Earnings Call Transcript - WHF Q4 2023

Operator, Operator

Good afternoon. My name is Angela, and I will be your conference operator today. I would like to welcome everyone to the WhiteHorse Finance Fourth Quarter and Full Year 2023 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 4:00 p.m. Eastern time. The replay dial-in number is (402) 220-2985, and no pass code is required. All participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to Jacob Moeller of Rose & Company. Please go ahead.

Jacob Moeller, Analyst

Thank you, operator, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's fourth quarter 2023 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, 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 2023 earnings presentation, which was posted to 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, Jacob, and good afternoon, everyone. Thank you for joining us today. We released our earnings this morning before the market opened, and I hope you've had a chance to review our results for the period ending December 31, 2023, which are also available on our website. On today's call, I will start with our fourth quarter results and current market conditions. Then our Chief Financial Officer, Joyson Thomas, will provide a more detailed analysis of our performance, after which we will open up for questions. I am pleased to report strong performance for the fourth quarter of 2023. Our GAAP net investment income and core net interest income for Q4 was $10.6 million or $0.456 per share, which comfortably exceeded our quarterly base dividend of $0.385 per share. This is a slight decline from Q3's GAAP and core NII of $10.8 million or $0.465 per share. Our net asset value per share at the end of Q4 was $13.63, reflecting a 1.7% decrease from the previous quarter, primarily due to a $6.8 million negative mark-to-market adjustment in our portfolio. These markdowns stemmed from company-specific performances but were partly offset by increases across four credits, which I will elaborate on shortly. Regarding our portfolio activity, we had gross capital deployments of $56.9 million in Q4, allocating $54.1 million to eight new transactions and $2.8 million for add-ons to existing investments. This marked the highest origination activity level in 2023, though it was slightly lower than in previous years. The constraints we faced in origination were mainly due to a lack of deal opportunities in a slow M&A environment, which created a tight deal market. Half of our new originations in Q4 were sponsored deals while the other half were non-sponsor deals. The sponsored deals had an average leverage of about 4.3 times debt to EBITDA and were primarily first lien loans with spreads of 575 basis points or higher, averaging an all-in rate of 12%. During the quarter, we transferred four of these new deals and one add-on to the Ohio STRS joint venture for a total of $27.6 million in exchange for cash. I will provide more details on our joint venture activity shortly. At the end of Q4, more than 97% of our debt portfolio consisted of first lien, senior secured loans. Following our Q4 originations, our portfolio was approximately two-thirds sponsor and one-third non-sponsor. Total repayments and sales in Q4 reached $34.9 million, primarily driven by two complete and two partial realizations, along with $0.6 million in net repayments on revolver commitments. As I mentioned in our last earnings call, repayment activity was elevated during the first half of 2023, and we anticipate this trend will continue through 2024, helped by a resurgence in M&A activities and some companies refinancing at lower rates. Currently, we have insights into several likely repayments in Q1, with $39 million already in full repayments and sales across five investments to date. We aim to redeploy this capital into promising investments throughout this quarter and beyond. Despite the modest deployment activity, our net leverage remained stable at 1.16 times, unchanged from the previous quarter, still below our target leverage range. With our portfolio primarily concentrated in first lien loans, which carry lower risk than second lien loans, we expect to run the BDC at up to 1.35 times leverage. Moving to an overview of our investment portfolio, after accounting for net repayments and the STRS joint venture transfers, along with the $6.8 million net mark-to-market changes and $1.2 million in accretion, our investment portfolio had a fair value of $696.2 million at the end of Q4, compared to $706.8 million from the previous quarter. The weighted average effective yield on our income-producing debt investments rose to 13.7% at the end of Q4 from 13.6% at the end of Q3, largely driven by a slight increase in the portfolio's base rate and spread. We continue to successfully utilize the STRS joint venture, which generated approximately $4.2 million in investment income for the BDC in Q4, an increase from $3.9 million in Q3. As of December 31, the fair value of the joint venture's portfolio was $312.2 million, with an average unlevered yield of 12.4% at the end of Q4, slightly down from 12.5% at the end of Q3 and up from 11.3% at the end of Q4 2022. The year-over-year increase in our unlevered yield is mainly attributed to rising base rates. The joint venture is currently producing an average annual return on equity in the mid-teens for the BDC, suggesting that WhiteHorse's equity investment in the joint venture yields attractive returns for our shareholders. Looking at the BDC's portfolio as a whole, we experienced some markdowns in Q4, predominantly influenced by our investments in American Crafts, Atlas purchaser, also known as Aspect Software, and Claridge products. However, these declines were partially countered by marks up across various portfolio investments. As we have previously noted, we are vigilant in monitoring our portfolio companies, particularly as we face some pressure in the consumer segment, though we have not observed demand weakness in other sectors such as general industrial B2B, healthcare, TMT, or financial services. Furthermore, our portfolio largely comprises non-cyclical or lightly cyclical borrowers, with no direct exposure to industries like oil and gas, auto, new home construction, or restaurants. Most of our deals have strong covenant protections, and in most instances, our private equity partners are supporting their credits with additional cash or contingent equity as necessary. No new credits were moved to non-accrual during the quarter, and while investments in non-accrual amounted to 2% of our total portfolio at fair value, this is a decrease from 2.8% at the end of Q3. Overall, we see a balanced activity in terms of credit performance and are generally satisfied with the health of our debt portfolio. American Crafts remains on non-accrual status, with its turnaround taking longer than expected, resulting in a markdown of $7.5 million or approximately $0.32 per share against our portfolio NAV in Q4. Our investments in PlayMonster, Crown Brands, and Arcserve are also on non-accrual. Following Q4, we and other lenders took control of Arcserve, and we believe the asset has potential upside in the upcoming 18 to 24 months as we implement changes in management and company structure to enhance profitability. We are hopeful to successfully exit our investment in Crown this quarter. Additionally, we took a markdown on Atlas purchaser, Aspect Software, which we believe is justified due to the ongoing restructuring. This asset remains on accrual status, and we are closely Monitoring the situation. We are confident in our ability to effectively navigate and improve troubled investments, as demonstrated by the successful exit from our investment in Arcole during Q2, which yielded a 1.2 times return on invested capital. WhiteHorse and H.I.G. Capital have a proven track record of leveraging resources and expertise to turn around investments with the aim of minimizing losses and preserving capital. We are actively collaborating with our troubled portfolio companies to enhance their performance. Moving to the broader lending environment, Q4 was characterized by increased liquidity from both direct lenders and banks. Consequently, market pricing for sponsor deals has fallen by about 50 basis points on average. As we enter 2024, this trend appears to be continuing, with additional liquidity entering the marketplace. We are observing a more optimistic outlook on the economy compared to most of 2023, leading our competitors to adopt more aggressive stances on leverage and pricing, including for companies we categorize as moderate and deep cyclicals. The current aggressive stance in the sponsor market resembles conditions from 2021 in terms of pricing and structure. Pricing for upper mid-market deals has decreased to between SOFR 475 and SOFR 550, while mid-market deals are now priced between SOFR 500 to 575, and lower mid-market deals range from SOFR 550 to 625. In the lower mid-market, we are seeing deals leveraged at 4 to 5 times, while mid-market deals are higher at 4.5 to 6 times, and cyclical credits are also transacting at 4.5 to 5.5 times leverage, which we view as very aggressive for that segment. Loan-to-value ratios, which were typically under 50% in Q3, have now climbed to 55% in the lower mid-market and 60% to 65% in the mid-market and upper mid-market. In the non-sponsor sector, deals consistently maintain loan-to-value ratios below 50%, averaging between 40% to 45%. Moreover, pricing stability remains in the non-sponsor market, where deals are priced between SOFR 650 to 850 with leverage multiples of 3 to 4.5 times. Given the current market environment, we are exercising caution in our deal sourcing, particularly with on-the-run sponsors, focusing our efforts on the off-the-run and non-sponsor markets where terms remain comparatively more favorable. Regarding our economic outlook for 2024, we believe that low unemployment and underlying pressures on wages and raw materials will continue to push prices. We do not foresee the Federal Reserve reaching its 2% inflation target as quickly as some might expect. We maintain that the market is overly optimistic regarding rate cuts, anticipating that elevated rates will contribute to slower economic growth. While we do not predict a recession, we expect at minimum a slowdown in growth through 2024 and into 2025. In such an elevated market environment, our sourcing model proves particularly advantageous, enabling us to identify deals in less competitive segments, especially within the off-the-run and non-sponsor markets. Our three-tier sourcing framework continues to provide the BDC with unique capabilities, and we are benefiting significantly from our affiliation with H.I.G., which excels in the mid-market and lower mid-market sectors. WhiteHorse has 22 origination professionals across 11 regional markets in North America. The strength of our origination pipeline allows us to be selective in our investments. Consequently, we believe the deals we are pursuing are more appealing than what is generally available in the market, both in terms of risk and return. Overall, we observe a continued rebound in deal volume and quality, with solid pipeline activity levels. Following Q4's repayment activity, the BDC balance sheet has about $50 million of capacity for new assets at our target leverage range, complemented by approximately $40 million of capacity from the joint venture. Deals priced at SOFR 625 and below are targeted for the joint venture, while those at SOFR 625 and above are focused on the BDC balance sheet. We are actively pursuing 12 new mandates and add-on acquisitions, with all new platform mandates being non-sponsor deals. While we cannot guarantee these deals will close, they fit within either the BDC or our joint venture if we decide to proceed. After the quarter ended, we successfully closed five new originations and three add-ons to our existing portfolio, with more deals in the pipeline. Of the new originations, one investment was transferred to the joint venture during the first quarter. In summary, our activity is picking up, and we remain cautiously optimistic about the market conditions for WhiteHorse. Despite ongoing worries about economic softening, we believe we are well-positioned to source attractive opportunities and navigate economic challenges thanks to our rigorous underwriting standards and continued delivery for our shareholders. Therefore, in our Q3 earnings release, we announced that the Board of Directors of the BDC approved an increase in our quarterly base dividend from $0.37 per share to $0.385 per share starting in Q4 of this year. Additionally, the Board approved a reduction in the base management fee rate paid to H.I.G. WhiteHorse Advisers from 2% to 1.75%, effective January 1, 2024. This change is expected to have a positive impact on our financial performance and our ability to sustain the increased base dividend moving forward. Before I wrap up, I want to mention the recent passing of our friend and fellow board member, Kevin Burke. Kevin offered invaluable insight during his time on the Board, and we are thankful for his dedication to WhiteHorse Finance. It was a true honor to have worked with Kevin, and we are deeply saddened by his loss. With that, I will hand the call over to Joyson for additional details on our performance 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 and core NII of $10.6 million or $0.456 per share. This compares with Q3 GAAP NII and core NII of $10.8 million or $0.465 per share and our previously declared quarterly distribution of $0.385 per share. Q4 fee income increased quarter-over-quarter to approximately $0.6 million in Q4 from $0.4 million in Q3. Q4 amounts are highlighted by a $0.4 million prepayment fee generated from the full realization of our investment in Aeyon and a small amendment fee from motivational marketing. For the quarter, we reported a net increase in net assets resulting from operations of $3.4 million. Our risk ratings during the quarter showed that 77.7% of our portfolio positions carried either one or two rating, slightly lower than 78.2% in the prior quarter. As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to initial expectations and a two rating indicates the Company is performing according to initial expectations. Regarding the JV specifically, we continue to grow its portfolio. As Stuart mentioned earlier, we transferred four new deals and one add-on transaction totaling $26.6 million. As of December 31, 2023, the JV's portfolio held positions in 34 portfolio companies with an aggregate fair value of $322.2 million compared to 32 portfolio companies at an aggregate fair value of $313 million as of December 30, 2023. Subsequent to the end of the fourth quarter, the Company transferred three investments to the JV, including one new portfolio company. The investment in the JV continues to be accretive to the BDC's earnings, generating a mid-teens return on equity. As we have noted in prior calls, the yield on our investment in the JV may fluctuate period-over-period as a result of a number of factors, including the timing and the amount of additional capital investments, the changes in asset yields in the underlying portfolio as well as the overall credit performance of the JV's investment portfolio. Turning to our balance sheet. We had cash resources of approximately $24.5 million at the end of Q4, including $13.7 million in restricted cash and approximately $138 million of undrawn capacity available under our revolving credit facility. As of December 31, 2023, the Company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 181% which was above the minimum asset coverage ratio of 150%. Our Q4 net effective debt to equity ratio after adjusting for cash on hand was 1.16x consistent with the prior quarter. Before I conclude and open up the call to questions, I'd like to again highlight our distributions. This morning, we announced that our Board declared a first quarter 2024 distribution of $0.385 per share, which is consistent with the previous quarter. As mentioned earlier by Stuart, in the fourth quarter of 2023, we increased our quarterly base distribution to $0.385 per share, which represents a cumulative increase of 8.5% as compared with the inaugural $0.355 per share dividend that was declared at the BDC's IPO. These actions speak to both the consistent strength of the platform as well as our resilient deal sourcing capabilities and being able to create a well-balanced portfolio generating consistent current income. As was announced in the beginning of 2023, our Board also implemented a formulaic supplemental quarterly distribution. For the fourth quarter, the Board did not declare a supplemental distribution, which is consistent with our formulaic supplemental distribution framework. We believe this framework allows us to maximize distributions to our shareholders while preserving the stability of our NAV, a factor that we believe to be an important driver of shareholder economics over time. In assessing distributions, we also consider taxable income relative to amounts that we have distributed during the year when setting our overall dividend. Our current estimate of undistributed taxable income, sometimes referred to as our spillover, as of the end of Q4 2023 is approximately $32 million. We continue to believe that having a healthy level of undistributed income is beneficial to the long-term stability of our base dividend. We continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations. The upcoming distribution, the 46th consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at or above a rate of $0.355 per share per quarter will be payable on April 2, 2024, to stockholders of record as of March 22, 2024. As we said previously, we will continue to evaluate our quarterly distribution, both in the near and medium term based on the core earnings power of our portfolio in addition to other relevant factors that may warrant consideration. With that, I'll now turn the call over to the operator for your questions.

Operator, Operator

Our first question comes from Mickey Schleien with Ladenburg.

Mickey Schleien, Analyst

Good afternoon, Stuart and Joyson. One question this afternoon, Stuart. You mentioned how aggressive the market has become and spread with tighter spreads at the more liquid end of the continuum, and you're focused now on direct origination, which, as we know, is harder to source and has a longer lead time. So are you comfortable in the BDC's ability to potentially replace all these repayments that you're likely to see with direct origination deal flow in this environment that we're experiencing?

Stuart Aronson, CEO

Well, Mickey, I'd start by sharing with you that in 2022 and 2023, which were very favorable markets for lenders to originate deals in, we focused very heavily more than most of our competitors on getting call protection. And on our non-sponsor deals, we got call protection at three to four years. And on many of our sponsor deals, we got call protection of three years or at least two years. So we think that, while repayments will pick up this year due to M&A activity, we think the repayments due to pricing will be mitigated by the call protection that we got in 2022 and 2023. Our overall volumes in the pipeline right now are pretty solid. And what we hear from the market is that they're likely to pick up based on higher M&A activity being driven by the more aggressive debt markets and the strong desire of LPs to get returns of capital from private equity firms. So, we do think that there will be plenty of volume to replace deals that get repaid. But deals that have been put on in a higher interest rate environment may be replaced with assets that have lower spreads. So in the JV, that could look like deals that were on at 600 being replaced with deals at 550 or 575, and on the BDC balance sheet, that could look like deals that were at 700 being replaced with deals that are 650 or 675. But there's definitely been a tightening of the pricing market in the sponsor sector. And as we've always shared with you, the non-sponsor sector remains pretty stable with pricing on deals typically between SOFR 650 and SOFR 900.

Bryce Rowe, Analyst

Stuart, let me start with some commentary on the first quarter-to-date repayment activity. You mentioned five deals. I am curious if those were driven by refinancing due to pricing, or if they were scheduled for maturity in 2024, or possibly connected to some M&A activity?

Stuart Aronson, CEO

Well, Bryce, one of the deals was a deal that was maturing and the sponsor owner of the Company not only wanted to refinance the debt, but wanted to take a dividend. And given the credit profile of the Company, we did feel comfortable giving the Company a dividend whereas the other lenders that were in the Company did feel comfortable doing it. So that deal refinanced, but we chose to exit. The other deals that we paid were mostly based on M&A activity where companies were being sold and we were getting repaid on the sale of those companies.

Bryce Rowe, Analyst

Okay. That's helpful. And then, if you look at kind of your schedule of investments, you have, I guess, a decent amount of maturities in '24. How do you feel about those kind of getting to the finish line? Do you think they can get refinanced within the BDC or do you kind of foresee them moving outside of the BDC?

Stuart Aronson, CEO

We have certain assets that we like for the long term based on our expectation of a muted economy in 2024 and '25. And for those situations, we would hope to refinance those companies or follow them to new owners. But we have other companies where we see long-term trend lines that we are less optimistic about. And as these companies come up for refinancing, we will probably not definitely, but probably choose to exit. So there really is a mix based on our credit outlook for each of the deals. But the market is very aggressive right now. And anything that we have that's maturing, that is performing and marked at a normal level, we feel highly confident that the more it will refinance those transactions with no problem.

Bryce Rowe, Analyst

You mentioned the capacity at both the BDC level and the joint venture. Regarding the capacity at the joint venture, is it being utilized with the new deals that have already been transferred there? Is this based on the current equity capital or borrowing base within the joint venture? Do you have additional capability to invest or commit more capital to the joint venture?

Stuart Aronson, CEO

I believe the figures of $50 million for the BDC balance sheet and $40 million for the JV reflect all recent transfers we have completed. However, these figures do not include the transactions currently in the pipeline that we anticipate closing. Additionally, all the new transactions expected to close are non-sponsor deals, and these are priced at SOFR 650 or higher. For example, we closed one non-sponsor deal in Q1 with modest leverage and loan to value, but due to our origination network, we managed to secure an opportunity at SOFR plus 900. This was a first lien deal with what we consider to be standard bank terms, showcasing very strong origination on our part.

Bryce Rowe, Analyst

Yes. Okay. Last one for me. You mentioned some markups within the portfolio. What's driving the markups? By specific, just any thoughts around the markups would be helpful.

Stuart Aronson, CEO

Yes. There are certain accounts where the credit situation is improving. I mentioned earlier that we may be exiting Crown Brands this quarter. We have negotiated an exit for that, and if it happens, the deal was marked up in the last quarter. If we complete this transaction as planned, it will be at a price that is even higher than the current mark.

Erik Zwick, Analyst

Good afternoon. I would like to begin with a question about the pipeline, which you have noted has several attractive opportunities as well as some currently in process. Could you provide some additional insights regarding the balance between new opportunities and add-on ones, as well as any common themes you are observing in terms of the types of opportunities and the industries or regions you are seeing?

Stuart Aronson, CEO

I believe that the mix is about five new platforms and about seven add-on opportunities. The add-on opportunities, for the most part, price above the current market because those deals were done in a higher priced market, although borrowers are looking for adjustments of price based on the fact that the market has become more aggressive. As I mentioned before, all of the new pipeline activity that is mandated right now are non-sponsor deals. And all of those non-sponsored deals are priced at 650 and above, so would be targeted for the BDC balance sheet. And there is no particular sector that we are finding more attractive. I would say what we are seeing, there was recently a deal that was brought to us for a company that we thought was a good company and a scaled company, but it was a cyclical company. And on a cyclical, we don't like putting more than 4x leverage on the Company, and this deal came to us at 5.25x leverage and about 65% loan to value. And we just found that to be a stunningly high leverage multiple and loan to value for a cyclical company heading into what we believe is a weakening economy. And so despite the fact that that deal was well priced at 650 or above, we walked away from that opportunity. So sticking to our knitting regarding a conservative credit outlook and the non-sponsor deals that we're working on, I believe, are all levered between 3x and 4x. So, modest leverage, good cash flow coverages and companies that we believe will be either non-cyclical or light cyclicals.

Erik Zwick, Analyst

I appreciate the additional details. Looking at Slide 8 of the presentation, I noticed that the average investment size in the portfolio has decreased by about $1 million since the third quarter of 2022. I'm curious if you've been actively trying to reduce the position size or if this change is more a reflection of the increased competitiveness at the higher end of the market. Do you expect this trend to continue? Smaller deals can be more challenging to manage while keeping the portfolio size stable, but they may also reduce concentration in specific positions. I’d like to hear your thoughts on this.

Stuart Aronson, CEO

For a significant portion of the last two years, the BDC has been either full or nearly full and unable to take on new deals. We feel positive about the repayments we're receiving and the opportunity to introduce new deals into the BDC. With our three-tier sourcing architecture, we are well positioned to maintain a steady flow of deals. As I mentioned earlier, we are focusing on the off-the-run and non-sponsor markets, which can involve both smaller and larger deals. Generally, in the last quarter, the deals we engaged in were primarily lower mid-market transactions, resulting in a somewhat lower average asset allocation to the BDC. However, the key takeaway is that we are avoiding large concentrations in the BDC. When I first joined, we had positions around $35 million or $40 million, which we deemed too concentrated for our BDC size. Moving forward, we plan to limit maximum allocations to around $20 million, with an average allocation likely closer to $8 million to $10 million, ensuring good diversity across our portfolio.

Melissa Wedel, Analyst

It's possible I missed this but I wanted to check in with you about whether or not you provided a specific amount on the post quarter end new investment activity? I think you said there were $39 million of repayments subsequent to quarter end, but I'm not sure we got a total amount on the origination side.

Stuart Aronson, CEO

I think it was five deals closed. But Joyson, do you have how much volume the new deals and add-on deals represented in this quarter so far?

Joyson Thomas, CFO

Yes. In regards to new deployments during Q1, they approximated about $30 million. So I think the way to think about this right now is as of the end of Q4 to Stuart's earlier comments, we had about $50 million of capacity on the BDC balance sheet, taking into account the approximately $40 million of repayments during Q1 and then that gets offset by the $30 million of deployments we just did in Q1 currently right now. So I think that's the way to think about it.

Melissa Wedel, Analyst

Okay. That's really helpful. I wanted to follow up on your comments about the pipeline. It's clear from your remarks today that there is a strong preference for the non-sponsored space due to the terms, pricing, and leverage levels available right now. Would you say that segment is developing as strongly as the sponsored space, or is it a bit more challenging to source those?

Stuart Aronson, CEO

Non-sponsor business is always much harder to find, much harder and longer to underwrite and frankly, even more complicated from a portfolio perspective. That said, our experience, including during the COVID downturn, is that the non-sponsor deals that we do because they're very conservatively structured and levered have performed as well or better than our sponsor portfolio. So we are actively involved in sourcing those non-sponsored transactions. It is frankly harder to source them than it is to source the sponsor deals which just sort of come out on a regular basis. But we have 22 originators in 11 locations across North America, many of whom understand that their primary responsibility is to source either non-sponsor or off-the-run sponsor deals. And those teams due to the fact that we've had extremely low turnover over the past three years are very experienced in their regions and more broadly. And our pipeline is solid at the moment. The pipeline is certainly not as large as it was in 2021 or even 2022. But it's similar to what it was in 2023. And from what we hear in the marketplace, with the more aggressive terms available in the financing market, there's more M&A activity going on, and that should feed both our sponsor and non-sponsor pipeline.

Melissa Wedel, Analyst

That's really helpful. I appreciate it. One last one, if I could sneak it in there. So in the non-sponsored space, you mentioned that I think the example that you gave was the owner dividend and to do a refi, you're comfortable with refi, not the dividend, et cetera. Begs the question, in the non-sponsored space, what are you seeing the use of capital as being right now? Is it a lot of refi activity? Or are non-sponsored companies also engaging in M&A?

Stuart Aronson, CEO

The non-sponsor deals we are currently pursuing mainly consist of loans aimed at fostering company growth, whether organically or through mergers and acquisitions. I don't believe any of the mandated deals include dividends. We are consistently cautious about issuing dividends to private equity firms or non-sponsor owners. These loans are primarily focused on growth. Additionally, the increase in M&A activity overall in the market benefits both non-sponsor and sponsor deal flow.

Operator, Operator

This does conclude today's question-and-answer period. I will now turn the program back over to our presenters for any additional or closing remarks.

Stuart Aronson, CEO

I appreciate everyone spending time with us on a call today. Recognize that the NII was very strong that the NAV did decrease for the quarter. We do believe that we mark deals on a realistic and conservative basis, which is not necessarily true through the entire BDC industry and we try to be accurate each quarter based on the information we have. That said, the companies that we have marked down, we are using the expertise across WhiteHorse and across H.I.G. to try to turn those companies around. And we do believe that there is a possibility of recovery and potentially significant recovery in both 2024 and 2025 on some of those accounts. So, we will work hard to continue to optimize the portfolio. And as I said in my prepared remarks, the Arcole acquisition transaction was a good example of the deal that we had to own the Company for three years, but we're ultimately able to get out of that one at a 1.2x return to the original capital invested. And with hard work and hopefully, some fortunate luck. We hope to have similar types of recoveries on some of the other troubled assets we're dealing with right now. And that's it. I appreciate everyone's time. Thank you very much.

Operator, Operator

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