quality investment opportunities across a broad range of industries. We have worked hard this year to achieve this goal and to diversify the portfolio with a number of suitable stable investments. Our deal sourcing network which is predicated on long standing relationships and our diligent investment process allows to source quality alignments.
Before turning the call over to Alastair, let me conclude my formal remarks, by noting that we remain committed to the preservation of capital in our existing portfolio as well as a deployment of capital in new investments while earning at attractive risk-adjusted return.
With that I'll now turn the call over to Alastair. Alastair?
Thank you Jay and thank you everyone for joining us today. I will now take you through the financial highlights of our earnings which we released this morning before the market opened. We have included the schedule investment in today's press release, as it will be several more days before we file our Form 10-K.
Looking at our results, for the quarter ended December 31, 2013, we reported net investment income of $4.2 million compared to $6.3 million in the third quarter. You may recall that in the third quarter included fee income of $1.9 million, primarily from Acella’s repayment, fourth quarter fee income was $1 million.
As Jay discussed regarding intra-quarter lumpiness, this was also visible with refinancing occurring earlier in the fourth quarter and origination activity taking place closer to year-end. Net realized and unrealized gains on investment were $2.2 million. These gains were primarily attributable to improvements in the marks and repayments of loans above that carried value.
For the fourth quarter 2013, there was an increase in net assets from operations of $6.3 million or $0.423 per share. Expenses for the quarter totaled $4.4 million, primarily consisting of interest expense on our credit facilities of $1.3 million and base management fees and performance based incentive fees of approximately $2.4 million.
Net asset value was $227 million at December 31, 2013, resulting in NAV per share of $15.16, up slightly from $226 million and NAV per share of $15.09 as of September 30, 2013.
Let me turn our attention now to the results for the full year ended December 31, 2013. We don’t believe the comparisons to 2012 a meaningful as we are only a public company for small portion of that year. However, you can see this compassion in today’s earnings release.
For 2013, we reported net investment income of $19.3 million or $1.29 per share. Net realized and unrealized losses on investments were $280,000. There was an increase in net assets from operations of $19 million.
Switching over to portfolio and investment activity, as of December 31st, the fair value of WhiteHorse Finance’s investment portfolio was $272.4 million, principally invested in 21 positions across 19 portfolio companies and is entirely comprised of senior secured debt investments. As of December 31st, the weighted average current cash yield on the portfolio was 10.9%. All the investments in the portfolio were rated at 2 that is defined as meeting expectations except for GMT which remains at 3, and there were no non-accrual loans at December 31, 2013.
Turning to our balance sheet, as of December 31, 2013, we had cash resources inclusive of restricted cash of approximately $96 million, compared with a $132 million as reported in the previous quarter. Our cash position and credit lines continue to provide us with sufficient resources to meet our origination goals for the foreseeable future.
At December 31, 2013, the company had 2 credit facilities and the senior notes that on a combined basis were drawn by approximately a $110 million. The company’s asset coverage ratio for borrowed amounts as defined by the 40 Act was 306% at December 31st, well above the statutes requirement of 200%.
Let me touch briefly on our distributions. On November 26, we declared a distribution for the quarter ended December 31st of $0.355 per share for a total distribution of $5.3 million. This distribution was paid to stockholders on January 3, 2014. This marks the company’s 5th distribution since our IPO in December 2012 with all distributions at the rate of $0.355 per share per quarter.
With our current cash position and the historical performance of our portfolio, we would expect to be in a position to continue our regular distribution. This concludes my formal remarks. I will now turn the call over to the operator and we look forward to your questions. Operator?
The floor is now opened for questions. (Operator Instructions). Your first question comes from the line of Ryan Lynch of KBW.
Ryan Lynch - KBW
Thank you. Good morning. And thank you for taking my questions. I was just looking for a little additional color on your investment in GMT. You guys refinance the loan and extended the loan last year to one year out, extended to June 2014. This quarter it looks like you guys had a little bit of a principal paid on the loan. I just want to get a little more color on you guys thoughts on that repaying that you guys trying to re-extend that investment a little bit longer, just little more color on that?
Sure. Thanks Ryan. We did a pay down this quarter. And through the year, you have seen that loan pay down in probably in 2013 approximately $14 million. And like you pointed out, we did extend that for a year in the middle of last year and so we do have that upcoming and Ethan might want to touch on briefly what we are looking at on that front.
Yes. I think it’s still early in the process, but it’s fair to say given our experience last year that we feel like we can work with the company to come up with the solution to the extent they are not going to find a lender away from us and they would like to talk about a potential extension or some other alternative.
We tend to have all of our options on the table, we haven’t gone into negotiating with them yet regarding that position, but I expect us to begin those at some point in the future. And given our experience there, I do think we’ll come up with the solution that works for everybody.
Ryan Lynch - KBW
Okay, great. Also the new loans you guys originated this quarter were quite a bit lower than kind of historical loans in your portfolio, brought the yield down in the overall portfolio quite a bit. So is there any focus for you guys on investing in lower yielding loans in order to ramp up the portfolio quickly?
Not exactly, Ryan, I’d point you to a couple of things. One is that 78% number that we highlighted at the beginning of the call, just a tremendous number of refinancing and turnover in the portfolio and we have been working pretty hard to get that money back out of the door.
And in fourth quarter, you can look at, I’d say kind of a split between two different kinds of investments made here. One is the going to -- the ones that were slightly lower yielding and probably in the more broader syndicated market where alongside maybe some of the BDCs or even CLOs. They are going instill what we have some kind of informational advantage or we feel like we have an advantage an edge on the investments. So that’s something like a [PMSI] where the other side of the house is HIG here previously own the company. So we feel like we’ve got a pretty good insight into management and what’s going on in that business.
The other investments I’d point you to are the proprietary ones that where we were the only lender and the reason that we were brought into the process was our expertise in the businesses and our ability to close quickly and certainly of course Future Payment Technologies, Sigue Corporation, other those are a little bit more difficult to understand, those are two big deals in our pipeline, $25 million on Sigue, $35 million of FPT. And if Sigue is carrying all 900 with 1% for and FDT is 1,000 and 1% for.
So, we'll continue to go out looking for those and trying to replace most of the things in our portfolio with those high yielding names where we feel very comfortable from a risk return standpoint.
And as we find those broadly syndicated names that I mentioned, we feel comfortable about the liquidity there as well in addition to kind of our risk return to the liquidity as well, but if we need to cycle out of those as we find things that we find more attractive, we'll be able to do that.
Ryan Lynch - KBW
Okay, great. And then one more question, I know you guys mentioned a lot, you guys had a lot of prepayments and refinancings in the last year, just kind of a broader question, what you guys are seeing in the market? Are you guys seeing any shift in the mix of growth in M&A deals in the market versus more refinancings going into 2014?
I think it's a good mix; it's hard to tell exactly what you're going to see in the next year. In a broader market, you have seen just a lot of refinancing activity in the last 12 months. I think you'll continue to see borrowers try to take advantage of credit markets that we discussed. The private equity world and M&A world have money to spend and they'll continue to find deals and that's good for us.
If you're talking about our specific experience here, we certainly don't see at high level of turnovers we did last year and I don't think we would have predicted 78%. The portfolio now is a much younger vintage as compared to a year ago when we started and most of these builds have a fair amount of protection so we’d expect to experience a lower rate of turnover next year.
Ryan Lynch - KBW
Okay. Thanks guys.
Thanks. Your next question comes from the line of Bryce Rowe of Robert W. Baird.
Bryce Rowe - Robert W. Baird
Hi good morning. Just to kind of follow-up on some of the previous questions there, Jay maybe you can stick to more along the lines of proprietary deals, like you brought here in the fourth quarter, just curious about maybe the pipeline for those types of investment?
And then kind of a secondary question to that is, if we continue to see somebody’s investment that would be consider maybe lower yielding than optimal. Has WhiteHorse considered waiving any level of fees that you pay under dividend fully released waive some fees until you get to the point where you are earning your dividend fully? Thanks.
Thanks Bryce. And some of the pipeline what we’re seeing going, looking out in the 2014, we’re pretty comfortable with our ability to deploy capital. There is a similar look to what we see in the last two quarters, a good mix of names that are similar to what we just discussed on Sigue and FPT and some things that are maybe slightly lower yielding with where we feel comfortable with the risk return.
It’s kind of hard to put a number on exactly and we've not done that in the past, but in general I’d say it looks similar to what we've seen. And look we’re comfortable saying that our goal is to be fully ramp and fully spent and that would be around $200 million for our goal this year to put many out the doors.
So that and I think that kind of holds into your second question there. As you spin that capital and get fully ramped and are able to take advantage of all the leverage facilities and the tools we had you’ll be fine on earning your dividend.
Bryce Rowe - Robert W. Baird
Right okay. Thanks Jay.
(Operator Instructions). At this time there are no further questions. I will now turn the call to Jay Carvell for any additional or closing remarks.
Thanks for joining today everyone. We look forward to speaking to you next quarter. Operator, back to you.
That does conclude today’s conference call. Thank you for your participation. All participants may disconnect at this time.
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