The information contained in this section should be read in conjunction with our
Consolidated Financial Statements appearing elsewhere in this quarterly report
on Form 10-Q. In this quarterly report on Form 10-Q, the "Company", "we", "us",
"our" and "WhiteHorse Finance" refer to
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
? our future operating results;
? our ability to consummate new investments and the impact of such investments;
our ability to continue to effectively manage our business and our business
? prospects and the prospects of our prospective portfolio companies, due to the
significant disruptions caused by the current pandemic caused by the novel
coronavirus (commonly known as "COVID-19");
? the ability of our portfolio companies to achieve their objectives;
? our contractual arrangements and relationships with third parties;
changes in political, economic or industry conditions, the interest rate
environment or conditions affecting the financial and capital markets, which
? could result in changes to the value of our assets, including changes from the
impact of the ongoing war between
lockdowns in
? the elevating levels of inflation, and the potential impact of inflation on our
portfolio companies and on the industries in which we invest;
? the dependence of our future success on the general economy and its impact on
the industries in which we invest;
? the impact of increased competition;
? the ability of our investment adviser to locate suitable investments for us and
to monitor our investments;
? our expected financings and investments and the rate at which our investments
are refunded by portfolio companies;
? our ability to pay dividends or make distributions;
? the adequacy of our cash resources and working capital;
? the timing of cash flows, if any, from the operations of our prospective
portfolio companies; and
? the impact of future acquisitions and divestitures.
We use words such as "may," "might," "will," "intends," "should," "could," "can," "would," "expects," "believes," "estimates," "anticipates," "predicts," "potential," "plan" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in "Item 1A-Risk Factors" in our annual report on Form 10-K and elsewhere in this quarterly report on Form 10-Q.
65
We have based the forward-looking statements included in this quarterly report
on Form 10-Q on information available to us on the date of this quarterly report
on Form 10-Q, and we assume no obligation to update any such forward-looking
statements. Although we undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, you are advised to consult any additional disclosures that
we may make directly to you or through reports that we may file with the
You should understand that under Sections 27A(b)(2)(B) and (D) of the Securities Act of 1933, as amended, or the Securities Act, and Sections 21E(b) (2)(B) and (D) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, do not apply to statements made in connection with this quarterly report on Form 10-Q or any periodic reports we file under the Exchange Act.
Overview
We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for tax purposes, we elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.
We were formed on
On
We are a direct lender targeting debt investments in privately held, lower
middle market companies located in
Our investment activities are managed by WhiteHorse Advisers and are supervised
by our board of directors, a majority of whom are independent of us, WhiteHorse
Advisers and its affiliates. Under our investment advisory agreement with
WhiteHorse Advisers, or the Investment Advisory Agreement, we have agreed to pay
WhiteHorse Advisers an annual base management fee based on our average
consolidated gross assets as well as an incentive fee based on our investment
performance. We have also entered into an administration agreement, or the
Administration Agreement, with
66
Agreement, we have agreed to reimburse
COVID-19 Developments
The ongoing COVID-19 pandemic and its effects on the
Given the persistence of COVID-19 and the difficulty in predicting the next phase of the pandemic the extent to which COVID-19 and/or other disease pandemics may continue to negatively affect our business and our portfolio companies' operating results and financial condition is uncertain. Due to the ongoing business disruptions caused by COVID-19, some of our portfolio companies have experienced financial distress and have defaulted on their financial obligations to us and their other capital providers. Such developments could impair the business operations of our portfolio companies and may result in a decrease in the value of our investment in any such portfolio companies.
In connection with the adverse effects of the COVID-19 pandemic, we have
restructured and may need to continue to restructure additional investments in
some of our portfolio companies, which has resulted in and could result in
additional diminished interest payments or in permanent impairments on our
investments. The effects of the COVID-19 pandemic discussed above may increase
the risk that more of our portfolio investments may be placed on non-accrual
status in the future. Any decreases in our net investment income would increase
the portion of our cash flows dedicated to distribution payments to stockholders
and to servicing our existing debt under our revolving credit facility, or the
Credit Facility, with
WhiteHorse Advisers' credit team continues to be in close contact with the owners and management teams of each of our portfolio companies. Since the onset of the COVID-19 pandemic, some of these owners and management teams have assessed the impacts to their businesses and are continuing to coordinate with us to guide their companies through the recovery. We are operating under a philosophy that we will work hand in hand with our borrowers to support them, allowing flexibility in our terms as appropriate, and we expect owners to support their businesses with additional equity where possible.
As a business development company, we are permitted under the 1940 Act to borrow
amounts such that our asset coverage, as defined in the 1940 Act, equals at
least 150% after such borrowing. We are required to comply with various
covenants pursuant to the Credit Facility. If we fail to satisfy the covenants
of the Credit Facility or are unable to cure any event of default or obtain a
waiver from the applicable lender, it could result in foreclosure by the lenders
under the Credit Facility, which would accelerate our repayment obligations
under the Credit Facility and thereby result in a material adverse effect on our
business, liquidity, financial condition, results of operations and ability to
pay distributions to our stockholders. As of
67
We are also subject to financial risks, including changes in market interest
rates. As of
Our management team has sought strategies that will help us weather periods of economic decline. We have attempted to avoid deeply cyclical sectors and have only made loans where we believed we would be able to recover 100% of our loans in the event of a financial crisis, such as the financial crisis in 2008. Additionally, we have taken a conservative position on the Company's liquidity, making sure we have a top-tier leverage partner and very significant cushion against default.
We will continue to monitor the ongoing effects of the COVID-19 pandemic and
guidance from
Reference Rate Reform
In
To identify a successor rate for
Other jurisdictions have also proposed their own alternative to LIBOR, including
the Sterling Overnight Index Average for Sterling markets, the Euro Short Term
Rate for Euros and Tokyo Overnight Average Rate for Japanese Yens. Although SOFR
appears to be the preferred replacement rate for
68
Revenues
We generate revenue in the form of interest payable on the debt securities that we hold and capital gains and distributions, if any, on the portfolio company investments that we originate or acquire. Our debt investments, whether in the form of senior secured loans or mezzanine loans, typically have terms of three to six years and bear interest at a fixed or floating rate based on a spread over LIBOR, SOFR or an equivalent index rate. Interest on debt securities is generally payable monthly or quarterly, with the amortization of principal generally being deferred for several years from the date of the initial investment. In some cases, we may also defer payments of interest for the first few years after our investment. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees. We capitalize loan origination fees, original issue discount and market discount, and we then amortize such amounts as interest income. Upon the prepayment of a loan or debt security, we record any unamortized loan origination fees as interest income. We record prepayment premiums on loans and debt securities as fee income when earned. Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
Expenses
Our primary operating expenses include (1) investment advisory fees to WhiteHorse Advisers; (2) the allocable portion of overhead under the Administration Agreement; (3) the interest expense on our outstanding debt; and (4) other operating costs as detailed below. Our investment advisory fees compensate our investment adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments.
We bear all other costs and expenses of our operations and transactions, including:
? our organization;
? calculating our net asset value and net asset value per share (including the
costs and expenses of independent valuation firms);
fees and expenses, including travel expenses, incurred by WhiteHorse Advisers
? or payable to third parties in performing due diligence on prospective
portfolio companies, monitoring our investments and, if necessary, enforcing
our rights;
? the costs of all future offerings of common shares and other securities, and
other incurrences of debt;
? the base management fee and any incentive fee;
? distributions on our shares;
? transfer agent and custody fees and expenses;
? amounts payable to third parties relating to, or associated with, evaluating,
making and disposing of investments;
? brokerage fees and commissions;
? registration fees; ? listing fees; ? taxes;
? independent directors' fees and expenses;
69
? costs associated with our reporting and compliance obligations under the 1940
Act and applicable
? the costs of any reports, proxy statements or other notices to our
stockholders, including printing costs;
? costs of holding stockholder meetings;
? our fidelity bond;
? directors and officers/errors and omissions liability insurance and any other
insurance premiums;
? litigation, indemnification and other non-recurring or extraordinary expenses;
? direct costs and expenses of administration and operation, including audit and
legal costs;
? fees and expenses associated with marketing efforts, including deal sourcing
and marketing to financial sponsors;
? dues, fees and charges of any trade association of which we are a member; and
all other expenses reasonably incurred by us or
? connection with administering our business, including rent and our allocable
portion of the costs and expenses of our chief financial officer and chief
compliance officer along with their respective staffs.
WhiteHorse Advisers or
70
Recent Developments
For the period
On
On
© Edgar Online, source