As you may have noticed from our articles on business development companies, they've come a long way from the dark days of the COVID Crash in Q1-2 2020.
BDC's got crushed in that market panic due to the uncertainty surrounding their underlying holdings. The market had no idea how well those smaller companies would weather the pandemic.
Fortunately, most BDC companies have been resilient, resulting in the industry bouncing back from their March-April 2020 lows.
WhiteHorse Finance (NASDAQ:WHF) is one of the smaller BDCs, with a $358M market cap, vs. the BDC industry average of ~$1.44B. WHF is currently selling at a slight -0.19% discount to NAV, vs. the BDC industry average NAV premium of 7%.
WHF also looks cheaper on a Price/NII basis, with a 9X valuation, vs. the BDC industry average P/NII of 13.39X. Additionally, it sports a 9.2% dividend yield, a bit higher than the 8.4% industry average:
One thing which initially caught our eye is the constancy of WHF's dividend history. In an industry which is prone to periodic dividend cuts, WHF's management has kept the quarterly payouts steady, at $.355. since its 2012 IPO.
WHF's board of directors declared a special distribution of $0.125/share in Q4 '21, which was paid on Dec. 10, 2020, to stockholders of record as of Oct. 30, 2020.
At its 1/6/22 closing price, WHF yielded 9.20%. It should go ex-dividend next on ~3/4/22, with a ~3/25/22 pay date. The 2.44% five-year average dividend growth rate includes some periodic special dividends:
Management has moved the portfolio more toward 1st Lien loans over the years, going from just 55% 1st Lien in 2014, to 82%, as of Q3 2021.
WHF's STRS JV with the State Teachers Retirement System of Ohio, which it started in Q1 2019, is a Senior Loan Fund which invests primarily in lower middle market, senior secured debt facilities. This JV has grown to represent 11% of WHF's portfolio, as of 9/30/21:
Another plus is that nearly all, 99.6%, of the portfolio is at floating rates, which offers investors some insulation vs. rising interest rates, which appear to be arriving in 2022, with the Fed targeting three rate hikes this year.
Healthcare is WHF's biggest industry exposure, at ~9%, followed by Internet & Direct Marketing, at ~7%, Building Products, at 5.6%, and Data Processing & Outsourced Services, at 5.3%. ~44% of its holdings are comprised of industries with less than 3% each:
As we noted above, BDC's 2020 swoon was caused by uncertainty about their underlying holdings' ability to survive the pandemic's economic pressures. Indeed, WHF's Non-Accruals reached a peak in Q2 2020, at 7.4%, but have improved markedly since then, falling to just 1.3%, as of 9/20/21:
Total and Net Investment Income both took a hit in 2020 while NAV/share was steady, at $5.23. So far in 2021, WHF has turned Total and Net Investment Income around, with 19.7% and 23.57% gains, respectively in Q1-3 2021.
NII/Share is up 13% vs. Q3 '20, while NAV/Share was up slightly, at $15.46, as of 9/30/21. WHF's Net Investment Spread has run at 5.7% for Q1-3 2021.
WHF's NAV hit a three-year low during the 2020 pullback, falling below $14
WHF's weakest metrics are in its profitability, which trail BDC averages. Its debt leverage is slightly higher than average, which, in the BDC world, isn't necessarily a bad attribute. Since these companies must pay out the lion's share of their earnings, they need to use leverage to create more earnings.
Management shows a slightly higher leverage figure of 1.19X, which is its highest since Q4 2020. Management targets a range of 1X to 1.25X for leverage.
WHF's debt is well laddered out into the future, with just $30M in private Notes coming due in 2023. The next maturity isn't until 2025, when its $265M credit facility, and $40M in Notes come due. That gives management plenty of time to refinance.
WHF issued $75 million in 4.00% notes due 2026 in November 2021, and $25.0 million in 4.25% Notes due 2028 in December. It also redeemed its 6.50% Notes due 2025 in December 2021.
WHF has underperformed the BDC industry average gains, in addition to those of the broad Financial sector, and the S&P 500 over the past year and quarter, but has outperformed the BDC industry over the past month.
All tables by Hidden Dividend Stocks Plus, except where otherwise noted.
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This article was written by
Robert Hauver, MBA, was VP of Finance for an industry-leading corporation for 18 years, and publishes SA articles under the name DoubleDividendStocks. TipRanks rates DoubleDividendStocks in the Top 25 of all financial bloggers, and Seeking Alpha rates us in the Top 5 of several categories, including Dividend Ideas, Basic Materials, and Utilities.
"Hidden Dividend Stocks Plus", a Seeking Alpha Marketplace service, which focuses on undercovered and undervalued income vehicles. HDS+ scours the world's markets to find solid income opportunities with dividend yields ranging from 5% to 10%-plus, backed by strong earnings.
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