WhiteHorse Finance's (WHF) CEO Jay Carvell on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: WhiteHorse Finance (WHF)

WhiteHorse Finance (NASDAQ:WHF)

Q2 2014 Earnings Conference Call

August 06, 2014 10:00 AM ET

Executives

Emily Liehen - IR, Prosek Partners

Jay Carvell - CEO

Gerhard Lombard - CFO

Analyst

Gerhard Lombard

Ryan Lynch - KBW

Bryce Rowe - Robert W. Baird

Merrill Ross - Wunderlich Securities

Terry Ma - Barclays

Operator

Good morning. My name is Jackie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second Quarter 2014 Earnings Teleconference. Our hosts for today’s call are Jay Carvell, Chief Executive Officer and Gerhard Lombard, Chief Financial Officer.

Today’s call is being recorded and will be available for replay beginning at 12 pm Eastern Standard Time. The replay dial-in number is 404-537-3406 and the pin number is 68696963. 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 Emily Liehen of Prosek Partners.

Emily Liehen

Thank you Jackie and thank you everyone for joining us today to discuss WhiteHorse Finance’s second quarter 2014 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.

Jay Carvell

Good morning, thank you for joining us today. I hope you’ve had a chance to review our press release which was issued this morning before the market opened. I’m going to take you through some highlights for the second quarter before turning the call over to Gerhard to walk you through our financial results.

As I’ve mentioned in the past, our focus is on sourcing proprietary quality investment opportunities in the small and mid cap space across a broad range of industries. Our activity this quarter as in quarters past reflects those goals. We invested $90 million during the quarter across seven positions bringing our investment activity to 107 million for the first half of the year. Of the 90 million two positions are $32 million and $22 million which were proprietary and originated through our relationship with HRG Capital. Repayments during the quarter were all anticipated or scheduled with nothing out of the ordinary. This level of originations is our second highest in our span as a public company and keeps us at our historical pace of 50 million per quarter.

However as we’ve mentioned on prior calls we continue to expect lumpiness from quarter to quarter when considered over the longer time frame, we expect quarterly originations to balance out.

For example we invested more than $200 million in 2013 while experiencing quarter over quarter lumpiness and believe we will encounter similar outcomes during the remainder of 2014.

In terms of preservation of capital our portfolio remains primarily invested in senior and secured positions and we continue to reduce risk, our risk profile through increased diversification in the portfolio. Gerhard will provide more detail on our financials but I want to spend just a few minutes on our investment portfolio. As of June 30, fair value of the portfolio was approximately 347 million, an increase of 109 million from the second quarter of 2013 and up 60 million as reported in the previous quarter.

We invested 90 million during the quarter in seven new portfolio companies across a broad range of industries some of which include healthcare, oil and gas, cable and satellite and metal and glass containers. Proceeds from repayments totaled 30 million, 19 million of which was attributable to the refinancing of Renaissance Learning. The remainder came in through scheduled repayments, amortizations and suites including 8.2 million from GMT through the cash lease agreement that we have discussed on previous calls.

I’d like to spend a moment discussing the markets and our positioning. The capital markets remain active and competitive. We’re seeing a lot of refinancing activity across all credit markets as well as a number of mergers and acquisitions and while we are still seeing compressed spreads, the tightening across the credit space has slightly abated recently.

In general, capital markets tend to slow down during the summer but we remain focused on finding high quality investments in closing deals during this traditionally quieter period. That said while we are underwriting a healthy number of opportunities, deals tend to close on their own pace and we expect some restress beyond this current quarter.

As evidenced this quarter our network through HIG continues to serve as a strong asset to us in this market environment. We continue to identify high quality investment opportunities through their network contributing to an overall healthy pipeline of potential originations.

I wanted to note a couple of events since the end of the quarter. First, our relationship with HIG was made all that much stronger recently. As we announced just after quarter close that we have been granted exemptive relief by the SEC permitting co-investments in portfolio companies among affiliated funds. This will allow us to provide our shareholders with access to a broader array of investment opportunities.

Also as you might have seen in our press release last week, we are pleased to announce the addition of Bill Markert to the WhitHorse Finance executive team as Chief Operating Officer, Bill has over 25 years' experience in operations and finance, serving most recently as CFO of Securus Technologies. His addition to the team bolsters operations infrastructure and provides further support for anticipated continued growth. Bill replaces Ethan Underwood who remains with our advisor HIG Capital in a role similar to the one he has very capably filled for the last two years. Ethan will also remain active on our investment committee.

And finally I want to take us opportunity to formally introduce you to Gerhard Lombard. Gerhard has been a part of the WhiteHorse Finance team as Controller since before we came as public company and I’m pleased to now work with him in his role as CFO. Also I want to thank Alastair Merrick, for all of his work over the last two years especially during our conversion to a public company and subsequent bond offering last summer.

Alastair will remain a consultant with WhiteHorse Finance to ensure a smooth transition of our financial reporting functions.

With that I will now turn the call over Gerhard. Gerhard?

Gerhard Lombard

Thanks Jay. I’ll spend a few minutes on the highlights of our financial results which we released this morning before the market open. Looking at our earnings for the quarter ended June 30, 2014 net investment income was 4 million essentially flat when compared with 4 million reported during the first quarter of 2014.

Second quarter fee income was 700,000. Net realized and unrealized gains on investments were $1 million compared with net realized and unrealized losses of 1.7 million during the second quarter of 2013.

Current quarter unrealized gains were primarily attributable to the reversal of unrealized losses previously recognized on our GMT investment that are now being reversed in line with principal repayments received. We reported a net increase in net assets resulting from operations of $5 million or $0.34 per share for the second quarter of 2014 compared with 3.2 million a $0.21 per share in the second quarter of 2013.

Expenses for the quarter totaled $5 million primarily consisting of the interest expense on our credit facilities of 1.4 million and base management fees and performance based incentive fees of approximately 2.7 million. This compares with 4.6 million in expenses for the three months ended June 30, 2013.

Net asset value was 227.8 million as of June 30, 2014 resulting a net asset value per share of $15.21. This compares with net asset value of 227 million or $15.16 per share as of December 31, 2013.

Switching over to portfolio and investment activity, as of June 30th the fair value of WhiteHorse Finance’s investment portfolio was 347.1 million, invested in 30 positions across 27 portfolio company and it’s primarily comprised senior secured debt investments.

The weighted average yield on the portfolio was 10.6% compared with 11.2% at the end of the previous quarter. In addition the risk ratings on the suspension majority of investment in the portfolio remain unchanged. Finally, there were no non-accrual loans as of June 30, 2014.

Turning to our balance sheet. As of June 30, 2014 we had cash resources inclusive of restricted cash of approximately 10.8 million compared with 96 million as of December 31st, 2013 and 103.3 million as of the second quarter of 2013.

The Company had two credit facilities and the senior notes that on a combined basis were drawn by approximately 127 million as of June 30, 2014. We are comfortable that our cash position and credit lines will continue to provide us with the ability to source loans and meet our origination goals for the foreseeable future.

The Company’s asset ratio for borrowed amounts as defined by the 1940 Act was 279% at June 30th well above the statutes requirement of 200%.

Last let me speak about our distributions. On May 28th we declared a distribution for the quarter ended June 30th of $35.5 per share for a total distribution a 5.3 million. This distribution was paid to stockholders on July 3, 2014. This marks the company’s seventh distribution since our IPO in December 2012 and all distributions were at the rate of $35.5 per share per quarter. And we expect to be in a position to continue our regular distribution.

This concludes my formal remarks. I’ll now turn the call back to the operator for your questions. Operator?

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions) Thank you. Our first question comes from the line of Ryan Lynch of KBW.

Ryan Lynch - KBW

In our opinion one of the struggles of managing WhiteHorse the IPO process is just then trying to keep the pace originations up with the heavy amount of repayments experienced. In the third quarter WhiteHorse received exemptive relief to co-invest with other funds managed by HIG. Can you just give us some color about what receiving the exemptive relief means for WhiteHorse’s origination pace going forward?

Jay Carvell

The main take away from that I believe is that it really gives you a deeper and wider opportunity set for WhiteHorse to go after, I don’t know that we’ll take advantage of that immediately or when it will but I do think that that gives us an opportunity to find deals that fit multiple pockets and gives us an opportunity to find things that maybe we wouldn’t have been able to pursue in the past, so that is a positive but each deal is kind of its own and we'll see where that shakes up.

Ryan Lynch - KBW

Okay, and then could you give us any color on how originations and repayments are shaping up so far quarter to date?

Jay Carvell

As we mentioned in our comments, there’s a lot of things we’re looking at for the quarter in terms of originations and as we said deals close at their own pace, I’m not sure when each of these will close but there’s a lot of things that we do like. In terms of repayments you’ve seen a couple of things come through the market already if you know those in our portfolio, but I think it’s really, probably on our historical pace, if I looked it as of today and across the quarter pretty much what we’ve seen over the last seven quarters would be what I’d expect.

Ryan Lynch - KBW

Okay and then what loan or investment, you saw that it was a little different with the $10 million investment NMSC senior loan program, can you maybe just give us more color on that investment, why it was made and what’s the kind of return expectation from that.

Jay Carvell

Sure, that is a little bit different than some of our other deals, we know the guys at New Mountain we have a relationship with some of the managers there and so we’re comfortable with the risk return that we’re looking for in that deal, you know I think that we’ll see in the next quarter or so you’ll see the payments on that and get a better feel for the run rate but low to mid-teens is probably where you would shoot for as of today.

Ryan Lynch - KBW

Okay, is that just an investment where you guys are partnering up with the guys over there and you guys are tranching up a loan, you guys are taking a sub or senior piece or how is that investment actually structured.

Jay Carvell

It’s more of a structured finance deal, it’s not a, we’re not participating in a loan with them if that’s what you’re getting at.

Ryan Lynch - KBW

Okay, got it. And then one last one, as you guys ramp up the portfolio which you guys have been to achieve your target leverage. Are there any investments in your portfolio that are maybe lower yielding say sub 8% yield and you guys would be looking to trade out of into higher yielding loans to kind of optimize the portfolio?

Jay Carvell

There’s nothing specifically I’d talk about today other than to say, over time you’ll see us continually optimize our portfolio and there’s something in our portfolio that lend themselves more to trading than others, and as we see better opportunities we’ll cycle out of the lower yielding deals but everything that we have in there we’re comfortable from a risk and return standpoint and as we find things that we like better I think you’ll see us cycle into those.

Operator

Our next question comes from the line of Bryce Rowe with Robert W. Baird.

Bryce Rowe - Robert W. Baird

Couple of questions and Jay you mentioned the pipeline of investments, understand that it can be lumpy, but just trying to get a feel for what’s in the pipeline, how many or what percentage would you say are the proprietary nature, obviously two of the seven deals this quarter were in that proprietary bucket and with some size and with some yield to them, so just trying to get a feel for what the pipeline looks like in terms of proprietary versus not the proprietary channel.

Jay Carvell

Kind of hard to answer that, honestly Bryce we’ve got a lot of things going on in there and in looking at deals that are proprietary that’s clearly our focus and we’re looking at several of those, but for me to try to put a percentage either a dollar or a numbering anything like that would be difficult right now.

Bryce Rowe - Robert W. Baird

Okay, okay and then in terms of -- just a balance sheet question, in terms of debt to equity and target debt to equity, if you can remind us where the targeted debt to equity level is and then if we think about where the stock is trading relative to book value how do you think about longer term, if we get to a point where the stock hasn’t recovered to book value, how should we think about capital deployment or portfolio growth from that point forward?

Jay Carvell

Bryce thanks for the question, look using debt capital is clearly efficient and accretive to our stockholder returns and so we look very carefully at our leverage ratios both from a regulatory and operational stand-point. Having said that, we’re very comfortable drawing on our credit line and we’ll optimize our leverage based on both market conditions and expected portfolio movement. I don’t think we’re managing to a hard number, you’ve definitely seen our leverage pick up over the past quarter as we drew on a credit facility, we’re 0.54 right now. And so I think you should expect the number to continue to go up as we draw on the credit line and deploy capital.

Unidentified Analyst

Okay. And just to follow up on that, is there a particular level where you started to get uncomfortable? Is there a hard stop in terms of how far you’ll go?

Jay Carvell

Well, we certainly (wanted to see) [ph] one-to-one but I think we’ll obviously be conservative and stay well in from the regulatory cap, but we’re not going to shy away from growing our credit line either.

Operator

Our next question comes from the line of Merrill Ross with Wunderlich Securities.

Merrill Ross - Wunderlich Securities

Everybody focused on how quickly you can build up the balance sheet, but if we look at end point being a balance sheet that supports your quarterly distribution, what would be your goal in terms of the timing to get there? Because I think that really reflects in your stock price, currently getting and -- you don’t cover the distribution so anything comes under pressure, when will that be at shipping point what volume of assets, earnings assets?

Jay Carvell

Good question Merrill. I think if you’re trying to model it you’ve got to look at where we’re when we’re more fully spent. As Gerhard mentioned we are probably a little bit light on leverage right now and as you fill out the portfolio and draw your positions then I think that you’ll be in a better position to meet the goals that you’re talking about.

Merrill Ross - Wunderlich Securities

Okay. Thank you.

Jay Carvell

We are committed to that distribution.

Operator

(Operator Instructions) Our next question comes from the line of Terry Ma with Barclays.

Terry Ma - Barclays

Hi guys. So I think most of my questions have been answered already but just going back to new mountain investment real quick, is that a one-off investment or are we going to see you guys try and use more of that 30% bucket going forward?

Jay Carvell

It’s a good question Terry. We’re committed to finding good risk return on all of these investments and so we’ll look at those type of investments and some of the things that would fit that 30% bucket. We’re not looking to fill it; we’re not looking to not fill it. So we’re just kind one-off we will find things that seem to make sense and we’ll take those as they come. This was something we feel comfortable with, from a structural standpoint from a management standpoint and so it made sense.

Terry Ma - Barclays

Okay, got it. And can you maybe just comment on the degree of competition you're seeing in your markets and how it’s effective pricing yield?

Jay Carvell

Sure. In general as you know everything is tightening up across credit markets, and the smaller end and mid comps are not immune to that, it’s not as dramatic as we see in the larger cap space. But you’re still going to see some of that. There is nobody that I would say we consistently see across deals that we are competing against but you see different wide variety from time-to-time of whether it’s a BTS or specially finance company or even (family) [ph] offices can get involved in this space.

So it’s not as dramatic as you would see in the broadly syndicated market where competition is pretty tight. But it’s probably more that you would have seen five years ago.

Operator

It appears we have no further questions at this time. I would like to turn the floor back over to Jay Carvell for any additional or closing remarks.

Jay Carvell

Okay. Thanks for joining us everyone. We look forward to speaking with you next quarter. Operator I’ll turn it back to you.

Operator

Thank you. That does conclude today’s conference call. Thank you for your participation. All participants may disconnect at this time.

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WhiteHorse Finance (NASDAQ:WHF): Q2 EPS of $0.34 beats by $0.07. Total Investment Income of $9.01M (-5.2% Y/Y) beats by $0.29M.