WhiteHorse Finance, Inc. (NASDAQ:WHF) Q2 2025 Earnings Call Transcript

WhiteHorse Finance, Inc. (NASDAQ:WHF) Q2 2025 Earnings Call Transcript August 9, 2025

Operator: Good afternoon, everyone. My name is Bo and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second Quarter 2025 Earnings Conference Call. Our hosts for today are Stuart Aronson, Chief Executive Officer; and Joyson Thomas, Chief Financial Officer. Today’s call is being recorded and will be made available for replay beginning at 4:00 p.m. Eastern time today. The replay dial-in number is (402) 220-6986, no pass code is required. [Operator Instructions] It is now my pleasure to turn the floor over to Robert Brinberg of Rose & Company. Please go ahead, sir.

Robert Brinberg: Thank you, Bo, and thank you, everyone, for joining us today to discuss WhiteHorse Finance’s Second Quarter 2025 Earnings Results. Before we begin, I’d 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. Before these forward-looking — I’m sorry, 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 Second Quarter 2025 earnings presentation, which was posted on our website this morning. With that, allow me to introduce WhiteHorse Finance’s CEO, Stuart Aronson. Stuart, you may begin.

Stuart D. Aronson: Thank you, Rob. Good afternoon, everyone. Thank you for joining us today. As you’re aware, we issued our earnings this morning before the market opened, and I hope you’ve had a chance to review our results for the period ended June 30, 2025, which can also be found on our website. On today’s call, I will begin by addressing our second quarter results and current market conditions. Joyson Thomas, our Chief Financial Officer, will then discuss our performance in greater detail, after which, we will open the floor for questions. Our results for the second quarter of 2025 were disappointing as our investment portfolio declined this quarter due to net realized and unrealized losses, which impacted our financial performance.

Q2 GAAP net investment income and core NII was $6.6 million or $0.282 per share compared with a quarterly distribution of $0.385 per share and was below the Q1 GAAP and core NII of $6.8 million or $0.294 per share. NAV per share at the end of Q2 was $11.82 representing a 2.4% decrease from the prior quarter. NAV per share was impacted by net realized and unrealized losses in our portfolio that totaled $4.3 million. Turning to our portfolio activity in Q2. We had gross capital deployments of $39 million, which was partially offset by total repayments and sales of $36.2 million, resulting in net deployments of $2.8 million. Gross capital deployments consisted of 3 new originations totaling $33.1 million and the remaining $5.9 million was used to fund 3 add-ons to existing investments.

Q&A Session

In addition, there was $0.3 million in net fundings made on revolver commitments. Of our 3 new originations in Q2, 1 was nonsponsor and 2 were sponsor deals with an average leverage of approximately 4x EBITDA. All of our Q2 deals were first lien loans at an average spread of 560 basis points and average all-in rate of 9.9% compared to 9.6% in the first quarter of 2025. Total repayments and sales were $36.2 million, primarily driven by complete realizations in our positions in CleanChoice and Flexitallic. At the end of Q2, 99.3% of our debt portfolio was first lien senior secured, and our portfolio mix was approximately 2/3 sponsor and 1/3 non-sponsor. During the quarter, the BDC transferred 3 new deals and 1 existing investment to the STRS JV.

At the end of Q2, the STRS JV total portfolio had an aggregate fair value of $330 million at an average effective yield on the JV’s portfolio of 10.6% compared to 10.8% in Q1. Leverage for the JV at the end of Q2 was 1.16x compared with 0.98x at the end of the first — the prior quarter. We continue to successfully utilize the JV and believe WhiteHorse’s equity investment in the JV continues to provide attractive returns for our shareholders. After net deployment, JV transfers and net realized and unrealized losses, total investments decreased by $21.7 million from the prior quarter to $629.3 million. This compares to our portfolio’s fair value of $651 million at the end of Q1. The weighted average effective yield on our income- producing debt investments decreased to 11.9% at the end of Q2, compared to 12.1% in the first quarter of 2025.

The weighted average effective yield on our overall portfolio increased slightly to 9.8% at the end of Q2 compared to approximately 9.6% at the end of Q1, primarily driven by Telestream returning to accrual status and the realization of American Crafts. During the quarter, we took net write-downs of $3.6 million primarily driven by write-downs in Honors Holdings and Aspect Software. As I mentioned earlier, American Crafts has now been fully resolved, eliminating any further downside from that investment. No credits replaced on nonaccrual in Q2 and nonaccrual investments totaled 4.9% of the debt portfolio, an improvement compared with 8.8% of the net portfolio at fair value in the prior quarter. As I mentioned earlier, Telestream returned to accrual status this quarter, which will benefit the BDC’s earnings capacity going forward.

We also expect that a portion of MSI information services will likely go back on accrual in the third quarter, subject to a successful restructuring of the debt. Other deals on nonaccrual are likely to remain that way for some period of time. We are continuing to actively work on getting deals off nonaccrual, leveraging the expertise of our 5-person dedicated restructuring team and the resources of HIG Capital. Aside from credits on nonaccrual, our portfolio is performing well. We have performed subsequent tariff analysis across the portfolio, and we believe that less than 10% of the portfolio is either heavily or moderately exposed to tariffs. Turning to the lending market. M&A activity remains pretty subdued due in part to tariff uncertainty, and this has led to reduced supply of new financing deals in the market.

At the same time, there is plenty of capital available from other lenders. This has created unprecedented competition for companies doing financings particularly for companies that are noncyclical and do not have meaningful international sales exposure. In the upper mid-cap and large-cap markets, deals are typically pricing at SOFR 4.25% to SOFR 4.75%. and, in many cases, on highly adjusted EBITDA levels. Leverage multiples in that sector are between 6 and 8x and deals are getting structured with partial pick to make the cash flows work on the deals. That is not nearly as true in the middle market where we focus, where pricing is 50 basis points higher at between SOFR 4.75% to SOFR 5.25%. Most of the deals we see are getting down at leverage of between 4 to 6x and most deals still have covenant protection.

And the lower mid-market pricing is very similar to the mid-market with pricing starting at SOFR 4.75% but more often being at 5.00% or 5.25% and extending to as high as 5.75% for more complex or cyclical credits. These prices and structures are for the sponsor market, The nonsponsor market remains much less competitive. We continue to focus significant resources on the nonsponsor market where there are better risk returns in many cases and much less competition than what we’re seeing in the new on-the-run sponsor market. We currently have 24 originators covering 13 local regional markets. Given market conditions, these originators are primarily focused on sourcing off-the-run sponsor deals for smaller private equity firms and nonsponsor deals as we look for value in the market where there is limited deal flow and a lot of aggressiveness.

To put the attractiveness of the nonsponsor market in context, our nonsponsor mandates are still levered only 3 to 4.5x and the highest priced deal we have priced recently is at SOFR 7.00% with all the other deals being SOFR 6.00% or better. Subsequent to quarter end, the BDC has closed 2 new investments of $14.4 million and had 1 full repayment totaling $9.6 million. There were 2 existing investments fully transferred to the JV totaling $8 million following the deployment activity in Q2 and pro forma for several transactions that have closed or that we expect to close in Q3 of 2025. The BDC balance sheet has very little capacity for new assets. The JV on the other hand, has approximately $20 million of capacity supplementing the BDC’s existing capacity.

Our overall sourcing is being impacted by the muted M&A activity, and our pipeline is lower than normal for this time of the year. We currently have 6 new mandates and are working on 2 add-ons to existing deals. Our 6 mandates comprise 3 sponsor deals and 3 nonsponsor deals. While there can be no assurance that any of these deals will close, all of these deals should fit into the BDC or our JV should we elect to transact. With that, I’ll turn the call over to Joyson for additional performance details and a review of our portfolio composition. Joyson, go ahead.

Joyson C. Thomas: Thanks, Stuart, and thanks, everyone, for joining today’s call. During the quarter, we recorded GAAP net investment income and core NII of $6.6 million or $0.282 per share. This compares with Q1 GAAP NII and core NII of $6.8 million or $0.294 per share as well as our previously declared quarterly distribution of $0.385 per share. Fee income of approximately $0.8 million in Q2 was primarily due to prepayment fees earned on the full repayment in CleanChoice Energy as well as from other amendment fees. For the quarter, we reported a net increase in net assets resulting from operations of $2.3 million. Our risk ratings during the quarter showed that approximately 76.8% of our portfolio positions either carried a 1 or 2 rating slightly higher than the 74.1% reported in the prior quarter.

As a reminder, a 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations and a 2 rating indicates the company is performing according to such as initial expectations. Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier, in the second quarter, we transferred 3 new deals and 1 existing investment to the SRS JV totaling $22.8 million. As of June 30, 2025, the JV’s portfolio helped positions in 43 portfolio companies with an aggregate fair value of $330.2 million compared to 41 portfolio companies with an aggregate fair value of $310.2 million as of March 31, 2025. The investment in the JV continues to be accretive for the BDC’s earnings, generating a mid-teens return on equity.

During Q2, income recognized from our JV investments aggregated to approximately $3.4 million, a slight decline from $3.7 million in Q1. As we’ve noted in prior calls, the yield on our investment in the JV fluctuate period-over-period as a result of a number of factors, including the timing and amount of additional capital investments, the changes in asset yields in the underlying portfolio as well as the overall credit performance of the JV’s investment portfolio. Turning to our balance sheet. We had cash resources of approximately $33.3 million at the end of Q2 including $22.7 million in restricted cash and approximately $100 million of undrawn capacity available under our revolving credit facility. During the second quarter, we completed a CLO term debt securitization and issued $174 million of debt, which bears interest at 3-month term SOFR plus 1.7%.

The reinvestment period for this new term debt securitization runs through May 25, 2029, with the term debt having a maturity date of May 25, 2037. In connection with the CLO financing transaction, all amounts outstanding under our revolving credit facility were repaid, following which, we also reduced the maximum size of the revolving credit facility to $100 million. This debt optimization reduced our borrowing costs, extended our debt maturity profile and enhanced our ability to access the debt capital markets, complementing the more traditional channels we’ve accessed and utilized in the past. We expect this optimization to result in cost savings of between $0.01 to $0.015 per share per quarter. As of June 30, 2025, the company’s asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 174.6%, which was above the minimum asset coverage ratio of 150%.

Our Q2 net effective debt-to-equity ratio after adjusting for cash on hand was approximately 1.22x compared with 1.23x from the prior quarter. Before I conclude and open up the call to questions, I’d like to again highlight our distributions. This morning, we announced that our Board declared a third quarter distribution of $0.385 per share, which is consistent with the prior quarter. The upcoming regular distribution, the 52nd consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at or above the rate of $0.355 per share per quarter will be payable on October 3, 2025, to stockholders of record as of September 19, 2025. As we said previously, we will continue to evaluate our quarterly distribution, both in the near and medium term based on the core earnings power of our portfolio in addition to other relevant factors that may warrant consideration.

In assessing distributions, we also consider our taxable income relative to amounts that we have distributed during the year when setting our overall dividend. After accounting for and including the distribution of approximately $8.9 million paid on July 3, 2025, our remaining amount of undistributed taxable income related to the 2024 annual period sometimes referred to as our prior year spillover, is approximately $9.7 million. With that, I’ll now turn the call back over to the operator for your questions. Operator?

Operator: [Operator Instructions] We’ll go first this afternoon to Christopher Nolan of Ladenburg Thalmann.

Christopher Whitbread Patrick Nolan: I guess on American Crafts, is it correct that, that was an exit or was there a restructuring?

Stuart D. Aronson: It was a sale of the remaining piece of the company, and that sale yielded very little in terms of proceeds. So we have resolved that, taken the write-down, and there is no further downside on that account.

Christopher Whitbread Patrick Nolan: Got you. And on the CLO, and Joyson was going through some of the details, helpful. But what is the term of it for the reinvestment period?

Joyson C. Thomas: Reinvestment period is through May 25, 2029.

Operator: We’ll go next now to Melissa Wedel of JPMorgan.

Melissa Wedel: I appreciate the reminder on the portion of the portfolio where companies are facing tariff pressure. I’m wondering if you can expand on that a little bit. I’m curious if there are — the extent to which any mitigating actions can be taken or have been taken. Can you elaborate on — I assume some of it’s supply chain pressure. If not, could you explain a bit more on that?

Stuart D. Aronson: Yes. I mean it varies company by company. In some cases, the companies are actively negotiating to have their suppliers absorb a portion of the tariff amount. What we’re seeing in a decent number of cases, about half the tariff amount is being absorbed. In some of the cases, the tariff amounts are still not clear based on ongoing negotiations and changes week to week. And then in some other cases, particularly where we’ve had companies that source out of China, they have been moving their sourcing. One of our companies is in the toy business. and they’ve moved a lot of their sourcing from China to Vietnam. So people are taking the information that exists in the market, trying to optimize based on whatever is going on. But as we all recognize, the tariff situation changes every week and in some cases, every day. So people are having to be nimble to keep up with what’s going on, Melissa.

Melissa Wedel: That certainly makes sense. I also appreciated the update on sort of post-quarter end activity and I guess, a couple of things jumped out there. First of all, it seemed like the mandate — I’m not sure if you sized it in terms of dollars, but the number of mandates that you referenced seems to be certainly higher than last quarter, though that might not be too surprising given the volatility last quarter. But given the higher number of mandates, should we be thinking about that as you also have in line of sight to some elevated repayment activity given the constraints on leverage within the general portfolio?

Stuart D. Aronson: We think that we’re right now in a pretty good balance between repayment and new mandates. There are companies that are either in the midst of being sold or expected to be sold in Q4. In the cases where we like those companies, we will attempt to pursue them with the new owners. But I would say, in general, Melissa, the messages that the BDC balance sheet is expected to be fully deployed this quarter based on the mandates that we have now and based on what we’re seeing in terms of repayment activity and then as I mentioned earlier, the JV has about $20 million of additional capacity, which would be, on the average deal allocation, about 3 deals that we could add to the JV, which would create more income.

Melissa Wedel: Well, and I guess, I’ll sneak in 1 more follow-up on that, in particular, given the, I’d characterize as fairly limited, extra capacity in the JV. Do you have any plans on either upsizing the existing JV or perhaps pursuing additional joint ventures with other partners?

Stuart D. Aronson: No, there are no plans to increase the JV at this time. If we decide that makes sense, we’ll certainly let you know but we think the JV is sized appropriately, and we’re doing our best to keep it as close to full as we can.

Operator: [Operator Instructions] We’ll go next now to Heli Sheth of Raymond James.

Heli Sheth: In regards to the dividend, I know you mentioned prior year spillover of $9.7 million. Any update on any idea on thought processes for working down spillover through 2025 and into 2026?

Stuart D. Aronson: Joyson, can you take that?

Joyson C. Thomas: Certainly. Yes, as we mentioned before, the undistributed spillover income related to 2024, that still remains at $9.7 million. And so as we’ve discussed in prior calls, that factors into the dividend distribution for the remainder of this year into next. So I think the way to think about it is thinking about the October distribution that will be made of approximately $8.9 million, there’s still a small amount, less than $1 million, that would be undistributed. And so factors to consider there would be a potential special dividend, otherwise, that would go undistributed for the year and roll into tax incurrence for the year. So I think from that standpoint, we’re looking at that undistributed taxable income in combination with other factors related to just shortfall of the earnings in the current year when we think about the dividend for 2026.

Operator: We go next now to Sean-Paul Adams of B. Riley Securities.

Sean-Paul Aaron Adams: On the portfolio companies that you mentioned were suffering tariff impacts, are you seeing any incremental bottom line flow-through to just the net consumer? Historically, during the COVID period, it was passed through to the end user with little to no issue after the 6- to 12-month volatility period.

Stuart D. Aronson: And the answer is, yes, to the extent that tariffs are not being fully absorbed by the suppliers. Our companies are raising prices, and they are seeing competing companies raise prices as well. So far, what we don’t know is how the consumer will react to those higher prices. And a good example of that is the toy and game company that we’re lending to. We won’t know the consumer reaction to higher prices until we get through the holiday season and see what the sales look like. But in general, anything not being absorbed by the suppliers is being attempted to be passed through to the final users or consumers.

Operator: [Operator Instructions] And gentlemen, I have no further questions coming in today. So that will bring us to the conclusion of today’s conference call. We would like to thank everyone for joining today’s WhiteHorse Finance Second Quarter 2025 Earnings Conference Call. Again, thanks so much for joining us, everyone, and we wish you all a great afternoon. Goodbye.

Stuart D. Aronson: Bye-bye.