Published Wed, 25 Mar 2020 10:21:01 -0400 on Seeking Alpha
We project NAV hit of $1.70 per share (11.15%) from emerging 2020 credit defaults exposing the dividend to reduction.
Net investment income was $7.7 million in Q4 2019 ($0.375 per share).
Company pro-forma indicates Net Investment Income (NII) would take a hit of $2.2 million based on current rate cuts (7.15% annualized drop).
Poorly-timed $97.3 million JV launch with State of Ohio (STRS JV) highlights adverse selection concerns.
WhiteHorse's managers should renegotiate with Ohio to unwind the venture or pledge Ohio-related fees to public shareholders.
Interest Rate Exposure
According to Stuart Aronson, WhiteHorse Finance's Chief Executive Officer in its recent earnings call, stated "During the fourth quarter, we maintained our focus on strong credit quality and successfully originated 13 new first-lien loans.” These 13 new closed deals (put on the books pre-Coronavirus outbreak) were closed in the then prevailing hyper-competitive/”easy” credit environment – which was associated with generally looser covenants and lower yields. Thus, the last quarter of transaction activity at WhiteHorse could serve as a drag on future NII.
The portfolio at December 31, 2019 consisted of 66 positions across 51 companies with a weighted average effective yield of 10.4% on income-producing debt investments. Recent Fed action in the wake of the Coronavirus has now kicked in, and LIBOR subsequently plummeted - roughly 100 bps since year end 2019. Given that WhiteHorse’s portfolio is virtually all floating rate debt, the company’s own sensitivity analysis indicates NII will drop 7.15% on an annual basis (all things being equal) from these change in base interest rates alone.
The timing of the full effect of this anticipated rate-driven NII drop of course is uncertain, as prepayments and refinancings will impact the velocity and timing of the ultimate impact as the year plays out. But the key take-away here is that the company’s own forecast NII drop... Read more
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