Stuart Aronson - CEO Edward Giordano - CFO Sean Silva - Prosek Partners, IR.

Bryce Rowe - Robert W. Baird & Co. Merrill Ross - Wunderlich Securities, Inc..

Good morning. My name is Paula, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter and Full Year 2016 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer; and Ed Giordano, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 1.00 PM Eastern. The replay dial-in number is 404-537-3406, and the pin number is 70205251. 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 Instructions].

It is now my pleasure to turn the floor over to Sean Silva of Prosek Partners..

Thank you, Paula, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's fourth quarter and fiscal year 2016 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, they 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.

During this call, we will discuss GAAP and non-GAAP financial measures for which a reconciliation can be found in our press release, which is available on our Web site at www.whitehorsefinance.com. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin..

Thank you, Sean. Good morning 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 which are also available on our Web site.

I’m going to take you through our fourth quarter and fiscal year operating performance and then Ed will review our financial results, after which we’ll take your questions.

As our results indicate, we had both a strong quarter and a strong fiscal year across all key operational and financial metrics, a result of our disciplined approach to origination activity and our commitment to enhancing NAV and diversifying our portfolio.

We reported net investment income of $0.358, which is above our quarterly stockholder distribution of $0.355 per share, allowing us to once again cover our quarterly dividend.

Our average unlevered effective yield decreased to 11.8%, down slightly from 12.1% last quarter based on a refinancing of a high yielding second lien loan into a safer first lien loan. As you will hear me discuss in a few moments, the average effective yield for new originations during the fourth quarter stood at 13.1%.

I would also note that NAV for the quarter was $13.63 per share, a $0.14 increase from last quarter driven by strong performance in our underlying portfolio, including marked improvements in Crews of California and Caelus Energy. For fiscal 2016, our year-end NAV marks a $0.30 per share increase from the same period in the prior year.

These results are driven by our commitment to pursuing senior secured, low leverage, high yield opportunities to capitalize on market conditions while maximizing shareholder value.

We continue to focus the portfolio on non-sponsor and sponsor, low leverage, high yielding companies where we find attractive opportunities with fewer market participants and are able to leverage H.I.G.’s broader middle market sourcing capabilities.

On the origination side this quarter, we had two new loans totaling 20.1 million; the first was $16.7 million first lien secured term loan with outcome health, a health information provider in Chicago. And the second was a $3.4 million second lien loan to Sunteck, a transportation company in New Jersey.

We were pleased with the risk return standpoint from a risk return standpoint on both of these opportunities given the spread and starting leverage levels. These two new loans resulted in an average effective yield of 13.1%. On the repayment side, we saw total activity during the quarter of only 2.5 million, down from 33.2 million last quarter.

In addition, we refinanced a $36.8 million loan to Future Payment Technologies into a new $23.3 million loan, reducing our net position by 13.5 million and increasing diversity. I will focus on this investment more in a minute.

For the year ended, December 31, 2016, we invested 121.5 million in new and existing portfolio companies offset by repayments in sales of 133.7 million. This compares to 167.7 million invested in new and existing portfolio companies and repayment in sales of 135 million in 2015. Turning now to our investment portfolio.

As of December 31, 2016, the fair value of the portfolio was 411.7 million, which is above the 402.9 million reported at the end of the third quarter.

As of the end of 2016, the majority of our portfolio was comprised of senior secured loans to small-cap borrowers and virtually all of those loans were variable-rate investments, primarily indexed to LIBOR.

The portfolio had an average investment size of 11.1 million based on fair value with the largest investment being 26.8 million, a weighted average effective yield of 11.8% on the assets and an estimated weighted average leverage multiple of only 3.4 times.

We continue to focus on the diversity of our portfolio already holding 37 positions across 29 companies. I will now provide an update on an important position within our portfolio.

On last quarter’s call, we discussed the markdown of our position in Future Payment Technologies, a merchant payment company based in Dallas due to decreases in the company’s performance that led us to adjust a fair value of that asset.

We have since engaged with the company and their owners to support the sale process and are pleased to report that the company was successfully sold with the new owner injecting material equity into the company.

The transaction has allowed us to successfully shift our position in that credit from a moderately leveraged second lien loan that had a cash yield of 13% to a lower leverage first lien loan with a cash yield of 9.25%. We also decreased our exposure from 36.8 million to 23.3 million.

This is a clear example of our successful efforts to minimize portfolio risks and minimize portfolio volatility, including – lower volatility including diversity of the portfolio. Separately, though our exposure remains small to the sector, fundamental strength in oil and gas have resulted in improved valuations on our holdings in that area as well.

Throughout most of the fourth quarter, the portfolio was either close to or fully invested. Driven by the fourth quarter’s new originations, our leverage levels increased modestly from 0.70 times to 0.74 times.

And when accounting for expected closings in our pipeline this quarter, Q1, we expect leverage to settle within our target range between 80% and 90%. Regarding our pipeline, we’ve already had a strong start to the year and expect there to be between four and six additional investments in our BDC during the first quarter.

We’re continuing to find attractive deals facilitated by our sophisticated three-tier sourcing architecture with H.I.G. which allows us to find opportunities before they’re intermediated by third parties. Moving forward, we expect most investments in WhiteHorse Finance to fall between a size range of $4 million to $20 million.

Turning now to our macro outlook. We expect that the current political environment will be even more positive for midmarket and lower midmarket American businesses, which will both support the performance of our portfolio and also create opportunities for investing.

We believe the sponsor space will remain highly competitive, given the clear oversupply of capital in that space both in the middle market and the lower midmarket. The non-sponsor market is less crowded and continues to provide very attractive opportunities.

Looking ahead, we will continue to pursue our strategy of making low-leverage, high-yielding investments that allow us to earn our dividend, protect our NAV, diversify our portfolio and maximize shareholder value. We look forward to continuing to update you on that progress. And with that, I’ll now turn the call over to Ed..

Thanks, Stuart. For our fourth quarter results, NII was 6.6 million for the quarter or $0.358 per share compared to 7.3 million or $0.397 per share in the prior quarter. Our investment income continues to consist primarily of recurring cash interest.

We reported a net increase in net assets from operations of 9.1 million or $0.50 per share for the fourth quarter. As of December 31, 2016, net asset value was 249.4 million or $13.63 per share, up from 246.8 million or $13.48 per share as reported for Q3. Switching over to portfolio and investment activity.

The risk ratings of our portfolio remained mostly unchanged. We continue to maintain a three rating on our energy holdings to reflect the current macroeconomic market conditions. As a reminder, we continue to have low exposure to the energy sector overall with approximately 4% of our portfolio representing energy or energy-related investments.

Turning to our balance sheet. WhiteHorse Finance had cash resources of approximately 28.9 million as of December 31, 2016 and approximately 40 million of undrawn capacity under its revolving credit facility. We continue to closely monitor our asset coverage ratio and feel comfortable with our leverage as of December 31, 2016.

The company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 234.8% at the end of the fourth quarter, well above the statute's requirement of 200%. Our net effective debt-to-equity ratio after adjusting for cash on hand was 0.63 times. Last, I'd like to highlight our quarterly distribution.

On December 6, we declared a distribution for the quarter ended December 31, 2016 of $0.355 per share for a total distribution of 6.5 million to stockholders of record as of December 20, 2016. The distribution was paid to stockholders on January 3.

This marked the company’s 17th distribution since our IPO in December 2012, with all distributions at the rate of $0.355 per share per quarter. We expect to be in a position to continue our regular distributions. I will now turn the call to the operator for your questions.

Operator?.

The floor is now open for questions. [Operator Instructions]. Your first question comes from Bryce Rowe from Baird..

Thanks. Good morning..

Hi, Bryce..

Stuart, you mentioned the four to six potential new investments here in the first quarter of '17.

I was just curious what pricing looks like or may look like on those investments with the thought of looking at the outcome health investment within outflows 50 coupon, just curious how those four to six will compare to the activity here in the fourth quarter of '16?.

The assets that we are originating are very consistent with our history. The yields on this assets range from a low of 9% to a high of about 12%, so very consistent with continuing to try to earn the dividend with core interest income. These have all been proprietary deals that have been sourced through our direct origination network.

And I would tell you my belief is in all cases, they are loans and assets that are more attractive than are available in the generally traded or broadly syndicated market. So we continue to see the value of finding transactions at their source as opposed to relying on intermediaries or large banks to generate assets for us..

That’s helpful. Thanks. Then maybe a follow up to that. With commentary of new investment activity here in the first quarter, just wondering if you have visibility into maybe any repayment activity that you’ve experienced thus far in the first quarter? Thanks..

So we do have companies in our portfolio that have performed quite well where the owners of the company have indicated to us that there are intentions to potentially sell the companies this year. Some of those companies have the potential to be sold in Q1 and frankly in others quarters across the year.

We try to track that as much as we can to maintain optimal investing activity. But candidly, we can’t plan to replace a loan until the loan actually repays, because especially on these non-sponsored companies and entrepreneurial owners, even though they intend to sell, sometimes they change their mind at the last minute.

So we do know that there is potentially some repayments but frankly nothing out of the norm. We see the average life on our assets running about three years. And if you look at the repayments that we expect to see in the BDC this year, I’d say that would be consistent with the average life statement that I just made..

Great. Thank you. I appreciate it..

No problem..

[Operator Instructions]. Your next question comes from Merrill Ross of Wunderlich..

I think this is a follow-on but I was asking sort of the same question about other companies with – I really admire what you did with Future Payment Technologies. I think that was a great transaction and I can pick a few others that are large in size and second lien and getting kind of old that maybe could also benefit from that sort of transaction.

So I guess it’s really just a question of do you see any of that happening again in the first quarter or maybe the first half?.

Well, the Future Payment Technologies situation was motivated by a performance dip at the company. I will tell you that the size of that investment, the $37 million, is not a size that I intend to replicate in the BDC. We used to have 41 million to origins and we sold positions in that to take it down to 25 million or below.

With Future Payment Technologies, as we remedied that situation, we took our exposure down to 23 million. As I shared earlier, the goal is to take positions between 4 and 20 on incremental assets. So honestly per the recommendations of the people who follow our BDC, we will continue to show enhanced diversity in our portfolio.

We’re obviously very fortunate that everything in our portfolio is on accrual but we all know that there are risks and we want to make sure that to the extent any mistakes are made that those mistakes are not debilitating to the overall portfolio, which is why we’re going to seek diversity.

As it regards the concentration of first lien loans and second lien loans, my goal is to optimize the return of the BDC while minimizing risks in a responsible way. We are an investor in both first lien and second lien situations. The Sunteck loan that we made this quarter was a second lien situation.

But I will tell you without giving exactly the statistics that the leverage on that loan was under four times and the loan to value on that was under 50%. So even when we do second lien loans, we seek to do low loan to value and low leverage multiples that are consistent with the philosophies that we espoused.

At the moment, there is no second lien loan in the portfolio that is marked in a position that is particularly concerning. I take that back, other than the 1 million position in Grove Boheima [ph], which is marked in the 60s, but that is a very small position. And obviously given where it’s marked, it is a focus for refinancing if it could be done.

But broadly, we’re going to manage our portfolio to our natural attrition and try to focus on as much as possible first lien assets where we can command the yields that are appropriate to earning the dividend on a quarterly or annual basis..

Outcome Health seems a bit – an outlay just on the 7.5% in interest rate.

Do you have any comment on that one?.

I do. That company was doing an acquisition of a company that I lent to for many years when I used to run the sponsor business at GE. I had good insight as did my team into the strength of the company being acquired in terms of their performance through the down cycle.

I’ve also seen the industry of the acquiring company perform through the down cycle and felt very good about that. We had an opportunity to pick up that asset with a 750 yield at a price of 90, which we did. And that loan, the last I looked, was already trading at 97, 98 this quarter.

Obviously, at the end of last quarter we marked it to where the value was then. But you can look up that value. It’s publicly available information. So that loan is trading even better now. And depending on where it’s trading at the end of the quarter, there could be a markup on that that would be warranted.

So it was a very attractive asset and it’s turned out to be even more attractive than we thought we were. I can’t tell you that I projected that the loan would gain 8 points of value in just a couple of months..

It would be nice if you could. Thank you..

At this time, there are no further questions. That does conclude today’s conference call. Thank you for your participation. All participants may disconnect at this time..