Good afternoon. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance First Quarter 2022 Earnings Conference Call. Our hosts 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 made available for replay beginning at 5:00 p.m. Eastern Time. The replay dial in number is 402-220-1122. No passcode is required. [Operator Instructions]. It is now my pleasure to turn the floor over to Robert Brinberg of Rose & Co. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's First Quarter 2022 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 first quarter 2022 earnings presentation, which is posted on our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Rob. Good afternoon, everyone, and thank you all 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 from the period ended March 31, 2022, which can also be found on our website. On today's call, I will begin by addressing our first quarter results and current market conditions, and then Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail, after which we will open the floor for questions. I'm pleased to report a strong first quarter performance for 2022. Q1 GAAP net investment income was $8.5 million or $0.368 per share. Core NII, after adjusting for a $0.6 million capital gains incentive fee reversal, was approximately $7.9 million or $0.344 per share. NAV per share at the end of Q1 was $14.99, representing a decrease of $0.11 from Q4 2021. This decline was primarily due to realized losses associated with the sale of our investment in Grupo HIMA, which we noted earlier in our portfolio update press release on May 3, 2022, partially offset by market adjustments from the restructuring of PlayMonster and net mark-to-market gains across the portfolio. Turning to our portfolio activity for the quarter. Gross capital deployments in Q1 totaled $83.6 million, which eclipsed our previous record for the highest level of gross deployments in any first quarter in our history. Of this amount, $69.5 million was funded into 6 new originations and the remaining $14.1 million was funded into add-ons of existing portfolio investments. Gross deployments were partially offset by repayments and sales of $45.1 million, primarily driven by 5 full realizations and partial sales in several credits as we look to create capacity and optimize the BDC's portfolio for…

Thanks, Stuart, and thank you all for joining today's call. During the quarter, we recorded GAAP net investment income of $8.5 million or $0.368 per share. This compares to $7.5 million or $0.331 per share in the fourth quarter of 2021. Core NII was approximately $7.9 million or $0.344 per share after adjusting for a $0.6 million capital gain incentive fee reversal. This compares to Q4 2021 core NII of $7.3 million or $0.322 per share and a quarterly distribution of $0.355 per share. Q1 fee income increased slightly quarter-over-quarter to $0.5 million from $0.3 million in Q4. The increase was due to higher prepayment amendment activities during the current quarter. For the quarter, we reported a net increase in net assets resulting from operations of $5.7 million, which is a $2.6 million increase from Q4 '21. Our risk ratings during the quarter showed that 90.1% of our portfolio positions carried either a 1 or 2 rating, consistent with the prior quarter. As a reminder, a 1 rating indicates that the company has seen its risk of loss reduced relative to initial expectations and a 2 rating indicates the company is performing according to initial expectations. Regarding the JV specifically, we've continued to grow that investment. As Stuart mentioned earlier, we transferred 6 new deals, 5 add-on transactions and the remaining portion of 3 previously transferred deals, aggregating to approximately $82.7 million in exchange for a net investment in the JV of $25 million as well as cash proceeds of approximately $57.7 million. As of March 31, 2022, the JV's portfolio helped positions in 33 portfolio companies, with an aggregate fair value of $312.8 million compared to 28 portfolio companies at a fair value of $259.5 million in Q4 '21. The investment in the JV continues to be accretive to…

[Operator Instructions]. We will take our first question from Mickey Schleien with Ladenburg.

I want to start by thanking you for the depth of your prepared remarks, Stuart, because it allows us to focus on the bigger picture without having to ask all these housekeeping questions. So with that in mind, Stuart, given your long track record in the credit markets, I'd really be interested in hearing your outlook for the rest of this year and going into next year in terms of the default environment considering all the headwinds that we're facing in the credit markets.

Yes, Mickey, good day, and a great question. It's a complicated question. I would tell you that there are numerous headwinds that everyone is aware of, rising labor costs, rising raw material costs, rising transportation costs, anything with oil as an endpoint is impacted there. While we have no direct exposure into Russia or Ukraine, it turns out, one of our companies use as a type of cooking oil that primarily came out of Eastern Europe and prices of that cooking oil have been impacted by the war. So they're now switching to different cooking oils and trying to deal with that. So there are many headwinds, but what we're seeing across our portfolio, in almost every single company, is that those rising costs and headwinds are being absorbed by price increases that are being pushed through. So I do believe we are in an inflationary spiral. I don't see it slowing down yet based on what's going on in our portfolio. We have one portfolio company in the food business that is currently pushing through its fourth price increase, and the price increases have all been reasonably significant. At WhiteHorse, based on the insights that we get from our parent company, HIG, we do think that there is real risk of recessionary environment, in both Europe and then ultimately, the U.S., although Europe seems to be ahead of the U.S. in terms of that. Ahead meaning more pressure in Europe. And we are underwriting all of our transactions to the possibility or even likelihood of a recessionary environment within 12 months. That means that since others are not doing that and others are not doing that, we are, at the moment, pretty uncompetitive on companies that are cyclical or even moderately cyclical. We've had a lot of those deals…

I appreciate that explanation, Stuart. It's really helpful. And to follow up on your answer. You have 3 companies whose debt investments would seem to be on credit watch, PG Dental, Crown Brands and SureFit. Is there anything thematic amongst those 3 related to your comments about inflation and cost inputs? Or are these more idiosyncratic issues to those 3 companies?

PG Dental dealt with issues during COVID and is still dealing with labor issues that the owners of the company are trying to resolve. The owners of that company have continued to support the company with additional equity. And so we feel good about the ownership and their support. Crown serves commercial kitchens. Restaurants are, of course, doing much better, but they also serve the commercial kitchens of hotels and cruise lines. And hotels and cruise lines have not returned to normal yet. So that company continues to have pressure on the cash flows, although they're doing much better than they were during the depths of COVID. The owner there has also supported the company with increased equity commitment as recently as the first quarter. And SureFit is a company that sells to brick-and-mortar retailers and has had some supply chain issues. They have passed through price increases. As I indicated, virtually all the companies have, but they are dealing with supply chain limitations on timing of product arrival, and that has had some impact. So one way or another, it all relates back to COVID supply chain labor, but they are very different situations among the 3.

I understand. My last question relates to your comment about second -- the lack of second liens. When we think about the broad HIG platforms, are there opportunities that the BDC, perhaps to add another vertical, it could be things like equipment finance or ABL lending or even investing in CLO equity, which tends to be generating very high cash flows right now. Is there any likelihood of those things occurring? Or are you just going to stick to your knitting and wait for the market to come back to you?

Well, Mickey, we're largely out of investing capacity in the BDC. So any new initiative that was targeted, putting a lot of assets on the books would be very difficult. Equipment lending and ABL, we don't think that the returns are particularly attractive in those sectors right now from what we see. There's plenty of competition and pricing has been bid down. We see the best ROE that we're getting, being the JV. We are getting low to mid-teens returns out of the JV. And as the BDC is full, we are no longer putting any assets with 500 pricing, 550, 575 is not going into the JV at all. And the JV is now positioned to take on higher-returning assets, with spreads from LIBOR 600 to LIBOR 650. So if anything, I would say, if we have available capital, we may allocate a little more capital into the JV and increase the JV cash flows, which, as you've seen, have grown strongly and have been a stable source of increased earnings for the BDC investor.

Yes, they certainly have, and congrats on that performance. Stuart, those are all my questions this morning -- this afternoon.

Thank you, Mickey.

We will take our next question from Bryce Rowe with the Hovde Group.

Maybe just a follow-up to the discussion around the JV. And obviously, it's growing as a percentage of your portfolio and certainly appreciate the ROE, is there a level at which you start to get uncomfortable with the size of the JV relative to the overall portfolio?

The JV is well diversified. The JV is all senior secured assets. So the JV as an investment vehicle is very consistent with the investing philosophy of the BDC. The only thing that is ultimately a pressure point is the 30% bucket for assets of that type that aren't compliant with the overall guidelines of BDC investing. And as a result, there's a little more money, because we want to leave a big cushion, there's a little more money that we'd be willing to consider putting towards the JV, probably something in the range of $15 million to $25 million. But after that, we believe the rest of that as cushion for the 30% bucket. But again, the JV as an entity is very consistent with our investing philosophy and very accretive for the shareholders of our BDC.

Okay. Yes, makes sense. Let's see. Let's maybe shift to the rate environment and the impact on the BDC. When you look at your portfolio, can you remind us where the weighted average floor is in the portfolio? And at what point do you start to see some positive impact from higher rates?

Joyson, that's all yours.

Bryce, as it relates to the weighted average floor rate right now in the portfolio, it has held consistent over the last couple of quarters. So it's just above 1% at 1.03%, 1.04%. And the way to think about this, I think, is for every 100 basis points increase, we look -- we will look to have a net interest income contribution of about $4.9 million. So that's obviously inclusive of the additional accretion for -- or the additional interest income earned on our portfolio, net of the additional interest expense on our credit facility.

Okay. Okay. And Joyson, is the impact -- is it lagged? So this move above your average floor here in the second quarter, that will get reflected starting in the back half of this year?

Yes, I think there's a way to look at it. The -- a good portion of our portfolio does reset on a quarterly basis.

Yes. Okay. Okay. I think that's it for me. I think -- I appreciate all the commentary, Stuart and Joyson.

Again, we try to get feedback from all of you to understand what you want to hear from us and please continue to let us know so we can include as much transparency as possible in the public comments.

[Operator Instructions]. We'll take our next question from Robert Dodd with Raymond James.

On repayment activity. Obviously, last quarter, you talked about elevated prepayment income in the first half of the year. Obviously, that didn't happen in Q1 with the market volatility, et cetera. Some of that seems to have happened in Q2. You've already had $45 million in repayments. Do you expect kind of the same amount of prepayment income you were previously thinking, which you didn't give us a number, but conceptually concentrated in Q2? Or do you think the environment is going to result in some people -- some borrowers waiting even longer or just sitting on that current structures and not prepaying at all given where the market is right now?

I think it's the latter. We have seen several transactions, some private market and some involving SPACs that have unwound due to market conditions. And I think the pace of prepayments that we might have seen in 2022 will be muted compared to what they might have been based on a series of things that are going on in the market right now that are leading to less stability. I think we're going to still have a normal repayment stream. And in a normal year, about 3% of the assets in our pool repay. And so I think that is a guess, but a decent guess for what we'll see over the course of 2022.

Got it. On kind of following up to Bryce's question before I get to more conceptual. On the NII sensitivity, just from your [indiscernible] sale, which is that's interest income less interest expense delta. So does that sensitivity you gave, that 4.9, does that not include the potential impact of increased income from the JV, which obviously structurally is the same and would see, to the BDC, and would see a benefit if rates were to lie at the level the forward curve is currently pointing to?

Robert, that's correct. So this is looking at the BDC portfolio and not necessarily underlying to the JV. And so there would be further kind of excess when looking at the JV portfolio relative to its credit facility. And then obviously, in terms of just the time you need to get that income repatriated up to the BDC.

Got it. Got it. I appreciate that. Last one, if I can. Stuart, I mean, on the -- your outlook, obviously includes the possibility of a recession, that you were very clear. Thank you for all the detail on that. So if -- when we look at the forward curve as it is, I mean, it's come back a little bit, but it certainly doesn't appear to be forecasting any material reduction to say, '23 or anything like that. What do you think the possibility is that we get to '23 sometime, there is a recession, the Fed has kind of round-tripped and we're back to Fed funds at 50 than where we look like we're going by year-end here? Some rough question, but any color would be appreciated.

Robert, we recognize that there are forward curves, but the forward curves' accuracy is sporadic. And so we're underwriting to a conservative downside. We believe that the investors in the BDC don't want volatility, which is why we're in senior secured first lien loans for 96% of the portfolio. And we are trying to make sure we manage -- we've always underwritten to a potential repeat of the Great Recession within a couple of years of doing a deal. It's just we think we may be closer to that now than we've been in prior periods. And so we're modeling those in as soon as next year. If that happens, will the Fed change its policy? I think it depends on what we're seeing with inflation. There have been articles out that I've read about the risk of stagflation, and that is certainly a downside risk we're aware of, but of course, are hoping does not happen. But all I can say is we don't take the forward curves as anything more than one possibility for what may happen, and we tend to take a more conservative view then the forward curves might otherwise imply.

We have no further questions on the line at this time. I will turn the program back over to our presenters for any additional or closing remarks.

Great. Well, I thank everyone for taking the time to listen in and ask questions. And as always, as we prepare remarks for future quarters, if there are things that you'd like to hear as a part of the prepared remarks, please let us know before the call. That's both to the analysts and to the public investors. We're working hard to build a stable, safe portfolio that earns the dividend on a quarterly basis. And we will continue to do our best to deliver to our shareholders. Thank you very much.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.