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Edited Transcript of WHF earnings conference call or presentation 2-Mar-20 7:00pm GMT

Q4 2019 WhiteHorse Finance Inc Earnings Call

New York Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of WhiteHorse Finance Inc earnings conference call or presentation Monday, March 2, 2020 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joyson Thomas

WhiteHorse Finance, Inc. - CFO

* Stuart D. Aronson

WhiteHorse Finance, Inc. - CEO & Director

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Conference Call Participants

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* Bryce Wells Rowe

National Securities Corporation, Research Division - Research Analyst

* Christoph M. Kotowski

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

* Christopher John York

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Matthew Alan Tjaden

Raymond James & Associates, Inc., Research Division - Research Associate

* 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 afternoon. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter 2019 Earnings Conference Call.

Our host for today's call are Stuart Aronson, Chief Executive Officer; and Joyson Thomas, Chief Financial Officer.

Today's call is being recorded and will be available for replay, beginning at 4:00 p.m. Eastern. The replay dial-in number is (404) 537-3406, and the pin number is 2483375. (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, Maria. And thank you, everyone, for joining us today to discuss WhiteHorse Finance's Fourth Quarter 2019 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 fourth quarter 2019 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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Thank you, Sean. Good morning. And 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 available on our website.

I'm going to take you through our fourth quarter operating results, and Joyson Thomas, our Chief Financial Officer, will review our financial results before we open the line for questions.

During the first -- fourth quarter, our strong fundamentals and opportunistic approach to a disrupted marketplace produced a record-setting quarter for WhiteHorse Finance. Our $150.6 million in gross deployments was an all-time high. GAAP net investment income for the quarter was $7.7 million or $0.375 per share, and core NII was $0.385 per share, which continues to exceed our quarterly dividend of $0.355.

Our NAV was $15.23 per share. As you know, in addition to our regular quarterly dividend, we issued a special dividend of $0.195 in the fourth quarter. Hence, on an adjusted basis, excluding the special dividend, NAV would have increased to $15.43 per share as compared to $15.36 at the end of the third quarter. It is important to note that our NAV per share exceeds our IPO price in December of 2012 of $15 per share.

As I referenced last quarter, the liquid loan market experienced a disruption during the second half of 2019, which did normalize by the end of the year. This partially drove our elevated origination activity during the quarter. Within the confines of our disciplined approach to underwriting, we sourced an unprecedented number of high-quality originations, closing 13 new deals and 3 add-ons. 10 of our 13 new deals were sponsor deals, and all 3 of our add-ons were also sponsor deals. All of our deals and all of our add-ons were first-lien transactions, and we did not close any second-lien transactions in all of 2019.

The 13 new originations totaled $137.8 million, and the 3 add-ons totaled $12.8 million, resulting in a record gross investment activity offset by $68.3 million in sales and repayments, with an additional $0.2 million of net repayments on revolver commitments.

Our weighted average effective yield on income-producing investments decreased from 11% in Q3 to 10.4% in Q4, which included a 21 basis point market decline in the base rate. We also meaningfully increased our leverage from 0.75x to 0.97x, and we are now approaching our target leverage range of 1 to 1.25x. To that end, we increased our leverage capacity with JPMorgan this quarter, while reducing our interest rate from LIBOR 2.75% to 2.50%. Joyson will provide more details on that transaction shortly.

Turning now to our joint venture vehicle. During the quarter, we transferred 4 deals and the remaining investment in an existing deal into our JV, totaling $31 million. At the end of 2019, WhiteHorse's total investment in the JV was approximately $33.3 million, representing a 60% interest. The JV's portfolio had 10 total issuers with an aggregate fair value of $97.3 million, and the yield on our investment in the JV continues to approach the targeted levels of 12% to 15%, as we ramp the vehicle and increase leverage.

Turning now to our capital structure. At the beginning of 2019, private funds that are managed by H.I.G., also known as the Bayside Funds, held 51% of all of our shares that were outstanding. Investors have inquired about this majority shareholder position and its impact to the liquidity within our shareholder base. With that in mind, we proactively addressed the liquidity in our shares during 2019. During the year, we conducted 2 offerings, 1 in June and 1 in December, to reduce the ownership interest of the Bayside Funds without diluting existing shareholders. Also, the Bayside Funds executed additional nondilutive private block trades to further diversify our shareholder base.

We are pleased to report that as of December 31, 2019, the Bayside Funds' position has been reduced from 51% to 23.7% of shares outstanding. This is proof that we are rigorously committed to understanding and addressing investor feedback in a way that enhances shareholder value, and we expect to work with the Bayside Funds in the coming year to further reduce their position and enhance long-term shareholder value.

With that, I'll now turn to our investment portfolio. At the end of Q4 2019, the fair value of the portfolio increased to $589.7 million compared to $527.5 million reported at the end of Q3. As mentioned, this increase was due to 13 newly originated loans and 3 add-ons, totaling $150.6 million in gross deployments. These were all first-lien deals with strong credit quality. And within our portfolio, 88.5% of loans are now first lien, and approximately 55% of the loans are sponsor backed.

Total repayments on sales of $68.3 million were primarily driven by 5 realizations, the most notable of which was StackPath. On last quarter's call, I mentioned that a large strategic investor had made cash investment into StackPath at a level that was a multiple of our loan balance, allowing us to put the loan back on accrual at the end of Q3. Since then, we are pleased to report that StackPath was repaid at par in addition to a success fee premium, generating an overall internal rate of return of about 16% and which positively impacted our results and accounted for $1.2 million of fee income out of the $2.1 million of fee income we recorded during Q4.

While we are pleased with our successful outcome for StackPath, we continue to experience headwinds in our position IN AG Kings, which we marked down for the second consecutive quarter from $0.65 to $0.58 on the dollar. We are working hard to resolve this credit in a manner that is favorable to lenders, however, the process has been delayed more than we initially expected.

Our portfolio had a fair value average debt investment size of $10 million, with only 3 of our portfolio companies falling above our target investment size range of $4 million to $20 million. We've also significantly improved our leverage ratio over the past year from 0.57x in Q1 of 2019 to 0.97x in Q4. As a reminder, our target leverage ratio is between 1 to 1.25x, and management fees on assets over 1x leverage will drop by 75 basis points.

Thus far, in Q1, which is historically our slowest quarter, we've closed 1 first-lien senior secured sponsor deal with an additional 7 deals that are mandated. As always, there can be no assurance that those mandated deals will close. Already in Q1, we have recorded a partial pay down of our second-lien investment in Oasis Legal Finance.

Turning now to our market overview. During the second half of 2009 (sic) [2019], we saw a disruption in liquid loan market and capitalized on this by sourcing a record level of gross deployments. By the end of 2019, the disturbance was resolved naturally and markets normalized to their previous condition. However, the recent growth of the coronavirus epidemic has created new and significant equity market disruptions that are just now spreading into the debt market. We will continue to closely evaluate these evolving market conditions. We have historically been opportunistic in the face of market disruptions with a focus on maintaining credit discipline, and we'll continue to do the same in the markets that we're seeing today.

I will now turn it over to Joyson to speak in more detail about financials. Joyson?

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Joyson Thomas, WhiteHorse Finance, Inc. - CFO [4]

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Thanks, Stuart. We recorded GAAP net investment income of $7.7 million or $0.375 per share. This compares to $8.7 million or $0.421 per share in the prior quarter.

Core NII was $7.9 million for the quarter or $0.385 per share, covering our quarterly dividend of $0.355 per share. This compares to $8.3 million or $0.403 per share in Q3. Core NII adjusts for $0.2 million of capital gains incentive fees accrued, which resulted from earning $1.2 million in net portfolio gains this quarter.

We reported net mark-to-market losses of $0.4 million primarily driven by markdowns on AG Kings of $0.8 million and Mills Fleet Farm of $0.6 million partially offset by a $1 million markup on Vero Parent, Inc. doing business at Syncsort.

Realized gains this quarter were driven by the realization of our Crews of California warrants for $1.5 million, which occurred in conjunction with a related loan payoff in Crews during this quarter. After considering our net realized and unrealized losses, we reported a net increase in net assets resulting from operations of approximately $8.8 million or $0.42 per share for the fourth quarter.

As of December 31, 2019, net asset value was approximately $313 million or $15.23 per share, which compares to $315.5 million or $15.36 per share as reported for Q3. The decrease in NAV is attributable to the special dividend of $0.195 per share paid during the quarter. Excluding this dividend, NAV would have been $15.43 per share.

As it pertains to our portfolio and investment activity, nearly 85.6% of our portfolio carries either a 2 or 1 risk rating on a scale of 1 to 5, where an asset rated at 2 is performing according to our initial expectations and an asset rated at 1 has performed better, such that the risk of loss has been reduced relative to those initial expectations.

Turning to our balance sheet. During the quarter, we amended our credit facility with JPMorgan to, first, reduce the interest rate spread from 2.75% to 2.5%; second, increase the facility size from $200 million to $250 million with an additional $100 million accordion option; third, increase the advance rate from 57% to 60%; and finally, change the minimum borrowings requirement to 70% of the facility size.

We had cash resources of approximately $27.5 million as of December 31, 2019, including $23.3 million of restricted cash and approximately $11.1 million of undrawn capacity under our revolving credit facility, excluding accordion under the revolver. We continue to closely monitor our asset coverage ratio and feel comfortable with our leverage as of December 31, 2019. The company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 203% 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 0.8x as of the end of the quarter.

Next, I'd like to highlight our quarterly distribution. On December 9, we declared a distribution for the quarter ended December 31, 2019, of $0.355 per share for a total distribution of $7.3 million to stockholders of record as of December 19, 2019. The distribution was paid to stockholders on January 3, 2020. This marks the company's 29th consecutive quarterly distribution since our IPO in December 2012, with all distributions at the rate of $0.355 per share per quarter.

In addition, as mentioned earlier, the company's Board of Directors declared a special distribution of $0.195 per share, which was paid on December 10, 2019 to stockholder of record as of October 31, 2019. We expect to be in a position to continue our regular distributions.

I'll now turn the call over 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, just want to touch on your comments. I appreciate the quarter-to-date update there. But just around the recent volatility in the credit markets. I know this is a seasonally slower quarter for you, but do you expect that this volatility will impact originations in the near term? And should we read into what you've closed so far around that at all? And then similarly, would you expect increased repayment activity given the rally in interest rates?

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

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So I'll answer the second part first, Tim. Because LIBOR is the basis for all of our loans and their floating rate, the decrease in interest rates should not have any impact on repayment activity. Although if LIBOR continues to decline, that will put does some pressure on our earnings per share. I will highlight in that, that we get LIBOR floors on our deals. Virtually all, if not all of our deals, do have LIBOR floors that range between 1% and 1.5%. So we have some exposure to declining interest rates. But below 1%, we have virtually no exposure.

In regard to deals in the quarter, in the equity market volatility -- equity market volatility in and of itself does not have any impact on the deals we close or don't close. But the reason for the equity market volatility, according to most folks, is, of course, the coronavirus. And there are transactions that we have had in pipeline, specifically in the travel industry or the event industry, where over the last couple of weeks, our view on those credits has changed. And so things that we might have closed up 4 weeks ago, 6 weeks ago that had event risk, i.e., the concept of people attending events are things that we're taking a much more cautious view on, given the risk of pandemic. So we are rolling that in now.

There are many deals where there is, of course, general economic volatility that could come from a pandemic. We are still carefully evaluating those. I would say it's particularly in the travel- and event-oriented businesses, where if there was pipeline flow, those deals are less likely to close. But other than that, I would say, our pipeline looks at the moment pretty normal.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. Got it. Yes. And when asking about the credit mark volatility, it was really the underlying factors there driving that. So I appreciate you making that distinction. Yes, I guess, just following up on that, though, recapping it a little bit. It sounds like you could have some more fallout in the pipeline. So what are your expectations for growth over the course of the year? It was a very strong year for you guys in 2019. Do you see originations stacking up at the same levels? And has sentiment from any of your portfolio companies changed as a result of the coronavirus and underlying factors driving this volatility?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [5]

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We are bigger and stronger than we have ever been. We are now up to, with accepted offers, 44 people. We are now located in 12 cities across North America, with the 2 newest offices that we've opened being in Toronto and in Portland, Oregon. We are actively involved in potentially adding additional offices in the Midwest and Southeast. And so our direct originations model continues to be extremely robust, and we anticipate that this deal flow on average should be as good as or better than it was last year, with the caveat being the disruption in Q4 did throw a couple of things into our lap that we won't get this year unless there's another disruption. And again, it may be that we're experiencing that disruption right now. It may, in fact, be starting as of last week.

In terms of estimating where we end up, we took leverage from 0.57 to 0.97x this year. We really don't want to take leverage anywhere beyond 1.25x. So frankly, in terms of portfolio growth, we have less that we need to get done to get to our limit than we achieved last year, and we will do our very best, subject to credit considerations, to increase deployment to get to that 1 to 1.25x leverage. But again, we do not anticipate being more than 1.25x leverage by any significant degree.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [6]

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Got it. Okay. That's helpful. I appreciate those comments there. And then just on the weighted average effective yield, down 70 basis points quarter-over-quarter, I believe. Clearly, the base rate played a part in that. But how much would you attribute to the competitive environment and the impact on spreads? And I also -- you mentioned the mix of sponsor deals looks a bit higher this quarter in the portfolio than it was a year ago. Has that played into the yield degradation at all as well?

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

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The first thing that impacted yield beyond the decrease in LIBOR was the fact that several very-high-returning deals repaid. Crews of California was on our portfolio list for a long, long time. That was a credit that was, as evidenced by its LIBOR plus 11% yield on a first-lien deal, a riskier credit. And we felt it was time to exit that credit and let another lender take it out. So that was an exit that we were supportive of.

We also had a second-lien loan to a company named Sunteck that was a very good performing company. And the company was sold, so that loan got repaid and took down our second-lien concentration even further.

I would -- if I was successful at getting our second-lien concentration back up to 20% to 25%, that would help boost the yield on the assets. But as we take the portfolio more and more into first lien, which we've done on credit considerations, that has continued to put pressure on the average return of our deals.

In addition, you're correct that on average, sponsor deals are priced lower than nonsponsor yields. That said, most of our sponsor deals are targeted for the JV. And the JV equity that we invest in returns expected level of 12% to 15%.

So the goal for the success of the BDC is to continue a robust mix of sponsor and nonsponsor deals, where many of the sponsor deals will be funded in the JV. The nonsponsor deals priced at LIBOR 6.50% and above will be fund under the BDC balance sheet, and we will try to create as stable a high-yielding portfolio as we can with an ultimate goal at 1.25x leverage to try to be earning the dividend on a quarterly basis from our core income without reliance on waiver fees, amendment fees and prepayment penalties, which all of you have seen happen almost every quarter. It's a very natural occurrence in a nonsponsor book to get waiver fees, amendment fees and prepayment penalties. But the analyst community and the shareholder community have asked us to try to get to a basis where core earnings generate that $0.355, and the waiver fees, amendment and prepayment penalties give us access to the $0.355. And the leadership of the BDC is working hard to get to that end game.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [8]

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And I know it's tough to -- given there are so many different elements around that, but is that something you believe you can achieve in 2020? Or is it possible it takes a little bit longer than that?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [9]

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I don't know what's going to happen this year, especially given the fact that we've seen the volatility in the markets over the past couple of weeks, and given that we don't know what's going to happen to the economy with the coronavirus. So I can't predict the rapidity with which we get there. All I can say is if 2020 behaves like 2019, then we would make very good progress. But I have no idea if 2020 is going to be anything like last year.

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Operator [10]

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Our 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 [11]

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So most of the questions, I think, that are on most people's minds have been asked previously, but just a few more, if I may. Stuart, I understand that forecasting what may or may not happen related to the coronavirus is very difficult right now. But I imagine you've started to reach out to your management teams of your borrowers to take their pulse on what they think is happening to their business. Are there any specific credits in your book that you're particularly concerned about right now related to that issue?

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

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So the credit that I would say has the most exposure to the virus is our credit Quest. Quest does draperies, a very simple thing, at events that range from corporate events to weddings. The company is, we think, a very good company with a very long -- good long-term value proposition. But if there were a period of time where people were no longer holding corporate events because people were afraid of the virus, then demand for the draperies that this company provides would dip during that period.

That said, Quest is owned by a private equity firm. There's nothing about what they do that's going to go away ultimately because of the virus. And I am personally of the opinion that the private equity firm would support the company through whatever the coronavirus period would be, whether that's 3 months, 6 months or 9 months. So we don't view there being a particular concern on that credit other than the fact that, again, it would at least temporarily be impacted.

Nothing else in our portfolio has that level of, what I'll call, event risk other than that credit. There's a very small amount of China sourcing exposure in our portfolio, but I think much less than the average BDC because we're focused on the lower mid-market, and the lower mid-market is much more an American-focused market and not so much linked into China, which is why our portfolio companies really have not been impacted by the trade war to any measurable degree.

So we do have credit resources that have taken a look across our portfolio for the level of coronavirus exposure. And in general, at the moment, it seems pretty low. And there has been no feedback from any of our management teams that as of the moment they're seeing any economic weakness in the U.S. resulting from the coronavirus.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [13]

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That's really -- that's interesting and helpful, Stuart, I appreciate it. Just a couple more questions, more housekeeping sort of questions. Were there any onetime adjustments to investment income, either positive or negative in the quarter, for example, from StackPath or anything else?

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

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Joyson, I'll let you answer that.

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Joyson Thomas, WhiteHorse Finance, Inc. - CFO [15]

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Mickey, this is Joyson. So we did have some nonrecurring fee income recognized during the quarter from these (inaudible) exits. I think as we mentioned earlier on the call, $1.2 million of our fee income was driven on -- from StackPath and that was largely due to essentially that success fee premium. So I think in terms of onetime adjustments for the quarter, again, it really boils down to the nonrecurring fee income elements.

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

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I understand, Joyson. How about interest income? Sometimes we see reversals or accruals for past interest income that may have been deferred for something that was on nonaccrual, for example. Anything like that?

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Joyson Thomas, WhiteHorse Finance, Inc. - CFO [17]

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Nothing in relation to interest accruals. So we did put StackPath back on in Q3. There was a little bump up in interest income in the prior quarter as it relates to that. So there wasn't any adjustments related to that. Of course, we would have a little bit of accelerated recognition on the discount amortization from these prepayments as well.

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

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I understand. And my last...

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

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Mickey, I will highlight, by the way, since StackPath was brought up, just as it gets into how we mark troubled assets, we try to be very transparent quarter-to-quarter. StackPath ran into a problem. There were a lot of people that had the view that the StackPath asset would be good, but we viewed there as being downside risks. So in Q2, I believe, we had it marked at $0.75 on the dollar. But the final outcome of that highlighted that we obviously had a lot of upside in that mark as well. And we're really happy that the sponsor who managed that credit ended up with such a good outcome for themselves and, ultimately, for us -- for our BDC as well.

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

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Yes. Absolutely, that's welcome news, and congratulations on that. Lastly, Stuart, can you just remind us on the JV? What's the JV's target leverage on its own balance sheet? And sort of what are your expected return on equity metrics for that vehicle?

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

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The JV will, in general, run at about 1.5x leverage on the JV assets that are all expected to be first-lien assets. And the projected return on the JV junior capital to us is 12% to 15%.

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Operator [22]

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Our 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 [23]

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Most of mine were asked. But just you were going a little fast when you were talking about the amendments to the revolving credit facility. And can you just go through, looking at Page 13 of the deck, what the availability went to? Is it $250 million? And are there -- is there any conditionality of -- on the $100 million accordion feature? And I guess what I'm getting at is, is your current leverage -- or liquidity and leverage capacity sufficient to get you into the middle or upper end of your target leverage ratio? Or is there something else you need to do on the right-hand side of the balance sheet?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [24]

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So I'll answer the last part of that and then pass the balance of the question back to Joyson. We could hit our targeted leverage just using the JPMorgan facility. That said, fixed interest rates have dropped to all-time lows. And so we are also aware of and entertaining the possibility of issuing more unsecured debt as opposed to using more secured debt. And the decision as to what to do will be driven by a combination of the expected asset deployment in Q1 and also what spread the debt can be issued at, at this point in time.

So again, we do not need any more unsecured debt, but unsecured debt is a option that is open to us and it may be attractive given where 5-year and 10-year treasuries are now sitting.

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Joyson Thomas, WhiteHorse Finance, Inc. - CFO [25]

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Chris, this is Joyson. I'll just summarize again our changes on the credit facility. So the interest rate spread was at 2.75%, we've reduced that now to 2.5%.

The facility size -- the core facility size was $200 million with a $35 million accordion. So now we have $250 million of capacity with an additional $100 million of accordion. So again, $350 million in total capacity. The advance rate on collateralized assets will go -- increase from 57% to 60%. And then again, the borrowings requirement, the stated percentage is 70% of the facility size. So that equates to $175 million based on the $250 million current capacity.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [26]

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Okay. And to draw on the accordion, is there -- are there any special wells -- bells and whistles that you need to go through to do that? Or is it just kind of like drawing on the initial $250 million?

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Joyson Thomas, WhiteHorse Finance, Inc. - CFO [27]

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Yes. It's going to -- it'll take a few -- a little bit of lead time in terms of more than just a couple of days, right? But it is basically submitting some paperwork and then that just being sent for approval in terms of formal approval with the committee. But we don't foresee it as kind of a long or a large lead time on that.

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Operator [28]

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Our 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 [29]

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Just one question and one follow-up. We've seen a -- an increase in the percentage of sponsor deals over the last year. I'm wondering if that's opportunistic. Or is there something strategic that we should be thinking about going on?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [30]

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Rick, the business itself has ramped up very significantly, and we have a breadth of reach into the sponsor market that, candidly, we didn't have 2 or 3 years ago. We're very careful about what we do on the sponsor side, as people are aware in the general sponsor market, leverage multiples are at 5.5x, 6.5x, 7.5x or even more. And those leverage multiples are being done off of adjusted synergized EBITDA, such that we believe the actual lending multiples are even higher than those 5.5 to 7.5x ranges.

We're calling primarily on smaller sponsors or what we call off-the-run sponsors. And the sponsor deals that we're doing are almost all in the range of 3.5 to 5.5x leverage with equity checks that are 40% or greater. The directly originated sponsor deals we're doing, we're doing with covenants, where much of the market has gone covenant light.

And so from a credit perspective, in terms of leverage loan-to-value and covenants, what we're doing on the sponsor side, we think, is very consistent with the risk that we're taking on the nonsponsor side. That said, nonsponsor lending is a very different endeavor. It is much harder to find the nonsponsor deals because there's no place you can go to just sort of get them. We directly organically originate the vast majority of our nonsponsor deals in the 12 different regions where we're situated. And those nonsponsor deals are typically between 2.5 and 4.5x leverage. And often price -- well, they almost always price between LIBOR 6.50% and LIBOR 8% on first-lien deals.

We would love to keep our mix about 50-50. We're hiring more people on the nonsponsor side than we are on the sponsor side to try to keep the mix at about 50-50. But any given quarter, there's just a lot of variation in terms of what we find, what we get mandated on and what we close. And in Q4 in particular, because of the disruption in the marketplace, a lot of the things that came our way were sponsor deals. And frankly, a number of them were sponsor deals that would have ended up at much lower pricing in the broadly syndicated marketplace that ended up getting clubbed up instead and we joined up in those clubs.

So I'd say, in the case of a market disruption, you're going to see more sponsor deals. But in the case of our normal sourcing activity, plus or minus 50-50 with any given quarter being 40-60 or 60-40.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [31]

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Got it. That's very helpful. And then just as a follow-up, we're now 2/3 of the way through the quarter. It's been a volatile quarter. Back of the envelope, what do you think the asset marks would be quarter-to-date, given the volatility that we've seen, not even on a levered basis, but just on a sort of asset basis?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [32]

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Well, the good news for us is the vast majority of our assets are lower mid-market assets that don't vary with the large-cap marks. So we have a couple of large-cap assets and a couple of assets that vary that way. But our assets are generally valued on the core performance of the underlying asset. And so based on what I've seen so far in the quarter, I don't believe that there is any materiality to the mark movements. Also noting that, candidly, even in the large-cap debt markets, which are the most volatile, notwithstanding the multi-thousand point moves in the equity markets, the large-cap debt markets have seen very little price compression, a little bit, but very little other than in some of the travel names like the airline stocks.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [33]

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I'm sorry, I didn't mean to interrupt.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [34]

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No. No, I apologize. Go ahead.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [35]

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No. I was just going to say thank you for the candor.

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Operator [36]

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Our next question comes from the line of Chris York of JMP Securities.

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [37]

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I just have one. Stuart, I wanted to elaborate on your comment of being bigger and stronger. So I noticed WhiteHorse raised $1.1 billion in the principal lending fund in early January. I mean I view this as another positive development for the growth of the platform. So the question is, should investors expect that the BDC will receive any direct or indirect benefits from this outside capital raise?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [38]

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Yes. There is a very clear linkage between our ability to win new business for the BDC and the additional capital that H.I.G. WhiteHorse has under management. The WhiteHorse principal lending fund, as publicly announced, was closed with a focus on sponsor deals. It's one of the reasons that you are seeing more sponsor flow coming through.

But as an organization, we can now underwrite $200 million of an individual transaction, and that gives us the ability to be a sole-source solution to the vast majority of lower mid-market players in both the sponsor and nonsponsor space. So if you go back 3 years ago, we really couldn't speak for more than $50 million, and we found lots of opportunities that were between $50 million and $150 million, and we weren't in a position to land those opportunities for our shareholders and for our BDC, whereas now, we are positioned to do that.

And the other thing you're seeing is simply, as indicated to our shareholders several years ago, we are very significantly increasing diversity in the BDC. A few years ago, we had positions that were upwards of $35 million or $40 million on $400 million to $500 million of assets, and now positions that we've been adding have been between $4 million and $20 million on an asset pool that will ultimately get up to about $700 million if we hit our deployment targets. So it's a much better diversified base of assets that come off of the fact that we're managing this pool of capital, and we can win more deals and do appropriate allocations.

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [39]

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Great. That's great color. I think investors will appreciate knowledge of your scale and crossing the platform

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Operator [40]

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Our next question comes from the line of Matt Tjaden of Raymond James.

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Matthew Alan Tjaden, Raymond James & Associates, Inc., Research Division - Research Associate [41]

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Just a quick question on Grupo HIMA. So on the 3Q call, if I remember correctly, you said that you received some financial documents post quarter end that were a little bit weaker than expected, and we're expecting to take a markdown on the asset. And as far as I can tell, the asset marks were the same this quarter as compared to the prior. So any color you can give us on that?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [42]

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That's a great question. After getting the data that implied weakness, we got subsequent data that reversed that weakness. And therefore, based on the improved data that came and that we currently have, we did not see any reason to mark that asset down further. So we did see that as a risk, but that risk abated. And I'm pleased to be able to report that to you. And hopefully, Grupo HIMA, which is hospitals operating in Puerto Rico, will continue to strengthen. And hopefully, that asset will be a good outcome for our shareholders.

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Operator [43]

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Our next 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 [44]

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Stuart, just had one follow-up. I know one of your strategic initiatives is to reduce the Bayside footprint and increased liquidity in the flow to the stock. But just wondering with the stock price trading below 90% of NAV right now and at a 10.5% dividend yield, just how you think about executing on buybacks and the returns there versus where you're putting capital to work right now.

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

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Yes. So the Bayside shareholders are, to all the evidence we have, smart, rational entities, and they understand the need to take some of the discount in order to exit as they have. They've sold assets at below NAV. But the recent market sell-off, of course, will make it less attractive for the Bayside shareholders to exit.

There are a number of routes that we can take to ultimately address the overhang. And then the question, we've taken the overhang from 51% down to 23.7%. At some point, which all of you and the analyst community have to help me understand, the overhang becomes small enough that, in theory, it shouldn't even worry people anymore. So we're trying to get a good gauge on where that should go. But again, we're working closely with the Bayside shareholders to get to a level that is not intimidating to the marketplace, whatever that level be, and that will happen based on them viewing that the shares are trading at a fair value relative to the overhang risk that their position creates.

Other than that, there's really nothing to share on that overhang. But we're going to do our very best to try to have that resolved in 2020, if that is possible to be done.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [46]

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Got it. I appreciate those comments. I guess, I just want to maybe clarify one part of that question that I ask is just how you feel about repurchasing your stock in the open market.

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

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If the stock traded back down to where it was very recently for what appeared to be no good reason, the Board of the company would take it under advisement that a repurchase of shares could make sense. But given the performance of the company, absent illogical trading levels, there is no plan at the moment to repurchase shares.

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Operator [48]

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(Operator Instructions) Our next question comes from the line of Bryce Rowe of National Securities.

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Bryce Wells Rowe, National Securities Corporation, Research Division - Research Analyst [49]

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Just curious, some of the activity this quarter, you flagged that L plus 6.50% might make its way into the JV. So just curious if we should expect activity from this past quarter to make its way into the JV here in the first quarter.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [50]

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For the most part, the assets that will go into the JV will be priced between LIBOR 5.25% and LIBOR 6.25%. Assets that are priced at LIBOR 6.50%, for the most part, will remain on the balance sheet of the BDC.

That said, we will, with those assets that are at 6.50%, seek to optimize deployment and returns vis-à-vis the leverage and the earnings power of the BDC. So said another way, the higher-yielding an asset, the easier it is to have the asset on the balance sheet of the BDC. But so far, all the assets that have been transferred into the JV have been at LIBOR 6.25% and below.

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Bryce Wells Rowe, National Securities Corporation, Research Division - Research Analyst [51]

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Okay. That's helpful. And then one follow-up to the comment about equity market volatility maybe starting to make its way into the credit markets. And with LIBOR being down here in 2020, are you finding the ability to offset that LIBOR compression with possibly some wider spreads on your deals? Or is that not -- are you not seeing that quite yet?

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [52]

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We -- we're hoping to see that, but we have not seen that. We were thinking that the market may self-correct to the lower LIBOR. But in general, as of, let's call it, 2 weeks ago before the coronavirus volatility, what we saw happening in terms of January competition was pricing was very stable. Not worse, but pretty much the same. And we're right now in price discovery on several assets based on the volatility in the market. And by price discovery, what I'm trying to say is we're trying to get more price, and we'll find out whether other people want to cut us or not.

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Operator [53]

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And that was our final question, ladies and gentlemen. And with that, we will conclude today's conference call. Please disconnect your lines at this time. And have a wonderful day.

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Stuart D. Aronson, WhiteHorse Finance, Inc. - CEO & Director [54]

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Great. Thank you so much.