WhiteHorse Finance: 12% BDC Yield, Mr. Market Says 'Meh'

seekingalpha04-19

WhiteHorse Finance benefits from higher interest rates due to its mostly floating rate assets.WHF's yields have been rising since early 2022, reaching 13.7% in Q4 2023.WHF's portfolio consists of 80% ...

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If so, it should benefit business development companies, BDCs, such as WhiteHorse Finance (NASDAQ:WHF) which have mostly floating rate assets, and fixed rate debts. WHF has 99.1% in floating rate assets. Like other BDCs, WHF's yields have been rising since early 2022 - its effective yield rose from 9.2% in Q1'22, all the way to 13.7% in Q4'23: WHF site Company Profile: WhiteHorse Finance, Inc. is an externally managed business development company, specializing in originating senior secured loans, lower middle market, and growth capital industries. It typically invests between $5 million to $25 million in companies having an enterprise value of between $50 million and $350 million. WHF commenced operations on January 1, 2012, with an IPO in December 2012. (WHF site). On November 1, 2023, WHF entered into, an amended and restated investment advisory agreement with the Investment Adviser, effective as of January 1, 2024, pursuant to which the base management fee rate was reduced to 1.75% from 2.00%. Holdings: As of 12/31/23, 80% of WHF's $696M portfolio were in 1st Lien Loans, 2% were 2nd Lien Loans, 2% were in Equity, and 15% were held in its JV. Its loans typically have a term of three to six years. WHF site WHF's top industry exposures are a diversified mix, led by its top 5 industries - Broadline Retail, 6.2%, Application Software, 5.8%, Chemicals, 5.2%, Home Furnishings, 4.7%, and Specialized Consumer Services, 4.1%. 48.3% of its holdings are in other industries. It held 116 positions in 72 portfolio companies, with an average investment size of $5.2M. WHF site Other than its JV, WHF's top 9 borrowers each represent 2.2% to 3.1% of the portfolio, led by Cable and Satellite company Bulk Midco: WHF site JV: In 2019, WHF formed a JV with STRS Ohio, one of the largest US public pension funds. STRS Ohio serves active, inactive, and retired Ohio public educators. This JV also invests primarily in senior secured loans, including first lien and second lien facilities, to performing lower middle market companies across a broad range of industries that typically carry a floating interest index rate based on SOFR, or an equivalent index rate and have a term of three to six years. The JV's top 5 industries form 43.2% of its portfolio, led by IT Consulting, at 16.4%, Environmental & Facilities Services, at 8.7%, Diversified Services, at 6.1%, Broadline Retail, and Tech Hardware, both at 6%: WHF site Portfolio Company Ratings: Like other BDCs, WHF reviews its holdings quarterly. It uses a 5-tier system, with the top tier representing investments performing well, and tier 5 representing investments in payment default with a significant risk of not receiving full repayment. As of 12/31/23, WHF had $14M in non-accruals, representing 2.2% on a fair value basis, and 5.2% on a cost basis. WHF site WHF's non-accruals last spiked in Q1'21, rising to 3.7%, with the economy struggling with the lingering effects of COVID-19 lockdowns and logistics problems. They subsided to 0% for all of 2022, but began rising again in 2023, hitting 5.2% in Q3-4 '23, a higher % than the BDC peer average of 2.6%: WHF site Earnings: Q4'23: WHF invested in 8 new portfolio companies for a total of $54.1M and made add-on investments totaling $2.8M to existing portfolio companies. It received dispositions and principal repayments of $34.9M. WHF also transferred 5 investments, comprised of 4 new portfolio companies, and 1 add-on investment, to the STRS JV, totaling $27.6M. Total Investment Income was flattish, while NII and NII/Share fell ~4%. Interest expense rose nearly 14%, and NAV/Share declined 4.7%. NAV/share was negatively impacted by $6.8M of net mark-to-market markdowns. 2023: As seen elsewhere in BDC land, 2023 was a big year for WHF, with topline growth of 18%, 14.6% NII growth, and 15% NII/share growth. Realized gains swung from a $14M loss to a ~$1M gain, but Unrealized Gains jumped 218%, to $23.25M. Interest expense rose 36%, ~$8M in 2023. Hidden Dividend Stocks Plus Dividends: Management paid a consistent $.3550 quarterly dividend from 2013 until Q2 2023, when it raised it to $.37, and subsequently raised it to $.3850 in Q4'23. They also paid special distributions totaling $.575 in 2019-2023. WHF should go ex-dividend next on ~6/20/24, with a 7/5/24 pay date. Hidden Dividend Stocks Plus NII/Dividend coverage improved from 1.09X to 1.19X in 2023: Hidden Dividend Stocks Plus From a 2012 starting NAV/share of $15.41, WHF has paid $15.79 in base dividends, and $.58 in special dividends, for a total of $30.00/share. WHF site Profitability & Leverage: WHF's ROA and ROE both improved in 2023 and were higher than BDC industry averages, while EBIT Margin also improved. Debt/NAV leverage was a bit lower in 2023, in line with the BDC industry, whereas interest coverage declined, and was lower than average. Hidden Dividend Stocks Plus Debt & Liquidity: As of 12/31/23, WHF had $10.5M in cash, plus $138.5M available on its $335M Credit Revolver. The Revolver comes due in 2025. It also has $194.50 in Notes, $40M of which come due in 2025. Its 7.875% 2028 Notes are currently selling for $25.20. WHF site Performance: WHF has trailed the BDC industry, the broad Financial sector, and the S&P 500 on a price and total return basis over the past year. It has, however, outperformed the BDC industry so far in 2023 on a price basis. Hidden Dividend Stocks Plus Over the past 5 years, WHF has significantly trailed these larger BDCs - Ares Capital (ARCC), Main Street Capital (MAIN), and Hercules Capital, Inc. (HTGC), on a total return basis. Ycharts Analysts' Price Targets: WHF received a downgrade from B. Riley in January '24, who took it from Buy to Neutral, with a $13.25 price target. At $12.38, WHF is 4% below Wall Street analysts' average price target of $12.90, and 11.57% below their $14.00 highest price target. Hidden Dividend Stocks Plus Valuations: At $12.38, WHF was selling at a 9.17% discount to its 12/31/23 NAV/share of $13.63, vs. the overall BDC industry average 2% premium to NAV. WHF's P/Sales was also much cheaper than the BDC industry average. Hidden Dividend Stocks Plus WHF's trailing and forward earnings multiples are both cheaper than BDC averages, as is its EV/EBIT valuation. Its 12.44% dividend yield is higher than average. Hidden Dividend Stocks Plus Parting Thoughts: While its valuations are currently lower than BDC averages, WHF has a long history of selling below book value, with occasional rises above 1X. We don't see any compelling reason to buy shares at this point. It may take Mr. Market longer to change his mind about WHF. Meanwhile, there are other BDCs which offer better prospects. 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