WHITEHORSE FINANCE, INC. The trend on the ratings is Stable. The Company's Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3, resulting in WhiteHorse's final ratings positioned in line with its IA.
KEY RATING CONSIDERATIONS
The ratings reflect WhiteHorse's established lower-middle market lending platform and track record, as it benefits from higher overall base rates and generates acceptable earnings from its predominantly floating-rate investment portfolio. The Company has a diversified funding profile, including a material portion of unsecured debt, with well-laddered maturities. WhiteHorse is managed by
The Stable trend considers the turmoil in the
RATING DRIVERS
Over the longer-term, solid profitability and operating performance along with sound credit fundamentals would lead to a ratings upgrade. Conversely, the ratings would be downgraded if there is a sustained reversal of earnings performance that erodes net asset value or if dividend distributions are not covered by net investment income for an extended period. A material increase in non-accrual investments or a sizable loss that significantly reduces the Company's capital buffer to regulatory requirements would also result in a ratings downgrade.
RATING RATIONALE
WhiteHorse's sound franchise is based on the Company's long-standing track record through multiple economic cycles and underpinned by its relationship with
WhiteHorse focuses on directly originated investments to privately held, lower middle market
Positively from a credit perspective, WhiteHorse has shifted its investment focus from junior capital investments and non-sponsored portfolio companies into senior secured (first lien) investments backed by financial sponsors. At 2Q23, 81% of the investment portfolio (95% including the
WhiteHorse's top line revenue has benefitted from a 300 basis point rise in base rates over 2022 and net investment income has strengthened despite a smaller investment portfolio. The Company has generated an annual net profit over the last six years, with a net increase in net assets resulting from operations (net income) of
WhiteHorse's risk profile is considered acceptable, as non-accruals increased to 4.0% of the cost of debt investments at 2Q23 driven by consumer-related portfolio companies and others that had operational challenges due to market pricing, independent of current economic conditions. We note that the exposure to non-sponsored portfolio companies (35% at 2Q23) carries some additional risk from a lack of other institutional financial support in times of crisis. In our view, financial sponsors are incentivized to protect their equity investments by investing additional capital when a business turnaround is necessary and view sponsor support as a first line of defense. As the Company's loans are substantially all floating rate with interest rate floors, earnings will continue to benefit from any further interest rate hikes.
WhiteHorse's funding profile is fairly diverse, with a capital stack that is more unsecured than other BDCs of its size, with approximately 44% of its debt financing in unsecured form, and 56% from its secured revolving credit facility at 2Q23. The Company has successfully tapped the public and private debt capital markets with a number of smaller issuances, with well-laddered maturities out through 2028. Liquidity is adequate, considering unfunded commitments of
Capitalization is considered acceptable, though the Company's target of 1.35x debt-to-equity is somewhat elevated for lower middle market assets which are a mix of non-sponsored and sponsor-backed. At 1.32x gross debt-to-equity at 2Q23, the Company was still well inside of regulatory limits of 2.0x. DBRS Morningstar estimates that WhiteHorse would need to incur losses of
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (
Notes:
All figures are in
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions: https://www.dbrsmorningstar.com/research/402314/global-methodology-for-rating-non-bank-financial-institutions. (
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
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