WhiteHorse Finance, Inc. (WHF) Earnings Call Transcript & Summary

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 2026 Earnings Conference Call. Our host for today's call are Mr. Stuart Aronson, Chief Executive Officer; and Mr. Joyson Thomas, Chief Financial Officer. Today's call is being recorded, and a replay is available through a webcast in the Investor Relations section of our website at whitehorsefinance.com. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Robert Brinberg of Rose & Company. Please go ahead, sir.

Thank you, Bo, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Second Quarter 2026 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 statements. Today's speakers may refer to material from the WhiteHorse Finance Second Quarter 2026 earnings presentation, which was posted on our website yesterday. 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 for joining us today. As you're aware, we issued our earnings yesterday after market close, and I hope you've had a chance to review our results for the period ending June 30, 2026, which can also be found on our website. On today's call, I'll begin by addressing our second quarter results and current market conditions. Then Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail, after which, we will open the floor for questions. At a high level, our second quarter results reflect 3 main themes: one, net asset value per share increased, primarily driven by unrealized gains in one of our existing workout accounts; two, share repurchases during the quarter, again provided a meaningful benefit to NAV per share accretion; and three, core earnings moderated relative to the prior quarter, reflecting a portfolio yield that was impacted as a result of a smaller average portfolio size as well as our loan investment in Outward Hound going on to nonaccrual status in the first quarter. Touching more specifically on unrealized appreciation in the portfolio and following the markdowns that weighed on the first quarter's results that we had previously flagged, our portfolio marks turned net positive for this quarter. Gross unrealized depreciation of $7.1 million, was offset by just $1.4 million of gross depreciation, with the substantial majority of the portfolio unchanged quarter-over-quarter. Net markups were led by our position in Starco, also known as Chase Products or Pressurized Holdings where the markup on our equity investment contributed approximately $4.8 million or roughly $0.22 a share. I will provide more detail on the markup in Chase as well as provide an update on the number of other investments in our portfolio later in this call. Turning to our financial results. Q2 GAAP net investment income and core NII were each $4.7 million or $0.217 per share compared with Q1 GAAP net investment income and core NII of $5.6 million or $0.253 per share last quarter. NAV per share at the end of Q2 was up to $11.77 compared with $11.47 at the end of Q1, an increase of approximately 2.6%. The change in NAV reflected net realized and unrealized gains of approximately $0.265 per share in the aggregate as well as share repurchases that were accretive to NAV by more than $0.06 per share, partially offset by the approximate $0.033 per share NII shortfall as a result of the distribution paid during the quarter that exceeded the net investment income for the period. A detailed bridge of the quarter-over-quarter change in the NAV per share is provided on Slide 15 of our earnings presentation. Even though our NII this quarter was below the quarterly distribution rate, as I've shared in the past, we have a number of restructured credits that have been equitized that are not producing NII, but are likely to be realized either later this year or in 2027. Those realizations should add to the BDC's NII generating capability. Turning to shareholder value. Our shares have continued to trade at a meaningful discount to NAV, and both management and the Board remain focused on actions that we believe can help enhance shareholder value over time. So far, that focus has included disciplined portfolio repositioning, selective capital deployment, accretive share repurchases and steps to support distributable earnings. Management and the Board continue to explore other options as well. We remained active under the Board's expanded share repurchase program through the first 2 months of the second quarter, and those repurchases were accretive to NAV, as I mentioned earlier. We paused repurchase activity in late May. That decision reflects the balance we took -- we look to strike between buying back shares at a meaningful discount to NAV, which is accretive, and the corresponding reduction in equity, which raises our leverage ratio levels and competes with the capital we can put into newly originated investments. Capacity remains available under the repurchase program and we will continue to assess recommending repurchases as a part of our broader strategy of seeking ways to create shareholder value. Joyson will provide additional detail on the quarter's repurchase activity. In addition, the advisers agreed to extend the temporary voluntary incentive fee waiver for the third quarter of 2026, reducing the applicable rate from 20% to 17.5%. We view the fee waiver as a constructive step to support distributable earnings and shareholder value. As we have said previously, this fee waiver is temporary, and any decision regarding future periods will be revisited based on the then current conditions and in consultation with the Board. We have also been encouraged by the alignment shown through continued open market purchases by our officers and directors during the second quarter and is disclosed on Form 4 filings. We believe that reflects our confidence in the underlying value of WhiteHorse Finance. Turning to portfolio activity. We had gross capital deployments of $25.4 million in Q2. Repayments and sales were muted during the quarter and offset gross deployments by approximately $2.2 million, resulting in net deployments of approximately $23.2 million before the effects of transferring assets into the STRS JV. Gross capital deployments consisted of 3 new originations totaling $23.1 million, with the remaining amount deployed to fund add-ons to 5 existing portfolio companies. The 3 new originations were headlined by 2 former WhiteHorse borrowers, Empire Office for $10.1 million and Intermedia Cloud Communications for $6.6 million as well as 1 new portfolio company borrower, Vibration Mountings & Controls for $6.4 million. Of our 3 new originations in Q2, 1 was nonsponsor and 2 were sponsor. The sponsor deals are targeted to be transferred to the STRS JV. Our new originations in Q2 had an average leverage of approximately 4.2x EBITDA and were all first-lien loans. Total repayments and sales of $2.2 million were driven by partial paydowns with no full realizations during the quarter. During the quarter, the BDC transferred 2 new deals to the STRS JV totaling $7.8 million. The transfers were headlined by Industrial Service Solutions at $5.1 million and Trimlite at $2.7 million. We continue to successfully utilize the STRS JV and believe that WhiteHorse Finance's equity investments in the JV continues to provide attractive returns to our shareholders. After net deployments in JV transfer activity as well as net realized and unrealized gains recognized during the quarter, total investments increased from the prior quarter by $26.2 million to $569.2 million. This compares to our portfolio's fair value of $543 million at the end of Q1. During the quarter, we recognized approximately $0.1 million in net realized losses and approximately $5.8 million of net unrealized gains for aggregate net realized and unrealized gains of approximately $5.7 million or approximately $0.265 per share. The net mark-to-market gains were driven primarily by a $4.8 million markup on Chase, a $0.4 million markup on PlayMonster, and approximately $0.5 million of other net markups across the portfolio. For those unfamiliar, Case Products is a developer and manufacturer of bulk consumer and industrial chemical and aerosol products in the United States. We assumed ownership of the business in March of 2023. Since then, the company has improved EBITDA from negative levels to a run rate in the low positive double digits, supported by new customer wins and added production capacity, and it continues to track ahead of plan this year. The markup this quarter reflects the improvement in operating performance and the updated valuation inputs that follow from it. We are cautiously optimistic about the prospect of a liquidity event on this asset over the next 6 to 12 months. PlayMonster, you may recall, is a toy and games company with owned and licensed brands, including Hacky Sack, Spirograph, Taco vs. Burrito and 5-Second Rule, we assumed ownership alongside a co-lender in January of 2022. The business has returned to positive and growing adjusted EBITDA with meaningful year-over-year improvement and continued momentum into 2026 and the markup reflects that trajectory. PlayMonster is at in earlier stage than Chase with respect to any realization, and we would expect any process to follow the finalization of full year 2026 results at the earliest. Both positions generate limited cash income today, a realization in either case would convert to full realized value into cash available for future redeployment into income-producing investments, which would positively contribute to help support core NII over time. At the end of Q2, 98.8% of our debt portfolio was first-lien senior secured, and our portfolio continued to reflect the balanced mix of sponsor and nonsponsor investments, with nonsponsor representing approximately 40% of the portfolio at fair value. The weighted average effective yield on our income-producing debt investments was 10.8% at the end of Q2, consistent with the 10.8% at the end of Q1. The weighted average effective yield on our overall portfolio was approximately 8.8% at the end of Q2 compared to approximately 8.7% at the end of Q1. With respect to nonaccrual status, there were no additions to or removals from nonaccrual during the quarter. Excluding the STRS JV, nonaccrual investments represented 3.6% of the total debt portfolio at fair value, consistent with the 3.6% at the end of the prior quarter and 6.9% at cost compared with 7.2% at costs at the end of the prior quarter. The 4 issuers on nonaccrual at quarter end were Camarillo Fitness Holdings, Newscycle Solutions, Outward Hound and PlayMonster. Turning to Outward Hound, we completed the restructuring of the business subsequent to quarter end in early July, working alongside the other lenders in the group. We recapitalized the company with a new revolver and term loan, converted a substantial portion of the outstanding debt into equity and extended the maturity. WhiteHorse now holds the majority ownership and control of the Board and the restructured term loan returned to accrual status upon closing, which will be positive for Q2 NII -- Q3 NII. The company continues to operate in a challenging environment for pet products where category demand has softened and retailers have maintained lean inventory positions. Consumer sell-through has held up better than peers, but that has not yet translated into improved orders. With a materially deleveraged capital structure and control of the Board, we are working closely with management on various operating initiatives to drive incremental top line growth and optimize the company's cost structure. We will continue to evaluate both organic and inorganic paths to build value in the position and improve our ultimate recovery over time. Regarding Newscycle, this is a small position for the BDC, representing less than 0.5% or 1% of the portfolio at fair value. Management has been focused on stabilizing financial performance and on cost reduction initiatives, and the company is currently preparing for a sale process. We will provide an update as that progresses. Finally, regarding Camarillo Fitness, formerly known as Honors Holdings, our mark reflects the expected proceeds from the sale of the underlying locations. That process is actively underway. And as locations are sold and cash is returned, we'll redeploy that capital into income-producing investments. As always, we continue to actively manage underperforming credits, leveraging our dedicated restructuring resources and the broader capabilities of HIG. Aside from the credits on nonaccrual, our portfolio continues to perform well. Consistent with what we shared last quarter, our exposure to software companies remains modest at approximately 10.5% of the portfolio at cost and 9.3% at fair value across 6 portfolio companies. Turning to the market conditions. The market conditions are interesting and different from those a quarter ago. The volume of M&A activity is only moderate, similar to last year. However, the supply-demand imbalance we experienced last year is much improved due largely to the negative press surrounding the direct lending market. This negative press has had multiple effects. One effect has been to scare retail investors, resulting in capital outflows that have reduced the appetite of some of the largest players in the marketplace. Another effect is that increasing criticism of the asset marketing policies of direct lenders and BDCs has led to greater scrutiny of both, where assets are marked down and the types of credits in which people are investing. In particular, the software sector, which was strongly in favor 1.5 years ago, is now strongly out of favor because the market recognizes that some software and technology companies face significant downside risk from potential AI disruption. Those factors have resulted in more conservative market environment. Deals are being completed at headline multiples that are generally more reasonable that is certainly true in the technology and software sector, but we think we are seeing it more broadly as well. Previously, out-of-favor sectors, such as industrials, have come back into favor because they do not face the same AI risk. Overall, what we're seeing in the market, depending on the sector, is leverage that is 0.5x to a 1x lower than a year to 1.5 years ago with pricing 25 to 50 basis points higher. This is particularly true in the sponsor market. As I shared before, the sponsor market cycles up and down, but the nonsponsor market does not cycle very much. We are seeing lower leverage multiples and higher pricing on sponsor deals with most deals below 50% loan-to-value and some even below 40% loan-to-value. In general, we are also getting better documents, including protection against LMEs, or liability management executions. Without LME protection, instead of equity coming into a troubled credit, companies may issue super senior debt, strip existing lenders of collateral and install the super senior debt at the top of the capital structure. We have been vigilant in avoiding those situations ever since the Aspect Software deal that led to a loss of the BDC. And the vast majority of the deals we have completed over the past 3 years, we have limited, or we believe, eliminated the downside risk from LME. As geopolitical tensions rise and fall, M&A activity slows when tensions are high and tends to pick up when tensions are lower. Across the WhiteHorse direct lending platform, we are doing about 40% to 50% more volume this year than we did last year because we find current market conditions more attractive, we are seeing better credits, lower leverage and better documents. We are also getting covenants on most of our deals. In fact, the vast majority of our middle market credits have covenant protection. Spreads in the middle market and upper middle market are generally as higher, higher than spreads in the lower mid-market. Again, this fact applies primarily to sponsor deals. Intuitively, that does not make sense because, on average, smaller companies carry greater risk and historically have commanded a pricing premium. However, third-party data from an investment bank that performs independent valuations for our portfolio validates what we are seeing. Pricing for midsized and larger deals is as high or higher than pricing for smaller deals. We are, therefore, trying to improve the risk return trade-off. Most of the deals we are working on now are middle market or upper middle market credits, where we see a better risk return dynamic. Current market pricing for sponsor deals is SOFR plus 475 to 550, approximately 50 basis points higher than a year ago. As I mentioned, we're getting covenants on the vast majority of deals we are doing. We are not -- sorry, we are doing senior secured debt almost exclusively. The nonsponsor market is relatively stable. Nonsponsor middle market, lower middle market deals generally command pricing of SOFR plus 600 and above with 2-point upfront fees or higher. Larger nonsponsor deals are priced more in the range of 550 to 650. If we believe those are good credits, we will participate in them as well. Deals size to 600 and above are still targeted for the BDC balance sheet, deals below 600 are generally targeted for the JV. With that said, and subsequent to our quarter end, we closed on 1 new deal in the BDC. We also transferred positions in 5 portfolio companies to the STRS JV. Pro forma for those transfers, the STRS JV's remaining capacity has been fully utilized. So no deals -- so new deals will generally be added to the JV only as repayments occur on existing JV investments. The BDC balance sheet currently has capacity for approximately $10 million of additional assets. And similarly, we will create additional capacity there as we receive repayments. With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition. Joyson?

Thanks, Stuart, and thanks, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income and core NII of $4.7 million, or $0.217 per share. This compares with Q1 GAAP NII and core NII of $5.6 million, or $0.253 per share as well as our previously declared second quarter base distribution of $0.25 per share. Q2 fee income was approximately $0.1 million compared with $0.4 million in the prior quarter, driven primarily by amendment fees from Lift Brands, also known as Snap Fitness and NA Services. For the quarter, we reported a net increase in net assets resulting from operations of $10.4 million. Our risk ratings during the quarter showed that approximately 86.6% of our portfolio positions either carried a 1 or 2 rating, a slight decrease from the 88.3% 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 such initial expectations. Regarding the JV specifically, we continue to utilize the platform as a complement to the BDC. As Stuart mentioned earlier, we transferred 2 new deals during the second quarter to the STRS JV totaling $7.8 million in exchange for a net investment in the STRS JV of $2.3 million as well as cash proceeds of $5.5 million. During the quarter, there were no full realizations in the JV. At the end of Q2, the STRS JV's total portfolio had an aggregate fair value of $340.3 million across 43 issuers, of which 14 are common issuers with the company at an average effective yield of 9.8%. This compares with an aggregate fair value of $327.1 million at an average effective yield of approximately 9.9% across 41 portfolio companies as of March 31, 2026. Leverage for the JV at the end of Q2 was approximately 1.10x compared with approximately 1.08x at the end of the prior quarter. The investment in the JV continues to be accretive for the BDC's earnings, generated a low teens return on equity. During Q2, income recognized from our JV investment aggregated to approximately $3.2 million compared to approximately $3.6 million reported in Q1. 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 amount of additional capital investments, changes in asset yields in the underlying portfolio and the overall credit performance of the JV's investment portfolio. Turning to our balance sheet. We had cash resources of approximately $28.1 million at the end of Q2, including approximately $19.6 million in restricted cash, primarily representing interest and principal proceeds received at quarter end in our securitized leverage facilities, and approximately $8.5 million at the fund level reserved for the quarterly dividend paid in early July. We have $85 million of unsecured notes maturing in December of this year, consisting of $10 million or 5.375% notes due December 4 and $75 million or 4% notes due December 15. We continue to monitor the debt capital markets and recent offerings in both the retail and institutional space, and we will remain opportunistic in evaluating our alternatives as we approach year-end in addressing these maturities, which may also include a combination of available capacity under our revolving credit facility as well as cash on hand. As of June 30, 2026, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 177%, which is above the minimum asset coverage ratio of 150%. At quarter end, gross leverage was 1.30x compared with 1.31x in the prior quarter, while our net effective debt-to-equity ratio after adjusting for cash on hand was 1.19x compared with 1.12x in the prior quarter. The increase in net effective leverage primarily reflected lower cash balances at quarter end as deployments outpaced repayments during the quarter. In regards to our share repurchase program, the company repurchased approximately 345,000 shares during the second quarter at a weighted average price of approximately $7.42 per share, inclusive of commissions, for a total cost of approximately $2.6 million. Those repurchases were accretive to NAV by more than $0.06 per share. We have not repurchased any shares since late May and approximately $9.5 million remains available under the current authorization. Cumulatively, since the inception of our share repurchase program in the fourth quarter of 2025, we have repurchased approximately 1.8 million shares at a weighted average price of approximately $7.36 per share, and we estimate that our buybacks have contributed approximately $0.33 per share of NAV accretion, demonstrating our commitment to creating shareholder value. Before I conclude and open the call to questions, I'd like to discuss our recent distributions and corresponding distribution policy. Yesterday, we announced that our Board declared a third quarter base distribution of $0.25 per share. The distribution will be payable on October 5, 2026, to stockholders of record as of September 21, 2026. 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 award consideration. With that, I'll now turn the call back over to the operator for your questions. Operator?

[Operator Instructions] We'll go first today to Hong Zhang with JPMorgan.

Yes. This is Hong on for Rick. I guess on the call, you talked about potentially realizing gains in the second half of the year. I was wondering if you could share some color as to quantity or the timing.

I'm sorry, I couldn't hear you well. Something about the second half of the year?

Yes. You talked about potentially monetizing some realized gains in the second half of the year. I was wondering if you can add some numbers or just timing color to it?

The most likely realization or 2 realizations in the second half of the year are Chase, Starco, Pressurized Holdings, which is 3 different names of one account, and then also Naviga. Chase, Starco is doing very well. It is operating above budgeted levels. As I reported, the company has won new customers and actually built new production lines to accommodate those new customers such that the run rate EBITDA that was negative when we took over the company is now in the low positive double digits. The mark that we've taken on that asset, while it is positive, is frankly lower than the valuations that the investment banks have told us to expect in the sale process. We have no idea where it will come out, but there's always upside and downside. But if the investment banks are accurate, there could be upside to that valuation. Naviga, similarly, the bankers have indicated a valuation range. And on that deal, we believe we are marked at or below the low end of that valuation range. So that's another monetization that could occur, where, again, there can be upside or downside, but if you believe the bankers' valuations, there could be upside. If those occur, they will generate cash. That cash can be redeployed into earning assets and/or into shareholder repurchases. And while there's no assurance that will occur by year-end, as Lord knows, there's plenty of geopolitical volatility out there as we sit here today, both of those processes are moving forward. PlayMonster, as I shared in the call, is having a tremendous year. Hacky Sack is very on trend and is providing a boost even above what we thought the company would be able to do 3 months ago. And if the results at the end of the year are strong, we and the other lender may choose to sell the company. Again, we don't know how that process will go. It's too far away. But that could also generate cash revenues or cash receipts that could be reinvested in earning assets.

Got it. And then I guess as it relates to the buyback, I understand it's always a moving target, but is there a -- I guess, a discount to NAV's threshold that you have in mind that would make buybacks if you are more attractive in the near term?

Obviously, when the share price is lower, it makes the buybacks more attractive. We've completed enough buybacks that even with limited new investment activity, our leverage is at target levels. And so whether there will be more share buybacks this quarter is still a question mark.

We go next now to Robert Dodd of Raymond James.

And you answered that question partly, [indiscernible] there's more potential upside on NAV from these exits. Moving on to Outward Hound, right, when we look at Chase and PlayMonster, I mean it's a process on doing these restructurings. It takes a while sort of work involved. Outward Hound, the restructuring has just occurred. So on that, I mean, is that more likely to be a late '27 or even a 2028 kind of realization as you put some time into maybe hoping that the customer volume flows through and things like that? Or are you looking to monetize some of these things sooner rather than later? Some of them are just working out, obviously, Chase may be in the second half. Is that like are you putting your foot on the gas a little bit? Or is that just how it's working out? And what are your thoughts on Outward Hound?