WhiteHorse Finance Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 9 speakers on the call.

Operator

Afternoon. My name is Shelby, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance First Quarter 2023 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 4 o'clock p.

Operator

M. Eastern Time. The replay dial in number is 402-220 to 1548. No passcode is required. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation.

Operator

It is now my pleasure to turn the floor over to Robert Brinberg of Rose and Company. Please go ahead.

Speaker 1

Thank you, Shelby, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Q1 2023 earnings results. Before we begin, I'd like to remind everyone that certain statements which are not based on historical facts made during this to the call, including any statements relating to financial guidance, may be deemed forward looking statements within the meaning of the Private to Assurity's Litigation Reform Act of 1995. Because these forward looking statements involve known and unknown risks to the Q and A. These are important factors that can 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.

Speaker 1

Today's speakers may refer to material from WhiteHorse Finance's to the Q1 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.

Speaker 2

Thank you, Rob. Good afternoon, 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 for the period ended March 31, 2023, which can be also be found on our website. On today's call, I'll begin by addressing our Q1 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.

Speaker 2

I'm pleased to report strong performance for the Q1 of 2023. In Q1, GAAP net investment income And core NII was $10,700,000 or $0.461 per share, which more than covered our previously declared dividend of 0 point 355 to share. Regarding dividends and as previewed on our last earnings call, the management and the Board of the BDC Have closely examined whether an upward adjustment should be made to the regular dividend given the improved earnings power of the BDC portfolio resulting from an increase in spreads and base rates. In this regard, we are announcing several changes to our dividend structure to ensure that our shareholders benefit from our earnings momentum. I'm pleased to announce that our Board has elected to increase our regular quarterly dividend to $0.37 per share, up from $0.355 per share that we have paid consistently since our IPO.

Speaker 2

We believe that this increase in our regular dividend is both appropriate and sustainable given the increased earnings power of our portfolio. In addition to ensure our shareholders consistently benefit from the earnings generated in excess of this regular dividend, We are introducing a new formula based supplemental dividend. The supplemental dividend will be calculated as 50% of our NII in excess of our regular dividend rounded to the nearest cent and subject to certain measurement tests. Joyston will discuss the supplemental dividend framework in more detail later in the call and how that framework applies to our Q1 2023 financial results. NAV per share at the end of Q1 was $14.20 representing a $0.10 decrease from prior quarter, inclusive of the $0.07 per share special dividend that was declared in Q1.

Speaker 2

In addition to the impact of the special dividend, to mark to market losses in our portfolio contributed to the decline in NAV per share. These mark to market losses, which totaled 3,500,000 We're driven by company specific performance in some of our consumer facing portfolio companies as well as some specific challenges to certain portfolio companies are experiencing independent of economic conditions. Turning to our portfolio activity for the quarter. Gross capital deployments in Q1 totaled $34,100,000 Of this amount, dollars 18,800,000 was funded into 3 new originations on the remaining $15,300,000 funding add ons to existing portfolio investments. In addition to these add ons, we had $700,000 in net fundings made under our existing revolver commitments.

Speaker 2

All three of our new originations in Q1 were sponsor deals And had an average leverage of approximately 3.6 times. I note that all these deals were 1st lien loans with spreads of 6.75 or higher and had an average all in rate of 12%. At the end of Q1, 96.8% of our debt portfolio was 1st lien and 100% was senior secured. In Q1, total repayments and sales were $19,300,000 primarily driven by 1 complete realization and 2 partial pay downs. Additionally, during the quarter, the company transferred 3 new deals and 4 add ons to the SDRS JV, totaling $25,900,000 Although originations continue to outpace repayments, the result of the JV transfer activity Led the company's net effective leverage to decrease slightly down to 1.23 times from 1.26 times at the end of Q4 and consistent with management's long term target range.

Speaker 2

Subsequent to quarter end, there has been one full realization to date. We are pleased to announce that the turnaround process of our formally troubled asset, RCO Holding, has reached a profitable conclusion. We alongside one other lender took control of the operating company and have successfully managed that company to a sale transaction. In April of this year, we exited our investment with an approximate 1.2 times return on the original invested capital. This outcome demonstrates WhiteHorse and HIG Capital's ability to leverage our collective resources and expertise to turnaround troubled investments with the objective of minimizing losses in capital preservation.

Speaker 2

We anticipate repayment activity to remain relatively low through the first half of twenty twenty three. Given the change in marketplace pricing, which I'll discuss shortly, We believe that repayments of historical investments when they occur will likely allow WhiteHorse to redeploy that capital into higher yielding investments. As I shared on prior calls, so long as our portfolio remains heavily concentrated in 1st lien loans, which have a lower risk profile than 2nd lien loans, We expect to continue to run the BDC at up to 1.35 times leverage. With that in mind, I'll now step back to bring our entire investment portfolio into focus. After the effects of the STRS JV asset transfers, as well as $3,500,000 in net mark to market changes, The fair value of our investment portfolio was $749,200,000 at the end of Q1.

Speaker 2

This is down marginally from $760,200,000 at the end of Q4. The weighted average effective yield on our income producing debt investments Was 13.2% as of the end of Q1, an increase from the Q4 level of 12.6%. The variance was primarily driven by an increase in the portfolio's base rate. Addressing the STRS Ohio JV, We continue to successfully use the JV. The JV generated investment income to the BDC of approximately $4,200,000 in Q1 As compared to $4,000,000 in Q4, this increase was primarily driven by moderately higher base rates.

Speaker 2

As of March 31, the fair value of the JV's portfolio was $308,900,000 and at the end of the Q1, The JV's portfolio had an average unlevered yield of 11.8%. Comparatively, the average yield was 11.3% in Q4 and 7.86% in Q1 of 2022. The increase in unlevered yield is primarily due to the rising base rates. With the rise in base rates, the JV is currently producing an average annual return on equity in the mid teens to the BDC. We believe WhiteHorse's equity investment in the JV provides attractive return for shareholders.

Speaker 2

Given the JV's return on equity, we look forward to utilizing to the recent new capital commitment as we seek to increase our exposure to a highly accretive earnings stream. Transitioning to the BDC's portfolio more broadly, as mentioned earlier, there were some markdowns in the portfolio in Q1. I will elaborate on specific market dynamics shortly, but would note that as of the last quarter, we see credit pressure as most acute in consumer facing companies. Nonetheless, the vast majority of our deals have strong covenant protection, We are finding that private equity owners are behaving very well and supporting their credits with new cash or contingent equity as needed. Other than the consumer facing borrowers and a couple of other credits, the vast majority of our portfolio is performing well.

Speaker 2

Notably, our investment in American Crafts and Sklar Holdings underwent restructuring during the quarter as both Companies have consumer exposure and have been experiencing demand softness. These deals were non sponsor owned and the owners did not have the liquidity to effectively manage the businesses through the downturn. As such, WhiteHorse selected to provide both companies with the necessary liquidity in return for control equity positions in each company. Alongside restructuring professionals at HIG Capital and other private equity lender partners, we are working to strengthen the companies and manage through a weaker demand environment in order to position each company for a successful exit in the next 2 to 4 years. Additionally, as I previewed last quarter, our original remaining to play Monster was moved to non accrual status at the beginning of Q1.

Speaker 2

This is our only asset on non accrual and the deal represents less than 1% of the BDC's to portfolio at fair value. WhiteHorse took control of the company during Q1 of 2022 after financial irregularities were uncovered In response to toy demand being lower than usual this past holiday season, the BDC and the other senior lender who provided additional defensive funding to PlayMonster in order to help the company move past the current consumer demand softness and provide a bridge to the holiday season in 2023. We anticipate the PlayMonster turnaround process will take 2 to 4 years, And there can be no assurances that we will ultimately recover 100% of our invested capital. Turning to broader lending market. As mentioned last quarter, the back half of twenty twenty two saw a material correction in the direct lending markets as the combination of general economic weakness, to significant inflation and rising interest rates, applied credit pressure on borrowers.

Speaker 2

While economic conditions in the Q1 of 2023 continue to test debt coverage, We remain happy with the performance and the quality of our portfolio companies. In general, we've observed an increase in borrower revenues, which can be attributed to inflation. In about half our portfolio, companies have been able to maintain margins by successfully passing through increased to the next question. In the other half, there's been an uptick in leverage, which thus far has only had a modest impact on our typical borrowers' debt service coverage. We remain vigilant in monitoring our portfolio companies and we have not seen the demand weakness in other sectors including general industrial, B2B, to Healthcare, TMT and Financial Services.

Speaker 2

Additionally, our portfolio remains mostly represented by non cyclical or light cyclical borrowers as we hold no direct exposure to oil and gas, auto or restaurants and very little exposure to the construction sector. With the markets remaining disrupted by credit challenges, we have heard that several lenders are beginning to experience troubles in their portfolio, Driven by highly leveraged loans that were closed in the quarters prior to the rising interest rate environment. Meanwhile, WhiteHorse has consistently and deliberately chosen to deploy capital into deals with more conservative leverage terms and with premium pricing and as such has built to portfolio that we believe is better equipped to withstand a potential economic downturn with high inflation. While there are still few lenders that appear to be slow at adjusting to the new market realities. The average lender is now pursuing credits with lower leverage profiles and there continues to be less capital available in the marketplace before the correction.

Speaker 2

The banking community that services a syndicated market of loans has thus remained highly conservative. And from a lending perspective and our opinion, the overall terms in the private debt market are as good now as they have been since the Great Recession. In the mid to lower end of the market, which is our focus, loans are now being issued on more conservative credit terms with tighter documentation and covenants. And in addition to the increase and in addition to that increased pricing. However, this pricing change is more pronounced in the mid to upper mid markets than in the lower mid market.

Speaker 2

As we continue to focus on optimizing risk returns and navigate towards the market segments that offer the best rewards for investors during any period of time, The BDC has begun to divert more resources to the mid and upper mid market deals in order to take advantage of the most attractive risk adjusted returns. Despite the exceptionally attractive market terms, we are being cautious in the face of a weakening economy. Given our expectations for a weak economy in the balance of 2023 2024, we will ensure that the companies we invest in can weather the storm. We are also increasingly focused on cash flow coverage on the risk that rates may continue to rise, although the forward curve indicates that rates will likely decline. The investments in our existing portfolio were underwritten at modest leverage levels and generally we are well positioned to withstand even another 100 basis points of rate increases.

Speaker 2

WhiteHorse is equipped to take advantage of these lender friendly market conditions as our pipeline remains at seasonally strong levels despite the market disruptions and our 3 tier sourcing architecture continues to provide the BDC differentiated sourcing capabilities. The overall pipeline is over 180 deals and we continue to derive significant advantages from the shared resources and affiliation with H. I. G, who is a leader in the mid market. The strength of the pipeline enables us to be conservative in our deal selection and the current primary limiting factor for originations to the BDC's investing capacity.

Speaker 2

Our strategy and competitive advantages continue to result in momentum in our originators business in originations business, thus far in the Q2, the company is closed on 2 new deals, 1 of which will be transferred to the JV as well as one add on transaction that will also be transferred to the JV. We currently have visibility for several additional new deals, although there can be no assurance that any of these will close nor that the BDC will have capacity for these deals. We anticipate utilizing the capacity provided by repayments when they occur to continue to rotate into higher yielding assets. Additionally, we expect to see growth in the JV portfolio as we draw down on our newly increased commitment to the joint venture. Both of the aforementioned factors should ultimately lead to higher income and greater coverage for our dividend.

Speaker 2

At the conclusion of the Q1, we remain cautiously optimistic despite expectations of economic softening, optimistic. Despite expectations of economic softening, we believe WhiteHorse is well positioned to continue executing on our 3 tiered sourcing approach with rigorous underwriting standards in the new year and beyond. With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition. To Jason, go ahead.

Speaker 3

Thanks, Stuart, and thank you all for joining today's call. During the quarter, We recorded GAAP net investment income and core NII of $10,700,000 or $0.461 per share. This compares with Q4 2022 GAAP NII and core NII of $11,100,000 or $0.476 per share, as well as our previously declared quarterly distribution of $0.355 per share. Q1 fee income decreased quarter over quarter to $1,000,000 in Q1 from $1,900,000 in Q4, with Q1 amounts being highlighted by amendment fees of $600,000 generated from investments in Lip Brands, Lenny and Larry's and Brooklyn Bedding. For the quarter, we reported a net increase in net assets from operations of $7,500,000 which is an $8,700,000 increase from Q4 2022.

Speaker 3

Our risk ratings during the quarter show that 73.2% of our portfolio positions to either a 1 or 2 rating, slightly lower than the 74.8% reported in 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 continue to grow our investment. As Stuart mentioned earlier, we transferred 3 new deals and 4 add on transactions totaling $25,900,000 in exchange for cash proceeds of 25,900,000 As of March 31, 2023, the JV's portfolio held positions at 30 portfolio companies with an aggregate fair value of 308,900,000 compared to 28 portfolio companies at a fair value of $284,300,000 as of December 31, 2022. Subsequent to the end of the Q1, the company transferred 2 investments to the JV, including 1 new portfolio company.

Speaker 3

To the JV continues to be accretive to the BDC's earnings, generating a mid teens return on equity. As we have noted in prior calls, The yield on our investment in the JV may fluctuate period over period as a result of a number of factors, including the timing and amount of additional capital investments, to 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 $22,200,000 at the end of Q1, including $10,500,000 of restricted cash and approximately $97,000,000 of undrawn capacity available under our revolving credit facility. We continue to monitor the ongoing situation impacting certain regional banks and do not expect any of our portfolio company's business operations to be significantly impacted as a result of these events.

Speaker 3

That said, we maintain a vigilant posture and are prepared to support them. WhiteHorse Finance has sufficient liquidity to meet the unfunded needs of our portfolio companies and broad resources to ensure continuous support of our current portfolio companies against the highly volatile market backdrop. As of March 31, 2023, the company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 177.1%, which is above the minimum asset coverage ratio of 150%. Our Q1 net effective debt to equity ratio after adjusting for cash on hand was 1.23 times as compared to 1.26 times in the prior quarter. Before I conclude and open up the call to questions, I'd like to again highlight our distributions.

Speaker 3

On March 2, 2023, we declared a distribution for the quarter ended March 31, 2023, dollars 0.355 per share to stockholders of record as of March 24. The dividend was paid on April 4, 2023, marking the company's 42nd consecutive quarterly distribution. This speaks to both the consistent strength of the platform as well as our resilient deal sourcing capabilities and be able to create a well balanced portfolio generating consistent current income. In addition to this quarterly distribution, we declared a special distribution of $0.07 per share for stockholders of record as of March 24, 2023. The distribution was also paid on April 4th and inclusive of this special distribution, total distributions paid thus far in 2023 amount to $0.425 per share.

Speaker 3

Finally, this morning, we announced that our Board declared an increase in our regular distribution. Specifically, our 2nd quarter distribution will be $0.37 per share to be payable on July 5 to stockholders of record as of June 21, 2023. This will mark the company's 43rd consecutive quarterly distribution paid since our IPO in December 2012 with all distributions at or above to $0.355 per share per quarter. Additionally, as Stuart mentioned before, each quarter, the Board will utilize a framework to determine if a supplemental distribution should be made. This formulaic quarterly supplemental distribution, if declared, will be in addition to the regular quarterly distribution that was just raised at $0.37 per share.

Speaker 3

The framework the Board will use to determine the supplemental distribution, if any, will be calculated as the lesser of 1, 50% of the quarter's earnings That is in excess of the quarterly base distribution and 2, an amount that results in no more than a $0.15 per share decline in NAV over the current quarter preceding quarter. Earnings for the purpose of measuring the excess over the quarter's base distribution is net investment income. The NAV decline measurement is inclusive of the supplemental distribution calculated and to be clear is measured over the 2 most recently completed quarters. Accordingly,

Speaker 4

for Q1 2023,

Speaker 3

we had generated $0.461 per share of NII, which was in excess of our previously declared Q1 regular distribution of $0.355 per share. The framework would then have us take 50% of this excess or $0.053 per share en route to the nearest cent, which would equate to a proposed $0.05 per share supplemental distribution. However, Given our negative NAV per share movements during Q4 2022 and Q1 2023 as a result of unrealized mark to market declines in the portfolio, to the $0.15 per share NAV decline limitation was a factor for the quarter's calculation. As such, our Board did not declare a supplemental distribution for this quarter. We believe this formulaic supplemental distribution framework allows us to maximize distribution to our shareholders, while preserving the stability of our NAV, a factor that we do believe to be an important driver of shareholder economics over time.

Speaker 3

With that, I'll now turn the call back over to the operator for your questions. Operator?

Operator

Thank

Speaker 5

Yes. Good afternoon. Hello, Stuart and Joyce. And can you hear me?

Speaker 2

Yes, Mickey. Good afternoon.

Speaker 5

Hi. Stuart, I just wanted to follow-up on your comments about the level of competition, make sure I understand what you were saying, Because we're hearing that larger commercial banks are constraining their lending and there are obviously challenges for some lenders to access The syndicated loan market. So how do those trends play into your strategy of going up market within the BDC And also the opportunity in the Senior Loan Fund.

Speaker 2

Exactly as you said, because the syndicated markets are still in disarray for all but the strongest of borrowers. There's more opportunity in the markets served by direct lenders and BDCs and those deals are increasingly attractive as you get to companies with EBITDA that is in the mid market range of $30,000,000 to $100,000,000 So, whereas we've seen On average, lower spreads on smaller deals, which is the opposite of a normal upmarket environment. Mickey, in a normal market, Our lower mid market off the run sponsor deals have spreads that are typically 50 to 75 basis points higher than mid market and upper mid market deals. And at the moment, the spreads are either aligned or the lower mid market deals are 25 basis points lower. So from a risk return perspective, We believe that the mid market and upper mid market at this moment is generally not on every deal, but generally more attractive.

Speaker 2

And we've been booking deals that are generally larger EBITDA companies with $30,000,000 of EBITDA or more.

Speaker 5

Stuart, if I can follow-up, I mean that you're absolutely right. I mean, I can't recall a situation where spreads in Upper middle market or middle market are better than lower middle market. Is that being caused by some players that are acting rationally or new entrants or is it some specific deals that are getting done at numbers that are Attractive to you, but that's a really unusual situation. Is there anything you can tell us about what precipitated that?

Speaker 2

There are a couple of lenders in the marketplace that continue in the lower mid market marketplace who continue to underprice deals versus the mid market. When we see that happen, we just let those deals go And we reallocate our resources into the more attractive risk return transactions. There was more of that going on in 2022. There were more lenders who had not adjusted to the market price, But we're not concerned by it. We just think the market dynamics are abnormal right now And we do expect over time that the lower mid market deals will once again command a premium to the mid market deals.

Speaker 2

It's just with the shortage of liquidity in the mid market, those mid market deals are being priced up to find adequate liquidity.

Speaker 5

I understand. That's interesting and also very helpful. Those are all my questions this afternoon. Thanks for your time.

Speaker 2

Thanks, Mickey.

Operator

And we'll take our next question from Robert Dodd with Raymond James.

Speaker 6

Hi, guys, and congratulations on the quarter and the variable supplemental Formulaic dividend market does like this. On essentially following up to Mickey's, on this mid upper low versus lower, I mean, obviously, the 3 deals you did in the quarter were sponsored transactions. I mean, and typically, as we move further upmarket, I think that's less and less non sponsored. So is this going to result in a mix shift away From or further mix shift away from non sponsored transactions in the portfolio and is that Part of the deliberate calculus or is that just a side effect of where you're seeing The risk return in the upper market right now.

Speaker 2

Robert, I should have been clear and I wasn't clear. I apologize for that. The This location in the lower mid market is almost entirely on sponsor deals. So we see that lower price on lower mid market sponsor deals. We have a deal mandated right now that we hope to close in mid June.

Speaker 2

That is a non sponsor transaction with pricing of $7.50 over at leverage of under 3 times EBITDA. So the non sponsor market continues to be robust, Well priced conservative leverage, conservative terms, and we're working on a number of non sponsored transactions. So I would not expect, In general, a change for the balance of the year between sponsor and non sponsor. It was just the luck of the draw that in this past quarter, all three deals that we closed were sponsor deals.

Speaker 7

Got

Speaker 6

it. Got it. Thank you. So we would see a little bit of a bifurcation there like the most continued sponsor deals, but those Probably in the lower market and then the more sponsored deals in the upper end of the market. Is that fair?

Speaker 2

I think what you'll see is the non sponsor deals will be both lower mid market and mid market. The deal that I was making reference 2 that's mandated that should close in June actually has more than $30,000,000 of EBITDA. So it's a mid market sized deal. So our non sponsor pipeline is reasonably strong right now with both lower mid market and mid market opportunities. And all of those opportunities are either priced very attractively or we have one deal where the leverage is Extremely low like one times leverage, and the pricing, would be about $625,000,000 So and that would go into the JV.

Speaker 6

Got it. Got it. I appreciate that. And then last one, I mean, obviously, your portfolio leverage, to your point, right, you can handle Higher rates given the relatively lower portfolio leverage and your spreads aren't super high. They're attractive, but they're not super high.

Speaker 6

So that tends to imply pretty decent interest coverage. Is there a at what point would you Actually be worried for lack of a better term. I mean, how high and again, the forward curve is indicating down, but how high Would the Fed have to go for you to feel concerned from the perspective of coverage and you may be needing to provide more support or sponsors needing to provide meaningful support just from a kind of an interest coverage from a rate perspective.

Speaker 2

Robert, our interest coverage ratio on average across The portfolio is greater than 2 times. Individual credits vary much more significantly. We ran an analysis in the face of a yield curve that is predicting lower rates And we ran the assumption that rates went up by 100 basis points and there was no material additional stress in the portfolio, Even if rates went up another 100 basis points. So that's the best sensitivity I can give you right now. Again, we expect interest rates to be peaking out, but if they went up 100 basis points more, We would not on most accounts see an interest coverage problem or a debt service problem.

Speaker 4

Got it. Thank you. No problem.

Operator

And we'll take our next question from Eric Swick with Home Group.

Speaker 7

Thank you. Good afternoon. I wanted to start just on the FTRF joint venture and I know you referenced you made a greater commitment to it and continues to grow and that you added some new investments here in the Q1 and it sounds like a couple more slated for 2Q. So just curious, longer term, how you think about its Concentration in your total portfolio and if you have a target range or potentially even a cap on how large it could become?

Speaker 2

Well, I wouldn't say it's capped, but I would tell you that the size that we have it at currently with the recent increase At the moment is probably as large as we plan to go. We don't want to get too heavy into The 30% bucket of concentration and We've grown the JV nicely. It's generating very positive returns for our investors. And with the deployment of the remaining 25, 15 from us and 10 from our Ohio STRS partner. The JV should be at its target levels.

Speaker 7

That's helpful. Thanks. And then just looking at Slide 12 And the improvement in the net investment spread certainly took a nice leg up in the middle to second part of 22 and seems to have flattened out here a little bit in Q1. If the Fed transitions from its hiking cycle to a kind of holding it at higher for longer strategy, which I guess as you referenced or maybe that Robert referenced before, the futures curve is actually pointing towards down, but if the Fed were to hold higher for longer, What are your expectations for your ability to hold or potentially even improve the net investment spread at this point?

Speaker 2

If rates stay where they are, as we rotate into New deals that have higher spreads from deals that were sourced in 2019 or 2021 that had lower spreads. We will get a gentle upward movement in our earnings capability. But again, I think everyone knows A lot of the increase in the income has come from the higher base rates as I shared in the prepared remarks. And our expectation is That most of that benefit is showing up in the numbers that you saw this quarter, might get a little bit better just because people choose sulfur periods that often run 3 months. So we convert quarter to quarter into new sulfur periods.

Speaker 2

So there should be some upward momentum next quarter, but I think you've seen most of it already roll into the numbers. Joy said if you disagree with that, please share your thinking.

Speaker 3

No, I think that's exactly what we're seeing.

Speaker 7

That makes sense. And last one for me, I think you have some 2023 notes Coming due and just curious about your thoughts on the source of funds to redeem those and potentially, replace that capital or if you would just use the revolver. Curious, any thoughts there?

Speaker 2

We've spoken to firms in the marketplace. Treasury rates themselves are not that unattractive right now, at least in our opinion, as you go out the curve, but spreads are very high right now. And frankly, we can do a lot better by drawing down on our JPMorgan facility than we can by issuing unsecured. So we will keep an eye on the unsecured market. And as that market moderates back to more normalized spreads, we will consider issuing a new round of unsecureds, but at the moment, given market conditions, we're more inclined to fund that $30,000,000 under our JPMorgan line.

Speaker 7

Great. Thanks for taking my questions today.

Speaker 2

No problem. Thank you, Eric.

Operator

We'll take our next question from Bryce Roe with B. Riley.

Speaker 4

Thanks. Good afternoon. Stuart, I wanted to ask about the kind of the internal performance ratings. Not too terribly surprised to see some shift with some of the dynamics you discussed in your prepared remarks. But Just wanted to get a sense from you, what's driving some of the movement into the 3 rated credits?

Speaker 4

And then you also saw some movement into the 1 rating there, which may or may not be surprising given the macro backdrop.

Speaker 2

Yes. We have a number of credits where the ability to increase price Has not kept up with rising raw material and labor prices, and those companies are working with lower margins. So, as a result of that, The companies are, in most cases, slightly underperforming, to our original budgets, Which is why you've seen a move down a little bit in average rating. But a 3% is not particularly concerning. It just means it's underperforming where it was originally.

Speaker 2

And as I think I shared, About half our portfolio is seeing increased EBITDA and lower leverage And the other half of the portfolio is seeing decreases in EBITDA and higher leverage. And so that's balancing out to On average, slightly higher like 0.1 or 0.2 turns higher leverage across the portfolio.

Speaker 4

Okay. Okay. Maybe a couple more from me. The Arco transaction that you noted in to prepared remarks assuming you monetized that or exited that around the fair value that we saw as of March 31?

Speaker 2

I believe we did. Joyson?

Speaker 3

Bryce, yes, we did exited that the price that was marked at 331. And as Stuart had mentioned in prepared remarks, overall, like to date that equated to about 1.2 times on our invested capital.

Speaker 4

Okay. Okay. Last one around rates, a lot of discussion around higher rates or lower rates. I would assume that there was quite a bit of consternation in taking the regular dividend up a penny and a half And with the prospects of maybe seeing lower rates at some point in the future. So if you could just talk about sensitivity to lower rates and how comfortable you are earning that $0.37 even in a lower rate environment.

Speaker 2

So we assume that the yield curve is correct. We assume that, sulfur will come back down under 3% in a couple of years. We ran our sensitivities based on that. And based on the advice of our shareholders and analysts, we only raised the regular dividend by an amount We felt was sustainable. And so if the yield curve is correct, the dividend should be sustainable absent unforeseen circumstances at the $0.37 level and that's why we took everything above $0.37 and link that to the variable mechanism that Joyson described in-depth.

Speaker 4

Got it. That's good color.

Speaker 2

Appreciate it, Stuart. No problem. Thank you, Bryce.

Operator

We'll take our next question from Melissa Wedel with JPMorgan.

Speaker 8

Good afternoon. Thanks for taking my questions today. Sorry to drill in on the dividend, the supplemental, but I want to make sure that we are thinking about that and accounting for that properly in our model. As I heard you articulate on the call today, if I'm understanding you correctly, There is a threshold at which if NAV would be lowered by $0.15 a share between Both net income and the supplemental dividend, there would be no supplemental dividend at all. To closing

Speaker 1

the call forward, is that right?

Speaker 3

That's right. To think about this is that Inclusive of the supplemental dividend, the decrease in NAV over the current And the preceding quarter would be limited to $0.15 per share. So we would factor in not only the supplemental dividend, But then to the extent that we do have maybe unrealized mark to market declines in NAV that would also limit it in any particular quarter.

Speaker 8

Okay. And just to make the distinction, we're talking about there would be it's either that 50% of excess earnings is declared or if it would trigger that if it would trip that $0.15 decline Threshold, there would be none at all. It wouldn't be just reduced to limit the now

Speaker 3

It would be reduced. So like as an example, if Inclusive of the proposed $0.05 per share supplemental dividend that would have caused a NAV decline of $0.17 per share, then that proposed $0.05 supplemental dividend would have been reduced by $0.02 such that the supplemental dividend would have been $0.03 per share.

Speaker 8

Okay. Got it. Very helpful.

Speaker 3

Thanks so much.

Speaker 4

That's so

Speaker 3

for illustration purposes only. Yes.

Speaker 8

Yes. Understood. Thank

Operator

you. And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Speaker 2

I appreciate everybody taking the time to join us this afternoon. We continue to work hard to generate sustained predictable results and to give transparency. And as I always invite our analysts and shareholders, if there are things you'd like us to share on upcoming calls, please let us know before those calls so we can try to make

Operator

That concludes today's teleconference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
WhiteHorse Finance Q1 2023
00:00 / 00:00