Good afternoon. My name is Sia and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance First Quarter 2020 Earnings Conference Call. Our host for today's call are Stuart Aronson, Chief Executive Officer; and Joyson Thomas, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 5:30 P.M. Eastern Time. The replay dial-in number is 404-537-3406 and the pin number is 5258636. 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. Please go ahead, sir..

Thank you, Sia and thank you to everyone for joining us today to discuss WhiteHorse Finance's first quarter 2020 earnings results.

Before we begin, I would like to remind everyone that certain statements that 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 first quarter 2020 earnings presentation which was posted to our website this morning at www.whitehorsefinance.com. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart you may begin..

Thank you, Sean. Good afternoon and thank you for joining us today. Let me -- first, let me say I hope you and your families are safe and healthy as we navigate these unprecedented times. The WhiteHorse Finance team has been working remotely for several months now with no interruptions to business continuity.

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 website.

I'm going to start by addressing our positioning relative to our liquidity and our portfolio risk followed by our Q1 results in more detail and then provide an update on current market conditions after which Joyson will address our operating performance and financial results. We'll then open the line for questions.

Over the past four years, we've maintained a disciplined and conservative credit culture to position the portfolio for market downturns. We consistently underwrote all our deals to withstand the downside case that was similar to the Great Recession.

However, for certain of our credits directly impacted by the pandemic and social distancing, it appears that the current economic environment will end up being worse than our downside case. Thankfully, so far this appears to impact only a small percentage of our portfolio.

In our April shareholder letter, we identified the actions we've taken in building our portfolio to prepare for a downturn in the credit environment and they do bear repeating so I'll briefly summarize. First, diversification of our underwriting strategy to where no asset comprises more than 3% at cost of the total target portfolio of the BDC.

Second, focus on first lien credits which comprise almost 90% of our debt portfolio with second lien exposure to only noncyclical credits. Third, directly sourcing assets that allow us to avoid the aggressive credit terms seen in the broadly syndicated market.

Fourth, a focus on lower mid-market and mid-market non-syndicated loans which historically have more volatile price marks than large-cap syndicated market -- sorry less volatile price market than the large-gap syndicated market. And fifth, diligent management of our liquidity position by operating well below our maximum advance rate.

Let me expand upon that last point given its importance in today's environment. We shared with the market that we have significant cushion on our senior secured leverage facility with JPMorgan.

And for us to be out of compliance with our maximum advance rate limit which would trigger a margin call, the average mark in our assets that currently collateralize our JPM facility as of the end of April would have to fall all the way down to about 66% of par.

I'll also note that several financial entities including many BDCs were disadvantaged by having significant amounts of undrawn obligations in the form of revolvers to portfolio companies. And many of those facilities were drawn down during the last few months subsequently creating liquidity squeezes for those lenders.

WhiteHorse has actively minimized revolver commitments as part of the structuring process, which led to a manageable exposure to unfunded commitments entering the COVID-19 disruption. At the end of Q4 our unfunded revolver commitments totaled only $2.6 million and at the end of Q1 this amount was $1.3 million.

While we have significant liquidity and we believe we have positioned the company to navigate market shocks there does remain uncertainty as to the extent depth and length of the COVID-19 impact. In our Investor presentation we share an estimate as to the level of impact of COVID-19 on our portfolio.

And as you can see accounts which have high or very high impact are estimated to represent only 6.3% of the portfolio.

That said, we also estimate that 41.2% of the portfolio is expected to have moderate impact and as a result management is taking a very defensive view of BDC liquidity and we only expect to add a few assets to the BDC portfolio in Q2. I would like to highlight that with each week we get new data on COVID-19 impact on the economy.

So it is likely that the estimates we have provided on COVID-19 impact on our portfolio will be adjusted over time. I'll now turn to our Q1 results.

WhiteHorse fourth quarter of 2019 saw record setting originations as we capitalized on market dislocations, Q1 saw slower deal flow due to normal Q1 slowdown and also to the emergence of business shutdowns and social distancing policies that resulted from COVID-19 at the end of the quarter.

GAAP net investment income for the first quarter was $6.1 million or $0.297 per share compared to $7.7 million or $0.375 per share in Q4. Q1 core net income was $5.5 million or $0.267 per share compared to $7.9 million or $0.385 per share in Q4.

These lower income levels were largely a result of a decrease in amendment waiver and amendment fees in Q1 as compared to prior quarters, as well as an increase in nonaccruals. NAV in Q1 was $13.86 per share, compared to $15.23 a share during Q4, a decrease of approximately 9%.

The decrease can primarily be attributed to the market price volatility seen during the quarter, as well as the direct impact of COVID-19 on some of our portfolio companies. Over time, we expect the decreased marks related to market price changes will be recovered as these assets repay at par.

Overall, we've been pleased with the relative performance of our investments our team and our private equity partners and business owners. We have found that so far, most business owners are taking actions to ensure their companies have the ability to get through the volatile economic period we are experiencing.

That said, we placed two investments on nonaccrual this quarter and now have three investments in our portfolio that are on nonaccrual basis. In terms of borrower performance, out of 48 borrowers across our portfolio, 44 made their scheduled interest payments for Q1 where three of those four were the assets that we have on nonaccrual.

While we maintained our quarterly dividend at $0.355 for the first quarter as I've shared, we were unable to cover that dividend with core earnings this quarter. Our intent continues to be to earn our dividend on an annual basis.

However, these unprecedented market conditions could impact future quarterly distributions, which we may temporarily align with our core earnings as we focus on cash allocation strategy and on keeping strong liquidity cushion and having capital to protect our borrowers during the period of COVID-19.

During the first quarter, we sourced four new deals and one add-on transaction, totaling $26.8 million. Of the four new deals three were non-sponsored all were first lien and had modest initial leverage.

This activity was partially offset by $16.9 million in total repayments and sales led by a partial paydown of $7.5 million on our second lien loan to Oasis Legal Finance. A weighted average effective yield on income producing investments decreased from 10.4% in Q4 to 9.9% in Q1.

The decrease was primarily driven by a drop in the base rate of 50 basis points. During the quarter, we also transferred four deals into our JV, totaling $28.5 million. At the end of Q1, WhiteHorse's total investment in the JV was approximately $42.1 million and the JV's portfolio had 14 total issuers with an aggregate fair value of $123 million.

At the end of Q1, the fair value of the portfolio decreased to $557.1 million compared to $589.7 million at the end of Q4, primarily driven by mark-to-market losses.

The marks at the end of the quarter on our COVID-19 impacted assets reflected all the information we had on those assets at that time, which in many cases included owner and management insights into the expected performance of these borrowers in Q2 and for the rest of 2020.

Some of the spread driven adjustments for Q1 appeared to have been mitigated so far in Q2 based on moves in the market. One of the few broadly syndicated loans we have is Syncsort, which is currently quoted around 90 versus the mark at the end of the quarter of 85.

Much of our markdowns resulted purely from changes in market prices and most loans that are marked in the low to high 90s are strong credits where the final recovery on the asset is expected to be par. That said there are also assets, which were marked down due to moderate-to-high COVID-19 impact.

Impacted companies are generally marked at 90 and below. And while we expect many of these loans to have improved performance with par recovery as the COVID-19 threat recedes there are some that may be permanently impacted with the resulting permanent loss of value.

These marks impacted gross leverage, which increased to 1.04 times at the end of Q1 compared to 0.97 times at the end of Q4. As disclosed in early April, we anticipate the highest pressure on three credits in the fitness and leisure and events industries given the current shutdowns.

The two credits in the fitness-leisure sector were forced to close all their studios and fitness clubs though at this time the clubs are scheduled to start reopening soon.

One of these fitness companies was unable to make its interest payment at the end of the quarter, and although we were able to execute a forbearance agreement subsequent to quarter end we have placed this credit on nonaccrual. We continue to have frequent discussions with the owner and we'll update you on this credit next quarter.

We have one additional troubled credit in the event related space, which is held in the JV. However, the owner has already provided significant additional liquidity in the form of new equity. And as a result, we don't expect any permanent issues on this credit.

Beyond those three, we have a restaurant franchisor that has been experiencing cash flow strain, but which has a significant takeout and delivery business, which is insulating it more than others in the space.

In many situation where there's high impact, the company's owners are actively providing the necessary liquidity to get through these difficult times. And in all of those situations, we are working constructively and cooperatively with them. In my time at GE, I managed a very large credit book through the Great Recession.

And at WhiteHorse, we operate on a philosophy that as long as the owners of the business are supportive, we will be supportive to them as well. To that extent, we are in some cases reducing debt-related cash burden on companies through deferrals of principal and/or deferrals of interest.

In terms of assets that are placed on non-accrual, that decision is based on there being material risk that the interest on those assets will not be collected in the future. With the addition of two credits to non-accrual, the nonaccrual percentage of assets at WhiteHorse Finance has risen to 3.7% at fair value.

We are working hard to resolve each of these situations and get all or a portion of these assets repaid or back on accrual status as soon as possible.

To that end despite the non-accrual status for AG Kings, the company has experienced significant tailwinds from COVID-19, as people are doing more shopping in grocery stores and that has helped King's cash flow position.

So while we are marketing the asset at $0.50 on the $1, we do see improved sales and financials as a result of these tailwinds and hope to have a constructive resolution of this workout situation later in 2020.

In addition to the support we and the owners of our portfolio companies have provided, a number of portfolio companies have applied and received relief under the CARES Act. To date 14 of our portfolio companies, many of which are non-sponsor owned, have applied for or received an aggregate $50 million in PPP loans, most of which are forgivable.

Our portfolio had a fair value averaging debt investment size of $9.3 million, with only three of our portfolio companies rising above our target investment size range of $4 million to $20 million. 89.3% of our debt portfolio is first lien, with only three second lien loans.

Two of these loans are on a formula basis against the liquidation value of a diversified pool of litigation receivables and we don't expect they will see any significant impact from the current disruptions from COVID. The third second lien loan Sigue, has a very modest leverage level and very little senior debt ahead of it.

As of the end of the quarter, 49.4% of our portfolio is sponsor backed and the rest of our loans are non-sponsor backed. Turning now to our market outlook. Based on COVID-19 impact, there has been a correction in the debt markets, with the most significant changes occurring in what had been the very frothy sponsor markets.

In general, we're seeing debt levels down 0.5 turn to 1 turn and the EBITDA being used to calculate debt levels is more realistic with fewer adjustments and add-backs than we were seeing in the pre-COVID period. Deal terms are also tighter with more deals having covenants and overall documentary turns being more conservative.

Pricing has increased 100 to 250 basis points, with the level of increase often tied to the complexity of the credit and the level of exposure to COVID-19 risk. Because the non-sponsor market had never gotten as aggressive as the sponsor market, there have not been as many changes in this sector.

Non-sponsored loans are still generally in the range of 2.5 to 4 times EBITDA. But pricing has increased about 100 basis points on average, based on what we're seeing so far in the marketplace. While the terms and pricing of deals in the market have improved a lot, the amount of deal flow has fallen.

Our weekly pipeline is down 40% to 50% from pre-COVID level, which we believe is less of a decrease than many firms have experienced in the market. We believe this lower decrease is due to the large number of direct originators we have in 12 markets across North America. We're taking a very conservative view towards adding new assets into the BDC.

Any assets added will be done with an evaluation of resulting liquidity, vis-à-vis expected repayment on other accounts. At the moment, we have two mandated deals expected to be added to the BDC portfolio in Q2. One will go into the JV and the other priced at LIBOR 850 will go into the BDC balance sheet.

Both of these deals are first lien and are levered at less than 4 times and both of these deals are at less than 50% loan-to-value. That said, there can be no assurance that either these mandated deals will close.

For most of our credits in Q1, the financial impact of COVID-19 on a reported covenant basis was very limited and we expect to see much more impact on financial performance across the portfolio, when Q2 financials are reported in August of 2020.

In several situations, where there'll be covenant violations or where interest being paid in kind, there are likely to be fees associated with these actions that should enhance long-term value to our investors.

In addition, we will expect there'll be very limited voluntary repayments of existing loans, while the debt markets and the economy are impacted by COVID-19 and it's after effects. Over the past four years WhiteHorse Finance, management has sought to position the BDC to exhibit as much stability as possible through an economic decline.

We have attempted to avoid deeply cyclical sectors and have only made loans where we believe a repeat of the Great Recession would allow us to recover 100% of our loans. We have focused on moderate leverage, first lien lending and have not originated a new second lien loan in over two years.

We also have taken a conservative position on our liquidity, making sure that we have a top-tier leverage partner and managing a significant cushion on our borrowing base.

We understand this is a very challenging time for our shareholders and our employees, with an unprecedented level of uncertainty, I want to assure you that we are fully operational and working hard to maximize the performance of the WhiteHorse Finance portfolio.

We always have been committed to providing you with complete transparency and that will continue. Before I turn the call over to Joyson, I do want to quickly note that in aggregate, insiders bought 167,925 shares during the quarter, as we continue to believe in the strength of our platform, despite the recent disruptions.

With that, I'll now turn the call over to Joyson to go over our financials..

Thank you, Stuart, and thank you all for joining today's call. During the first quarter we reported GAAP net investment income of $6.1 million, or $0.297 per share. This compares to $7.7 million or $0.375 per share in the prior quarter.

Core NII was $5.5 million for the quarter, or $0.267 per share, after adjusting for a $0.6 million reversal of the capital gains incentive fee accrual. This compares to $7.9 million or $0.385 per share in Q4. We reported net unrealized losses in our portfolio of $28.2 million, primarily driven by markdowns on five positions.

We also had a decrease in the fair value of our STRS JV investment of $4 million due to underlying markdowns in its portfolio. Fee income during the quarter was $0.3 million which reflects the lower volume of nonrecurring fee activity from waivers amendments as well as prepayments. This compares to fee income of $2.1 million during Q4.

Fee income can vary meaningfully by quarter. After considering our net realized and unrealized losses, we reported a net decrease in net assets resulting from operations of approximately $21 million.

As of March 31st, 2020, net asset value was approximately $284.7 million or $13.86 per share which compares to $313 million or $15.23 per share as reported in the prior quarter, primarily driven by the markdowns in our portfolio during the first quarter.

As it pertains to our portfolio and investment activity, nearly 67.5% of portfolio carries either a two or one risk rating on a scale of one to five where an asset rated two is performing according to our initial expectations and an asset rated one has performed better such that the risk of loss has been reduced relative to those initial expectations.

Turning to our balance sheet, we had cash resources of approximately $28.1 million as of March 31st, 2020 including $11.6 million of restricted cash and approximately $19.1 million of undrawn capacity under our revolving credit facility excluding the $100 million accordion under the revolver.

We continue to closely monitor our asset coverage ratio and feel comfortable with our leverage as of March 31st, 2020. The company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 196.2% at the end of the first quarter, well above our requirement under the statute of 150%.

Our net effective debt to equity ratio after adjusting for cash on hand was 0.94 times as of the end of the quarter. Next, I'd like to highlight our quarterly distribution.

On March 17th, we declared a distribution for the quarter ended March 31st, 2020 of $0.355 per share for a total distribution of $7.3 million to stockholders of record as of March 27th, 2020. The distribution was paid to stockholders on April 3rd, 2020.

This marks the company's 30th consecutive quarterly distribution since our IPO in December 2012 with all distributions at the rate of $0.355 per share per quarter. I'll now turn the call over to the operator for your questions.

Operator?.

[Operator Instructions] The first question will come from Mickey Schleien with Ladenburg. Please go ahead..

Yes, good afternoon Stuart and Joyson hope you're well.

Stuart could you give us a sense of the portfolio's average -- the borrower average EBITDA and the trends that you saw in that figure in the first quarter?.

I can only estimate it. Mickey hello. I hope you're doing well and staying safe. The average EBITDA that we have had across our portfolio over the last couple of years has been about $25 million. And that ignores a few outliers that we have where we bought a broadly syndicated credit at a discount like Syncsort.

We did not see any material change in average EBITDA at the end of Q1 Mickey because the COVID impact really was only for the last couple of weeks. And so even for companies that are impacted the impact was muted by the fact that it was only over a couple of weeks.

But as I've shared, when we did our marks on the assets at the end of the quarter, we did have visibility into what was going to go on based on the projections of owners and management for Q2 and many companies are going to see significant changes in EBITDA in Q2.

Companies with high impact, like the fitness companies and the event company, have largely seen revenues go away and therefore those companies are in a cash-bleed situation and we're working with the owners to give those companies liquidity to get through the air pocket of COVID.

But then the companies that are moderately impacted are companies where a portion of their sales have been knocked out due to COVID.

That could be the restaurant franchiser that I referred to where a number of their locations are closed or that could be the medical services companies which are impacted by the fact that elective procedures have been terminated for what is most of Q2.

So, we do believe that the vast majority of the moderately impacted companies that will see a Q2 impact, we'll see, a lift back a spring back in earnings in Q3 and Q4.

But the thing that we don't know yet and no one knows yet is how long the COVID impact will sustain in the economy and what the COVID impact will be after the reopening that is apparently getting underway in much of the country..

I certainly agree with that sentiment Stuart. And in terms of supporting your borrowers' liquidity I think you mentioned about half the portfolio is sponsored and half is not.

So, with respect to the proportion that's sponsored, how are those relations -- how are those sponsors behaving particularly Stuart since a lot of them have had dry powder for a long time and some of those funds are getting kind of long in the tooth and I'm interested to understand how much incentive do they have to continue to inject liquidity into borrowers late in the cycle of the life of those funds?.

Mickey our experience so far has been really good. Wherever a company is expected to come back from the COVID crisis and have value, the private equity firms have been willing to either already inject equity or they are actively negotiating to inject equity.

It's only in a situation where the private equity firm that believes that the impact of COVID is going to basically sync their equity that they won't inject new equity to protect themselves. And so far that is a very small minority of the situations we're facing into.

So the news has been positive on virtually every account that is needing liquidity from its owner..

That's good to hear. Just a couple of last question Stuart.

Were there any reversals of interest income in the quarter for the nonaccruals? In other words, did you reverse some interest that you accrued in Q1 -- in prior quarters in Q1 for the nonaccruals?.

Joyson?.

Yes. Hi Mickey. That was not the case. So we did not have any reversals of previously accrued. We just ceased accruing during the quarter..

During the quarter, okay. And lastly Stuart, just a more difficult question. But -- the stock has obviously had this long-term overhang issue from the pre-IPO shares and I'm sure those LPs are interested in liquidity just like everybody else. But pre-COVID there was a sense that well maybe that could be solved this year.

I'm interested in understanding how HIG and Bayside is thinking about dealing with that in the environment that we're in? In other words is that just like off the table now and we'll deal with this later? Or any thoughts in that regard would be really helpful..

they can always change their mind. So all I can share with you is they're thinking at the current time..

Appreciate that and that’s it for me. Actually I appreciate the time and I hope everyone there stays safe and healthy. Thank you..

Thank you. .

The next question will come from Tim Hayes with B. Riley FBR. Please go ahead..

Hey good afternoon, Stuart. I hope you're doing well and appreciate all the disclosure in the prepared remarks. My friend, if you could just maybe touch on the use of capital a little bit more. I know you made it clear that your intent is to be prudent with new investment going forward and that repayment activity likely to be a little bit lighter.

But do you anticipate cash flow will be used to delever? Or just kind of held on the balance sheet so that it's readily dispensable to support existing portfolio companies?.

We are going to continue to monitor the situation with COVID. We're running all sorts of projections as to what could happen. And we want to make sure that in our worst downside projection that we do not get to a situation where we would trigger margin call and the need to sell assets into a disruptive marketplace.

So first and foremost, we want to make sure we preserve value for the shareholders. If in our downside cases that we run and we look at weekly or biweekly we have room to selectively add assets as cash flows come in then that is exactly what we will do.

The assets that we're adding in this market environment are more attractive than anything we've seen since 2011 since really before the BDC was formed. And where possible and where prudent we want to take advantage of the market conditions to put these really good senior secured assets on the books.

But we will only do so, so long as in a downside scenario -- our worst downside scenario we do not believe we are putting at risk the liquidity of the BDC to avoid that type of downside for our shareholders..

Got it. Okay. So -- yes clearly still looking to play a little bit offense here, where it makes sense. And I know you gave color around what's expected to close on the origination side so far in the second quarter.

Would you be able to comment on just on the repayment side, if you've seen anything come through since quarter end or expect anything to repay before the end of June?.

We have one borrower with a significant position whose name I'm not willing to disclose who has alerted us that they're going to repay us in the next 30 days. Given market conditions and the fact that any given week anything can happen, we're not relying on that going on. But we have gotten a notice from someone that that would occur.

So it's possible that we will see a significant repayment in Q2 on at least one account..

Okay. That's helpful. And then on the JPMorgan credit facility and I apologize, I haven't looked through the credit agreement recently.

But what flexibility does JPMorgan have to change haircuts and/or spreads if conditions deteriorate? Just curious, if they've given any indication that that could be on the table?.

Well the terms of our agreement are locked in and were recently revised to be more favorable to us with higher advance rates, lower spread. The key issue is that JPMorgan has the ability to mark the assets. And if we disagree with their marks, we can challenge those marks and work with a third-party to get to a mark we all agree on.

The practical reality is we're so far inside of the advance rates that are the limits to our facility that even if we don't agree with JPMorgan on any given mark, it's not worth arguing about at this point because we're nowhere near our advance rate limits.

But what we will do and what we plan to do, if the go-forward situation in the economy leads to more pressure on the marks and we start to have any level of concern that JPMorgan's marks are inappropriate, we will trigger our rights to use a third-party to get to a valuation that is a reasonable valuation.

But at the moment, again we are very far away from any of the limits that we have. We were running the BDC at about 50% advance rate, even though our facility allowed for a 60% advance rate. And that cushion allows us to be able to still play some offense even given what's going on in the marketplace..

Got it. That's helpful. And then just one more for me.

I know it's a Board decision but just thinking about the dividend in the context for your preference for liquidity and earnings power kind of falling well below the dividend this quarter, just curious if you will – if you intend to recommend a reduction in the dividend to the Board? And when do you anticipate that dividend could be declared?.

So we need to evaluate the core earnings power of the BDC based on what is going on each quarter. As you've seen, waiver fees, amendment fees and prepayment penalties were very low this quarter but we don't know what they're going to be for Q2 yet. So we don't yet know what the core earnings for Q2 will be.

That said, I've tried to be proactive in communicating that if the core earnings are significantly different than the dividend level we may recommend to the Board that the dividend for Q2 or Q3 be reduced temporarily from the $0.355 normal dividend level.

And that would be focused on preserving liquidity and making sure we're not doing anything that risks long-term value to the shareholders. The other thing I'll mention, we have a rollover profit from our RCS gain that makes it such that if we don't pay a full dividend we can trigger tax liability.

And so our decision on what to do vis-à-vis the dividend is partially driven by the core earnings and the liquidity and then partially driven by the tax liability that will be triggered by paying a lower dividend. So we're trying to take all material things into account in terms of making that decision..

Right. That was actually going to be kind of part two of my question. So thanks for that comment. And I guess just to somewhat summarize that a little bit.

It sounds like where you set the second quarter dividend will be largely a reflection of kind of near-term earnings power but you could maybe – so the dividend you're not necessarily taking a long-term outlook with where you would maybe position it in the second quarter then you could maybe look to rightsize it again, whether that's up or down as conditions improve or deteriorate.

Is that the right way to think about it?.

Yes. We will take into account all the data we have including whether we take a significant repayment to look at cash and liquidity and then try to optimize based on the actual results in Q2. And understand, we're in the midst of it. So there's nothing specific I can share.

But I did mention on my prepared remarks that in Q2 and Q3, we are likely to see covenant defaults and requests for interest deferrals and those situations normally are accompanied by either increases in rate or fees. And so it would not be unexpected that there would be higher fee income in Q2 or Q3 than there was in Q1.

Again too early to know for certain. But directionally speaking, waiver fees and amendment fees have historically topped up our income and given us more earnings in each quarter..

Right. Right. Good. Thanks for the reminder there on that. All right that’s it for me. Thanks Stuart. Appreciate it..

Thank you, Tim.

The next question will come from Bryce Rowe with National Securities. Please go ahead..

Thanks, good afternoon..

Hey, Bryce..

Hi, Stuart I was curious, number one, you obviously talked about broad market versus company-specific impacts within the unrealized losses for the quarter and perhaps you could quantify that.

And going through the schedule of investments you can see where those assets that are marked below 90 and those that are above 90 so would you direct me to that? Or do you have kind of a specific number to share in terms of what was more broad market and what was more company-specific in terms of the NAV per share compression?.

Bryce, I tried to give as much as I could in the prepared remarks there indicating that for the most part the assets that are marked in the low to high 90s are things that are impacted by price moves in the marketplace. And that for the most part the COVID-impacted accounts are marked at below 90..

Yeah. Okay..

But even in the COVID affected account, a part of the markdown is the increase in rates in the marketplace right? So if something is marked at 80, then a part of that mark was the credit deterioration and a part of that mark was the price deterioration..

Okay. That's fair. Obviously your debt portfolio is 100% floating rate and we've seen LIBOR come down pretty dramatically from the end of March.

I was wondering what percentage of the debt portfolio is tied to one-month LIBOR and what percentage is tied to three months, so we might have a better idea of how the portfolio or the yield will be impacted here in the second quarter and beyond?.

Borrowers normally have the ability to choose between one-month and three-month LIBOR. But more importantly, we have LIBOR floors of 1% to 1.5% on virtually every deal in the portfolio. In fact Joyson can confirm it for me. But I think there may only be one or two deals in the entire portfolio that don't have LIBOR floor.

So we're protected from downside at this point on LIBOR given that both one-month and three-month are well-below 100 basis points..

There are three positions that have a 0% LIBOR floor. All others as Stuart had mentioned are north of that. So the average -- weighted average floors is just above 1%..

Okay, all right.

I think all my other questions -- I had one for you Joyson or Stuart, you talked -- you mentioned the spillover that you have that you're carrying right now, can you quantify what that dollar amount is for us?.

Yeah. It's approximately $17 million as of 3/31..

$17 million, one-seven?.

Yes..

Okay, thanks. That’s all I had. I appreciate it..

The next question will come from Rick Shane with JPMorgan. Please go ahead..

Thanks. Really two questions. First following up on Mickey's discussion related to sponsors. We're looking at the sponsors being the buffer during the short-term transition from the liquidity phase we went through in the beginning of this to the ultimate credit disposition, which will play out over the next several years.

I'm curious when you look at your portfolio, do you see having a lower percentage of sponsors in there as an advantage or disadvantage?.

It's a great question. I would say that what we have seen whether by luck or skill, I guess I'd really say it was luck, the majority of the more heavily impacted companies from COVID have been sponsor companies. And the sponsors are as I've really indicated, generally being very supportive of those companies.

The non-sponsor loans were done at lower LTV and lower leverage levels. And because none of the non-sponsor loans are in the highly impacted or very highly impacted category, those loans easily sustain losses of EBITDA of 30%, 40% or 50% and they can continue to perform.

So at the moment, we have not seen any negative bias from the fact that half our portfolio is non-sponsor loans. And again in fact just out of happenstance those loans on average have been less COVID affected than the sponsor loans..

Okay. That's great color. And I'm not going to give you a hard time for being lucky. There are a lot of people who would say that I'm lucky too. So I'm not going to criticize you for that. One question related to the spillover dividend.

So given the timing, does that set a minimum threshold for what you need to distribute by September 30th? Should we look at that when we consider the distribution as another factor that actually could cause you to distribute more than you would necessarily choose to?.

Joyson?.

Yeah, I think the way to look at it in similar to what Stuart had mentioned before is that's going to play one of the factors into our overall evaluation on the dividends quarter-over-quarter. So definitely tax is going to play a role on that right? But I think it is one of the factors, but it's not the sole factor in determining that..

Understood.

But so what time frame should we look at that $17 million is needing to be distributed by without triggering the tax benefit?.

Okay, fair enough. Yeah, understood now. So right, the dividend distribution need to be cleared by 10/15 of the current year right and paid out prior to 12/31..

Okay. That's the $17 million. I'm with you now. Okay, thank you very much..

The next question will come from Robert Dodd with Raymond James. Please go ahead..

Hi, guys.

Not to harp on too much on that theme, but on the dividend I mean -- and I realize again, yeah, this is a Board decision, but would there be contemplation of reducing the regular so to speak and then topping that up with a supplemental special distribution towards the end of the tax year? How many varieties of scenario are being contemplated there? And then, obviously, the other question is if you don't distribute it its corporate tax on it, what would the pay date of the corporate tax fee? And how much timing does that play into issues about managing liquidity over say the next six months?.

Robert, so far, the only conversation with the Board on the dividend was whether we paid the full dividend this quarter, which we decided to do and a discussion around liquidity and sensitivity for the coming quarter or two quarters.

There has not been any discussion around changing the permanent level of the dividend, or having it be some lower level plus a supplemental. I would say, our goal is to, as efficiently as possible, resolve the non-accruals and continue to look at the core earning power of the BDC.

And as long as that core earning power allows us to feel like we can earn $0.355 or more on an annualized basis, keep the current dividend in place.

And, again, if we're able to play some offense in this current market environment, where pricing is up quite significantly, that would support a higher core earnings for the BDC and we would again very much like to be able to keep the core dividend to $0.355..

Got it, got it..

The second part of your question I think belongs to Joyson -- the second part of your question I think is Joyson's..

Yes. Robert, I apologize, I have to go back and check in terms of the actual specific date that the corporate tax fee is due. I, obviously, know that the excise tax amounts in any particular year would be due with the filing of the extension in the subsequent year. But I have to go back on this one piece for you..

Okay. I appreciate that. I mean, just, to that point in terms of core earnings, again, Stuart, if I can. On the JV, I mean, this quarter, if I'm right, it's about $140,000 dividend from control entities, that seems relatively low today compared to the amount of capital that you've got invested in that. Obviously, it's still in ramp-up phase.

How long your target kind of return on invested capital for that vehicle? I think the presentation said there's 13% to 15%, if I'm right? How big does the asset base need to be? Or how far away time line do you think you are from generating that kind of return on invested capital on the amount you've put in? Because, obviously, that would also grow core earnings to the BDC as well..

The key to getting the returns off of the junior capital in the JV is ramping up the diversity, so we get the full benefit of the leverage line there. And we are actively moving in that direction and we'll hopefully have a constructive update on that next quarter.

We're not particularly worried about whether we get to the $75 million of deployment on the JV.

We're more focused on getting to appropriate diversity and maximizing the benefit of the credit line there, so that we can generate those 13% to 15% returns or higher, based on the fact that pricing in the marketplace has increased and that means some of the JV assets could have increased pricing as well..

Got it, got it. I appreciate that. Just a couple more, if I can, you can always cut me off.

On the JPMorgan facility, with the accordion feature the $100 million, what's the time frame necessary to invoke that? And has there been any contemplation of expanding that facility to date?.

We will, if we want to, but it's unlikely that we'll need to. With the cash we have and with the outstanding under that facility at the end of the quarter being about $220 million, I wouldn't see us adding enough assets to need to increase that facility. So we have it available if we want it. We could get it turned on in about probably two weeks.

But, again, very unlikely based on the current situation that we'd add enough assets in the current market environment to want to implement that trigger..

Got it, got it. And then if I can, one more. One, I think it was on response to Mickey. You mentioned, obviously, some of the businesses are having a substantial impact. And you mentioned -- yes, I can't remember your exact words now.

But what would be the conditions under which you would feel the need to obviously take the keys that potentially increases the liquidity needs from you to the portfolio company if you become the equity as well as the lender? So on those stressed portfolios, I mean, if you were to take those -- a couple of companies over, do you have the liquidity to support in actually taking that relatively aggressively?.

So, let me start by saying we deeply and strongly do not want to take over companies. We are not a vulture lender. We are not a loan-to-own shop. We are a par performing lender that wants to support the owners, be they sponsor owners or non-sponsor owners. That said we completely have the capability of taking companies over.

And if someone doesn't deal with us in good faith, then we will take companies over. And that is sort of always the silent threat that hangs over any negotiation with any sponsor or non-sponsor owner in regard to their supporting their company.

We will only take over a company if someone is dealing with us in, what we perceive to be, either bad faith or the owner has simply given up and hands us the keys. And then, we have an enormous amount of resources within the over 700 people at HIG to be able to understand and manage the turnaround of any type of distressed situation.

We have never had to take a company over before and I can tell you, with complete clarity, honestly, right now, there is no situation in the portfolio at the moment where I envision that we will need to take over the company. That could change, it could change in a week.

But at this moment, based on all the negotiations on all the workouts that we're doing, none of them would appear that they're moving towards us having to take the keys..

Got it. I appreciate that. Thank you..

The final question is from Greg Mason with Ares Management. Please go ahead..

Great. Good afternoon. Stuart glad to hear that you are doing well and safe. I wanted to follow up on Robert Dodd's question there on the accordion feature on the JPMorgan facility.

Is that exercisable at your sole discretion? Or do you have to bring in other lenders or get JPMorgan's approval for that? I know you might not have a need for it now, but just thinking about liquidity options for you.

Is that an option completely kind of at your discretion and disposal?.

They had credit approved the facility including the accordion, but they need to approve our request for the accordion increase. We have confirmed with JPMorgan as of quite recently that if we wanted it, it was still -- it is still available to us. But again, we don't see going in that direction.

That said, if I hear consistently from shareholders and analysts, the people want us to play more aggressively and not play defense that's a direction we could pivot. And if we pivoted in that direction we could trigger a $35 million accordion increase and book more assets as they come available.

But for the moment based on all the feedback we have within the firm and from external players, we've gotten the best advice that we should play very conservatively. And again we do have room to play some offense.

And if we get that repayment that someone has indicated they're going to give us that would be replacing a pre-COVID asset with a post-COVID asset and that could also be a good credit event for us..

Yes. Great. And I didn't mean that to say you should be playing offense. I just want to know your liquidity available. If you have to put up more capital towards companies that you have that available. So -- could you -- I know this will be in the Q when it's filed.

But could you outline the STRS JV kind of where you guys are from your equity, Ohio's equity and the leverage that's being used on the facility right now? I see $123 million of total assets, but curious of the makeup of that capitalization right now..

Joyson, do you have that able to share?.

Just give me one second I apologize..

While you're looking up that Stuart you can -- my final question touching a little bit on some of the previous questions about the non-sponsor. We've been hearing a lot of BDCs talk about sponsors are willing to put up capital. Fortunately, you don't have any issues it sounds like with the non-sponsor right now.

But if this is prolonged and there does need to be capital put in from the non-sponsored how easily is that capital available in the non-sponsored deals that you're in? What is their ability to support the companies?.

So it's a great question and the answer is that it varies very widely. In the case of R.J. O'Brien the family that owns the company I believe has over $1 billion of worth and they could support the company easily. And in other situations the owners have much less available capital.

We are always prepared especially on our nonsponsored companies to provide ease of liquidity where appropriate, but we often will get equity upside associated with doing that. And so if we provide additional liquidity that gets a commensurate upside in the future for the deployment of capital.

I can also tell you that across all of the accounts that we're negotiating with right now, there is only one account that I can think of -- no maybe two accounts where in return for new capital coming in we're agreeing to fund additional capital.

So in terms of having enough room to play defense with the BDC, we have plenty of room based on anything we're seeing right now and leaving plenty of room for things to change. So again, that's a part of the liquidity and defensive strategy that we're playing at the moment.

But there are very few situations where the owners of these companies are not solving the liquidity problem. And then frankly in the non-sponsor book I cannot think of a single situation right now where a company has a liquidity situation that we're needing to weigh in to do anything on..

All right. That's great. That does it for all my questions. If you have JV info that would be great. If not have a great day..

Yes Greg. So -- and just to clarify I'm sure you've already realized this. So the investment in the JV is structured in the form of both sub notes and pure equity investment. So at 3/31 the total amount of sub notes on the JV is approximately $60.9 million.

And then we have approximately a little more than $15 million of equity in the JV that's combined with STRS' partners..

And then we have 60% of that and they have 40% of that.

Right, Joyson?.

That's correct..

All right. Thank you guys appreciate it..

There are no further questions at this time. I would like to turn the conference back over to management for any closing comments..

I hope everybody stays safe and secure and we will continue to run the BDC conservatively, do our best to maximize dividend payout and dividend stability and give you as much transparency as possible.

We tried to do that with a letter prior to this call and then have tried in this call to be transparent and proactive about the information we're sharing with you to give you a sense of how much stability the BDC has hopefully giving investors’ confidence to invest with us long-term. That's all..

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect..