WHF - WhiteHorse Finance: Stability Gives Way To Growth With Fatter 11.5% Yield

2023-07-09 01:04:34 ET

Summary

• WhiteHorse's dividend yield has moved to 11.5% on the back of a 4% raise for the last declared payout.
• The business development company recorded a fiscal 2023 first-quarter total investment income increase of 30.6% year-on-year, beating consensus estimates.
• NAV per share dipped during the BDC's first quarter but the commons are currently swapping hands at a 9% discount to NAV.

WhiteHorse Finance ( WHF ) has prized itself on predictable stability. The business development company went public on the Nasdaq in 2012 with a near-maiden quarterly dividend payout of $0.355 per share. More than ten years later and the BDC last reported a quarterly cash dividend of $0.37 per share , a 4% increase from its prior payment and for an 11.5% annualized forward dividend yield. To highlight how rare such a raise is you only have to pull up the dividend trending for the last decade to see what's essentially an uninterrupted straight line only briefly punctuated by the occasional supplemental payouts recorded as a dip or spike. This new base dividend distribution is set to be followed by a more frequent variable supplemental quarterly payout.

Critically, the yield at 11.5% ranks high when compared to WhiteHorse's historical average on the back of a stock price that like many of its BDC peers has threaded water over the last 1 year. WHF is down around 4% over this time frame on a price return basis and around 7% on a total return basis. Externally managed by Miami-based H.I.G. Capital, an alternative assets investment firm with $57 billion of equity capital under management, WhiteHorse held a portfolio with a fair value of $749.2 million as of the end of its last reported fiscal 2023 first quarter.

Net Asset Value Dips With Commons At Discount

A few things to note. Loans on nonaccrual status at a percentage of WhiteHorse's portfolio at fair value came in at 0.4% for the first quarter, an increase from zero but still a far way away from the start of the pandemic when it surged to a record high of 7.4%. Further, the BDC is heavy on floating-rate loans. These formed 99.6% of its portfolio as of the end of the first quarter. First-lien loans, which confer the highest priority claim on the underlying assets of the borrower, constituted 81% of its portfolio.

WhiteHorse's NAV at the end of its first quarter was $330 million , around $14.20 per share. NAV per share dipped by $0.10 sequentially from $14.30 in the prior fourth quarter with the BDC recording a net increase in net assets from operations of $7.5 million during the period. NAV has been trending downwards since the Fed embarked on what would be ten consecutive interest rate hikes up until the June FOMC meeting. The CPI inflation figure for the month of June should be coming out on the 12th of July to dictate whether or not the next FOMC meeting on the 26th of July will see the Fed following through with its comments on the possibility of more rate hikes this year.

Critical for bulls, WhiteHorse is currently swapping hands at a 9% discount to its NAV, or around 91 cents on the dollar. However, with NAV per share seeing some pressure this discount might be closed but not from an appreciation of the commons. The risk here is that you'd buy at a discount that becomes inverted with a position still sporting negative price returns. The NAV decline was led by a $0.07 special dividend and $0.16 from unrealized mark-to-market declines in the portfolio. BDCs essentially have to walk a tightrope between maximizing the income of their shareholders whilst preserving NAV per share.

Healthy Dividend Coverage Heightens The Possibility Of More Raises

The BDC recorded a first-quarter total investment income of $26.16 million , up 30.6% over its year-ago comp and a beat by $1.23 million on consensus estimates. This growth came on the back of an increase in interest earned from their floating-rate loans and from gross investment deployments of $34.1 million. This included new originations of $18.8 million and $15.3 million of funding for add-ons to existing portfolio companies. Net investment income was $10.7 million, or $0.461 per share. This beat consensus estimates by around $0.02 and grew from NII of $0.368 per share in the year-ago comp. What's the play here? That the dividend is safe for current shareholders against an 80.3% dividend payout ratio.

WhiteHorse is guiding for more NII growth ahead and looks to be taking a more aggressive stance with its quarterly dividend with its management flagging that they want shareholders to more actively benefit from earnings generated in excess of the regular dividend. Future supplemental dividends will be calculated at 50% of NII in excess of the regular dividend, but it will have to be an amount that results in no more than a $0.15 per share decline in NAV over the current quarter and the preceding quarter. Hence, I think WhiteHorse forms a decent hold here with the NAV dip still in view.

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