WhiteHorse Finance - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 NII per share was $0.282 and total investment income was $18.84M; results reflected portfolio-specific losses (notably American Crafts write-off) and modestly lower yields versus Q1.
• Miss vs S&P Global consensus: EPS (NII/share) $0.286 actual vs $0.309 estimate; revenue $18.84M actual vs $19.33M estimate; Q1 also missed EPS and revenue, reinforcing estimate cuts risk for the near term (values marked with asterisks).
• NAV/share fell to $11.82 (−2.4% q/q) as net realized losses of $(22.0)M were partially offset by $17.73M of unrealized gains; non-accruals improved sharply to 4.2% of debt at fair value as Telestream returned to accrual.
• Balance sheet optimization: $298.15M CLO term securitization (with $174.0M notes issued) reduced revolver borrowings; management expects $0.01–$0.015 per share per quarter in interest cost savings, a potential support for dividend coverage in coming quarters.
• Dividend maintained at $0.385/share (payable Oct 3); management highlighted remaining 2024 spillover of ~$9.7M after the July distribution—an ongoing lever for payout stability.

What Went Well and What Went Wrong

What Went Well

• Non-accruals improved: fair value on non-accrual dropped to $24.0M (4.2% of debt FV) from $45.9M (7.6%) in Q1, with Telestream back on accrual, boosting earning capacity.
• JV scale and returns: STRS JV assets rose to ~$351M; WHF’s ROE on JV was ~14.0% in Q2, continuing to provide accretive income to the BDC.
• Balance sheet optimization: “We completed a CLO term debt securitization… which bears interest at three-month term SOFR + 1.7%. We expect this optimization to result in cost savings of between $0.01 to $0.015 per share per quarter.” — CFO Joyson Thomas.

What Went Wrong

• Core earnings softness: NII/core NII fell to $6.56M ($0.282/share) from $6.84M ($0.294/share) in Q1, reflecting lower effective yields and portfolio losses.
• Large realized loss: “Net realized losses included a write-off [of] American Crafts, LC for $21.0 million” — a key drag on results and NAV.
• Competitive market/muted pipeline: Management cited subdued M&A and intense sponsor market competition; focus shifted further to non-sponsor mandates amid limited BDC capacity and lower deal closure visibility.

Transcript

Speaker 3

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 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. If you would like to ask a question at this time, please press star one on your telephone. If you wish to remove yourself from the queue, you can press star two.

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

Speaker 4

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. 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 statement. 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.

Speaker 7

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 three new originations totaling $33.1 million, and the remaining $5.9 million was used to fund three add-ons to existing investments. In addition, there was $0.3 million in net fundings made on revolver commitments.

Of our three new originations in Q2, one was non-sponsor and two were sponsor deals, with an average leverage of approximately four times EBITDA. All of our Q2 deals were first lien loans at an average spread of 560 basis points and an 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 Energy and Flexitallic. At the end of Q2, 99.3% of our debt portfolio was first lien, senior secured, and our portfolio mix was approximately two-thirds sponsor and one-third non-sponsor. During the quarter, the BDC transferred three new deals and one existing investment to the STRS Joint Venture.

At the end of Q2, the STRS Joint Venture 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 1.16 times compared with 0.98 times at the end of the prior quarter. We continue to successfully utilize the JV and believe WhiteHorse Finance'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 were placed on non-accrual in Q2, and non-accrual investments totaled 4.9% of the debt portfolio, an improvement compared with 8.8% of the debt 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 earning capacity going forward.

We also expect that a portion of NSI Information Services will likely go back on accrual in the third quarter, subject to a successful restructuring of the debt. Other deals on non-accrual are likely to remain that way for some period of time. We are continuing to actively work on getting deals off non-accrual, leveraging the expertise of our five-person dedicated restructuring team and the resources of H.I.G. Capital. Aside from credits on non-accrual, 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 non-cyclical 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 six and eight times, and deals are getting structured with partial PIK 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 done at leverage of between four to six times, and most deals still have covenant protection.

In the lower mid-market, pricing is very similar to the mid-market, with pricing starting at SOFR +4.75%, but more often being at SOFR +5.00% or SOFR +5.25% and extending to as high as SOFR +5.75% for more complex or cyclical credits. These prices and structures are for the sponsor market. The non-sponsor market remains much less competitive. We continue to focus significant resources on the non-sponsor 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 non-sponsor 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 non-sponsor market in context, our non-sponsor mandates are still levered only three to four and a half times, and the highest price 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 two new investments of $14.4 million and had one full repayment totaling $9.6 million. There were two existing investments fully transferred to the JV, totaling $8 million. Following net 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 year. We currently have six new mandates and are working on two add-ons to existing deals. Our six mandates comprise three sponsor deals and three non-sponsor 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.

Speaker 5

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 one or two rating, slightly higher than the 74.1% reported in the prior quarter.

As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a two rating indicates a company is performing according to such initial expectations. Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier, in the second quarter, we transferred three new deals and one existing investment to the STRS Joint Venture, totaling $22.8 million. As of June 30, 2025, the JV's portfolio held 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 a credence for the BDC's earnings, generating a mid-teens return on equity.

During Q2, income recognized from our JV investment aggregated to approximately $3.4 million, a slight decline from $3.7 million in Q1. As we have noted in prior calls, the yield on our investment in the JV fluctuates 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 a revolving credit facility. During the second quarter, we completed a CLO term debt securitization and issued $174 million in debt, which bears interest at three-month term SOFR +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 this CLO term debt securitization, all amounts outstanding under a 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-activity ratio, after adjusting for cash on hand, was approximately 1.22 times compared with 1.23 times 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 a 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's spillover, is approximately $9.7 million. With that, I'll now turn the call back over to the operator for your questions. Operator?

Speaker 3

Thank you, Mr. Thomas. Ladies and gentlemen, at this time, if you do have any questions or comments, please press star one at this time, and you can always remove yourself from the queue if your question has been addressed by pressing star two. We'll go first this afternoon to Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Speaker 2

Hi, thank you for taking my questions. I guess, on American Crafts, is it correct that that was an exit or was there a restructuring? It was a sale of the remaining piece of the company, and that sale yielded very little in terms of proceeds. We have resolved that, taken the write-down, and there is no further downside on that account. Gotcha. On the CLO, Joyson was going through some of the details, helpful, but what is the term of it before the reinvestment period?

Speaker 5

Reinvestment period is through May 25, 2029.

Speaker 2

Great. That's it for me. Thank you. Thank you, Chris.

Speaker 3

Thank you. We'll go next now to Melissa Wedel of JPMorgan.

Speaker 6

Good afternoon. Thanks for taking my question. 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 is supply chain pressure? If not, could you explain a bit more on that? Thanks.

Speaker 2

Yeah. 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. 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. 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. People are taking the information that exists in the market, trying to optimize based on whatever's going on. As we all recognize, the tariff situation changes every week and in some cases every day.

People are having to be nimble to keep up with what's going on, Melissa.

Speaker 6

That certainly makes sense. I also appreciated the update on, sort of, post-quarter-end activity. 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. Given the higher number of mandates, should we be thinking about that as you also having line of sight into some elevated repayment activity given the constraints on leverage within the general portfolio?

Speaker 2

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. I would say, in general, Melissa, the message is 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. As I mentioned earlier, the JV has about $20 million of additional capacity, which would be, on the average deal allocation, about three deals that we could add to the JV, which would create more income.

Speaker 6

I guess I'll sneak in one more follow-up on that. In particular, given the, I've characterized 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? Thank you.

Speaker 2

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

Speaker 6

Got it. Thank you.

Speaker 2

Thank you, Melissa.

Speaker 3

Thank you. Just a quick reminder, ladies and gentlemen, star one, please, for any further questions today. We go next now to Haley Sheff of Raymond James.

Speaker 0

Good afternoon. Thanks for the question. In regards to the dividend, I know you mentioned prior year's spillover of $9.7 million. Any update on or any idea on thought processes for working down spillover through 2025 and into 2026?

Speaker 2

Joyson, can you take that?

Speaker 5

Sure. Certainly. Yeah. As we mentioned before, the undistributed spillover income related to 2024 that still remains is $9.7 million, and as we've discussed in prior calls, that factors into the dividend distribution for the remainder of this year into next. I think the way to think about it is, thinking about the October distribution that will be paid of approximately $8.9 million, there's still a small amount, less than $1 million, that would be undistributed. 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. I think from that standpoint, we're looking at that undistributed taxable income in combination with other factors related to just the shortfall of the earnings in the current year when we think about the dividend for 2026.

Speaker 0

Got it. Thanks for the call. I appreciate it.

Speaker 3

Thank you. We go next now to Sean Paul Adams of B. Riley Securities.

Speaker 1

Hey, guys. Good afternoon. 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.

Speaker 2

Good afternoon. 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. 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. In general, anything not being absorbed by the suppliers is being attempted to be passed through to the final users or consumers.

Speaker 1

Got it. Thank you.

Speaker 3

Thank you. Just again, a quick reminder, ladies and gentlemen, star one, please, for any further questions today, and we'll pause for just one moment. 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.

Speaker 1

Bye-bye.