WHITEHORSE FINANCE, INC. The information contained in this section should be read in conjunction with our Consolidated Financial Statements and Supplementary Data appearing elsewhere in this annual report on Form 10-K.
Forward-Looking Statements
Some of the statements in this annual report on Form 10-K constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties, including statements as to:
? our future operating results;
? our ability to consummate new investments and the impact of such investments;
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our ability to continue to effectively manage our business due to the
? significant disruptions caused by the current pandemic caused by the novel
coronavirus (commonly known as "COVID-19");
? our business prospects and the prospects of our prospective portfolio
companies, including as a result of the current COVID-19 pandemic;
? 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 current COVID-19 pandemic;
? 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 "Risk Factors" and elsewhere in this annual report on Form 10-K. We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report on Form 10-K, 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 theSEC in the future, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. 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 annual report on Form 10-K 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.
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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 onDecember 28, 2011 and commenced operations onJanuary 1, 2012 . We were originally capitalized with approximately$176.3 million of contributed assets fromH.I.G. Bayside Debt & LBO Fund II, L.P. andH.I.G. Bayside Loan Opportunity Fund II, L.P. , each of which is an affiliate ofH.I.G. Capital, L.L.C. , orH.I.G. Capital . These assets were contributed as ofJanuary 1, 2012 in exchange for 11,752,383 units inWhiteHorse Finance, LLC . OnDecember 4, 2012 , we converted from aDelaware limited liability company into aDelaware corporation and elected to be treated as a business development company under the 1940 Act. OnDecember 4, 2012 , we priced our initial public offering, or the IPO, selling 6,666,667 shares. Concurrent with the IPO, certain of our directors and officers, the managers ofH.I.G. WhiteHorse Advisers, LLC , or WhiteHorse Advisers, and their immediate family members or entities owned by, or family trusts for the benefit of, such persons, purchased an additional 472,673 shares through a private placement exempt from registration under the Securities Act. Our shares are listed on the Nasdaq Global Select Market under the symbol "WHF." We are a direct lender targeting debt investments in privately held, lower middle market companies located inthe United States . We define the lower middle market as those companies with enterprise values between$50 million and$350 million . Our investment objective is to generate attractive risk-adjusted returns primarily by originating and investing in senior secured loans, including first lien and second lien facilities, to performing lower middle market companies across a broad range of industries. Such loans typically carry a floating interest rate based on a risk-free index rate such as theLondon Interbank Offered Rate, or LIBOR, plus a spread and typically have a term of three to six years. While we focus principally on originating senior secured loans to lower middle market companies, we may also opportunistically make investments at other levels of a company's capital structure, including mezzanine loans or equity interests, and in companies outside of the lower middle market, to the extent we believe the investment presents an opportunity to achieve an attractive risk-adjusted return. We also may receive warrants to purchase common stock in connection with our debt investments. We expect to generate current income through the receipt of interest payments, as well as origination and other fees, capital appreciation and dividends. 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, withH.I.G. WhiteHorse Administration, LLC , orWhiteHorse Administration . Under our Administration Agreement, we have agreed to reimburseWhiteHorse Administration for our allocable portion (subject to the review and approval of our independent directors) of overhead and other expenses incurred byWhiteHorse Administration in performing its obligations under the Administration Agreement. COVID-19 Developments The ongoing COVID-19 pandemic and its effects on theU.S. and global economy had adverse consequences on the business operations of some of our portfolio companies and adversely affected, and may continue to adversely affect, our operations and the operations of our investment adviser. Our investment adviser is continuing to monitor the COVID-19 pandemic and its impact on our business and the business of our portfolio companies and has been focused on proactively engaging with our portfolio companies in order to collaborate with the management teams of certain portfolio companies to evaluate their response to the impacts of COVID-19. We cannot predict the full impact of COVID-19 and the uncertainty surrounding the continuing effects of more contagious strains of the virus that have emerged inthe United States and worldwide, including the extent to which the available vaccines prove to be ineffective against any new COVID-19 variants. In addition, countries around the world, includingthe United States , have seen significant increases in rates of COVID-19 infections, which was a result of, among other things, the rapid spread of COVID-19 variants, more frequent social gatherings and a reduction in the use of masks and social distancing. These developments, in conjunction with the potential adverse reactions to the vaccine, 80
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the politicization of vaccine mandates and the general public distrust of the safety and efficacy of the available vaccines may further increase the likelihood that the pandemic will continue for an extended period of time. As such, 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 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, withJPMorgan Chase Bank, National Association , as administrative agent and lender, or the Lender. 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 crisis, 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 ofDecember 31, 2021 , we were in compliance with all covenants and other requirements of the Credit Facility. 81
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We are also subject to financial risks, including changes in market interest rates. As ofDecember 31, 2021 , nearly all of our debt investments at fair value were at floating rates, which are generally based on a risk-free index rate such as LIBOR, and many of which are subject to certain floors. In connection with the COVID-19 pandemic, theU.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in our operating expenses or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for an analysis of the impact of hypothetical base rate changes in interest rates. 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 a repeat of the Great Recession would allow us to recover 100% of our loans. 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 fromU.S. and international authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot quantify the full effect of COVID-19 on our financial condition, results of operations or cash flows in the future.
Reference Rate Reform
InJuly 2017 , the head of theUnited Kingdom Financial Conduct Authority , or theFCA , announced that it will phase out the use of LIBOR by 2021. OnNovember 30, 2020 , theICE Benchmark Administration Limited , or the IBA, the administrator of LIBOR, announced that it will consult in earlyDecember 2020 to consider extending the LIBOR transition deadline to the end ofJune 2023 . OnMarch 2021 , theFCA and the IBA announced that (i) 1-week and 2-monthU.S. dollar LIBOR and non-U.S. LIBOR will cease at the end of 2021 and (ii) the remainingU.S. dollar LIBOR tenors will cease afterJune 30, 2023 , effectively extending the LIBOR transition period toJune 30, 2023 . There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. To identify a successor rate forU.S. dollar LIBOR, theFederal Reserve System , in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of largeU.S. financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized byU.S. Treasury securities, and is based on directly observableU.S. Treasury -backed repurchase transactions. As ofDecember 31, 2021 , SOFR is utilized as the floating benchmark rate on investments to two of our portfolio companies. 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 forU.S. dollar LIBOR, at this time, it is not possible to predict whether any of these alternative reference rates will attain market traction as a LIBOR replacement tool or the effect of any such changes as the establishment of alternative reference rates or other reforms to LIBOR may be enacted inthe United States ,United Kingdom or elsewhere. As such, the potential effect of SOFR and LIBOR on our net investment income cannot yet be determined, and the future of LIBOR at this time is uncertain. Refer to "Part I. Item 1A. Risk Factors - Risks Relating to our Business and Structure - Since we are using debt to finance our investments, and we may use additional debt or preferred stock financing going forward, changes in interest rates may affect our cost of capital, net investment income, value of our common stock and our rate of return on invested capital." of this Annual Report on Form 10-K. 82
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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 or an equivalent risk-free 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 NAV and NAV 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;
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? 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
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Recent Developments
OnJanuary 4, 2022 , the terms of the Credit Facility were amended to, among other things, continue to establish a temporary upsize to the borrowing capacity under the Credit Facility, which allowed WhiteHorse Credit to borrow up to$335 million for a four-month period that originally began onOctober 4, 2021 . OnFebruary 4, 2022 , the terms of the Credit Facility were further amended to, among other things (i) permanently increase WhiteHorse Credit's availability under the Credit Facility from$285 million to$310 million (the "$25 Million Increase"), (ii) increase the minimum funding amount from$200 million to$217 million , (iii) extend an additional temporary increase of$25 million in availability under the Credit Facility, allowing WhiteHorse Credit to borrow up to$335 million throughApril 4, 2022 (the "$25 Million Temporary Increase"), and (iv) apply an annual interest rate equal to applicable SOFR plus 2.50% to any borrowings under the$25 Million Increase in the Credit Facility and the$25 Million Temporary Increase in availability under the Credit Facility.
For the period
InFebruary 2022 , we increased our capital commitment to theSTRS JV in the amount of an additional$25 million , which brings our total capital commitment to theSTRS JV to$100 million , comprised of$80 million of subordinated notes and$20 million of LLC equity interests. In connection with this increase in our capital commitment, our andSTRS Ohio's amended economic ownership in theSTRS JV is approximately 66.67% and 33.33%, respectively.
Consolidated Results of Operations
Comparison of the Years Ended
Set forth below are the consolidated results of operations for the years endedDecember 31, 2021 and 2020. For information regarding the consolidated results of operations for the year endedDecember 31, 2019 , see the Company's Form 10-K for the fiscal year endedDecember 31, 2020 as filed with theSEC onMarch 8, 2021 . The consolidated results of operations described below may not be indicative of the results we report in future periods. Net investment income and net increase in net assets can vary substantially from period to period due to various reasons, including the level of new investments and the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, period to period comparisons of net increases in net assets resulting from operations may not be meaningful.
Consolidated operating results for the years ended
Year ended December 31, 2021 vs. 2020
($ in thousands, except per share data) 2021 2020 Variances
Total investment income $ 72,143 $ 61,699 $ 10,444
Total expenses 43,352 37,542 5,810
Net investment income 28,791 24,157 4,634Net realized gain on investments and foreign currency transactions
8,815 4,163 4,652
Net change in unrealized gain/(loss) on investments and foreign currency transactions
(7,512) 3,365 (10,877)
Net increase in net assets resulting from operations $ 30,094 $ 31,685 $ (1,591)
Net Investment Income
Net investment income for the years ended December 31, 2021 and 2020 totaled
$28.8 million and $24.2 million , respectively. Net investment income increased
by $4.6 million for the year ended December 31, 2021 from the year ended
December 31, 2020 , as described below under "Investment Income" and "Operating
Expenses".
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Investment Income
Investment income increased by$10.4 million for the years endedDecember 31, 2021 and 2020 primarily attributable to higher interest, dividend and fee income earned from investments in portfolio companies. Investment income fromSTRS JV increased by$3.9 million as a result of a larger investment portfolio. Investment income from non-recurring fee income increased by$0.6 million . We expect to generate some level of non-recurring fee income during most quarters from prepayments, amendments and other sources.
Operating Expenses
The following table summarizes our expenses for the years endedDecember 31, 2021 and 2020. Year ended December 31, 2021 vs. 2020 ($ in thousands) 2021 2020 Variances Interest expense$ 16,594 $ 13,125 $ 3,469 Base management fees 13,975 12,464 1,511 Performance-based incentive fees 7,524 7,619 (95) Administrative service fees 683 683 - General and administrative expenses 3,572 2,909 663 Total expenses, before excise tax 42,348 36,800 5,548 Excise tax 1,004 742 262
Total expenses, including excise tax
$ 5,810
Interest expense increased$3.5 million for the year endedDecember 31, 2021 from the year endedDecember 30, 2020 , primarily due to a higher borrowing base and a non-recurring charge of$0.8 million as a result of prepayment of the 2025 Public Notes. This was partially offset by lower interest rates resulting from a decrease in LIBOR and spread.
Base management fees increased by
Performance-based incentive fees decreased by$0.1 million for the year endedDecember 31, 2021 from the year endedDecember 30, 2020 , was mainly attributable to lower capital gains incentive fee accrual of$0.3 million compared with$1.5 million , respectively. This was offset by an increase in performance-based incentive fees for the year endedDecember 31, 2021 from the year endedDecember 30, 2020 , due to higher pre-incentive fee net investment income of$7.3 million compared with$6.1 million , respectively.
General and administrative increased
Excise Tax Expense
We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to be subject to tax as a RIC, we are required to meet certain source of income and asset diversification requirements, as well as timely distribute to our stockholders dividends forU.S. federal income tax purposes of an amount generally at least equal to 90% of investment company taxable income, as defined by the Code, and determined without regard to any deduction for dividends paid for each tax year. We have made and intend to continue to make the requisite distributions to our stockholders that will generally relieve us fromU.S. federal income taxes. Depending on the level of taxable income earned in a tax year, we may choose to retain taxable income in excess of current year distributions into the next tax year in an amount less than what would trigger payments ofU.S. federal income tax under Subchapter M of the Code. We may then be required to incur a 4% excise tax on such income. To the 86
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extent that we determine that our estimated current year annual taxable income may exceed estimated current year distributions, we accrue excise tax, if any, on estimated excess taxable income as taxable income is earned. Excise tax increased by$0.3 million for the year endedDecember 31, 2021 from the year endedDecember 30, 2020 , primarily as a result of higher net investment income and realized gains. For the year endedDecember 31, 2021 and 2020, we accrued a net federal excise tax expense of$1.0 million and$0.7 million , respectively.
Net Realized and Unrealized Gains (Losses) on Investments
The following shows the breakdown of net realized gains and losses on
investments for the years ended
Year ended
($in millions) December 31, 2021 December 31, 2020
AG Kings Holdings Inc.(1) $ 8.0 $ -
BW Gas & Convenience Holdings, LLC 0.2 -
Fluent, LLC - 0.2
Geo Logic Systems Ltd. 0.2 -
Meta Buyer LLC (d/b/a Metagenics, Inc.) (0.3) -
PMA Holdco, LLC (HDG) - 0.6
RCS Capital Corporation 0.6 -
Vero Parent, Inc. 0.5 1.0
Vessco Holdings, LLC (0.6) 2.3
Other(2) - 0.1
Total net realized gains on investments $ 8.6 $ 4.2
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(1) Escrow receivable amounts were recognized in connection with realization
events.
(2) Includes various investments with aggregate realized gains or losses less
than
The following shows the breakdown in the changes in unrealized appreciation and
depreciation on investments for the year ended
Year ended
($in millions) December 31, 2021 December 31, 2020
Gross unrealized appreciation on investments (1) $ 11.4 $ 17.8
Gross unrealized depreciation on investments (10.4) (12.9)
Reversal of prior period net unrealized
(appreciation) depreciation upon a realization (8.6) (1.6)
Total unrealized appreciation (depreciation) on
investments $ (7.6) $ 3.3
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(1) The year ended
Financial Condition, Off-Balance Sheet Arrangements, Liquidity and Capital Resources
This "Liquidity and Capital Resources" section should be read in conjunction with the "COVID-19 Developments" section above.
As a business development company, we distribute substantially all of our net income to our stockholders. We generate cash primarily from offerings of securities, borrowings under the Credit Facility, and cash flows from operations, including interest earned from the temporary investment of cash inU.S. government securities and other high-quality debt investments that mature in one year or less. We expect to fund a portion of our investments through future borrowings. In the future, we may obtain borrowings under other credit facilities and from issuances of senior securities to the extent permitted by the 1940 Act. We may also borrow funds to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities or if our board of directors determines that leveraging our portfolio would be in our best interest and the best interests of our stockholders. 87
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Our board of directors may decide to issue common stock, such as through at-the-market offerings, direct placements or otherwise, to finance our operations rather than issuing debt or other senior securities. Any decision to sell shares below the then-current NAV per share of our common stock is subject to stockholder approval and a determination by our board of directors that such issuance and sale is in our and our stockholders' best interests. Any sale or other issuance of shares of our common stock at a price below NAV per share results in immediate dilution to our stockholders' interests in our common stock and a reduction in our NAV per share. If we were to issue additional shares of our common stock during the next 12 months, we do not intend to issue shares below the then-current NAV per share. Restricted cash and cash equivalents include amounts that are collected and held by the trustee appointed as custodian of the assets securing the Credit Facility. Restricted cash is held by the trustee for the payment of interest expense and principal on the outstanding borrowings or reinvestment into new assets. Restricted cash that represents interest or fee income is transferred to unrestricted cash accounts by the trustee generally once a quarter after the payment of operating expenses and amounts due under the Credit Facility. We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve elements of liquidity and credit risk in excess of the amount recognized on the consolidated statements of assets and liabilities. As ofDecember 31, 2021 andDecember 31, 2020 , we had commitments to fund approximately$53.1 million and$19.6 million , respectively, of revolving lines of credit or delayed draw facilities to our portfolio companies. We reasonably believe that we have sufficient assets to adequately cover and allow us to satisfy our outstanding unfunded commitments. Senior Securities (In Thousands) Information about our senior securities is shown in the following tables as ofDecember 31, 2021 , 2020, 2019, 2018, 2017, 2016, 2015, 2014, 2013 and 2012. The report of our independent registered public accounting firm,Crowe LLP , on the senior securities table as ofDecember 31, 2021 , 2020, 2019, 2018 and 2017 is attached as an exhibit to this report. The "- " indicates information that theSEC expressly does not require to be disclosed for certain types of senior securities. Involuntary Liquidating Average Total Amount Asset Coverage Preference Market Value Class and Year Outstanding(1) per Unit(2) per Unit(3) per Unit(4) Credit Facility(5) Fiscal 2021$ 291,637 $ 1,735 $ - N/A Fiscal 2020 265,246 1,813 - N/A Fiscal 2019 238,917 2,047 - N/A Fiscal 2018 115,000 2,792 - N/A Fiscal 2017 155,000 2,576 - N/A Fiscal 2016 155,000 2,368 - N/A Fiscal 2015 102,000 2,305 - N/A Fiscal 2014 105,500 2,183 - N/A Fiscal 2013 25,000 3,064 - N/A Fiscal 2012 51,250 2,622 - N/A 6.000% 2023 Notes Fiscal 2021$ 30,000 $ 1,735 $ - N/A Fiscal 2020 30,000 1,813 - N/A Fiscal 2019 30,000 2,047 - N/A Fiscal 2018 30,000 2,792 - N/A 5.375% 2025 Notes Fiscal 2021$ 40,000 $ 1,735 $ - N/A Fiscal 2020 40,000 1,813 - N/A 5.375% 2026 Notes Fiscal 2021$ 10,000 $ 1,735 $ - N/A Fiscal 2020 10,000 1,813 - N/A 5.625% 2027 Notes Fiscal 2021$ 10,000 $ 1,735 $ - N/A Fiscal 2020 10,000 1,813 - N/A 4.250% 2028 Notes 88
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Table of Contents Fiscal 2021$ 25,000 $ 1,735 $ - N/A 4.000% 2026 Notes Fiscal 2021$ 75,000 $ 1,735 $ - N/A 2025 Public Notes(6) Fiscal 2021 $ - $ - $ - N/A Fiscal 2020 35,000 1,813 - 1,029 Fiscal 2019 35,000 2,047 - 1,049 Fiscal 2018 35,000 2,792 - 982 2020 Notes(7) Fiscal 2018 $ - $ - $ - N/A Fiscal 2017 30,000 2,576 - 1,026 Fiscal 2016 30,000 2,368 - 1,005 Fiscal 2015 30,000 2,305 - 1,010 Fiscal 2014 30,000 2,183 - 1,006 Fiscal 2013 30,000 3,064 - 982 Unsecured Term Loan(8) Fiscal 2015$ 55,000 $ 2,305 $ - N/A Fiscal 2014 55,000 2,183 - N/A Fiscal 2013 55,000 3,064 - N/A Fiscal 2012 90,000 2,622 - N/A
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(1) Total amount of each class of senior securities outstanding at the end of the
period presented (in thousands), exclusive of debt issuance costs.
The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as our consolidated total assets, less all
(2) liabilities and indebtedness not represented by senior securities, divided by
total senior securities representing indebtedness. This asset coverage ratio
is multiplied by
for the 2020 Notes, which were issued in
(3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.
Not applicable, except for with respect to the 2020 Notes and 2025 Notes, as
other senior securities are not registered for public trading on a stock
(4) exchange. The average market value per unit for the 2020 Notes and 2025 Notes
is based on the average daily prices two weeks prior to the fiscal year end
of such notes and is expressed per
On
(5) Facility. On
Facility, and we drew $102.0 million on the Credit Facility and used the
proceeds to repay the Natixis Credit Facility in full.
On
(6) amount of the 2025 Notes outstanding and delisted the 2025 Notes from the
Nasdaq Global Select Market.
On
(7) amount of the 2020 Notes outstanding and delisted the 2020 Notes from the
Nasdaq Global Select Market.
(8) On
due under the Unsecured Term Loan.
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Comparison of the Years Ended
Set forth below are our liquidity and capital resources for the years endedDecember 31, 2021 and 2020. For information regarding our liquidity and capital resources for the year endedDecember 31, 2019 , see the Company's Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onMarch 8, 2021 . Our operating activities used cash and cash equivalents of$90.2 million during the year endedDecember 31, 2021 , primarily for acquisition of investments and cash used from the net change in working capital, partially offset by net proceeds received from realizations and repayments on our investments. Our financing activities provided cash and cash equivalents of$97.0 million during the year endedDecember 31, 2021 , primarily due to issuance of$100.0 million of unsecured notes and proceeds of$37.5 million from the sales of common stock, offset by repayments of debt and the payment of distributions to stockholders. Our operating activities used cash and cash equivalents of approximately$64.6 million during the year endedDecember 31, 2020 , primarily for acquisition of investments partially offset by proceeds from principal payments and sale of portfolio investments. Our financing activities generated cash and cash equivalents of approximately$53.0 million during the year endedDecember 31, 2020 , primarily from borrowings under the credit facility partially offset by distributions to stockholders.
As of
As ofDecember 31, 2020 , we had cash and cash equivalent resources of$15.9 million , including$7.9 million of restricted cash. As ofDecember 31, 2020 , we had$19.8 million undrawn under the Credit Facility based on the collateral and portfolio quality requirements stipulated in the related credit and security agreement.STRS JV InJanuary 2019 , we andSTRS Ohio , formed a joint venture,STRS JV, that 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 rate based on the LIBOR or an equivalent risk-free index rate and have a term of three to six years.STRS JV invests in portfolio companies in the same industries in which we may directly invest.STRS JV was formed as aDelaware limited liability company and is not consolidated by either us orSTRS Ohio for financial reporting purposes. OnJuly 19, 2019 STRS JV formally launched operations. As ofDecember 31, 2021 ,STRS JV had total assets of$273.5 million . As ofDecember 31, 2020 ,STRS JV had total assets of$181.4 million . We provide capital toSTRS JV in the form of limited liability company, or LLC equity interests, and subordinated notes. As ofDecember 31, 2021 , we andSTRS Ohio owned 60% and 40%, respectively, of the LLC equity interests ofSTRS JV. As ofDecember 31, 2021 , we had commitments to fund equity interests and subordinated notes inSTRS JV of$15 million and$60 million , respectively, both of which were fully funded.STRS JV is managed by a four-person board of managers, two of whom are selected by us and two of whom are selected bySTRS Ohio . All material decisions with respect toSTRS JV, including those involving its investment portfolio, require unanimous approval of a quorum of the board of managers. Quorum is defined as (i) the presence of two members of the board of managers; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of managers; provided that the individual that was elected, designated or appointed by the member with only one individual present is entitled to cast two votes on each matter; or (iii) the presence of four members of the board of managers; provided that two individuals are present that were elected, designated or appointed by each member. 90
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Below is a summary ofSTRS JV's portfolio as ofDecember 31, 2021 andDecember 31, 2020 : ($ in thousands) As of December 31, 2021 As of December 31, 2020 Total investments(1) $ 259,510 $ 174,552 Weighted average effective yield on total portfolio(1) 7.9 % 7.9 % Number of portfolio companies in STRS JV 28 20 Largest portfolio company investment(2) 22,967 13,511 Total of five largest portfolio company investments(2) 83,057 60,252
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Weighted average effective yield is computed by dividing (a) annualized (1) interest income (including interest income resulting from the amortization of
fees and discounts) by (b) the weighted average cost of investment.
(2) At fair value.
Investments consisted of the following:
As of December 31, 2021 As of December 31, 2020
($ in thousands) Amortized Cost Fair Value Amortized Cost Fair Value
First lien secured loans $ 260,472 $ 259,510 $ 176,716 $ 174,552
Total $ 260,472 $ 259,510 $ 176,716 $ 174,552 The following table shows the portfolio composition by industry grouping at fair value:
Industry ($ in thousands) As of December 31, 2021 As of December 31, 2020 Advertising $ - - %$ 9,256 5.3 % Application Software 13,518 5.2 - - Building Products 16,603 6.4 19,754 11.3 Construction & Engineering 13,975 5.4 19,815 11.4 Data Processing & Outsourced Services 16,160 6.2 11,130 6.4 Diversified Support Services 10,489 4.0 10,230 5.9 Electronic Equipment & Instruments 6,687 2.6 - - Environmental & Facilities Services 6,872 2.6 6,248 3.6 Human Resource & Employment Services - - 11,549 6.6 Industrial Machinery 6,815 2.6 9,886 5.7 Insurance Brokers - - 7,838 4.5 Internet & Direct Marketing Retail 15,353 5.9 13,511 7.7 Investment Banking & Brokerage 10,054 3.9 11,076 6.3 IT Consulting & Other Services 40,697 15.7 - - Leisure Products 8,930 3.4 - - Packaged Foods & Meats 25,606 9.9 24,577 14.1 Personal Products 4,273 1.8 4,232 2.4 Pharmaceuticals 15,061 5.8 - - Real Estate Operating Companies 4,780 1.8 - - Research & Consulting Services 8,901 3.4 - - Systems Software 9,898 3.8 8,110 4.6 Technology Hardware, Storage & Peripherals 14,725 5.7 7,340 4.2 Trading Companies & Distributors 10,113 3.9 - - Total$ 259,510 100.0 %$ 174,552 100.0 % See Note 4 to our consolidated financial statements for further discussion onSTRS JV's portfolio and selected balance sheet information as ofDecember 31, 2021 andDecember 31, 2020 and selected statement of operations information for the year endedDecember 31, 2021 and 2020. 91
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Capital Raises
OnOctober 25, 2021 , we completed an offering of 1,900,000 shares of our common stock at a public offering price of$15.81 per share, inclusive of underwriting discounts and commissions. In connection with the offering, we granted the underwriters an overallotment option to purchase up to an additional 285,000 shares of our common stock. The issuance of 1,900,000 shares resulted in net proceeds to us of$29.4 million , inclusive of underwriting discounts and commissions and before offering expenses. OnNovember 3, 2021 , we raised an additional$4.3 million from the issuance of an additional 282,300 shares pursuant to the underwriters' exercise of the overallotment option to purchase additional shares. WhiteHorse Advisers agreed to bear a portion of the underwriting discounts and commissions in connection with the offering, such that the issuance of the 2,182,300 shares (which includes the additional shares issued pursuant to the overallotment option) resulted in net proceeds to us of$33.7 million before offering expenses, which was at or above our NAV per share at the time of the offering and the overallotment option.
At-the-Market Offering
OnMarch 15, 2021 , we entered into an equity distribution agreement, or the Equity Distribution Agreement, with WhiteHorse Advisers,WhiteHorse Administration andRaymond James & Associates, Inc. , as the sales agent, or the Sales Agent, in connection with the sale of shares of our common stock, par value$0.001 per share, with an aggregate offering price of up to$35.0 million . The Equity Distribution Agreement provides that we may offer and sell shares of our common stock from time to time through the Sales Agent in amounts and at times to be determined by us, or the ATM Offering. Actual sales will depend on a variety of factors to be determined by us from time to time, including market conditions and the trading price of our common stock. We expect to use all or substantially all of the net proceeds from the ATM Offering to invest in portfolio companies in accordance with our investment objective and strategies and for general corporate purposes. As ofDecember 31, 2021 , gross proceeds of$4.1 million have been raised from the ATM Offering.
Credit Facility
OnDecember 23, 2015 , our wholly owned subsidiaryWhiteHorse Finance Credit I, LLC , or WhiteHorse Credit, entered into the$200 million Credit Facility with the Lender. OnJune 27, 2016 , the Credit Facility was amended and restated to clarify certain terms. OnJune 29, 2017 , the Credit Facility was again amended and restated to, among other things, (i) extend the maturity date toDecember 29, 2021 , (ii) increase the amount contained within the accordion feature which allows for the expansion of the borrowing limit from$220 million to$235 million and (iii) reduce the interest rate spread applicable on outstanding borrowings to 2.75%. OnMay 15, 2018 , the terms of the Credit Facility were again amended and restated to, among other things, permit the financing of certain assets to be held byWhiteHorse Finance (CA), LLC , or WhiteHorse California, a wholly owned subsidiary of WhiteHorse Credit. OnNovember 19, 2018 , we entered into an amendment, which, among other things, allows for an increase in the advance rate and a temporary reduction, throughAugust 19, 2019 , in the required minimum outstanding borrowings under the Credit Facility. OnNovember 22, 2019 , the terms of the Credit Facility were amended to, among other things, (i) extend the maturity date fromDecember 29, 2021 toNovember 22, 2024 ;(ii) increase the size of the facility from$200 million to$250 million with an additional$100 million accordion feature, which allows for the expansion of the borrowing limit, exercisable in increments of at least$35 million , or the Commitment; (iii) reduce the interest rate spread applicable on outstanding borrowings from 2.75% to 2.50%; (iv) change the minimum borrowing amount from 77.5% to 70.0% of the Commitment; (v) increase the advance rate from 57% to 60%; and (vi) extend the non-call period fromOctober 29, 2019 toNovember 22, 2021 . OnDecember 21, 2020 , the terms of the Credit Facility were amended to, among other things, (i) increases the minimum funding amount from$175 million to$200 million , (ii) increase the size of the facility from$250 million to$285 million and retains an accordion feature which allows for the expansion of the borrowing limit up to$350 million and (iii) provide for the implementation of certain changes relating to the transition away from the LIBOR in the market. 92
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OnApril 28, 2021 , the terms of the Credit Facility were amended and restated to, among other things, enable WhiteHorse Credit to borrow in British Pounds or Euros. OnJuly 15, 2021 , the terms of the Credit Facility were amended to, among other things, allow WhiteHorse Credit to reduce the applicable margins for interest rates to 2.35%, extend the non-call period fromNovember 22, 2021 toNovember 22, 2022 , extend the end of the reinvestment period fromNovember 22, 2023 toNovember 22, 2024 and extend the scheduled termination date fromNovember 22, 2024 , toNovember 22, 2025 . OnOctober 4, 2021 , the terms of the Credit Facility were amended to, among other things, establish a temporary upsize to the borrowing capacity under the Credit Facility, which allows WhiteHorse Credit to borrow up to$335.0 million for a three-month period beginning onOctober 4, 2021 . The Credit Facility provides for borrowings in an aggregate principal amount up to$285 million with an accordion feature which allows for the expansion of the borrowing limit up to$350 million , subject to consent from the Lender and other customary conditions. The required minimum outstanding borrowings under the Credit Facility are$200 million , unless the accordion feature is exercised, at which time the required minimum outstanding borrowings will be$245 million . Under the Credit Facility, there are two coverage tests that WhiteHorse Credit must meet on specified compliance dates in order to permit WhiteHorse Credit to make new borrowings and to make distributions in the ordinary course - a borrowing base test and a market value test. The borrowing base test compares, at any given time, the aggregate outstanding amount of all Lender advances under the Credit Facility less the amount of principal proceeds in respect of the collateral on deposit in the accounts to the NAV of the collateral, as set forth in the credit agreement and related documentation. To meet the borrowing base test, this ratio must be less than or equal to 50%, as set forth in the credit agreement and related documentation. To meet the market value test, the value of WhiteHorse Credit's portfolio investments must exceed a minimum of 165% of the aggregate outstanding amount of all Lender advances as set forth in the credit agreement and related documentation. Advances under the Credit Facility are based on the three-month LIBOR for USD denominated borrowings plus an annual spread of 2.35%. The Credit Facility bears interest at EURIBOR, for EUR denominated borrowings, CDOR for CAD denominated borrowings, Sterling Overnight Index Average, for GBP denominated, plus a spread of 2.35% on outstanding borrowings. Interest is payable quarterly in arrears. WhiteHorse Credit is required to pay a non-usage fee which accrues at 0.75% per annum on the average daily unused amount of the financing commitments, to the extent the aggregate principal amount available under the Credit Facility has not been borrowed. WhiteHorse Credit paid an upfront fee and incurred certain other customary costs and expenses in connection with obtaining the Credit Facility. Any amounts borrowed under the Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, onNovember 22, 2025 . The Credit Facility and the related documents requireWhiteHorse Finance and WhiteHorse Credit to, among other things, agree to make certain customary representations and to comply with customary affirmative and negative covenants. The Credit Facility also includes customary events of default for credit facilities of this nature, including breaches of representations, warranties or covenants byWhiteHorse Finance or WhiteHorse Credit, the occurrence of a change in control, or failure to maintain certain required ratios. If we fail to perform our obligations under the credit agreement or the related agreements, an event of default may occur, which could cause the Lender to accelerate all of the outstanding debt and other obligations under the Credit Facility or to exercise other remedies under the credit agreement. Any such developments could have a material adverse effect on our financial condition and results of operations. If any of our contractual obligations discussed above is terminated, our costs under new agreements that we enter into may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Advisory Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders. 93
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As ofDecember 31, 2021 , there was$291.6 million in outstanding borrowings under the Credit Facility and, based on collateral and portfolio requirements stipulated in the Credit Facility agreement, approximately$43.4 million was available to be drawn on such date. The Credit Facility is secured by all of the assets of WhiteHorse Credit, which included loans with a fair value of$719.5 million as ofDecember 31, 2021 . As ofDecember 31, 2020 , there was$265.2 million in outstanding borrowings under the Credit Facility and, based on collateral and portfolio requirements stipulated in the Credit Facility agreement, approximately$19.8 million was available to be drawn on such date. The Credit Facility is secured by all of the assets of WhiteHorse Credit, which included loans with a fair value of$601.1 million as ofDecember 31, 2020 .
6.000% 2023 Notes
OnJuly 13, 2018 , we entered into the 2023 Note Purchase Agreement, to sell in a private offering$30 million of aggregate principal amount of unsecured notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act. Interest on the 6.000% 2023 Notes is payable semiannually onFebruary 7 andAugust 7 , at a fixed, annual rate of 6.00%. This interest rate is subject to increase (up to 6.50%) in the event that, subject to certain exceptions, the 6.000% 2023 Notes cease to have an investment grade rating. The 6.000% 2023 Notes mature onAugust 7, 2023 , unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. The 6.000% 2023 Notes are general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness that we may issue. The closing of the transaction occurred onAugust 7, 2018 . We used the net proceeds from this offering, together with cash on hand, to redeem existing debt.
5.375% 2025 Notes
OnOctober 20, 2020 , we entered into the 2025 Note Purchase Agreement, to sell in a private offering$40 million of aggregate principal amount of unsecured notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act. Interest on the 5.375% 2025 Notes is payable semiannually onApril 20 andOctober 20 , at a fixed, annual rate of 5.375%. This interest rate is subject to increase (up to 6.375%) in the event that, subject to certain exceptions, the 5.375% 2025 Notes cease to have an investment grade rating. The 5.375% 2025 Notes mature onOctober 20, 2025 , unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. The 5.375% 2025 Notes are general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness that we may issue. The closing of the transaction occurred onOctober 20, 2020 . We used the net proceeds from this offering to redeem existing debt.
5.375% 2026 Notes
OnDecember 4, 2020 , we entered into the 2026 Note Purchase Agreement, to sell in a private offering$10 million of aggregate principal amount of unsecured notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act. Interest on the 5.375% 2026 Notes is payable semiannually onJune 4 andDecember 4 , at a fixed, annual rate of 5.375%. This interest rate is subject to increase (up to 6.375%) in the event that, subject to certain exceptions, the 5.375% 2026 Notes cease to have an investment grade rating. The 5.375% 2026 Notes mature onDecember 4, 2026 , unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. The 5.375% 2026 Notes are general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness that we may issue. The closing of the transaction occurred onDecember 4, 2020 . We used the net proceeds from this offering to redeem existing debt.
5.625% 2027 Notes
OnDecember 4, 2020 , we entered into the 2027 Note Purchase Agreement, to sell in a private offering$10 million of aggregate principal amount of unsecured notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act. Interest on the 5.625% 2027 Notes is payable semiannually onJune 4 andDecember 4 , at a fixed, annual rate of 5.625%. This interest rate is subject to increase (up to 6.625%) in the event that, subject to certain exceptions, the 5.625% 2027 Notes cease to have an investment grade rating. The 5.625% 2027 Notes mature onDecember 4, 2027 , unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. The 94
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5.625% 2027 Notes are general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness that we may issue. The closing of the transaction occurred onDecember 4, 2020 . We used the net proceeds from this offering to redeem existing debt.
4.000% 2026 Notes
OnNovember 24, 2021 , we completed a public offering of$75 million of aggregate principal amount of unsecured notes, the net proceeds of which were used to fund investments in debt and equity securities and repay outstanding indebtedness under our revolving credit facility. Interest on the 4.000% 2026 Notes is paid semiannually onJune 15 , andDecember 15 each year, at a fixed, annual rate of 4.00%. The 4.000% 2026 Notes will mature onDecember 15, 2026 and may be redeemed in whole or in part at any time prior toSeptember 15, 2026 , at par plus a "make-whole" premium, and thereafter at par. The 4.000% 2026 Notes will rank equally in right of payment with our other outstanding and future unsecured, unsubordinated indebtedness, including the 6.000% 2023 Notes, the 5.375% 2025 Notes, the 5.375% 2026 Notes, the 5.625% 2027 Notes and the 4.250% 2028 Notes. The 4.000% 2026 Notes will effectively rank behind all of our existing and future secured indebtedness (including indebtedness that is initially unsecured in respect of which we subsequently grant security) in right of payment, to the extent of the value of the assets securing such indebtedness, including our Credit Facility.
4.250% 2028 Notes
OnDecember 6, 2021 , we entered into the 2028 Note Purchase Agreement, to sell in a private offering$25 million of aggregate principal amount of unsecured notes to qualified institutional investors in reliance on Section 4(a)(2) of the Securities Act. Interest on the 4.250% 2028 Notes is payable semiannually onJune 6 andDecember 6 , at a fixed, annual rate of 4.25%. This interest rate is subject to increase (up to 5.25%) in the event that, subject to certain exceptions, the 4.250% 2028 Notes cease to have an investment grade rating. The 4.250% 2028 Notes mature onDecember 6, 2028 , unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. The 4.250% 2028 Notes are general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness that we may issue. The closing of the transaction occurred onDecember 6, 2021 . We used the net proceeds from this offering to redeem existing debt.
2025 Public Notes
OnNovember 13, 2018 , we completed a public offering of$35 million of aggregate principal amount of unsecured notes, the net proceeds of which were used to fund investments in debt and equity securities and repay outstanding indebtedness under our revolving credit facility. Interest on the 2025 Public Notes is paid quarterly onFebruary 28 ,May 31 ,August 31 andNovember 30 each year, at a fixed, annual rate of 6.50%. The 2025 Public Notes will mature onNovember 30, 2025 and may be redeemed in whole or in part at any time, or from time to time, at our option on or afterNovember 30, 2021 . The 2025 Public Notes will rank equally in right of payment with our other outstanding and future unsecured, unsubordinated indebtedness, including the 6.000% 2023 Notes, the 5.375% 2025 Notes, the 5.375% 2026 Notes and the 5.625% 2027 Notes. The 2025 Public Notes will effectively rank behind all of our existing and future secured indebtedness (including indebtedness that is initially unsecured in respect of which we subsequently grant security) in right of payment, to the extent of the value of the assets securing such indebtedness, including our Credit Facility. The 2025 Public Notes were redeemed onDecember 17, 2021 and were de-listed from the Nasdaq Global Select Market where it was trading under the symbol "WHFBZ." 95
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Portfolio Investments and Yield
As ofDecember 31, 2021 , our investment portfolio consisted primarily of senior secured loans across 127 positions in 76 companies with an aggregate fair value of$819.2 million . As ofDecember 31, 2021 , the majority of our portfolio was comprised of senior secured loans to lower middle market borrowers and nearly all of those loans were variable-rate investments, primarily indexed to LIBOR, with four fixed-rate loan investments representing 0.4% based on fair value. As ofDecember 31, 2021 , our portfolio had an average investment size of$5.9 million based on fair value and average debt investment size of$6.8 million , with investment sizes ranging from zero to$24.0 million and a weighted average effective yield of 9.0% (and a weighted average effective yield on income-producing debt investments of 9.1%). As ofDecember 31, 2020 , our investment portfolio consisted primarily of senior secured loans across 98 positions in 67 companies with an aggregate fair value of$690.7 million . As of that date, the majority of our portfolio was comprised of senior secured loans to lower middle market borrowers and nearly all of those loans were variable-rate investments (primarily indexed to LIBOR) with two fixed-rate loan investments representing 0.2% based on fair value. As ofDecember 31, 2020 , our portfolio had an average investment size of$6.6 million (average debt investment size of$7.3 million ), with investment sizes ranging from zero to$23.5 million and a weighted average effective yield of 9.4% (and a weighted average effective yield on income-producing debt investments of 9.9%).
For the year ended
For the year endedDecember 31, 2020 , we invested$302.7 million in new and existing portfolio companies, offset by repayments and sales of$213.8 million . Repayments included$13.1 million of scheduled repayments and$101.4 million of unscheduled repayments. We actively monitor and manage our portfolio with regard to individual company performance as well as general market conditions. Investment decisions on new originations generally include an analysis of the impact of the new loan on our broader portfolio, including a "top-down" assessment of portfolio diversification and risk exposure. This assessment includes a review of portfolio concentration by issuer, industry, geography and type of credit as well as an evaluation of our portfolio's exposure to macroeconomic factors and cyclical trends. We believe that consistent, active monitoring of individual companies and the broader market is integral to portfolio management and a critical component of our investment process. Our investment adviser uses several methods to evaluate and monitor the performance and fair value of our investments, which may include the following:
? frequent discussions with management and sponsors, including board observation
rights where possible;
? comparing/analyzing financial performance to the portfolio company's business
plan, as well as our internal projections developed at underwriting;
tracking portfolio company compliance with covenants as well as other metrics
? identified at initial investment stage, such as acquisitions, divestitures,
product development and specified management hires; and
? periodic review by the investment committee of each asset in the portfolio and
more rigorous monitoring of "watch list" positions.
As part of the monitoring process, our investment adviser regularly assesses the
risk profile of each of our investments and, on a quarterly basis, grades each
investment on a risk scale of 1 to 5. This risk rating system is intended to
identify and assess risks relative to when we initially made the investment and
could be impacted by such factors as company-specific performance, changes in
collateral, changes in potential exit opportunities or macroeconomic conditions.
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All investments are initially assigned a rating of 2, as this grade represents a company that is meeting initial expectations with regard to performance and outlook. A rating may be improved to a 1 if, in the opinion of our investment adviser, a portfolio company's risk of loss has been reduced relative to initial expectations. An investment will be assigned a rating of 3 if the risk of loss has increased relative to initial expectations and will be assigned a rating of 4 if our investment principal is at a material risk of not being fully repaid. A rating of 5 indicates an investment is in payment default and has significant risk of not receiving full repayment.
The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value:
As of December 31, 2021 As of December 31, 2020
Investments at Percentage of Investments at Percentage of
Investment Performance Rating ($ in millions) Fair Value Total Portfolio Fair Value Total Portfolio
1 $ 125.8 15.4 % $ 153.3 22.2 %
2 611.9 74.7 422.1 61.1
3 73.2 8.9 103.7 15.0
4 8.3 1.0 4.0 0.6
5 - - 7.6 1.1
Total Portfolio $ 819.2 100.0 % $ 690.7 100.0 %
Inflation
Inflation has not had a significant effect on our results of operations in any
of the reporting periods presented in our consolidated financial statements.
However, from time to time, inflation may impact the operating results of our
portfolio companies.
Distributions
In order to maintain our status as a RIC and to avoid the imposition of
corporate-level tax on income, we must distribute dividends to our stockholders
each taxable year of an amount generally at least equal to the sum of 90% of our
ordinary income and realized net short-term capital gains in excess of realized
net long-term capital losses out of the assets legally available for
distribution. In order to avoid the imposition of certain excise taxes imposed
on RICs, we must distribute dividends in respect of each calendar year of an
amount at least equal to the sum of (1) 98% of our ordinary income (taking into
account certain deferrals and elections) for the calendar year, (2) 98.2% of our
capital gains in excess of capital losses, or capital gain net income, adjusted
for certain ordinary losses, for the one-year period ending on October 31 of the
calendar year and (3) any ordinary income and capital gain net income for
preceding years that were not distributed during such years on which we incurred
no U.S. federal income tax.
In addition, in order to satisfy the annual distribution requirement applicable
to RICs, we may declare a significant portion of our dividends in shares of our
common stock instead of in cash. As long as a portion of such dividend is paid
in cash (which portion may be as low as 20% of such dividend under published
guidance from the Internal Revenue Service) and certain requirements are met,
the entire distribution will be treated as a dividend for U.S. federal income
tax purposes. As a result, a stockholder generally would be subject to tax on
100% of the fair market value of the dividend on the date the dividend is
received by the stockholder in the same manner as a cash dividend, even though
most of the dividend was paid in shares of our common stock.
The timing and amount of our quarterly distributions, if any, are determined by
our board of directors. While we intend to make distributions on a quarterly
basis to our stockholders out of assets legally available for distribution, we
may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of our distributions
from time to time. In addition, we may be limited in our ability to make
distributions due to the asset coverage requirements applicable to us as a
business development company under the 1940 Act. If we do not distribute a
certain percentage of our income annually, we will suffer adverse tax
consequences, including the possible loss of our ability to be subject to tax as
a RIC. We cannot assure stockholders that they will receive any distributions.
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During the year endedDecember 31, 2021 we declared distributions of$1.555 per share for total distributions of$33.4 million . During the year endedDecember 31, 2020 , we declared distributions of$1.545 per share for total distributions of$31.7 million . We monitor available net investment income to determine if a return of capital for taxation purposes may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for a fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders forU.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Notices to stockholders will be provided in accordance with Section 19(a) of the 1940 Act. For the years endedDecember 31, 2021 and 2020, distributions to stockholders did not include a return of capital, but did include approximately$1.4 million and$5.3 million , respectively, relating to long-term capital gains, for tax purposes. The specific tax characteristics of the distribution are reported to stockholders subject to tax reporting on Form 1099-DIV after the end of each calendar year and in our periodic reports with theSEC . Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains. We have adopted an "opt out" dividend reinvestment plan, or the DRIP, for our common stockholders. As a result, if we declare a distribution, then stockholders' cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically "opts out" of our DRIP. If a stockholder opts out, that stockholder receives cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject toU.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
? WhiteHorse Advisers manages our day-to-day operations and provides investment
management services to us pursuant to the Investment Advisory Agreement.
? office facilities and administrative services, including access to the
resources necessary for us to perform our obligations towards certain portfolio
companies, pursuant to the Administration Agreement.
We have entered into a license agreement with an affiliate of
? pursuant to which we have been granted a non-exclusive, royalty-free license to
use the "WhiteHorse" name.
We entered into the Investment Advisory Agreement with WhiteHorse Advisers in accordance with the 1940 Act onDecember 4, 2012 , which was most recently amended onNovember 1, 2018 . Under the Investment Advisory Agreement, WhiteHorse Advisers manages our day-to-day investment operations and provides us with access to personnel and an investment committee and certain other resources so that we may fulfill our obligation to act as a portfolio manager of WhiteHorse Credit under the Credit Facility. Payments under the Investment Advisory Agreement in future periods will be equal to (1) a management fee equal to 2.0% of the value of our consolidated gross assets; provided, however, that the management fee on consolidated gross assets financed using leverage over 200% asset coverage (in other words, over 1.0x debt to equity) will be equal to 1.25% and (2) an incentive fee based on our performance. See "Investment Advisory Agreement" in Note 7 to the consolidated financial statements. We also entered into the Administration Agreement withWhiteHorse Administration onDecember 4, 2012 . Pursuant to the Administration Agreement,WhiteHorse Administration furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations.WhiteHorse Administration also furnishes us with resources necessary for us to act as portfolio manager to WhiteHorse Credit under the Credit Facility. If requested to provide managerial assistance to our portfolio companies,WhiteHorse Administration will be paid an additional amount based on the services provided, which amount will not, in any case, exceed the amount we receive from the 98
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portfolio companies for such services. Payments under the Administration Agreement will be based upon our allocable portion ofWhiteHorse Administration's overhead expenses in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of our chief financial officer and chief compliance officer along with their respective staffs. WhiteHorse Advisers,WhiteHorse Administration or their respective affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, WhiteHorse Advisers,WhiteHorse Administration or their respective affiliates may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders. Such persons may face conflicts in the allocation of investment opportunities among us and other investment funds or accounts advised by or affiliated with WhiteHorse Advisers orWhiteHorse Administration . WhiteHorse Advisers or its affiliates will seek to allocate investment opportunities among eligible accounts in a manner that is fair and equitable over time and consistent with its allocation policy. However, we can offer no assurance that such opportunities will be allocated to us fairly or equitably in the short-term or over time. We depend on the communications and information systems and policies of WhiteHorse Advisers and its affiliates as well as certain third-party service providers to monitor and prevent cybersecurity incidents. Our board of directors and management periodically review and assess the effectiveness of such communications and information systems and policies.
Critical Accounting Estimates
The preparation of our financial statements in accordance with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. We have identified the following as critical accounting estimates.
Principles of Consolidation
Under the investment company financial accounting guidance, as formally codified in Accounting Standards Codification, or ASC, Topic 946, Financial Services - Investment Companies, we are precluded from consolidating any entity other than another investment company. As provided under ASC Topic 946, we generally consolidate any investment company when we own 100% of its partners' or members' capital or equity units. We own a 100% equity interest in each ofWhiteHorse Credit and WhiteHorse Finance Warehouse, LLC ,WhiteHorse Warehouse ,WHF PMA Holdco Blocker, LLC ,WhiteHorse RCKC Holdings, LLC andWhiteHorse Finance Holdings, LLC , which are investment companies for accounting purposes. As such, we have consolidated the accounts of WhiteHorse Credit,WhiteHorse Warehouse ,WHF PMA Holdco Blocker, LLC ,WhiteHorse RCKC Holdings LLC andWhiteHorse Finance Holdings, LLC into our financial statements. As a result of this consolidation, the amount outstanding under the Credit Facility is treated as our indebtedness.
Valuation of Portfolio Investments
We value our investments in accordance with ASC Topic 820 - Fair Value
Measurements and Disclosures. ASC Topic 820 defines fair value, establishes a
framework for measuring fair value and expands disclosures about assets and
liabilities measured at fair value. ASC Topic 820's definition of fair value
focuses on exit price in the principal, or most advantageous, market and
prioritizes the use of market-based inputs over entity-specific inputs within a
measurement of fair value.
Our portfolio consists primarily of debt investments. These investments are
valued at their bid quotations obtained from unaffiliated market makers or other
financial institutions that trade in similar investments or based on prices
provided by independent third party pricing services. For investments where
there are no available bid quotations, fair value is derived using proprietary
models that consider the analyses of independent valuation agents as well as
credit risk, liquidity, market credit spreads and other applicable factors for
similar transactions.
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Due to the nature of our strategy, our portfolio includes relatively illiquid investments that are privately held. Valuations of privately held investments are inherently uncertain, may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments. Our board of directors is ultimately responsible for determining the fair value of the portfolio investments that are not publicly traded, whose market prices are not readily available on a quarterly basis in good faith or any other situation where portfolio investments require a fair value determination. Our board of directors has retained one or more independent valuation firms to review the valuation of each portfolio investment that does not have a readily available market quotation at least once during each 12-month period. Independent valuation firms retained by our board of directors provide a valuation review on approximately 25% of our investments for which market quotations are not readily available each quarter to ensure that the fair value of each investment for which a market quote is not readily available is reviewed by an independent valuation firm at least once during each 12-month period. However, our board of directors does not intend to have de minimis investments of less than 1.5% of our total assets (up to an aggregate of 10% of our total assets) independently reviewed. The valuation process is conducted at the end of each fiscal quarter, with a portion of our valuations of portfolio companies without market quotations subject to review by one or more independent valuation firms each quarter. When an external event occurs with respect to one of our portfolio companies, such as when a purchase transaction, public offering or subsequent equity sale occurs, we expect to use the pricing indicated by such external event to corroborate our valuation.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
Our quarterly valuation process begins with each portfolio company or
? investment being initially valued by investment professionals of our investment
adviser responsible for credit monitoring in accordance with our valuation
procedures.
? Preliminary valuation conclusions are then documented and discussed with our
investment committee and our investment adviser.
The audit committee of our board of directors reviews these preliminary
? valuations, and on a quarterly basis, reviews the bases of the valuations by
our investment adviser and the independent valuation firms.
? At least once annually, the valuation for each portfolio investment is reviewed
by an independent valuation firm.
? Our board of directors discusses valuations and determines the fair value of
each investment in our portfolio in good faith.
Fair value of publicly traded instruments is generally based on quoted market
prices. Fair value of non-publicly traded instruments, and of publicly traded
instruments for which quoted market prices are not readily available, may be
determined based on other relevant factors, including without limitation,
quotations from unaffiliated market makers or independent third party pricing
services, the price activity of equivalent instruments and valuation pricing
models. For those investments valued using quotations, the bid price is
generally used unless we determine that it is not representative of an exit
price.
Fair value is the price that would be received in the sale of an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. Where available, fair value is based on observable market
prices or parameters, or derived from such prices or parameters. Where
observable prices or inputs are not available, valuation models are applied.
These valuation models involve some level of management estimation and
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judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity. Our fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active public markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about what market participants would use in pricing an asset or liability.
Investments for which fair value is determined using inputs defined above as Level 3 are fair valued using the income and market approaches, which may include the discounted cash flow method, reference to performance statistics of industry comparables, relative comparable yield analysis and, in certain cases, third party valuations performed by independent valuation firms. The valuation methods can reference various factors and use various inputs such as assumed growth rates, capitalization rates and discount rates, loan-to-value ratios, liquidation value, relative capital structure priority, market comparables, compliance with applicable loan, covenant and interest coverage performance, book value, market derived multiples, reserve valuation, assessment of credit ratings of an underlying borrower, review of ongoing performance, review of financial projections as compared to actual performance, review of interest rate and yield risk. Such factors may be given different weighting depending on our assessment of the underlying investment, and we may analyze apparently comparable investments in different ways. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the financial instrument. Fair value for each investment is derived using a combination of valuation methodologies that, in the judgment of the investment committee of the investment adviser are most relevant to such investment, including being based on one or more of the following: (i) market prices obtained from market makers for which the investment committee has deemed there to be enough breadth (number of quotes) and depth (firm bids) to be indicative of fair value, (ii) the price paid or realized in a completed transaction or binding offer received in an arm's-length transaction, (iii) a discounted cash flow analysis, (iv) the guideline public company method, (v) the similar transaction method or (vi) the option pricing method. In addition, onDecember 3, 2020 , theSEC announced that it adopted Rule 2a-5 under the 1940 Act, which establishes an updated regulatory framework for determining fair value in good faith for purposes of the 1940 Act. The new rule clarifies how fund boards can satisfy their valuation obligations in light of recent market developments. The rule will permit boards, subject to board oversight and certain other conditions, to designate certain parties to perform the fair value determinations. We will continue to review the new rule and its impact on us our valuation policies.
Investment Transactions and Related Investment Income and Expense
We record our investment transactions on a trade date basis, which is the date
when we have determined that all material terms have been defined for the
transactions. These transactions could possibly settle on a subsequent date
depending on the transaction type. All related revenue and expenses attributable
to these transactions are reflected on our
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consolidated statements of operations commencing on the trade date unless otherwise specified by the transaction documents. Realized gains and losses on investment transactions are recorded on the specific identification method.
We accrue interest income if we expect that ultimately we will be able to collect it. Generally, when an interest payment default occurs on a loan in our portfolio, or if our management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, we place the loan on non-accrual status and will cease recognizing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, we remain contractually entitled to this interest. We may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. Accrued interest is written off when it becomes probable that such interest will not be collected and the amount of uncollectible interest can be reasonably estimated. Any original issue discount, as well as any other market purchase discount or premium on debt investments, are accreted or amortized to interest income or expense, respectively, over the maturity periods of the investments. Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Interest expense is recorded on an accrual basis. Certain expenses related to legal and tax consultation, due diligence, rating fees, valuation expenses and independent collateral appraisals may arise when we make certain investments. These expenses are recognized in the consolidated statements of operations as they are incurred.
Loan Origination, Facility, Commitment and Amendment Fees
We may receive fees in addition to interest income from the loans during the life of the investment. We may receive origination fees upon the origination of an investment. We defer these origination fees and deduct them from the cost basis of the investment and subsequently accrete them into income over the term of the loan. We may receive facility, commitment and amendment fees, which are paid to us on an ongoing basis. We accrue facility fees, sometimes referred to as asset management fees, as a percentage periodic fee on the base amount (either the funded facility amount or the committed principal amount). Commitment fees are based upon the undrawn portion committed by us and we record them on an accrual basis. Amendment fees are paid in connection with loan amendments and waivers and we account for them upon completion of the amendments or waivers, generally when such fees are receivable. We include any such fees in fee income on the consolidated statements of operations.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements, which discusses recent accounting pronouncements applicable to us, if any.
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