Earnings Call Transcript - WHF Q4 2021

Operator, Operator

Good afternoon. My name is Ashley, and I will be your conference operator today. I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter and Full Year 2021 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 5:00 p.m. Eastern Time. The replay dial-in number is (402) 220-4942. It is now my pleasure to turn the floor over to Robert Brinberg of Rose & Company. Please go ahead.

Robert Brinberg, Introducer

Thank you, operator, and thank you everyone for joining us today to discuss WhiteHorse Finance’s fourth quarter 2021 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 related to the 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 Fourth Quarter 2021 Earnings Presentation, which was posted on our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Stuart Aronson, CEO

Thank you, Rob, and good afternoon. I appreciate everyone joining us today. As you might know, we issued our press release this morning before the market opened, and I hope you have reviewed our results for the period ending December 31, 2021, which are available on our website. I will start by discussing our fourth quarter and full year results as well as current market conditions. Joyson Thomas, our Chief Financial Officer, will then provide a more detailed analysis of our performance, after which we will open the floor for questions. We are pleased to announce robust results for both the fourth quarter and the full year. In 2021, core net investment income totaled $1.405 per share, up 12.5% from $1.249 per share in 2020. These financial results highlight the strong originations for the quarter and the year, with $483.2 million in gross deployments for the year and $199 million for the fourth quarter alone. Our gap net investment income for Q4 was $7.5 million or $0.331 per share, while core net investment income was $7.3 million or $0.322 per share. This is a comparison to Q3 core net investment income of $7.8 million or $0.372 per share, adjusted for the capital gains incentive fee reversal and accelerated amortization of deferred issuance costs from retiring our $35 million baby bond issuance. Further, due to strong originations and a favorable deployment outlook, we completed a secondary offering of shares, issuing 2.2 million shares at an average price of $15.81, generating approximately $33.7 million in new proceeds. Notably, we issued these shares at our then net asset value per share, with issuance costs covered by our management company. We quickly deployed these proceeds between the end of Q4 and Q1, minimizing any negative impact on earnings per share. To support the offering, WhiteHorse Advisors contributed $0.28 per issued share to help subsidize underwriting fees. The net asset value per share at the end of Q4 was $15.10, decreasing by $0.36 from Q3, primarily due to markdowns on investments in PlayMonster and Grupo HIMA and the special dividend payment of $13.5 million to shareholders. NAV per share was also affected by the delay in deploying capital from our follow-on offering during Q4. This quarter marks the company's 37th consecutive quarterly distribution paid since our IPO in 2012, maintaining a consistent rate of $0.355 per share per quarter. Importantly, our NAV per share remains above our initial public offering price, indicating the strength of our platform, deal sourcing capabilities, and historically conservative approach to deal structuring. Q4 was a record-setting period for capital deployments, totaling $199.2 million, with $181.3 million going into 18 new originations during the quarter and the remaining $17.9 million funding add-ons to existing portfolio investments. Gross deployments were partially offset by $35 million in repayments, largely due to full realizations, yielding $164.2 million in net deployments. We financed these net deployments through new debt and equity issuances of $65 million and $32 million, respectively. However, our record deployment exceeded our fundraising, increasing the company's effective leverage to 1.31x. Part of this increase resulted from several delayed repayments. We anticipate these delayed repayments to occur throughout fiscal year 2022, likely reducing our leverage levels. As previously mentioned, I’m pleased to report that the proceeds from the follow-on share offering were deployed between the closing of the offering and the end of the quarter. We are pleased with the pace of capital deployment, with 12 of the 18 new originations being sponsored and six non-sponsored, maintaining an average leverage level of only 4x. Notably, all these deals, except for one, were first lien transactions. By the end of Q4, over 95% of our debt portfolio was first lien, and 100% was senior secured. We continue to seek to add second lien loans to balance our portfolio but only found one that met our conservative risk criteria in Q4. Due to a shortage of suitable second lien loans, our portfolio now includes about 5% second lien loans, compared to our target of closer to 15%. As long as our portfolio remains heavily weighted in first lien loans, which carry lower risk and returns than second lien loans, we will consider operating the BDC at a higher target leverage of up to 1.35x to ensure we can consistently meet the $0.355 dividend on a quarterly basis. Looking at our overall investment portfolio, its fair value increased to $819 million at the end of Q4, up from $687 million at the end of Q3. The weighted average effective yield on income-producing debt investments was 9.1%, slightly down from the Q3 level of 9.3%. Non-accruals represented 1.3% of our debt portfolio, unchanged from Q3. Grupo HIMA remains on non-accrual status, and PlayMonster was placed on non-accrual status in Q4. The stability in non-accruals as a percentage of our debt portfolio at fair value is due to growth in our overall portfolio size. As indicated during our last earnings call, we marked down Grupo HIMA to 42% of par value in Q4, and we expect it to remain on non-accrual until restructuring negotiations conclude. We anticipate another markdown in Q1 based on new data since year-end. We marked PlayMonster down to 65% of par, and in Q1, lenders gained control of that company. Regarding supply chain disruptions and rising labor costs, most of our portfolio companies have managed to mitigate these impacts, generally passing on cost increases to customers, which has kept revenues steady and EBITDA stable or increasing. Our portfolios are well-insulated from rising interest rates, with reasonable debt and leverage levels; overall, our portfolio benefits from a rising rate environment as 99.6% consists of floating rate debt investments. We successfully utilized our joint venture, generating approximately $2.2 million in investment income for the BDC during the quarter, compared to $1.8 million in Q3. In Q4, we transferred $35.1 million in investments to the STRS JV, including three new deals, one add-on, and a portion of another deal, receiving $31.7 million in cash as well as a $3.4 million in-time contribution to the JV. The fair market value of the JV’s portfolio stood at $259.5 million as of December 31, with an average unleveraged yield of 7.9% at the end of Q4, down slightly from 8% in Q3. The JV’s portfolio comprises solely first lien senior secured loans. We are satisfied with the income contribution from the JV, which has produced an average annual return on equity in the low teens, supporting higher returns for shareholders and relevant in the current market context. We made an incremental $25 million commitment to the JV in Q1, increasing our economic interest from 60% to 66.7%, providing additional capacity for scaling and diversifying the JV’s portfolio, enhancing our earnings stream. Meanwhile, the market remains active, with a deal flow pipeline at an all-time high. The sourcing process is competitive, particularly for on-the-run sponsor deals where pricing, leverage, and documentation terms have returned to pre-COVID norms. While we anticipate high origination activity levels, we maintain a cautious approach, underwriting to conservative downside scenarios. Documentation terms and EBITDA adjustments in the off-the-run sponsor market (private equity firms with sizes below a billion dollars) are less aggressive than in the on-the-run sponsor market. Our physical presence in 12 regional markets provides us significant off-the-run sourcing advantages. Consistent with previous quarters, competition for non-sponsored deals is lower, allowing us to source attractively priced transactions with favorable leverage profiles. WhiteHorse differentiates itself through a three-tier architecture, leveraging resources and affiliations with H.I.G, a leader in mid-market investing. The WhiteHorse platform now includes 64 deal professionals focused on direct lending, and H.I.G provides access to a 20-plus person business development team using its proprietary prospect database of over 20,000 contacts. We benefit from our relationships with over 400 investment professionals at H.I.G, which yields a high-quality pipeline in competitive environments. So far in Q1, we have closed eight deals and are working on seven new mandates, including add-ons, with targeted closings in Q1 and Q2. Five of the eight closed deals are sponsor transactions, and five mandates are from sponsors divided between new originations and add-ons. It's likely we'll achieve a record number of transactions in Q1. The exceptional pipeline growth and these mandated deals enable the BDC to expand its portfolio and grow the JV, ultimately leading to higher income and greater dividend coverage. However, some pipeline deals may not enter our BDC portfolio as we manage our leverage towards the target of 1.35x or below, assuming a low concentration of second lien loans. In closing, we are well-positioned to continue executing our three-tier sourcing strategy while maintaining rigorous underwriting standards in the new year. Overall, our portfolio remains high quality and healthy. We are optimistic about 2022, and while cautious about cyclical industries, the ongoing pandemic effects, the war in Europe, and the competitive credit market, we believe in the strength of our team and sourcing and underwriting processes. Furthermore, the additional capital raised late last year and the incremental contribution to the JV will provide a strong advantage for our financial performance in Q1 and throughout 2022. Now, I will turn the call over to Joyson for further performance details and a review of our portfolio composition.

Joyson Thomas, CFO

Thanks, Stuart. And thank you everyone for joining today's call. During the quarter, we recorded GAAP net investment income of $7.5 million for $0.331 per share. This compares to $7.6 million or $0.36 per share in the third quarter. Core NII was $0.322 per share after adjusting for the $0.7 million net impact of accelerated amortization of deferred debt cost associated with the retirement of $35 million baby bonds, as well as $0.9 million capital gains incentive fee reversal. Q4 fee income was $0.3 million compared with $1.2 million in the prior quarter. The decrease was due to reduced prepayment and amendment activities during the current quarter. To that end, I'd like to highlight that a number of the anticipated repayments that were expected to occur in Q4 were pushed into 2022, so we expect to see fee income and accelerated OID accretion from these prepayments over the first half of 2022. We reported a net increase in net assets resulting from operations of $3.1 million. Our risk ratings during the quarter showed that 90.1% of our portfolio positions carried either a one or two rating as compared to 88.9% in Q3. Regarding the JV specifically, we continued to grow our investment. As mentioned earlier, we transferred three new deals, one add-on transaction, and the remaining portion of one previously transferred deal, which aggregated to approximately $35.1 million in exchange for a net investment in the JV of $3.4 million, as well as cash proceeds of approximately $31.7 million. As of December 31st, the JV’s portfolio held positions in 28 portfolio companies with an aggregate fair value of $259.5 million compared to 27 portfolio companies at a fair value of $239 million in Q3. The investment in the JV continues to be accretive to the BDC's earnings. We expect the yield on our investment in the JV may fluctuate period-over-period, as a result of the timing of additional capital invested, the changes in asset yields in the underlying portfolio as well as the overall performance of the JV’s investment portfolio. Turning to our balance sheet. We had cash resources of approximately $22.5 million as of December 31st, including $10.3 million restricted cash. At quarter end, we had approximately $43.4 million undrawn under our revolving credit facility. As mentioned during last quarter’s earnings call, I'd like to note that on October 4th, 2021, the terms of the credit facility were amended to, among other things, allow us to temporarily upsize the credit facility by $50 million, which allowed the BDC to borrow up to $335 million for a three-month period beginning on October 4th, 2021. Subsequent to quarter end, this was amended to permanently upsize the credit facility by $25 million to $310 million in total, and to extend the previous $25 million temporary upsize through April 4th. This provides significant flexibility to better account for timing differences between anticipated prepayments and originations. As of December 31st, 2021, the company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 172.6%, which was above the minimum asset coverage ratio of 150%. Our Q4 net effective debt to equity ratio after adjusting to cash on hand was 1.31x as compared with 1.14x from the prior quarter. Turning to capital raising activities during the quarter. During Q4, we successfully completed a primary offering of 2.2 million common shares at a public offering price of $15.81 per share resulting in net proceeds of approximately $33.7 million. As Stuart has mentioned, these proceeds were quickly deployed to new investments, which speaks to the breadth and quality of our broad pipeline. In November, WhiteHorse Finance announced the closing of the registered public offering of $75 million, 4% notes due 2026, which resulted in net proceeds of approximately $73.5 million. A portion of the offering proceeds were used to redeem our $35 million, 6.5% notes that were due 2025. Shortly thereafter in December, we sold $25 million of 4.25% notes due 2028 in a private placement offering to a qualified institutional buyer. Before I conclude and open up the call for questions, I'd like to highlight distributions. On November 9th, 2021, we declared a distribution for the quarter ended December 31st, 2021 of $0.355 cents per share to stockholders of record as of December 20th. The dividend was paid on January 4th, 2022. In addition to our quarterly distribution, we elected to declare a special distribution of $0.135 cents per share for stockholders of record as of October 29th, 2021 as we continue to monitor spill-back income and manage the excise tax. The distribution was paid on December 10, 2021. Inclusive of this special distribution, total distributions paid in 2021 were $1.555 per share. Finally, this morning, we announced that our Board declared a first quarter distribution of $0.355 cents per share to be payable on April 4th, 2022 to stockholders of record as of March 25th, 2022. This will mark the company's 38th consecutive quarterly distribution paid since our IPO in December 2012, with all distributions consistent at the rate of $0.355 per share per quarter. 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 the portfolio in addition to other relevant factors that may warrant consideration. With that I'll now turn the call back over to the operator for your questions.

Mickey Schleien, Analyst

Stuart, can you give us some sense of how your borrowers’ revenues and margins are trending and how do you feel about their ability to service their debt, given all the headwinds we’re confronting, including the potential for rate increases?

Stuart Aronson, CEO

Mickey, it's a great question. As you know in certain parts of the leverage finance market people are making loans that are regularly at 6.5x to 8x leverage on an EBITDA basis and 10 to 12 times leverage on a cash flow basis. That is not our strategy. As I mentioned earlier, our average originations this quarter, were at 4x EBITDA. When you do that on a cash flow basis, more typically our originations are at about 5x or 5.5x cash flow, which leads to very strong debt service coverage levels on the companies that we finance and leaves room for interest rates to move up very considerably before it would put pressure on the ability of our companies to service debt. In general, what we're seeing in our portfolio and I've heard from evaluation services, they're seeing this across the market, the vast majority of companies that are experiencing supply chain cost increases and labor cost increases are successfully pushing those through to their business and consumer customers, and revenues are generally growing in the majority of our portfolio, and EBITDA levels are either being maintained or increasing. So general portfolio performance is strong and even on the COVID-affected accounts with the exception of Grupo HIMA, which still remains quite bad, but all the other COVID-affected accounts are improving either gently or in some cases, very significantly.

Mickey Schleien, Analyst

Thank you, Stuart, that's a helpful explanation. If I could just follow up, I know that you tend not to invest in cyclical companies, which is common in the BDC sector, but within the portfolio companies that you've invested in, do they have any outside risks in terms of their cost inputs to either the sanctions that are developing in Europe or to commodity prices in general that we should be aware of?

Stuart Aronson, CEO

We do have companies that have inputs that are linked to oil and those companies are obviously seeing and will probably continue to see increased price pressure. But again, we have seen with, I would say literally every company in the portfolio that cost increases have been able to be pushed through. There seems to be an acceptance across the market that increased costs are requiring pass-throughs. And of course, we're all reading about that and hearing about that every day in terms of the inflation rate in the country. We definitely see that going on in our portfolio, and it's not only gone on in prior months but we have a number of portfolio companies that are doing price increases right now in March and April. And the feedback we're getting is that their customers, which include places like Walmart and Whole Foods are accepting those price increases understanding the nature of the pressures that are being put on companies.

Mickey Schleien, Analyst

Thank you, Stuart. I appreciate that explanation. Just one last housekeeping question maybe for Joyson, can you give us a sense of where your undistributed taxable income ended for the year net of the special distribution you made?

Joyson Thomas, CFO

Making pro forma for the regular distribution that was paid in January of 2022, undistributed income is approximately about $29.5 million.

Mickey Schleien, Analyst

$29.5 million. Thank you, Joyson. I have a couple more questions, but I'll hop into the queue to give someone else a chance to ask questions. Thank you.

Bryce Rowe, Analyst

Thanks for taking the question, and good afternoon. I think a lot to talk about here, a lot to digest. Wanting to maybe start with trying to size out the deal activity you've seen here in the first quarter, both closings and mandates, and then what that looks like relative to the repayment activity that kind of spilled over into the first quarter.

Stuart Aronson, CEO

Yes. In Q3 and Q4, we were alerted by a large number of borrowers that they intended to repay, most of those repayments were from intended sales of the company. A lot of those sales have not consummated yet. Some of them are going to consummate here in Q1. Some of them are expected to consummate in Q2 or Q3. Some of them have been pushed out until later in the year. So, we are not getting the repayments that we have been told to expect back in Q3 and Q4 of last year. And at the same time, our business volumes have been exceptionally strong at WhiteHorse as a consolidated entity. We had a record Q4, as evidenced by the record performance for the BDC in the addition of assets. Then on top of that, while this is not necessarily true across the whole market, we are also experiencing a record Q1 where at the WhiteHorse direct lending unit, we are likely to close 75% to 100% more volume than we closed in Q1 of 2021, 2020, or 2019, for that matter. The volumes are so strong that given where we are on the leverage in the BDC there is not room in the BDC to put all of those assets in. And so we are targeting only higher yielding assets for the BDC in support of trying to consistently earn the dividend. If we saw a surge of repayments, we currently have plenty of origination volume to replace those. And so long as I mentioned in the prepared remarks, so long as we are not doing many second lien loans and the second lien concentration stays well under the 15% target, we will operate the BDC at a slightly higher leverage of about 1.35x as opposed to the prior target of 1.25x. That larger asset balance and those more assets will generate more income that will help us cover the dividend on a more reliable basis.

Bryce Rowe, Analyst

I have a couple of follow-up questions regarding your comments. When you mentioned higher yielding, could you clarify what that means? Additionally, you've increased your commitment to the joint venture, which you've discussed previously. I'm curious about how quickly you plan to invest that $25 million into the joint venture now that you have such a strong pipeline.

Joyson Thomas, CFO

Bryce, our existing pipeline has deals that are mandated that are supposed to close, although there never can be assurance that deals will close, that would consume all of that incremental $25 million of allocation to the JV. So, based on projections and subject to the caveat that sometimes deals don't close as planned, if mandated deals close as planned, all of that JV capacity will be utilized either by the end of Q1 or early in Q2. And to your other question, at this very moment, based on the limited capacity in the BDC, I don't have any new deals in my pipeline that I'm planning on putting on the balance sheet of the BDC, unless the yield on that asset is at least LIBOR seven. And I have several assets that are yielding in excess of LIBOR seven that I am targeting to put into the BDC. So it's a very high-class situation to be able to build the portfolio with the BDC with senior secured first lien assets that are yielding LIBOR 700 and above.

Bryce Rowe, Analyst

Yep. It certainly is. Think I'll jump back into the queue and maybe come back with a follow-up or two, but I'll give somebody else a chance. Thanks, Stuart.

Sarkis Sherbetchyan, Analyst

Thank you for the question. I want to revisit the new leverage target. With the increased concentration on first lien, this approach seems feasible. When I examine the balance sheet, can you clarify how it aligns with the current deal activity? It appears you will be selective in your choices. Based on the expected repayments or prepayments, it seems you plan to reinvest while maintaining the investment portfolio in a similar range, possibly focusing on higher yielding assets. Is that the correct understanding?

Stuart Aronson, CEO

At the moment based on the current pipeline of mandated deals, your assessment is exactly right. We should have no problem operating the BDC at about 1.35 times leverage, in fact I would say based on the current pipeline, which includes some repayments that are supposed to come in, at the moment our leverage today is actually a little higher and we're expecting several repayments before the end of the quarter. But we are currently in a situation where the originations activity across our both sponsor and non-sponsor side are very strong. We are finding good high yielding assets for the JV and good, even higher yielding assets for the BDC balance sheet. We will do our very best as we operate in the balance of Q1 and Q2 to optimize the risk return of the BDC portfolio.

Sarkis Sherbetchyan, Analyst

Great. That's super helpful. And then just shifting gears here a bit, I think if I look at the 4Q interest expense line, a bit higher than what I was anticipating. Is that because the debt extinguishment cost was inside there or should I be thinking about it in a different place?

Joyson Thomas, CFO

Sarkis, that is correct. The accelerated amortization from those debt issuance costs would be on the interest expense line.

Stuart Aronson, CEO

Can you share what that cost was, Joyson, just so people can calculate that in.

Joyson Thomas, CFO

Yeah. Thank you. The gross amount is approximately $800,000, 0.8 million. As I mentioned before, the net impact net of the incentive fee benefit was $0.7 million, that adjusted out to core NII.

Stuart Aronson, CEO

And on the first share basis, Joyson, that's about what, $3.5 a share?

Joyson Thomas, CFO

Somewhere between three and a half and four. Yep.

Sarkis Sherbetchyan, Analyst

Okay. Fantastic. That's all for me. I'll hop back in the queue.

Melissa Wedel, Analyst

Good morning. Thank you for taking my questions today. I wanted to follow up on your comments regarding the delays in repayment activity that have shifted into the first half of this year. Could you provide more context on what is causing these delays? Is there any cause for concern, or are companies holding onto capital more closely due to the heightened uncertainty in the environment? Any insights you could provide would be appreciated. Thank you.

Stuart Aronson, CEO

Yes. There's nothing bad and nothing concerning. I would say that what I've heard from some private equity firms or even some non-private equity firm sellers is that the bankers who were representing them told them that they could get certain valuations on their assets. And in some cases, those valuations came through at lower levels leading the equity players to not want to sell. So either that or they're delaying the sale until later in 2022. So none of those exits that have not yet happened are related to problem assets, all of the companies are performing. It relates primarily to the desired equity gains of the sellers of the company, and they are just holding on. In some cases, we have one credit where there was a planned sale in Q4. A strategic company is buying that credit. They're going for regulatory approval, and the regulatory approval has just taken longer than anticipated, so not a problem, and that one in particular, which is related to infrastructure spending, continues to do phenomenally well. So we do expect to see most of those repayments occur at some point during 2022, and I think we have even sitting there today, two or three more repayments that we're expecting during the month of March.

Melissa Wedel, Analyst

I appreciate the context. It's interesting that we've heard from various BDC managers recently about discrepancies between public and private market valuations, which could delay some deals. Some managers suggest this might slow down origination activity, while others believe it could increase demand for growth capital from the private debt market, potentially benefiting origination. Given the delays in some deal activity you've mentioned, I'm curious about the nature of your conversations with portfolio companies. Are they currently seeking growth capital? I understand that your BDC is constrained in new issuances, but any insights would be valuable. Thank you.

Stuart Aronson, CEO

Yes, our portfolio companies are performing well overall and are in a growth phase. Several of them continue to pursue add-on acquisitions or expand organically. The best way to assess the portfolio's performance is by reviewing our asset valuations. Historically, we have aimed for realistic valuations, which can fluctuate based on new quarterly information. The only asset consistently declining is Grupo HIMA, the second largest hospital chain in Puerto Rico. Its performance has been significantly affected by COVID and other ongoing issues in Puerto Rico. We are working diligently to improve this situation, but it hasn't been trending positively. Aside from Grupo HIMA, the rest of the portfolio is doing well, and even those impacted by COVID seem to be showing positive results, particularly now that the Omicron variant appears to be behind us. The preliminary results for February are mostly encouraging, with some being very positive.

Robert Dodd, Analyst

Good morning. I’d like to start with a question about Grupo HIMA and then move on to the origination question. You mentioned that performance is trending in the wrong direction. Could you clarify whether you are referring to the financials of Grupo HIMA or the negotiations regarding the work?

Stuart Aronson, CEO

The financial performance of Grupo HIMA has remained very poor, which has resulted in ongoing markdowns. We are implementing various strategies using resources at H.I.G. to improve the situation. Last quarter, we observed several outcomes that were both above and below our expectations. However, many of the more optimistic scenarios have not materialized due to the company's financial performance. Currently, we are unsure of how things will unfold, as it is a week-by-week situation. Nonetheless, we estimate that by the end of this quarter, there will be an additional markdown on that asset, likely in the range of $0.20 to $0.30 compared to the current mark of $0.42.

Robert Dodd, Analyst

The general trend this quarter has been a slowdown in Q1 among many BDCs and private credit participants, with expectations of rebuilding later this year. However, that doesn’t seem to apply to you, as your performance is significantly up compared to even pre-COVID Q1. Can you explain if there's a difference in the mix of channels through which you are obtaining these opportunities? Is the sourcing different for Q1 compared to Q4, which was also strong? It appears you’re outperforming the industry in terms of volume in Q1. What do you think accounts for this?

Stuart Aronson, CEO

All I can tell you is that we have representatives in 12 regional offices across North America. And so we don't rely on the New York and Chicago banks to bring us volume. We generate our own volume. And so what I've heard from some of the other players in the industry is that Q1 has slowed down a lot from Q4 and most people are experiencing what I guess they'd refer to as a normal Q1. That has not been the case for us. Our regional origination network, including both private equity and non-private equity deals has been exceptionally strong, frankly surprisingly strong. We didn't predict or budget that we’d be operating this heavily. My team, which is up to the mid-sixties number of people, is operating at almost a hundred percent capacity in Q1. I can't remember in my 35-year career ever being so busy, relatively speaking, in a Q1. We're being still equally selective on the deals we're doing. We're turning down anything that we think is too cyclical or too highly levered. We're also turning down deals where we think others are being too aggressive on price. But as a result, the portfolio of deals that we're closing are modest leverage, consistent with the history of what you've seen with our BDC, and the pricing is generally strong. My biggest frustration, to be honest with you, is I wish I had more capacity, because there are deals that I would've liked to have put into the BDC, where the BDC just can't take them unless I was going to operate at even higher leverage. We don't want to take the leverage up from what we're indicating to the market. So again, we're focusing on the higher yielding deals. I would say the deals going into the JV, which historically is focused on deals priced 550 to 650, I would say right now the JV deals will probably be all 600 and above, and anything going on the balance sheet of the BDC is likely to be at LIBOR 700 or above.

Sarkis Sherbetchyan, Analyst

Thank you. Thanks a lot. Yeah, appreciate it.

Stuart Aronson, CEO

No problem.

Mickey Schleien, Analyst

Stuart, just to follow up on your frustration about leverage at the BDC. With the stock trading above NAV, are you open to raising some common equity at these prices and unleashing some capacity?

Stuart Aronson, CEO

We always prioritize what we believe is best for the BDC shareholders. Currently, we have not pursued that option. The BDC has been trading above NAV consistently. Depending on future opportunities, we might consider it, but so far we have opted to focus on optimizing the portfolio with these higher yielding assets. Our goal is to establish a strong first lien portfolio with yields that allow us to reliably cover our dividend from quarter to quarter. As mentioned earlier, we faced a hit of about three and a half to 4 cents per share due to the writedown of the bond fees. Without that, earnings per share would have been higher. So, we remain optimistic. While there are no guarantees, we feel positive about our capacity in 2022 given our current position.

Mickey Schleien, Analyst

I understand. In terms of the cadence of your portfolio investments and exits in the fourth quarter, when I look at the trajectory you’re on, interesting versus the growth in the debt portfolio, it seems that your net investments were very much skewed to the end of the year. Is that correct? Or am I missing something?

Stuart Aronson, CEO

Yes. It’s quite common for many deals to finalize in December during Q4, which has been my experience over the last 35 years. So, there were also several assets involved, and a few transactions that were expected to close in Q4 ended up extending into Q1.

Mickey Schleien, Analyst

Understand. My last question, to what extent understanding that many of your notes are – unsecured notes are private. Can you give us a sense of which ones of them are callable at this point in time or in the near future?

Stuart Aronson, CEO

Joyson, do you have commentary on that?

Joyson Thomas, CFO

Mickey, as of the end of Q1 2022, we don’t have any that are callable. We do have some that will mature in 2023, and we will evaluate that likely in the second half of this year.

Mickey Schleien, Analyst

So those 2023s, which were the ones I was thinking about, do they have a call feature or is it more of a standard structure?

Joyson Thomas, CFO

They do. To clarify my response, some of these have call features that would require prepayment premiums. There are certain ones that could technically be redeemed with a prepayment premium. From that perspective, I think we might consider that later this year, but it's not currently a focus.

Mickey Schleien, Analyst

Fair enough. I thank you for that. Those are all my follow-up questions. I appreciate your time.

Bryce Rowe, Analyst

Thanks a lot. Wanted to just maybe ask a question about asset sensitivity both at the BDC and at the JV, Stuart or Joyson, can you give us a feel for what the weighted average floor is within the BDC’s debt portfolio and then how the JV’s asset sensitivity might look relative to the BDC or the floors similar within the JV?

Stuart Aronson, CEO

The LIBOR floors or SOFR floors across our portfolio are fairly consistently at 1%. There are a couple of deals with floors that are a little bit lower, 75 basis points. I think we have floors on either all of our assets or virtually all of our assets and that is consistent with our current pipeline as well. We are not adding any deals in Q1 that don't have LIBOR or SOFR floors.

Bryce Rowe, Analyst

That's great, Stuart. And more for me, the move to non-accrual for PlayMonster, any reversal of interest in the fourth quarter tied to that?

Joyson Thomas, CFO

There was none.

Operator, Operator

And there are no further questions at this time.

Stuart Aronson, CEO

Any other questions? As always, we seek to have transparency in what we share with the market. If between this call and the next call there's any topics that any of our analysts or shareholders would like us to address, please do let us know and we'll do our very best to be responsive. I thank everybody for their time.

Operator, Operator

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.