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Edited Transcript of WHF earnings conference call or presentation 6-Mar-19 3:00pm GMT

Q4 2018 WhiteHorse Finance Inc Earnings Call

New York Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of WhiteHorse Finance Inc earnings conference call or presentation Wednesday, March 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. Giordano

WhiteHorse Finance, Inc. - Interim CFO

* Stuart D. Aronson

WhiteHorse Finance, Inc. - CEO & Director

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Conference Call Participants

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* Christoph M. Kotowski

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Timothy Paul Hayes

B. Riley FBR, Inc., Research Division - Analyst

* Sean Silva

Prosek LLC - Associate VP

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Presentation

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Operator [1]

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Good morning. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter 2018 Earnings Conference Call.

Our host for today's call are Stuart Aronson, Chief Executive Officer; and Ed Giordano, Interim Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 1:00 p.m. Eastern. The replay dial-in number is (404) 537-3406 and the PIN number is 6175488. (Operator Instructions)

It is now my pleasure to turn the floor over to Sean Silva of Prosek Partners.

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Sean Silva, Prosek LLC - Associate VP [2]

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Thank you, Lori, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's fourth quarter 2018 earnings results.

Before we begin, I would like to remind everyone that certain statements, which are not based on historical facts made during this call, 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.

Today's speakers may refer to material from the WhiteHorse Finance's fourth quarter and fiscal year 2018 earnings presentation, which was posted to our website this morning at www.whitehorsefinance.com.

With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [3]

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Thanks, Sean. Good morning. Thank you for joining us today. As you're aware, we issued our press release this morning prior to market open, and I hope you've had a chance to review our results, which are also available on our website.

I'm going to take you through our fourth quarter operating performance, and then Ed will review our financial results, after which we will take your questions.

During the fourth quarter, NAV per share decreased by $0.11 to $15.35, due primarily to 2 markdowns in our portfolio, on which I'll provide more detail shortly.

Core net interest income was $0.398 per share, a roughly $0.05 increase from last quarter, comfortably covering our quarterly dividend of $0.355. Core net interest income excludes the reversal of capital gains incentive fee accrual and an excise tax accrual, which Ed will address in his prepared remarks.

During the quarter, our equity investment in Aretec converted to cash, which also impacted earnings. We will look to deploy the proceeds received from Aretec, which equated to an exit multiple of roughly 2.6x our original invested capital or approximately $53.7 million of net proceeds. With that said, deployment will continue to follow the disciplined diligent approach to sourcing and underwriting that defines our overall strategy.

Our weighted average effective yield on debt investments was flat from the prior quarter at approximately 11.9%.

Turning now to other recent developments. In anticipation of soon operating with increased leverage at WhiteHorse Finance, we issued $35 million of baby bonds with a maturity of 7 years and a fixed coupon of 6.5%. We will actively continue to manage the liability side of the BDC to have a balance between fixed and floating rate and secured versus unsecured financing.

Further, to minimize the amount of idle cash sitting on the balance sheet, we have negotiated a temporary decrease in the minimum borrowings to $115 million under our secured debt credit facility with JPMorgan.

Finally, at the end of January, we officially closed our joint venture transaction with STRS Ohio, which we had referenced during last quarter's call. We are actively engaged with STRS Ohio on the timing to begin investing out of the joint venture. We believe the JV will enhance our ability to invest in lower risk senior secured assets, increase diversification and deal flow, all while preserving our traditional sourcing and underwriting standards to uphold the risk-adjusted return characteristics of the overall portfolio.

Turning now to our investment portfolio. As of December 31, 2018, the fair value of the portfolio was $469.6 million compared to $509.6 million reported at the end of the third quarter. The decline in portfolio balances was mainly attributable to the sale of our Aretec investment and the delay in deploying the excess cash from the realization into new investments.

We also experienced pressure on 2 of our credits during the quarter. The first is AG Kings, which has faced performance issues driven by intensified competition, though there has been recent stabilization of key metrics. We have, therefore, executed an amendment and waiver of prior defaults. This includes a deferral of certain payments subject to detailed conditions. Based on the company's current leverage level and our evaluation of enterprise value, we are optimistic this credit will be resolved in a manner that is favorable to the lenders.

The second transaction that had a markdown was StackPath, which we marked down to $0.82 on the dollar. We are in active negotiations with the private equity owner of this company, who is providing significant additional equity to support the company as they seek to turn around its performance.

These unrealized losses were partially offset by a markup to par on Caelus due to the repayment of a loan, which occurred in January of 2019, and a markup on our first-lien investment in Grupo HIMA based on improved performance in cash flow.

Regarding originations, during the quarter, we made 4 new directly originated first-lien senior secured investments as well as 1 new secondary purchase, totaling $46.1 million. These were comprised of fundings into NNA Services for $10.3 million, Arch Coal acquisition for $9.3 million, Global Franchise Group for $10 million, Quest Events for $11 million and a secondary purchase in Sure Fit Home Products for $5.5 million.

Additionally, we had one refinancing during the quarter. We refinanced our second-lien loan to Mills Fleet Farm into a new first-lien position, which added, on a net basis, $7.6 million of assets to the portfolio.

During the quarter, in addition to our realization in Aretec Group, we had 2 other full exits. The first was a full paydown of SecurAmerica, which has an internal rate of return of about 28% or 1.3x money-on-money. This credit repaid with a make-whole interest and a prepayment penalty, and this contributed to our strong fourth quarter performance. The second payoff was a full paydown on the second-lien loan to Montrose Environmental Group for $8.5 million, which also included a prepayment penalty.

Our portfolio had an average debt investment size of $10.1 million based on fair value, with all but 2 of our positions falling at or below the upper range of our target investment size of $20 million.

Due to cash from Aretec and issuance of notes, our leverage ratio decreased during the fourth quarter to 57% as compared to 62% leverage recorded at the end of the third quarter. As shared last quarter, we intend to carefully ramp up investments and manage WhiteHorse Finance at leverage of 1 to 1.25x in the future.

Turning now to our pipeline and recent performance. Thus far, in the first quarter, we have closed 3 transactions with an additional 3 transactions that are mandated. There can be no assurance that those mandated transactions will close, but 5 of these transactions are first lien, 4 of them are sponsor transactions. We then -- we do tend to experience a seasonal slowdown during Q1, but that has not changed our general optimism for expected deal flow over the course of 2019.

Turning now to our macro outlook, where general market conditions remained very competitive. The end of 2018 was characterized by capital outflows in the large cap market and a resulting liquidity shortfall, which caused large-cap market prices to decline by 3 to 6 points. We also saw a number of weaker transactions get hung in the marketplace. However, those large-cap market dynamics did not permeate the lower mid-cap market as it was not subject to the liquidity swings of the large-cap market nor had the lower mid-cap market been experiencing the excesses seen within the large-cap market.

We have seen increased competition in the sponsor sector as competitors typically focused on mid-cap deals are dipping into lower mid-cap sector. This resulted in modestly lower pricing or higher leverage on certain transactions, where we walked away from lower mid-cap deals that we thought were exhibiting mid-cap structures. By comparison, the non-sponsor market has been more static, where we continue to see leverage between 2 to 4x on transactions, and loan-to-value is generally at 50% and below.

With that, I'll now turn the conversation over to Ed.

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [4]

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Thanks, Stuart. We recorded GAAP net investment income of $8.0 million or $0.391 per share. This compares to $3.8 million or $0.184 per share in the prior quarter.

Core NII was $8.2 million for the quarter or $0.398 per share. This compares to $7.2 million or $0.349 per share in the prior quarter. As Stuart mentioned earlier, core NII excludes the capital gains incentive fee and the net impact of excise taxes.

During the quarter, there was approximately $0.6 million reversal of capital gains incentive fee accrual as a result of net markdowns in our portfolio. In addition, we recognized an excise tax accrual this quarter.

As we discussed earlier in the year, with the pending realization of our Aretec investment and the corresponding gain that would come along with it, we were assessing whether we would distribute the gain -- this gain or retain it to deploy new income-producing investments. After now exiting Aretec, we have made the determination to invest the gain and not distribute it. As a result, we'll incur a 4% annual excise tax on the annual amount of the income we retained that would otherwise be required to be distributed in order to avoid the excise tax. We currently estimate the amount of undistributed earnings below this -- the requirement to be $25 million or tax of approximately $1 million annually. The amount is subject to change based on the finalization of our tax return for this year. In future years, if we begin to distribute amounts above this requirement, the estimated tax would conversely decrease.

Turning to our overall earnings. We reported a net increase in net assets resulting from operations of $4.9 million or $0.24 per share for the fourth quarter. As of December 31, 2018, net asset value was $315.3 million or $15.35 per share, down from $317.7 million or $15.46 per share as reported for Q3.

As it pertains to our portfolio of investment activity, the risk ratings of our portfolio saw balanced changes, with 3 of our positions being upgraded to a 2 or 1 rating, while 3 other positions being downgraded to a 3 rating.

Turning to our balance sheet. We had cash resources of approximately $33.7 million as of December 31, 2018, including a $9.6 million of restricted cash and approximately $85 million of undrawn capacity under our revolving credit facility.

We continue to closely monitor our asset coverage ratio and feel comfortable with our leverage as of December 31, 2018. The company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 275.2% at the end of the fourth quarter, well above our reduced requirement under the statute of 150%.

Our net effective debt-to-equity ratio, after adjusting for cash on hand, was 0.46x as of the end of the quarter.

Next, I'd like to highlight our quarterly distribution. On December 6, we declared a distribution for the quarter ended December 31, 2018, of $0.355 per share for a total distribution of $7.3 million to stockholders of record as of December 18, 2018. The distribution was paid to stockholders on January 3, 2019. This marks the company's 25th distribution since our IPO in December 2012, with all distributions at a rate of $0.355 per share. We expect to be in a position to continue our regular distributions.

I will now turn the call to the operator for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Tim Hayes of B. Riley FBR.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [2]

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My first one, can you just quantify the impact from prepayment income in the quarter?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [3]

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Ed, do you have that number?

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [4]

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I don't believe so.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [5]

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We can circle back on that one. I have a couple other ones, and we can even bring it off-line if you need to check later.

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [6]

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Yes.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [7]

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Yes. I will say prepayment penalties are a normal piece of what we get, especially in the nonsponsor market, and both SecurAmerica and Montrose were nonsponsor deals. So we -- again, they're variable quarter-to-quarter. But in a good quarter like this quarter, we get significant prepayment penalties, which help propel us above our dividend for the quarter. As I've shared with the market and with you guys before, our general target is to make sure we earn our dividend on an annual basis with the understanding that those prepayment penalties, waiver fees and amendment fees will vary quarter-by-quarter.

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [8]

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I can tell you that the fee income was $1.1 million for the quarter, and the accretion is 1.2%. So there's some acceleration of accretion in that 1.2% number, but it's pretty consistent from the prior quarter.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [9]

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Okay. Yes, that's helpful. And then, I know you don't grow for the sake of growing and bring up leverage for the sake of just increasing ROEs by any means. But can you just comment on your expected pace of growth this year and maybe how long you think it will take to deploy the Aretec proceeds and bring up leverage to target levels? Just trying to gauge when you see the company being on -- or the portfolio being on a more normalized earnings run rate.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [10]

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So it's very hard to answer that question because it gets into future deal flow, and we are subject to ongoing competition in the market. All I can say is we have increased our staffing from the last time that I was talking to the public. The direct lending organization that H.I.G. serves WhiteHorse with is up to 41 people, which include 18 senior originators in 11 different cities across the country. The newest city that we've entered is Cleveland. And we're doing all of that to make sure that we have solid deal flow that will allow us to, with caution and conservatism, ramp up the investments without significantly increasing average investment size. Again, we've heard from analysts and from shareholders that people do want us to have significant diversity in the BDC, and so we're trying to balance all the metrics of low-risk appropriate diversity and deployment of capital with a goal of getting to 1 and 1.25x, and we'll have more data on that as we get into the busier quarters of the year, including Q2 and Q4.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [11]

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Okay. Understood. And on the JV, have you contributed any capital there? And do you feel you have the bandwidth to grow the balance sheet at the pace you'd like while also allocating resources and capital to the JV?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [12]

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We originate a solid flow of first-lien senior secured assets that price at LIBOR 525 to LIBOR 650. Those assets, if we did not have the JV, would not be good candidates to go into BDC because the yields wouldn't be high enough to be properly accretive for the BDC. And so having the JV for us allows us to take those stable senior secured first-lien assets and roll them into what the BDC is investing in, in a capital-efficient manner. We do believe, based on our architecture and our flow, that we will be able to fill the JV over several years.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [13]

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Okay. Understood. And then, just kind of circling back to earnings power here. Core NII well ahead of the dividend this quarter and should increase as the portfolio continues to grow, the JV ramps leverage gets close to your target levels, et cetera. How do you think about the dividend over 2019? And at what point would you consider or feel comfortable -- consider recommending to the board to raise the dividend?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [14]

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We have earnings that occur in the core interest streams of the company, and then we have earnings that occur in the waiver fee, amendment fees and prepayment penalties. As we reach a level, where the core earnings before the fees -- the waiver fees, amendment fees and prepayment penalties, if that core earning was exceeding our current dividend, it would be logical to have a conversation with the board about whether the business was then prepared to increase the dividend in response to that. But in terms of when that would happen, or if that would happen, we won't know until we build the increased portfolio, recognizing, importantly, that we are very, very focused, I'm very, very focused on the quality of the portfolio, increased amounts of first-lien lending. And that is job number one. The security and safety of the existing dividend is the primary focus. And if in then building the portfolio, there is an ability to increase the dividend, we'd, of course, be pleased to do that. But we're not going to chase yield nor are we going to chase too much second-lien lending in order to achieve that.

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Operator [15]

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Your next question comes from the line of Mickey Schleien of Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [16]

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Just wanted to talk a little bit about the stock price. It does seem to be impacted by the overhang of the Bayside shares. I think it'd be helpful to the market for us to understand what the remaining life is in the funds at Bayside that own the WhiteHorse shares?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [17]

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The Bayside shares that -- sorry, the Bayside organizations that own the shares are private and subject to confidentiality agreements. So I'm not at liberty to share those terms. What I have shared before and can share again is that the goal of H.I.G. managing those funds is for optimization of value, and we are working with and will continue to work with the investors in those funds to seek to make sure that long-term value for those funds is maximized, and we do not anticipate any issue with the funds having to sell shares in the near future. But we do very much have a long-term or medium-term focus on seeking to reduce that overhang through sale of those shares into the hands of investors that will be able to keep them long term.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [18]

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Stuart, could one of those investors actually be the BDC itself? I mean, when you think about where your leverage is and the price to book value, it -- just from a mathematical perspective, it would seem to make a lot of sense. I do understand it would affect the stock's liquidity, but what is limiting WhiteHorse from doing something like that?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [19]

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Well, of course, the scale of the overhang is significant. And so while in theory, the BDC could repurchase some number of shares from Bayside, the solution to the overhang is going to need to be more comprehensive than simply a modest share repurchase into the BDC.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [20]

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No, I appreciate that. And in the prepared remarks, you mentioned the JV, but I wasn't quite clear, did you say anything about the initial scale? I know you have the ultimate scale delineated in the prepared documents. But initially, where do you see this thing in terms of size and the scope of funding? And when do you think it'll actually start operating?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [21]

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So our assets will go into the JV with size ranges generally between $5 million and $15 million. I do not believe there'll be any positions in the JV that will be more than $15 million. We have started accreting assets that are intended to go into the JV, but we will not transfer assets into the JV until it is the right time for the BDC shareholders to see those assets transfer in. And because of the very significant cash inflows that came from Aretec, and because we need to achieve certain leverage levels to get -- sorry, diversity levels to get leverage in the JV, it is not yet clear when we will start selling assets into the JV. I would indicate, based on current pipeline, it won't be for at least 2 months.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [22]

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So Stuart, those assets are being held somewhere else within H.I.G. Am I understanding you correctly?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [23]

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No, there are assets that have gone into the BDC that are better held as a part of the JV, and we will seek to transfer those assets into the JV as the cash is deployed and leverage ramps up.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [24]

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And does the JV have its debt capital in place at this point?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [25]

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We have reached agreement and are in documentation with a credit provider, who is providing a credit line, on which we will make the terms public when the documentation is done.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [26]

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Okay, fair enough. And my last question, just in terms of the BDC's credit facility. Has that been amended to adopt the higher leverage limits that are now allowed?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [27]

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Ed, do you want to speak to where we are on the amendments of the current facility?

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [28]

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Sure. So we gave -- we did amend the facility. It does allow for an upside. We already had an upside in it. We did reduce temporarily the undrawn fee rate from 100 basis points to 60 basis points, and we had to step down the minimum draw amount down to $115 million from $55 million, that steps up in 2 steps, from $115 million to $135 and then back to $155 million, and we'll -- at that point, we'll revert back to the 60 basis point undrawn fee.

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Operator [29]

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Your next question comes from the line of Rick Shane of JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [30]

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Two things. First, can we just talk a little bit about what's going on at StackPath? That seems to be a pretty strong space at the moment. And I'm just curious, is it competitive pressure from larger players? Is it the scale business?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [31]

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Yes, StackPath had financial performance deterioration that was related to competitive dynamics of the marketplace. That's exactly right.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [32]

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Got it. And did they lose a major customer, too? Is that specifically what drove it?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [33]

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Again, because these companies are private, I'm not in the position to talk about any specifics of the performance, simply that the performance fell, the private equity firm that owns the company is actively engaged in improving the situation, and they have conviction that they can improve it. And because of that conviction, they're investing new equity behind us in the capital structure as a part of that turnaround effort.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [34]

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Got it. And it's funny, I realized that I asked the question that some of that specifics you wouldn't be able to answer, I apologize. Other question, as we think about the excise tax moving through 2019, should we assume that it's ratably distributed over the fourth quarters going forward as opposed to that fourth quarter true-up.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [35]

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Ed?

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [36]

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Sorry, can you repeat that?

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [37]

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For the excise tax, so let's assume that the excise tax continues at roughly $1 million a year, should we assume that that's distributed $250,000 a quarter? Or is it a fourth quarter true-up like it was this year?

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [38]

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Well, it would be accrued quarterly, but it's paid on an annual basis with the return.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [39]

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Got it. And given the timing of annual true-ups in distribution requirements, would we expect -- if you were continuing to retain earnings and pay an excise tax, which makes sense strategically, would the true-up be in the third or fourth quarter normally?

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [40]

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What do you mean by the true-up?

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [41]

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Well, because you have to make the distributions, generally speaking, by September 30, do -- would we -- and we saw this year sort of a -- and again, it had to do with the timing of the distribution, we saw the true-up for the excise tax in the fourth quarter. Normally, if they were going to be a step-up or a step-down in the excise tax, wouldn't we see it in the third quarter?

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Edward J. Giordano, WhiteHorse Finance, Inc. - Interim CFO [42]

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You would. Because we're -- then we'll have a better estimate at that point of the annual income for tax return purposes with an excise tax. So yes, we would make any adjustment and any adjustment in dividend in the fall.

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Operator [43]

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(Operator Instructions) Your next question comes from the line of Chris Kotowski of Oppenheimer.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [44]

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Well, most of mine were asked, but just can you remind us what the base management fee waiver is? And why that's there? And how long that needs to be there?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [45]

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The -- are you talking about the waiver of the management fee against cash?

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [46]

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Oh, is that it? The $270 million, or something like $150,000 for the quarter.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [47]

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Yes. So Ed can confirm the numbers, but we proactively waived management fee against cash balances through last quarter. We do anticipate the cash balances will -- and that was related to increased cash balances coming from the sale of the Aretec position. We do anticipate, based on the normal deployment of assets, that cash balances will return to the normal low levels. So that waiver should not be needed in the future. But if for any reason cash balances were excessive, we would coordinate with the board to determine whether we should extend that waiver.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [48]

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Okay. All right. And then, I guess, just generally, I mean, it -- and maybe it's not surprising that you zig a little bit when others zag. I mean, you've been -- it seems like you've been able to grow assets fairly readily earlier in 2018. And you mentioned that the nonsponsor-based market is somewhat disconnected and insulated from what we saw in the liquid-traded market. But I guess, just relatively speaking, I'd say the deployments were -- in the fourth quarter, looked like they were less than we would generally expect from you. And is that a caution about the markets? Or was that just the way things fell out in the random order of -- nature of things?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [49]

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It absolutely is the latter. And in fact, several of the transactions that I shared that closed in Q1 were transactions that, at one point, we thought would be closing in Q4, and there was just a carryover into Q1 because of things that related to due diligence and documentation on those companies. Specifically, as it regards the nonsponsor effort, it is a massively labor-intensive effort in the origination and the due diligence. And the time that it can take to originate structured due diligence and close a nonsponsor deal can be amazingly long. I mean, sometimes it takes us 9 months or even a year to get one of those deals done. The beauty of those deals, of course, is if the leverage is low, the pricing is attractive, the covenants are generally set very tight. And we've seen great earnings and great performance on that overall book for our investor base. But it is not reliable in terms of how many deals will show up a quarter or how quickly we'll be able to close the deals. We make sure we do all of our underlying due diligence before we get a deal closed up. And that underlying due diligence, just so people know, includes forensic work on the numbers, background checks on the management. We do industry checks. We do supplier checks and customer checks, read all the underlying contracts. So we do that on all of our deals, but it's even more important in the nonsponsor market where you don't have a private equity firm concurrently doing all that work with you.

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Operator [50]

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At this time, there are no further questions.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [51]

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All right. Everyone, thank you very much, and we look forward to speaking with you next quarter.

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Operator [52]

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Thank you for participating in the WhiteHorse Finance Fourth Quarter 2018 Earnings Conference Call. You may now disconnect.