Good afternoon, everyone. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter and Full Year 2022 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 made available for replay beginning at 4:00 pm Eastern Time. The replay dial-in number is 402-220-6071. No passcode is required. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Jacob Moeller of Rose & Company.

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

Thank you, Jacob. Good afternoon and thank you all for joining us today. As you are aware, we issued our press release this morning prior to market open. And I hope you’ve had a chance to review our results for the period ended December 31, 2022, which can also be found on our website. On today’s call, I’ll begin by addressing our fourth quarter and full year results and the current market conditions. Then Joyson Thomas, our Chief Financial Officer will discuss our performance in greater detail, after which we’ll open the floor for questions. This afternoon, we are pleased to report strong results for the fourth quarter and for the full year 2022. In 2022, core net interest income totaled $35.5 million or $1.526 per share, representing a 19% increase from 2021’s core NII of $29.7 million or $1.405 per share. Full year core NII exceeded regular shareholder distributions by $0.106 per share, or $2.5 million. These results demonstrate the continued strength of WhiteHorse’s lending platform and strong origination activity highlighted by $221 million in gross deployments for the year. In Q4, GAAP net investment income in core NII was $11.1 million or $0.476 per share, which more than covered our quarterly dividend of $0.355 per share. This marked our highest quarterly NII since the Company’s IPO. Assuming no unforeseen factors emerge, as long as base rates continue to be in excess of 4% we expect the earnings power of the BDC’s current portfolio to exceed our current dividend level. NAV per share at the end of Q4 was $14.30, representing a $0.46 decrease from the prior quarter after accounting for the $0.05 per share special dividend that was paid in Q4. This decline was largely the result of market pricing during the quarter that led to WhiteHorse’s marking…

Thanks, Stuart, and thank you everyone for joining today’s call. During the quarter, we recorded GAAP net investment income in core NII of $11.1 million or $0.0476 per share, compared with the quarterly distribution of $0.355 per share. In Q3 GAAP NII was $9.8 million or $0.42 per share. And core NII was $8.6 million or $0.372 per share. Q4 fee income increased quarter-over-quarter, up to $1.9 million from $0.4 million in Q3. And it was driven by prepayment fees generated from two of the full realizations that occurred during the quarter. In the fourth quarter, we recorded a decrease in net assets resulting from operations of $1.2 million, a decline of $5.1 million compared to Q3, which is primarily driven by our mark-to-market losses recognized in the portfolio this quarter, partially offset by the realized gains and investment income earned in excess of our distributions declared. Our risk ratings during the quarter showed that 74.8% of our portfolio positions carried either 1 or 2 rating, lower than 83.5% reported in the prior quarter. The decline was driven by for three portfolio companies that were fully realized during the quarter that have been rated on 1 in the prior quarter, in addition to investments in five portfolio companies, which were downgraded to a 3 rating in Q4. 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’s performing according to initial expectations. Regarding the JV specifically, one portfolio company fully realized and one new asset was transferred during the fourth quarter in exchange for cash of $8 million. As of December 31 2022, the JV’s portfolio help positions in 28 portfolio companies with an aggregate fair value of $284.3 million compared to…

Thank you, sir. The floor is now open for your questions. [Operator Instructions] Our first question will come from Mickey Schleien with Ladenburg Thalmann.

Stuart, Joyson, thanks for your really thorough remarks. It’s quite helpful. So I just have a couple of questions. Could you give us a sense of where the cash interest coverage ratio was of the on balance sheet portfolio based on fourth quarter interest rates?

Joyson, do you have that information or is that something we need to get for later sharing?

Yes. The cash interest coverage ratio underlying portfolio, we don’t actually have that readily available. Let us see if we can try to get this for you during the call.

Okay. Meanwhile, could you tell us what kind of trends you’re seeing in revenues and EBITDA of the on-balance sheet portfolio and where the average EBITDA level stands today?

Mickey, we just completed a full portfolio review for all the deals in our organization, both performing and troubled. And the ratio that we saw compared to closing leverage was about 40% of our deals are experiencing higher EBITDA and have lower leverage than closing. About 40% of our deals have lower EBITDA and higher leverage than closing, and about 20% of our deals are about static with closing leverage and even EBITDA levels. So very balanced performance, with the caveat being that the consumer facing accounts have seen anywhere from moderate to severe demand decreases, and leverage on those consumer facing accounts is up significantly.

My last question, if I’m not mistaken. You have some unsecured notes due this year. Just curious whether the terminology in the credit facility will allow you to repay those from the credit facility or will you have to divest some assets to pay those off?

We have the availability under our existing credit facility to borrow, to replace the unsecured notes in their entirety. Whether we will do that under our secured facility or whether we will issue new unsecured notes has not yet been determined. But again, we do have the ability under our facility to fund the full amount that is maturing, without having to sell any assets.

Our next question comes from Bryce Rowe with B. Riley.

I wanted to maybe start on the comments you just made to Mickey’s question there, Stuart. The portfolio review you just finished, the financials that you get from the portfolio companies, were they as of the end of September or end of December?

The vast majority of our companies, because they’re mid market and lower mid market, we get reporting that is quicker than what you see in the upper mid market and large cap deals. And so, we timed our portfolio review this week, because the vast majority of the companies had already reported their December numbers to us. So, not for all the companies. But I would say for over 90% of our companies, we had year-end results.

Okay. That’s helpful. And certainly reassuring to know that. Around the dividend, Stuart, you obviously in your prepared remarks talked about the potential for an increase, and some discussion around a dividend increase at the board level, what would kind of put you in a position to actually increase as opposed to maybe taking a construct of a base plus a supplemental that we’ve seen many BDCs employ here?

Yes. What we’re looking at is we’re looking at the earnings health of the overall portfolio offset by any accounts that we think have a risk of going on nonaccrual. And as I mentioned, already, one of our accounts will go on and on accrual in Q1, although it’ll be a very small position in the overall portfolio. If we determine that based on the term structure of interest rates, and the strength of the portfolio, that we can consistently generate returns above the $0.355, then the Board and management will probably be okay with a long-term increase to the base dividend. If we conclude that there’s going to be more variability quarter to quarter in earnings, then we would probably stick with the $0.355, and then just declaring supplemental distributions when the earnings are higher. But based on the modeling that we’re doing so far, it does look like the BDC -- as long as interest rates certainly stay above 4% that the BDC should be able to generate income in excess of the current dividend level.

And then maybe a follow-up to that, as we think about the portfolio yield, the weighted average portfolio yield having climbed with higher base rates. Is there a timing mismatch in terms of when assets reset in terms of a rate versus when liabilities reset?

Not much of one. Joyson, do we really have any delay there at all?

Yes. That’s correct, Stuart. Not much. The way to think about it, Bryce is the majority of our portfolio assets, either reset monthly or quarterly. And then, with respect to draws -- on the borrowings on the facility, that would in theory, reset quarterly in conjunction with the waterfall.

[Operator Instructions] Our next question comes from Erik Zwick with Hovde Group.

First, just a bit of a follow-up on the kind of the discussion on the dividend from that prior question. And if I look at the futures curve for three-month LIBOR, it looks like it potentially falls below 4% sometime in the second or third quarter of 2024. So not this year, but six quarters out, not that far from here. So just curious about is there anything you could do or strategies you have in place between now and then to potentially improve earnings, because, as you mentioned, you’re considering increasing the regular dividend. And my guess is you would not want to have to cut that at any point. So just trying to kind of connect the dots there, or maybe you’ve got a different view on market rates and think they’ll stay higher longer than the markets currently anticipating. Just curious if you could provide some color there.

Well, Erik, we’re in a very, very attractive spread environment right now. And when you take base rates and spreads, senior debt is yielding 11.5% to 13%, which is a world away from where we were a year, year and a half ago. I don’t personally believe that spreads will stay this high for an extended period. I think this is evidence of a disrupted market, with disruptive liquidity. And people being very concerned about economic softening in the marketplace. And we also look at the yield curve. But the things that we’re doing to improve earnings are number one, operating at the 125 to 135 leverage; and number two, we’ve increased our allocation to the JV, which will create more core income coming out of the JV in the future. Because as I mentioned on my prepared remarks, the IRRs on the JV investment are in the low to mid-teens. So, we just want to run sensitivity downside cases, including with SOFR going below 4%, to make sure that if we increase the dividend, that dividend should be able to be maintained through at a minimum and extended period of projected performance. And again, if we don’t believe we can do that, then we’ll stick with the $0.355, and do supplemental dividends as we did this quarter.

I appreciate the additional color there.

By the way, if our analysts have views as to which is a better path, if you understand the risks and rewards of what we can do. We’d be very happy to take your feedback from both analysts and shareholders as to what you guys think the right path is. But definitely during the current period with current rates and current base rates, we are seeing excess income, as evidenced by the $0.07 special dividend this quarter.

And then just looking at the concentration of the portfolio that mixed between sponsored and non sponsored, for a number of years that that sponsored portion was growing steadily. It did come back a little bit here last year in 2022. I’m curious if that was a reflection of intent on your part, or maybe just market dynamics and how you would expect that to trend in future quarters?

In general, our originations activity is about 75% sponsor, and 25% non-sponsor. But for the BDC balance sheet, we’re only including assets that are priced to 700 or higher, SOFR 700 or higher. So, to the extent we’re doing sponsor assets that are priced at 650 or 675, which historically would have gone on the BDC balance sheet, but in today’s market environment, they’re not, those deals if they don’t fit in the JV, don’t fit into the BDC. So, the BDC gets more of the non-sponsor deals, which have a generally higher yield profile. Sponsor deals in today’s market, we see pricing in a range of 650 to 750. And non-sponsor deals in today’s market, we see pricing at a range of 700 to 900. So, pretty much all the non-sponsor deals we’re looking at price at a level that fits onto the BDC balance sheet, assuming that that balance sheet has room.

That makes sense. I appreciate the clarity. And just one last one for me on the kind of credit quality front. I’m curious, have you seen any uptick in amendment requests from any of your portfolio companies?

Absolutely. We have companies -- again, the companies that have been affected by the consumer-led slowdown have tripped covenants. Where covenants have been tripped, we are generally looking for a combination of equity support and higher rate. That’s the beauty of having covenants is that when you trip a covenant, you’re able to get both credit protection to the downside and typically a higher rate. And as I mentioned in my prepared remarks, the private equity firms that own the companies we’ve lent to have been remarkably supportive. I would say, with the exception of PlayMonster, where the private equity firm walked away from the company because of fraud, pretty much every heavily impacted private equity based account we’ve had has demonstrated support for the company with either cash or contingent equity. It’s been pretty much universal.

Our next question comes from Robert Dodd with Raymond James.

I have a couple of housekeeping ones first, if I can. On the prepay fees or prepay and related fees, right? I think Stuart in your prepared remarks, you said it, I think it was $2.6 million from a couple of assets. The other income range is $1.9 million. So, is it fair to say that maybe $1.5 million of that was in other income and then 1 -- just over $1 million was embedded explicitly in interest income?

Joyson, I’ll pass that to you in terms of the characterization of how the numbers work through.

Yes. Robert, fee income for Q4 was $1.9 million. And as we mentioned that that was predominantly due to prepayment fees that were generated on Escalon Services and CHS Therapy.

Got it. But was there any accelerated amortization related to -- showed up at the interest income?

Yes, sounds correct. The accelerated amort worked, about 700,000.

How much -- in terms of talking about dividend policy over there. How much taxable spillover do you have currently? Because obviously, historically it’s been high and that’s going to affect your decision making as well.

As of the end of Q4, the spillover was a little over $24 million. Based on that number related to our distribution requirement for the tax year 2022, we do not envision a required special dividend. But as Stuart alluded to earlier, in regards to 2023 and forecasted potential earnings, we do expect earnings in excess of our distributions. And so, that as he had mentioned before, he’s going to factor into our determination on how we do dividends going forward, i.e. do we increase the regular dividend or do some supplemental dividends during the year.

Understood. And then, one -- your response to Mickey’s question on EBITDA, Stuart, I mean, you said 40% of the portfolio is -- has EBITDA that’s lower than -- at underwriting. If I looking at your investment ratings, you’ve got 25% that’s category 3, 4 or 5, which -- so there’s a discrepancy there between 40% and 25%. Is it fair to say that a portion of those portfolio companies have lower EBITDA than at close were expected to have lower EBITDA? I mean, can you give us any reconciliation between the 25% that are rated higher risk, so to speak, but the 40%, that lower EBITDA?

It’s a matter of magnitude, Robert. If we did a deal with 4 times leverage and it’s currently at 4.25 times leverage, that would be a part of the 40%, where the EBITDA is down and the leverage is up. But going from 4 to 4.25 times leverage would not trigger a company to become a 3. The company would need to materially underperform before that would happen. So, if the leverage had gone from 4 times to call it 5.5 times, then it would probably become a 3. But for small decreases in EBITDA and small increases in leverage, those assets are generally still rated at 2.

The last one for me, I mean, you’ve mentioned, obviously, the sponsors have been quite responsive with the exception of PlayMonster when necessary. How were you looking -- for the non-sponsor book, obviously, there is no sponsor to put in more cash or contingent equity. So, how are you evaluating those non-sponsor businesses that may be having a few issues in this situation? And are the owners willing to -- the equity owners willing to step up even though they don’t necessarily, obviously, have a fund or anything like that? I mean, so what’s -- how’s the non-sponsors segment looking in terms of cash needs and are they getting it?

That’s a really good question, Robert. And the answer is that there is not a single answer. In many cases, non-sponsor companies are owned by either very wealthy individuals or wealthy family offices. And in those cases, we are generally finding that the owners are injecting capital into the companies the same way private equity firms are. But there are other non-sponsor companies that are owned by entrepreneurs that don’t have deep pockets, and don’t have the wherewithal to support their companies through the economic turbulence that is going on right now, especially in the consumer sector. And in those companies, we are generally willing to provide incremental capital. But in return for that incremental capital, we take minority and/or majority equity stakes in the Company. So, a part of non-sponsor lending, where there are owners that either can’t or won’t support their companies is playing the long-term game of investing those companies during the downturn, getting equity in those companies during the downturn, and then managing those companies back towards economic health, when a downturn doesn’t exist, and then generating, hopefully, nice equity gains off of those equity positions we took in the downturn. That’s again, less true in sponsor deals, because the sponsors are almost uniformly willing to put up equity to protect a good company. But on the non-sponsor side, it really breaks into two camps, where just directionally about half of the companies have owners that can support the companies, and about half the companies have owners that can’t support the companies.

Thank you. At this time, we have no further questions in queue. I’ll turn the call back over to management for any additional or closing remarks.

I’d just say in closing that the market environment that we’re in right now is a little bit more liquid than it was in Q4. We’ve seen pricing moderate in Q1 by about 25 basis points. If that held on, that would imply that the mark on performing assets in Q1 could be a little higher than the mark was in Q4. Again, we mark to whatever the market prices are. And in Q4, we saw especially the lower mid market adjust, as I said on my prepared marks as a number of lower mid market lenders, finally adjusted to the market shift. So, it’s an attractive market environment right now, modest leverage, limited add-backs to synergies in the analyses that our buyers are doing. And we are looking forward to putting money to work in what is a attractive market environment so far of 2023, which again has worked out to be pretty much as attractive as Q2, Q3 and Q4 of 2022. With that, hope we’ve given you transparency. Anything that you want to hear about on the next call, either shareholders or analysts, please let us know so we can make sure that these calls are as useful to everybody as they possibly can be. And thank you for taking the time.

Thank you. This concludes today’s WhiteHorse Finance fourth quarter and full year 2022 earnings conference call. You may disconnect your line, and have a wonderful day.