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EX-32.2 - EXHIBIT 32.2 - WhiteHorse Finance, Inc.v445105_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - WhiteHorse Finance, Inc.v445105_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - WhiteHorse Finance, Inc.v445105_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - WhiteHorse Finance, Inc.v445105_ex31-1.htm

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Form 10-Q

 

(Mark One)

  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

or

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from  ______________ to ______________

Commission file number: 814-00967

 

WHITEHORSE FINANCE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 45-4247759
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

 

1450 Brickell Avenue, 31st Floor
Miami, Florida
33131
(Address of Principal Executive Offices) (Zip Code)

 

(305) 381-6999

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨   No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
       
Non-accelerated filer ¨ Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes   ¨     No   x

 

As of August 4, 2016 the Registrant had 18,303,890 shares of common stock, $0.001 par value, outstanding.

 

 

 

  

WHITEHORSE FINANCE, INC.

 

TABLE OF CONTENTS

 

    Page
Part I. Financial Information 3
Item 1. Financial Statements 3
  Consolidated Statements of Assets and Liabilities as of June 30, 2016 (Unaudited) and December 31, 2015 3
  Consolidated Statements of Operations for the three and six months ended June 30, 2016 (Unaudited) and 2015 (Unaudited) 4
  Consolidated Statements of Changes in Net Assets for the six months ended June 30 (Unaudited) and 2015 (Unaudited) 5
  Consolidated Statements of Cash Flows for the six months ended June 30, 2016 (Unaudited) and 2015 (Unaudited) 6
  Consolidated Schedules of Investments as of June 30, 2016 (Unaudited) and December 31, 2015 7
  Notes to the Consolidated Financial Statements (Unaudited) 13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 49
Item 4. Controls and Procedures 49
Part II. Other Information 50
Item 1. Legal Proceedings 50
Item 1A. Risk Factors 50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
Item 3. Defaults Upon Senior Securities 50
Item 4. Mine Safety Disclosures 50
Item 5. Other Information 50
Item 6. Exhibits 51

 

2 

 

  

Part I. Financial Information

 

Item 1. Financial Statements

 

WhiteHorse Finance, Inc.

Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share data)

 

   June 30, 2016   December 31, 2015 
   (Unaudited)     
Assets          
Investments, at fair value          
Non-controlled/non-affiliate company investments  $381,500   $395,143 
Non-controlled affiliate company investments   19,360    20,200 
Total investments, at fair value (amortized cost $420,016 and $436,109, respectively)   400,860    415,343 
Cash and cash equivalents   18,946    22,769 
Restricted cash and cash equivalents   25,196     
Receivables from investments sold   661     
Interest receivable   3,680    3,407 
Prepaid expenses and other receivables   88    192 
Total assets  $449,431   $441,711 
           
Liabilities          
Debt  $191,410   $183,482 
Distributions payable   6,498    6,498 
Management fees payable   5,939    3,813 
Payables for investments purchased       2,865 
Accounts payable and accrued expenses   867    1,001 
Total liabilities   204,714    197,659 
           
Commitments and contingencies (See Note 7)          
           
Net assets          
Common stock, 18,303,890 shares issued and outstanding, par value $0.001 per share and 100,000,000 authorized   18    18 
Paid-in capital in excess of par   271,679    271,679 
Accumulated overdistributed net investment income   (7,227)   (7,419)
Accumulated realized gains on investments   38    1,176 
Accumulated unrealized depreciation on investments   (19,791)   (21,402)
Total net assets   244,717    244,052 
Total liabilities and total net assets  $449,431   $441,711 
           
Number of shares outstanding   18,303,890    18,303,890 
Net asset value per share  $13.37   $13.33 

 

See notes to the consolidated financial statements

 

3 

 

  

WhiteHorse Finance, Inc.

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

  

   Three months ended June 30,   Six months ended June 30, 
    2016    2015   2016   2015 
Investment income                    
From non-controlled/non-affiliate company investments                    
Interest income  $12,106   $10,696   $24,126   $21,207 
Fee income   256    724    932    824 
From non-controlled affiliate company investments                    
Dividend income   688    742    1,402    1,402 
Total investment income   13,050    12,162    26,460    23,433 
                     
Expenses                    
Interest expense   1,951    1,703    3,867    3,373 
Base management fees   2,248    2,132    4,500    4,252 
Performance-based incentive fees   1,609    1,472    3,300    2,805 
Administrative service fees   205    314    415    643 
General and administrative expenses   611    655    1,190    1,140 
Total expenses   6,624    6,276    13,272    12,213 
Net investment income   6,426    5,886    13,188    11,220 
                     
Realized and unrealized gains (losses) on investments                    
Net realized losses                    
Non-controlled/non-affiliate company investments   (1,138)   (296)   (1,138)   (379)
Net realized losses   (1,138)   (296)   (1,138)   (379)
Net change in unrealized appreciation (depreciation)                    
Non-controlled/non-affiliate company investments   2,681    (40)   2,451    (518)
Non-controlled affiliate company investments   160    200    (840)   200 
Net change in unrealized appreciation (depreciation)   2,841    160    1,611    (318)
Net realized and unrealized gains (losses) on investments   1,703    (136)   473    (697)
Net increase in net assets resulting from operations  $8,129   $5,750   $13,661   $10,523 
                     
Per Common Share Data                    
Basic and diluted earnings per common share  $0.44   $0.38   $0.75   $0.70 
Dividends and distributions declared per common share  $0.36   $0.36   $0.71   $0.71 
Basic and diluted weighted average common shares outstanding   18,303,890    14,982,857    18,303,890    14,982,857 

 

See notes to the consolidated financial statements

 

4 

 

  

WhiteHorse Finance, Inc.

Consolidated Statements of Changes in Net Assets (Unaudited)

(in thousands, except share and per share data)

 

   Common Stock   Paid-in
Capital in
   Accumulated
Overdistributed Net
Investment
   Accumulated
Realized
Gains
(Losses) on
   Accumulated
Unrealized
Appreciation  
(Depreciation)
   Total Net 
   Shares   Par amount   Excess of Par   Income   Investments   on Investments   Assets 
Balance at December 31, 2014   14,982,857   $15   $228,731   $(5,918)  $728   $1,802   $225,358 
                                    
Net increase in net assets resulting from operations               11,220    (379)   (318)   10,523 
                                    
Distributions declared               (10,638)           (10,638)
                                    
Balance at June 30, 2015   14,982,857   $15   $228,731   $(5,336)  $349   $1,484   $225,243 
                                    
Balance at December 31, 2015   18,303,890   $18   $271,679   $(7,419)  $1,176   $(21,402)  $244,052 
                                    
Net increase in net assets resulting from operations               13,188    (1,138)   1,611    13,661 
                                    
Distributions declared               (12,996)           (12,996)
                                    
Balance at June 30, 2016   18,303,890   $18   $271,679   $(7,227)  $38   $(19,791)  $244,717 

 

See notes to the consolidated financial statements

 

5 

 

  

WhiteHorse Finance, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

   Six months
ended June 30,
 
   2016   2015 
Cash flows from operating activities          
Net increase in net assets resulting from operations  $13,661   $10,523 
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:          
Paid in kind income   (522)   (632)
Net realized losses on investments   1,138    379 
Net unrealized (appreciation) depreciation on investments   (1,611)   318 
Accretion of discount   (1,075)   (772)
Amortization of deferred financing costs   428    396 
Acquisition of investments   (41,115)   (74,125)
Proceeds from principal payments and sales of portfolio investments   57,668    90,836 
Net changes in operating assets and liabilities:          
Restricted cash and cash equivalents   (25,196)   (3,441)
Interest receivable   (273)   (340)
Prepaid expenses and other receivables   104    302 
Receivables from investments sold   (661)    
Payables for investments purchased   (2,865)    
Management fees payable   2,126    436 
Accounts payable and accrued expenses   (134)   128 
Net cash provided by operating activities   1,673    24,008 
           
Cash flows from financing activities          
Proceeds from borrowings under credit facility   78,250    29,000 
Repayment of borrowings under credit facility   (70,750)   (34,000)
Deferred financing costs       (629)
Distributions paid to common stockholders, net of distributions reinvested   (12,996)   (10,638)
Net cash used in financing activities   (5,496)   (16,267)
           
Net change in cash and cash equivalents   (3,823)   7,741 
Cash and cash equivalents at beginning of period   22,769    11,647 
Cash and cash equivalents at end of period  $18,946   $19,388 
           
Supplemental disclosure of cash flow information:          
Interest paid  $3,210   $2,976 

 

See notes to the consolidated financial statements

 

6 

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited)

June 30, 2016

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net Assets
 
North America                             
Debt Investments                             
Advertising                             
Fluent Acquisition II, LLC                             
First Lien Secured Term Loan  L+11.50%  12.00%  12/8/20  $27,442   $26,930   $27,442    11.21%
   (0.50% Floor)  (1.00% PIK)                       
Intersection Acquisition, LLC                             
First Lien Secured Term Loan  L+10.00%  11.00%  9/15/20   16,253    16,107    16,253    6.64 
   (1.00% Floor)                          
             43,695    43,037    43,695    17.85 
Auto Parts & Equipment                             
Crowne Group, LLC                             
First Lien Secured Term Loan  L+9.25%  10.25%  5/26/21   12,500    12,071    12,375    5.06 
   (1.00% Floor)                          
                              
Broadcasting                             
Multicultural Radio Broadcasting, Inc.                             
First Lien Secured Term Loan  L+10.50%  11.50%  6/27/19   14,850    14,850    14,761    6.03 
   (1.00% Floor)                          
Consumer Finance                             
Golden Pear Funding III, LLC(7)                             
Second Lien Secured Term Loan  L+10.25%  11.25%  6/25/20   25,000    24,755    24,775    10.12 
   (1.00% Floor)                          
Second Lien Secured Revolving Loan  L+10.25%  11.25%  6/25/20   5,000    4,953    4,955    2.03 
   (1.00% Floor)                          
Oasis Legal Finance, LLC(7)                             
Second Lien Secured Term Loan  N/A(5)  10.50%  9/30/18   9,000    8,900    8,973    3.67 
                              
Sigue Corporation(6)                              
Second Lien Secured Term Loan  L+10.50%  11.50%  12/27/18   25,000    24,717    24,350    9.95 
   (1.00% Floor)                          
             64,000    63,325    63,053    25.77 
Data Processing & Outsourced Services                             
Future Payment Technologies, L.P.                             
Second Lien Secured Term Loan  L+12.00%  13.00%  12/31/18   36,632    35,829    36,633    14.97 
   (1.00% Floor)  (1.00% PIK)                       
Department Stores                             
Mills Fleet Farm Group, LLC                             
Second Lien Secured Term Loan  L+9.75%  10.75%  2/26/23   7,146    6,995    7,081    2.89 
   (1.00% Floor)                          
Distributors                             
360 Holdings III Corp.                             
First Lien Secured Term Loan  L+9.00%  10.00%  10/1/21   9,925    9,550    9,796    4.00 
   (1.00% Floor)                          
Diversified Support Services                             
Sitel Worldwide Corporation                             
Second Lien Secured Term Loan  L+9.50%  10.50%  9/18/22   8,670    8,510    8,531    3.49 
   (1.00% Floor)                          
Smile Brands Group Inc.                             
First Lien Secured Term Loan  L+7.75%  9.00%  8/16/19   11,782    11,642    10,239    4.18 
   (1.25% Floor)  (1.50% PIK)                       
             20,452    20,152    18,770    7.67 
Electronic Equipment & Instruments                             
AP Gaming I, LLC                             
First Lien Secured Term Loan  L+8.25%  9.25%  12/20/20   9,750    9,534    9,409    3.85 
   (1.00% Floor)                          

 

7 

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) (Continued)

June 30, 2016

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net Assets
 
Food Retail                             
Crews of California, Inc.                             
First Lien Secured Term Loan  L+11.00%  12.00%  11/20/19  $17,449   $17,196   $17,239    7.04%
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Revolving Loan  L+11.00%  12.00%  11/20/19   5,042    4,966    4,982    2.04 
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Delayed Draw  L+11.00%  12.00%  11/20/19   5,057    4,981    4,997    2.04 
Loan  (1.00% Floor)  (1.00% PIK)                       
             27,548    27,143    27,218    11.12 
Health Care Facilities                             
Coastal Sober Living, LLC(6)                             
First Lien Secured Term Loan  L+10.25%  11.25%  6/30/19   25,134    24,786    24,881    10.17 
   (1.00% Floor)                          
Grupo HIMA San Pablo, Inc.                             
First Lien Secured Term Loan  L+7.00%  8.50%  1/31/18   14,513    14,397    13,177    5.38 
   (1.50% Floor)                          
Second Lien Secured Term Loan  N/A(5)  13.75%  7/31/18   1,000    975    700    0.29 
             40,647    40,158    38,758    15.84 
Health Care Technology                             
Client Network Services, Inc.                             
First Lien Secured Term Loan  L+13.00%  13.50%  4/24/19   5,771    5,609    5,771    2.36 
   (0.50% Floor)                          
First Lien Secured Revolving Loan  P+12.00%  15.50%  4/24/19   3,500    3,500    3,500    1.43 
   (3.50% Floor)                          
             9,271    9,109    9,271    3.79 
Integrated Telecommunication Services                             
Securus Technologies Holdings, Inc.                             
Second Lien Secured Term Loan  L+7.75%  9.00%  4/30/21   9,090    9,061    8,045    3.29 
   (1.25% Floor)                          
Internet Retail                             
Clarus Commerce, LLC                             
First Lien Secured Term Loan  L+11.27%  12.27%  3/17/21   6,000    5,885    6,000    2.45 
   (1.00% Floor)                          
Office Services & Supplies                             
Katun Corporation                             
Second Lien Secured Term Loan  L+11.25%  12.25%  1/25/21   5,000    4,965    5,000    2.04 
   (1.00% Floor)                          
Oil & Gas Drilling                             
ProPetro Services, Inc.(6)                             
First Lien Secured Term Loan  L+6.25%  7.25%  9/30/19   8,595    8,537    6,859    2.80 
   (1.00% Floor)                          
Oil & Gas Exploration & Production                             
Caelus Energy Alaska O3, LLC                             
Second Lien Secured Term Loan  L+7.50%  8.75%  4/15/20   13,000    12,869    9,191    3.76 
   (1.25% Floor)                          

Other Diversified Financial Services

                             
The Pay-O-Matic Corp                             
First Lien Secured Term Loan  L+11.00%  12.00%  3/31/18   9,184    9,062    9,184    3.75 
   (1.00% Floor)                          

 

8 

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Unaudited) (Continued)

June 30, 2016

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net Assets
 
Research & Consulting Services                             
Project Time & Cost, LLC                             
First Lien Secured Term Loan  L+14.50%  15.00%  10/9/20  $10,705   $10,494   $10,438    4.27%
   (0.50% Floor)                          
Specialized Consumer Services                             
Pre-Paid Legal Services, Inc.                             
Second Lien Secured Term Loan  L+9.00%  10.25%  7/1/20   18,000    17,845    17,874    7.30 
   (1.25% Floor)                          
Specialized Finance                             
GMT Holdings 1, Ltd. & GMT Holdings 12, Ltd.(4) (7)                             
First Lien Secured Term Loan  N/A(5)  10.00%  6/30/17   1,297    1,297    1,297    0.53 
                              
Trucking                             
Fox Rent A Car, Inc. (9)                             
Second Lien Secured Term Loan  L+12.00%  12.47%  10/31/19   7,500    7,441    6,997    2.86 
                              
Total Debt Investments            384,787    379,209    371,705    151.89 
                              
Equity Investments                             
Advertising                             
IDI, Inc. Warrants(6)  N/A  N/A  12/8/25                
                              
Diversified Support Services                             
Constellation Health, LLC Warrants(6)  N/A  N/A  9/30/18           654    0.27 
                              
Food Retail                             
Crews of California, Inc. Warrants(6)  N/A  N/A  12/31/24           985    0.40 
Nicholas & Associates, LLC Warrants(6)  N/A  N/A  12/31/24           190    0.08 
Pinnacle Management Group, LLC Warrants(6)  N/A  N/A  12/31/24           356    0.15 
RC3 Enterprises, LLC Warrants(6)  N/A  N/A  12/31/24           105    0.04 
                     1,636    0.67 

Other Diversified Financial Services

                             
Aretec Group, Inc. (6) (7)    N/A  N/A  N/A       20,687    7,504    3.06 
                              
Specialized Finance                             
NMFC Senior Loan Program I LLC Units(6)(7)(8)  N/A  N/A  6/10/19       20,120    19,361    7.91 
                              
Total Equity Investments                40,807    29,155    11.91 
                              
Total Investments           $384,787   $420,016   $400,860    163.80%

  

(1) Except as otherwise noted, all investments are in companies that are not affiliated person of, or controlled by, the Company, as defined by the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’), and provide collateral for the Company’s credit facility.

 

(2) The investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (‘‘LIBOR’’ or ‘‘L’’) or the Prime Rate (‘‘Prime’’ or ‘‘P’’), which resets monthly, quarterly or semiannually.

 

(3) The interest rate is the ‘‘all-in-rate’’ including the current index and spread, the fixed rate, and the payment-in-kind (‘‘PIK’’) interest rate, as the case may be.

 

(4) The Company’s investments in GMT Holdings 1, Ltd. and GMT Holdings 12, Ltd. are held through its subsidiary Bayside Financing S.A.R.L.

 

(5) Interest rate is fixed and accordingly the spread above the index is not applicable.

 

(6) The investment or a portion of the investment does not provide collateral for the Company’s revolving credit facility.

 

(7) Not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of total assets. Qualifying assets represent 85% of total assets.

 

(8) Investment is a non-controlled/affiliate investment as defined by the 1940 Act.

 

(9) The investment is on non-accrual status.

 

See notes to the consolidated financial statements 

 

9 

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments

December 31, 2015

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net Assets
 
North America                             
Debt Investments                             
Advertising                             
Fluent Acquisition II, LLC                             
First Lien Secured Term Loan  L+11.50%  12.00%  12/8/20  $28,017   $27,462   $27,765    11.38%
   (0.50% Floor)  (1.00% PIK)                       
Intersection Acquisition, LLC                             
First Lien Secured Term Loan  L+10.00%  11.00%  9/15/20   16,462    16,302    16,429    6.73 
   (1.00% Floor)                          
             44,479    43,764    44,194    18.11 
Broadcasting                             
Multicultural Radio Broadcasting, Inc.(6)                             
First Lien Secured Term Loan  L+10.50%  11.50%  6/27/19   14,850    14,850    14,806    6.07 
   (1.00% Floor)                          
Consumer Finance                             
Golden Pear Funding III, LLC(7)                             
Second Lien Secured Term Loan  L+10.25%  11.25%  6/25/20   25,000    24,731    24,650    10.10 
   (1.00% Floor)                          
Second Lien Secured Revolving Loan  L+10.25%  11.25%  6/25/20       (52)        
   (1.00% Floor)                          
Oasis Legal Finance, LLC(7)                             
Second Lien Secured Term Loan  N/A(5)  10.50%  9/30/18   9,000    8,881    8,973    3.68 
                              
Sigue Corporation(6)                              
Second Lien Secured Term Loan  L+10.50%  11.50%  12/27/18   25,000    24,669    24,875    10.19 
   (1.00% Floor)                          
             59,000    58,229    58,498    23.97 
Data Processing & Outsourced Services                             
Future Payment Technologies, L.P.                             
Second Lien Secured Term Loan  L+12.00%  13.00%  12/31/18   36,447    35,510    36,447    14.92 
   (1.00% Floor)  (1.00% PIK)                       
Distributors                             
360 Holdings III Corp.(6)                             
First Lien Secured Term Loan  P+8.00%  11.50%  10/1/21   9,975    9,575    9,775    4.01 
   (3.50% Floor)                          
Diversified Support Services                             
Expert Global Solutions, Inc.                             
Second Lien Secured Term Loan  L+11.00%  12.50%  10/3/18   20,000    19,831    19,820    8.12 
   (1.50% Floor)                          
Orion Healthcorp, Inc.                             
First Lien Secured Term Loan  L+9.00%  11.00%  9/30/17   6,991    6,830    6,998    2.87 
   (2.00% Floor)                          
Sitel Worldwide Corporation                             
Second Lien Secured Term Loan  L+9.50%  10.50%  9/18/22   8,670    8,501    8,540    3.50 
   (1.00% Floor)                          
Smile Brands Group Inc.                             
First Lien Secured Term Loan  L+7.75%  9.00%  8/16/19   11,745    11,585    9,983    4.09 
   (1.25% Floor)  (1.50% PIK)                       
             47,406    46,747    45,341    18.58 
Electronic Equipment & Instruments                             
AP Gaming I, LLC (6)                             
First Lien Secured Term Loan  L+8.25%  9.25%  12/20/20   9,800    9,566    9,663    3.96 
   (1.00% Floor)                          

 

10 

 

 

 

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Continued)

December 31, 2015

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net Assets
 
Food Retail                             
Crews of California, Inc.                             
First Lien Secured Term Loan  L+11.00%  12.00%  11/20/19  $15,170   $14,889   $14,639    6.00%
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Revolving Loan  L+11.00%  12.00%  11/20/19   5,019    4,931    4,843    1.98 
   (1.00% Floor)  (1.00% PIK)                       
First Lien Secured Delayed Draw  L+11.00%  12.00%  11/20/19   5,034    4,946    4,858    1.99 
Loan  (1.00% Floor)  (1.00% PIK)                       
             25,223    24,766    24,340    9.97 
Health Care Distributors                             
P2 Newco Acquisition, Inc.(6)                             
Second Lien Secured Term Loan  L+8.50%  9.50%  10/22/21   6,000    5,952    5,982    2.45 
   (1.00% Floor)                          
Health Care Facilities                             
Coastal Sober Living, LLC(6)                             
First Lien Secured Term Loan  L+9.25%  10.25%  6/30/19   41,030    40,436    40,251    16.48 
   (1.00% Floor)                          
Grupo HIMA San Pablo, Inc.                             
First Lien Secured Term Loan  L+7.00%  8.50%  1/31/18   14,588    14,441    14,588    5.98 
   (1.50% Floor)                          
Second Lien Secured Term Loan  N/A(5)  13.75%  7/31/18   1,000    971    992    0.41 
             56,618    55,848    55,831    22.88 
Health Care Technology                             
Client Network Services, Inc.                             
First Lien Secured Term Loan  L+13.00%  13.50%  4/24/19   9,185    8,954    9,350    3.83 
   (0.50% Floor)                          
First Lien Secured Revolving Loan  P+12.00%  15.50%  4/24/19   1,000    1,000    1,018    0.42 
   (3.50% Floor)                          
             10,185    9,954    10,368    4.25 
Integrated Telecommunication Services                             
Securus Technologies Holdings, Inc.                             
Second Lien Secured Term Loan  L+7.75%  9.00%  4/30/21   9,090    9,059    5,936    2.43 
   (1.25% Floor)                          
Oil & Gas Drilling                             
ProPetro Services, Inc. (6)                              
First Lien Secured Term Loan  L+6.25%  7.25%  9/30/19   8,875    8,809    6,417    2.63 
   (1.00% Floor)                          
Oil & Gas Exploration & Production                             
Caelus Energy Alaska O3, LLC                             
Second Lien Secured Term Loan  L+7.50%  8.75%  4/15/20   13,000    12,856    9,269    3.80 
   (1.25% Floor)                          
Larchmont Resources, LLC                             
First Lien Secured Term Loan  L+8.75%  9.75%  8/7/19   1,745    1,777    1,238    0.51 
   (1.00% Floor)                          
             14,745    14,633    10,507    4.31 
Other Diversified Financial Services                             
RCS Capital Corporation(6) (7) (9)                             
Second Lien Secured Term Loan  L+10.50%  11.50%  4/29/21   20,750    20,687    7,262    2.98 
   (1.00% Floor)                          
The Pay-O-Matic Corp                             
First Lien Secured Term Loan  L+11.00%  12.00%  3/31/18   9,750    9,594    9,740    3.99 
   (1.00% Floor)                          
             30,500    30,281    17,002    6.97 
Research & Consulting Services                             
Project Time & Cost, LLC(6)                             
First Lien Secured Term Loan  L+11.00%  11.50%  10/9/20   11,700    11,468    11,571    4.74 
   (0.50% Floor)                          
Specialized Consumer Services                             
Pre-Paid Legal Services, Inc.(6)                             
Second Lien Secured Term Loan  L+9.00%  10.25%  7/1/20   18,000    17,830    18,054    7.40 
   (1.25% Floor)                          

 

11 

 

  

WhiteHorse Finance, Inc.

Consolidated Schedule of Investments (Continued)

December 31, 2015

(in thousands)

 

Investment Type(1)  Spread
Above
Index(2)
  Interest
Rate(3)
  Maturity
Date
  Principal
Amount
   Amortized
Cost
   Fair
Value
   Fair Value
As A
Percentage
Of Net Assets
 
Specialized Finance                             
GMT Holdings 1, Ltd. & GMT Holdings 12, Ltd.(4) (7)                             
First Lien Secured Term Loan  N/A(5)  10.00%  6/30/17  $1,710   $1,710   $1,710    0.70%
                              
Trucking                             
Fox Rent A Car, Inc.                             
Second Lien Secured Term Loan  L+12.00%  12.43%  10/31/19   7,500    7,438    7,395    3.03 
                              
Total Debt Investments            422,103    415,989    393,837    161.37 
                              
Equity Investments                             
Advertising                             
IDI, Inc. Warrants(6)  N/A  N/A  12/8/25                
                              
Diversified Support Services                             
Constellation Health, LLC Warrants(6)  N/A  N/A  9/30/18           989    0.41 
                              
Food Retail                             
Crews of California, Inc. Warrants(6)  N/A  N/A  12/31/24           191    0.08 
Nicholas & Associates, LLC Warrants(6)  N/A  N/A  12/31/24           37    0.01 
Pinnacle Management Group, LLC Warrants(6)  N/A  N/A  12/31/24           69    0.03 
RC3 Enterprises, LLC Warrants(6)  N/A  N/A  12/31/24           20    0.01 
                     317    0.14 
Specialized Finance                             
NMFC Senior Loan Program I LLC Units(6)(7)(8)  N/A  N/A  6/10/19       20,120    20,200    8.28 
                              
Total Equity Investments                20,120    21,506    8.82 
                              
Total Investments           $422,103   $436,109   $415,343    170.19%

 

(1) Except as otherwise noted, all investments are in companies that are not affiliated person of, or controlled by, the Company, as defined by the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’), and provide collateral for the Company’s credit facility.

 

(2) The investments bear interest at a rate that may be determined by reference to LIBOR or Prime, which resets monthly, quarterly or semiannually.

 

(3) The interest rate is the ‘‘all-in-rate’’ including the current index and spread, the fixed rate, and the payment-in-kind (‘‘PIK’’) interest rate, as the case may be.

 

(4) The Company’s investments in GMT Holdings 1, Ltd. and GMT Holdings 12, Ltd. are held through its subsidiary Bayside Financing S.A.R.L.

 

(5) Interest rate is fixed and accordingly the spread above the index is not applicable.

 

(6) The investment or a portion of the investment does not provide collateral for the Company’s revolving credit facility.

 

(7) Not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of total assets. Qualifying assets represent 86% of total assets.

 

(8) Investment is a non-controlled/affiliate investment as defined by the 1940 Act.

 

(9) The investment is on non-accrual status.

 

See notes to the consolidated financial statements

 

12 

 

  

WhiteHorse Finance, Inc.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2016

(in thousands, except share and per share data)

 

NOTE 1 – ORGANIZATION

 

WhiteHorse Finance, Inc. (“WhiteHorse Finance” and, together with its subsidiaries, the “Company”) is 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 (the “1940 Act”). In addition, for tax purposes, WhiteHorse Finance elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

On December 4, 2012, WhiteHorse Finance priced its initial public offering (the “IPO”), selling 6,666,667 shares. Concurrent with the IPO, certain of the Company’s directors, officers, the managers of its investment adviser 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 transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). WhiteHorse Finance’s common stock trades on the NASDAQ Global Select Market under the symbol “WHF”.

 

The Company’s 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 small-cap companies across a broad range of industries that typically carry a floating interest rate based on the London Interbank Offered Rate (“LIBOR”) and have a term of three to six years. While the Company focuses principally on originating senior secured loans to small-cap companies, it may also opportunistically make investments at other levels of a company’s capital structure, including mezzanine loans or equity interests and may receive warrants to purchase common stock in connection with its debt investments.

 

WhiteHorse Finance’s investment activities are managed by H.I.G. WhiteHorse Advisers, LLC (“WhiteHorse Advisers”). H.I.G. WhiteHorse Administration, LLC (“WhiteHorse Administration”) provides administrative services necessary for the Company to operate.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include WhiteHorse Finance, Inc., its wholly owned subsidiaries, WhiteHorse Finance Warehouse, LLC (“WhiteHorse Warehouse”) and WhiteHorse Finance Credit I, LLC, and its subsidiary, Bayside Financing S.A.R.L. All significant intercompany balances and transactions and have been eliminated. Additionally, the accompanying consolidated financial statements and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. This Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2015. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the year ending December 31, 2016.

 

Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates.

 

13 

 

  

Fair Value of Financial Instruments: The Company determines the fair value of its financial instruments in accordance with Accounting Standards Codification (“ASC”) Topic 820 — Fair Value Measurements and Disclosures. ASC Topic 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC Topic 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

 

Investments are measured at fair value as determined in good faith by the Company’s investment committee, generally on a quarterly basis, and such valuations are reviewed by the audit committee of the board of directors and ultimately approved by the board of directors, based on, among other factors, consistently applied valuation procedures on each measurement date. Any changes to the valuation methodology are reviewed by management and the Company’s board of directors to confirm that the changes are justified. The Company continues to review and refine its valuation procedures in response to market changes.

 

The Company engages independent external valuation firms to periodically review material investments. These external reviews are used by the board of directors to review the Company’s internal valuation of each investment over the year.

 

Investment Transactions: The Company records investment transactions on a trade date basis. These transactions may settle subsequent to the trade date depending on the transaction type. Certain expenses related to legal and tax consultation, due diligence, rating fees, valuation expenses and independent collateral appraisals may arise when the Company makes certain investments. These expenses are recognized in the consolidated statements of operations as they are incurred.

 

Revenue Recognition: The Company’s revenue recognition policies are as follows:

 

Sales: Realized gains or losses on the sales of investments are calculated by using the specific identification method.

 

Investment Income: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. The Company may also receive closing, commitment, prepayment, amendment and other fees from portfolio companies in the ordinary course of business.

 

Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.

 

Closing fees associated with investments in portfolio companies are deferred and recognized as interest income over the respective terms of the applicable loans using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan closing fees are recorded as part of interest income. Commitment fees are based upon the undrawn portion committed by the Company and are recorded as interest income on an accrual basis. Prepayment, amendment and other fees are recognized when earned, generally when such fees are receivable, and are included in fee income on the consolidated statements of operations.

 

The Company may invest in loans that contain a payment-in-kind (“PIK”) interest rate provision. PIK interest is accrued at the contractual rates and added to loan principal on the reset dates.

 

14 

 

  

Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. The Company may conclude that non-accrual status is not required if the loan has sufficient collateral value and is in the process of collection. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.

 

Cash and Cash Equivalents: Cash and cash equivalents include cash, deposits with financial institutions, and short-term liquid investments in money market funds with original maturities of three months or less.

 

Restricted Cash and Cash Equivalents: Restricted cash and cash equivalents include amounts that are collected and held by the trustee appointed as custodian of the assets securing the Company’s credit facilities. 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 once a quarter after the payment of operating expenses and other amounts due.

 

Deferred Financing Costs: Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These amounts are amortized using the effective interest method and are included in interest expense in the consolidated statements of operations over the estimated life of the borrowings. Deferred financing costs are presented in the consolidated statements of assets and liabilities as a direct reduction from the carrying amount of the related debt liability.

 

Income Taxes: The Company elected to be treated as a RIC under Subchapter M of the Code. In order to maintain its ability to be taxed as a RIC, among other requirements, the Company is required to distribute dividends each taxable year of an amount generally at least equal to 90% of the sum of its ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, determined without regard to any deduction for dividends paid, out of the assets legally available for distribution. In addition, the Company is generally subject to a nondeductible excise tax in respect of any calendar year equal to 4% of the amount by which the sum of (1) 98% of ordinary income for the calendar year (taking into account certain deferrals and elections), (2) 98.2% of capital gains in excess of capital losses, or capital gain net income, for the one-year period ending on October 31 of the calendar year (adjusted for certain ordinary losses) and (3) any ordinary income and capital gain income for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax exceed distributions for such calendar year. The Company accrues estimated excise tax on the amount, if any, that estimated taxable income is expected to exceed the level of stockholder distributions described above.

 

The Company’s tax returns are subject to examination by federal, state and local taxing authorities. Because many types of transactions are susceptible to varying interpretations under U.S. federal and state income tax laws and regulations, the amounts reported in the accompanying consolidated financial statements may be subject to change at a later date by the respective taxing authorities.

 

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statement is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

Penalties or interest that may be assessed related to any income taxes would be classified as general administrative expenses on the consolidated statements of operations. The Company had no amounts accrued for interest or penalties on June 30, 2016 or December 31, 2015. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months. Tax returns for each of the federal tax years since 2012 remain subject to examination by the Internal Revenue Service.

 

15 

 

  

Dividends and Distributions: Dividends and distributions to common stockholders are recorded on the ex-dividend date. Quarterly distribution payments are determined by the board of directors and are paid from taxable earnings estimated by management and may include a return of capital and/or capital gains. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

 

The Company maintains an “opt out” dividend reinvestment plan for common stockholders. As a result, if the Company declares a dividend or other distribution, stockholders’ cash distributions will be automatically reinvested in additional shares of common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.

 

Earnings per Share: The Company calculates earnings per share as earnings available to stockholders divided by the weighted average number of shares outstanding during the period.

 

Risks and Uncertainties: In the normal course of business, the Company encounters primarily two significant types of economic risks: credit and market. Credit risk is the risk of default on the Company’s investments that result from an issuer’s, borrower’s or derivative counterparty’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments due to changes in interest rates, spreads or other market factors, including the value of the collateral underlying investments held by the Company. Management believes that the carrying value of its investments are fairly stated, taking into consideration these risks along with estimated collateral values, payment histories and other market information.

 

Newly Adopted Accounting Standards: As permitted by Section 7(a)(2)(B) of the Securities Act, the Company has elected to defer the adoption of new and revised accounting standards applicable to public companies until they are also applicable to private companies. There are currently no such standards being deferred that will, in management’s opinion, have a material impact on the consolidated financial statements.

 

Recent Accounting Pronouncements: During January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which, among other things, requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, this ASU changes the disclosure requirements for financial instruments. This guidance is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2017. Early adoption is permitted for certain provisions. The Company is currently evaluating the impact of adopting ASU 2016-01 on its consolidated financial statements and relate disclosures.

 

During May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 will remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This guidance is effective retrospectively for annual and interim periods beginning on or after December 15, 2016, and for interim periods within those fiscal years, with early adoption permitted. The Company does not expect ASU 2015-07 to have a material impact on its consolidated financial statements and related disclosures.

 

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During April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as clarified by ASU 2015-15, Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issunce Costs Associated with Line-of-Credit Arrangements, containing guidance that requires debt issuance costs related to a recognized debt liability of a reporting entity to be presented in the statement of assets and liabilities as a direct reduction from the carrying amount of such debt liability, instead of being recorded as a separate asset. ASU 2015-15 allows an entity to defer and present debt issuance costs for line-of-credit arrangements as an asset and subsequently amortize these deferred costs over the term of the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03 and ASU 2015-15. This guidance is effective for annual and interim periods beginning on or after December 15, 2015. The Company adopted ASU 2015-03, as clarified by ASU 2015-15, which did not have a material impact on the Company’s consolidated financial statements other than corresponding reductions to total assets and total liabilities on the consolidated statements of assets and liabilities. Prior to adoption, the Company recorded deferred debt issuance costs as deferred financing costs as an asset on the consolidated statements of assets and liabilities. Upon adoption, the Company reclassified these costs as unamortized debt issuance costs that reduce debt in the liabilities on the consolidated statements of assets and liabilities and retrospectively reclassified the $3,518 of deferred debt issuance costs that were previously presented as deferred financing costs as an asset as of December 31, 2015. There was no effect on the consolidated statements of operations as a result of the adoption of ASU 2015-03, as clarified by ASU 2015-15. 

 

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NOTE 3 — INVESTMENTS

 

Investments consisted of the following:

 

   June 30, 2016   December 31, 2015 
   Amortized Cost   Fair Value   Amortized Cost   Fair Value 
First lien secured loans  $211,394   $208,600   $219,126   $215,641 
Second lien secured loans   167,815    163,105    196,863    178,196 
Equity   40,807    29,155    20,120    21,506 
Total  $420,016   $400,860   $436,109   $415,343 

 

The following table shows the portfolio composition by industry grouping at fair value:

 

   June 30, 2016   December 31, 2015 
Advertising  $43,695    10.90%  $44,194    10.64%
Auto Parts & Equipment   12,375    3.09           
Broadcasting   14,761    3.68    14,806    3.56 
Consumer Finance   63,053    15.73    58,498    14.08 
Data Processing & Outsourced Services   36,632    9.14    36,447    8.78 
Department Stores   7,081    1.77         
Distributors   9,796    2.44    9,775    2.35 
Diversified Support Services   19,424    4.85    46,330    11.15 
Electronic Equipment & Instruments   9,409    2.35    9,663    2.33 
Food Retail   28,854    7.20    24,657    5.94 
Health Care Distributors           5,982    1.44 
Health Care Facilities   38,760    9.67    55,831    13.44 
Health Care Technology   9,271    2.31    10,368    2.50 
Integrated Telecommunication Services   8,045    2.01    5,936    1.43 
Internet Retail   6,000    1.50         
Office Services & Supplies   5,000    1.24         
Oil & Gas Drilling   6,859    1.71    6,417    1.54 
Oil & Gas Exploration & Production   9,191    2.29    10,507    2.53 
Other Diversified Financial Services   16,688    4.16    17,002    4.09 
Research & Consulting Services   10,438    2.60    11,571    2.79 
Specialized Consumer Services   17,874    4.46    18,054    4.35 
Specialized Finance   20,657    5.15    21,910    5.28 
Trucking   6,997    1.75    7,395    1.78 
Total  $400,860    100.00%  $415,343    100.00%

 

The portfolio companies underlying the investments are located in the United States. As of June 30, 2016 and December 31, 2015, the weighted average remaining term of the Company’s debt investments was approximately 3.5 years and 3.9 years, respectively.

 

During the fourth quarter of 2015, the Company placed its second lien investment in RCS Capital Corporation on non-accrual status in anticipation of a voluntary petition for a ‘‘pre-packaged’’ Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Delaware, which was filed on January 31, 2016. On May 23, 2016, the Company’s second lien investment converted to 536,042 shares of common stock in Aretec Group, Inc. (previously known as RCS Capital Corporation). As of June 30, 2016, the fair value of the Company’s investment in Aretec Group, Inc. was $7,504. As of December 31, 2015, prior to the conversion, the amortized cost and fair value of the Company’s second lien investment in RCS Capital Corporation was $20,687 and $7,262, respectively.

 

As of June 30, 2016 and December 31, 2015, the total fair value of non-accrual loans was $6,997 and $7,262, respectively.

 

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NOTE 4 – FAIR VALUE MEASUREMENTS

 

Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

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.

 

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. The Company’s 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.

 

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. During the six months ended June 30, 2016 and 2015, there were no changes in the observability of valuation inputs that would have resulted in a reclassification of assets between any levels.

 

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Fair value for each investment is derived using a combination of valuation methodologies that, in the judgment of the investment committee of WhiteHorse Advisers are most relevant to such investment, including, without limitation, 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 arms’-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.

 

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of June 30, 2016:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $   $   $208,600   $208,600 
Second lien secured loans           163,105    163,105 
Equity           29,155    29,155 
Total investments  $   $   $400,860   $400,860 

 

The following table presents investments (as shown on the consolidated schedule of investments) that were measured at fair value as of December 31, 2015:

 

   Level 1   Level 2   Level 3   Total 
First lien secured loans  $   $   $215,641   $215,641 
Second lien secured loans           178,196    178,196 
Equity           21,506    21,506 
Total investments  $   $   $415,343   $415,343 

 

The following table presents the changes in investments measured at fair value using Level 3 inputs for the six months ended June 30, 2016:

 

   First Lien
Secured
Loans
   Second
Lien Secured
Loans
   Equity   Total
Investments
 
Fair value, beginning of period  $215,641   $178,196   $21,506   $415,343 
Funding of investments   23,645    17,470        41,115 
Non-cash interest income   338    184        522 
Accretion of discount   572    503        1,075 
Proceeds from pay downs and sales   (31,150)   (26,518)       (57,668)
Conversion from debt to equity       (7,263)   7,263   
Net realized losses   (1,138)           (1,138)
Net unrealized appreciation   692    533    386    1,611 
Fair value, end of period  $208,600   $163,105   $29,155   $400,860 

  

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The following table presents the changes in investments measured at fair value using Level 3 inputs for the six months ended June 30, 2015:

 

   First Lien
Secured
Loans
   Second
Lien Secured
Loans
   Equity   Total
Investments
 
Fair value, beginning of period  $220,038   $162,252   $21,210   $403,500 
Funding of investments   39,550    34,575        74,125 
Non-cash interest income   271    361        632 
Accretion of discount   477    295        772 
Proceeds from pay downs and sales   (69,189)   (21,647)       (90,836 
Net unrealized depreciation   (202)   (177)       (379)
Transfers out of Level 3   (960)   592    50    (318)
Fair value, end of period  $189,985   $176,251   $21,260   $387,496 

 

The significant unobservable inputs used in the fair value measurement of the Company’s investments are the discount rate, market quotes and exit multiples. A significant increase or decrease in the discount rate in isolation would result in significantly lower or higher fair value measurement, respectively. A significant increase or decrease in the market quote for an investment would in isolation result in significantly higher or lower fair value measurement, respectively. A significant increase or decrease in the exit multiple would in isolation result in significantly higher or lower fair value measurement, respectively. As the fair value of a debt investment diverges from par, which would generally be the case for non-accrual loans, the fair value measurement of that investment is more susceptible to significant volatility from changes in exit multiples as a significant unobservable input.

 

Quantitative information about Level 3 fair value measurements is as follows:

 

Investment Type  Fair Value at
June 30, 2016
   Valuation
Techniques
  Unobservable
Inputs
  Range
(Weighted Average)
First lien secured loans  $160,449   Discounted cash flows  Discount rate  10.8% – 18.2% (13.0%)
           Exit multiple  5.0x – 8.0x (6.2x)
    48,151   Weighting of discounted cash  Discount rate  10.5% – 17.0% (13.2%)
        flows and consensus pricing  Market quotes  83.0 – 100.0 (92.9)
           Exit multiple  3.5x – 9.0x (6.1x)
   $208,600          
               
Second lien secured loans  $119,464   Discounted cash flows  Discount rate  11.1% – 39.3% (14.6%)
           Exit multiple  2.8x – 6.5x (5.4x)
    43,641   Weighting of discounted cash  Discount rate  10.8% – 20.8% (14.1%)
        flows and consensus pricing  Market quotes  60.0 – 98.4 (86.8)
           Exit multiple  5.0x – 8.5x (6.4x)
   $163,105          
               
Equity  $27,519   Discounted cash flows  Discount rate  13.1% – 15.3% (13.7%)
           Exit multiple  1.0x – 9.0x (3.2x)
    1,636   Black-Scholes model  Volatility  25.0%
   $29,155          
Total Level 3 investments  $400,860          

 

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Investment Type  Fair Value at
December 31, 2015
   Valuation
Techniques
  Unobservable
Inputs
  Range
(Weighted Average)
First lien secured loans  $145,646   Discounted cash flows  Discount rate  10.3% – 20.7% (13.6%)
           Exit multiple  4.5x – 8.0x (5.5x)
    69,995   Weighting of discounted cash  Discount rate  10.5% – 23.6% (13.3%)
        flows and consensus pricing  Market quotes  67.0 – 98.0 (92.5)
           Exit multiple  3.5x – 9.0x (6.8x)
   $215,641