WhiteHorse Finance, Inc. (WHF) CEO Stuart Aronson on Q2 2020 Results –...

WhiteHorse Finance, Inc. (WHF) CEO Stuart Aronson on Q2 2020 Results – Earnings Call Transcript

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WhiteHorse Finance, Inc. (NASDAQ:WHF) Q2 2020 Results Conference Call August 10, 2020 2:00 PM ET

Company Participants

Sean Silva – Investor Relations

Stuart Aronson – Chief Executive Officer

Joyson Thomas – Chief Financial Officer

Conference Call Participants

Mickey Schleien – Ladenburg Thalmann

Timothy Hayes – B. Riley FBR

Chris Kotowski – Oppenheimer & Co.

Melissa Wedel – JP Morgan Chase

Robert Dodd – Raymond James

Bryce Rowe – National Securities

Operator

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second Quarter 2020 Earnings Conference Call.

Our host for today’s call are Stuart Aronson, Chief Executive Officer; and Joyson Thomas, Chief Financial Officer.

Today’s call is being recorded and will be available for replay beginning at 5:00 P.M. Eastern. The replay dial-in number is 404-537-3406 and the pin is 3181299. At this time, all participants have been placed in a listen-only mode. And the floor will be opened for questions following the presentation. [Operator Instructions]

It is now my pleasure to turn the floor over to Sean Silva of Prosek Partners.

Sean Silva

Thank you, Lisa, and thank you to everyone for joining us today to discuss WhiteHorse Finance’s second quarter 2020 earnings results.

Before we begin, I would like to remind everyone that certain statements which are not based on historical facts made during this call including any statements relating to financial guidance may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Because these forward-looking statements involve known and unknown risks and uncertainties these are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statements.

Today’s speakers may refer to material from the Whitehorse Finance second quarter 2020 earnings presentation, which was posted to our website this morning at www.whitehorsefinance.com.

With that, allow me to introduce WhiteHorse Finance’s CEO, Stuart Aronson. Stuart you may begin.

Stuart Aronson

Thank you, John. Good afternoon and thank you for joining us today. I hope you and your families continue to be safe and healthy as we navigate these unprecedented times. As you are aware, we issued our press release this morning prior to market open. I hope you have had a chance to review our results, which are also available on our website.

I’m going to start by addressing our results relative to market conditions. Joyson will then discuss your performance in more detail, after which we will open the line for questions.

We are pleased to report the second quarter results demonstrated a strong rebound from the lows experience in mid March. First, I would like to share that NAV increased materially to 14.61 per share, compared to 13.86 per share in Q1.

This 5.4% increase resulted from several factors: increased marks on assets, resulting from price improvements on the market, credit improvements on COVID-19 impacted loans, our work with our borrowers and sponsors and an opportunistic secondary market purchase.

Second, we have dramatically improved liquidity in the BDC with approximately $75 million of available capital under our secured credit line, excluding our $100 million accordion facility. This materially lowers downside risk relative to the prior quarter, should market volatility return, while providing the opportunity to take advantage of more attractive terms in the marketplace, which include lower leverage and higher prices on loans.

During the quarter, there were no adjustment items to core NII, so we are reporting second quarter in GAAP net investment income of $5.2 million or $0.255 per share. This compares to first quarter GAAP NII as explained $1 million or $0.297 per share, and first quarter core NII of $5.5 million or $0.267 cents per share.

The NII level this quarter resulted from a combination of lower asset balances, driven by repayments, interest rate declines, lower amendment and prepayment penalties compared to our historical trends and the income impact of assets that are on non-accrual.

Despite our increase in NAV, we would have liked to have seen stronger net investment income, deal activity was needed for the greater part of Q2 and while the market exhibited high volatility, we focused on making sure the BDC was safe with maximum liquidity.

In our investor presentation, we shared an estimate of the level of COVID-19 risk exposure across our portfolio. When we produce these reports, we take into account the most recent data on each company, including feedback from management about real-time performance and their best projections to what will occur going forward.

We have had a strong portfolio of focus since COVID hit and speak to management teams of impacted borrowers as frequently as every week. As you can see in the presentation accounts which are classified as either very high or high exposure collectively represent approximately 7% of our portfolio, which we believe is manageable considering the extreme disruption across the economy.

I’m pleased to share that across our portfolio, companies that were impacted by COVID-19 received consistent support from sponsors and private owners through equity injections and cost containment measures. We are working with owners of these companies to ensure that equity injections of liquidity are sufficient to bridge the companies into 2021.

During the quarter we entered into three new positions and three add-ons totaling $39.4 million in gross deployments. Of our three new positions which totaled $33.6 million two were non-sponsor. All portfolio additions during the quarter were first lien and our weighted average effective yield on income producing investments for Q2 was 9.6% compared to 9.9% during Q1.

Total repayments in sales were $36.6 million, including $24.8 million pay down on [CDA] (Ph), which was our largest and oldest active loan. This pay down meaningfully enhances our liquidity reduces second lien portfolio concentration and improves our credit quality.

As I have shared we have made tremendous progress in improving our liquidity and outstanding borrowings. Our JPMorgan facility has a maximum borrowing limit of $250 million with an additional $100 million accordion feature and a minimum borrowing amount of $175 million.

At the end of the first quarter we had outstanding balance of $231 million. At the end of the second quarter our outstanding balance decreased to $192 million. And as of today, our outstanding balance has reached the minimum borrowing amounts of $175 million.

This influx of liquidity, when combined with our disciplined approach to sourcing will allow us to rebuild our pipeline and take advantage of the better deals now available in the marketplace. The deals we pursue will be to companies that are not distressed, have low COVID-19 and show low to moderate cyclicality risk as we believe there is a high risk of recession in 2021.

At the end of the second quarter, the fair value of our portfolio decreased to $547.4 million compared to $557.1 million in Q1. Gross deployments of $39.4 million were fully offset by a transfer of $36.6 million in assets to our JV in addition to the $36.6 million of repayments in sales. However, we also recorded $17.8 million and mark-to-market gains during the quarter, which meaningfully improved NAV.

During the quarter, we reached an agreement to restructure one of our credits in the fitness industry, which was an area we had identified in prior quarters as high risk while involved lenders will encounter a partial and hopefully temporary loss on their debt positions.

The owner is injected material new equity into the company, and we were placing the restructured loan back on accrual in Q3. We received equity as a part of the restructuring, creating an opportunity for performance based upside over time as the COVID-19 issue is resolved.

Second, as has been publicly disclosed, we restructured our debt position for our credit in the financial services space and have taken ownership of its operating subsidiary, pending regulatory approval. The loan has been marked at $0.80. As the investment it is expected to convert into new equity ownership after quarter end, we will have the possibility for upside based on the firm’s future performance. And that firm is performing very, very well right now in the midst of program.

Third, NAV benefited from improvements in the situation on our non-accrual account AG Kings, as you would expect one outcome from COVID-19 is stronger demand for groceries, which has been the case at AG Kings.

And we also added to this position in a secondary trade temporarily affecting our reported non-accrual levels. We do have one small new account on non-accrual, which was marked down from $0.93 to $0.81. We are an active dialogue with the sponsor on this credit, as the borrower works to improve its current situation.

In total, the non-accrual percentage of assets at WHF will be 3.3% after giving effect to the aforementioned restructured credit, going back on accrual, and excluding the effect of our secondary market purchase of Kings during the quarter.

We have had ongoing success and improving portfolio diversification, and our portfolio had a fair value average debt investment size of $8.8 million. Within our debt portfolio 93.8% of our investments are now first lien, driven by the CDA repayment and 6.7% of our portfolio is sponsored backed.

Leverage decreased to 0.86 times during the second quarter compared to 1.04 times at the end of Q1, as we focused on improving liquidity during the quarter. Having accomplished that goal, we are optimally positioned to deploy capital into high quality loans as market conditions are big on improving.

Thus far in Q3, we have seven deals mandated as well as two potential add-ons, all of which are firstly in opportunities, and all of which will be priced at post COVID levels, and all of these deals are first lien. Unfunded commitments at quarter end were $2.4 million.

In terms of the macro outlook during April and May, we saw very limited competition in our key markets, as pricing surged significantly, but deal activity was very muted as most M&A activity was canceled or delayed.

Those trends reversed in June and July, is a number of competitors reentered the market. Pricing is now moderated to levels that are 75 to 150 basis points higher than pre-COVID, levels, and deal activity at least for us has recovered to about 80% to 90% of pre-COVID levels.

In general, our opinion is that deals we are working on now are more attractive in terms of risk return to what we have seen since 2012 to 2013 advantages. Now many COVID impacted companies are raising money to enhance liquidity.

But we have not participated in those distressed or stressed financings nor do we plan to. Our focus is financing opportunities for those companies that have low COVID impact and low to moderate cyclicality with the goal of keeping our portfolios stable and consistent as possible.

Regarding portfolio performance, because the lower leverage and lower LTVs on average, our non-sponsored portfolio has performed better than our sponsored portfolio. As evidenced by the mark on the non-sponsored deals versus sponsored deals. All five of our highest COVID impacted loans are owned by PE firms, and thankfully all those PE owners have been supportive so far.

In summary, while NII for the quarter was the below our goal, NAV has materially improved and liquidity is strong. Our goal is to carefully deploy capital on the improved market turns and position Whitehorse finance to be able to earn its dividends on a quarterly basis.

I will now turn the call to Joyson for more detail on our financials.

Joyson Thomas

Thanks Stuart and thank you all for joining today’s call.

During the second quarter, we recorded GAAP net investment income of $5.2 million, or $0.255 per share. There were no adjustment items to Q2 core NII, so these results compared to Q1 GAAP NII of $6.1 million for $0.297 per share, and Q1 core NII of $5.5 million or $0.267 per share.

During the quarter, we recorded net unrealized gains in our portfolio of $17.8 million, primarily driven by markups in four positions, including our investment in the STRS JV. Our investment in the STRS JV increased by $6.8 million of which $5.7 million can be attributed to new positions, and $1.1 million resulted from unrealized appreciation.

For the BDC, fee income during the quarter was $0.5 million, which while lower than historical trends was approximately 200,000 higher than the prior quarter. After considering our net realized and unrealized gains, we reported a net increase in net assets resulting from operations of approximately $22.8 million.

As of June 30th, 2020 net asset value was approximately $300.2 million or $14.61 per share, which compares to $284.7 million or $13.86 per share in Q1, primarily driven by the markups and the opportunistic secondary purchase referenced earlier.

As it pertains to our portfolio and investment activity, nearly 64.2% of our portfolio carries either two or one risk rating on a scale of one to five, where an asset rated two is performing according to our initial expectations and asset rated one has performed better, such as the risk of loss has been reduced relative to those initial expectations.

Turning to the balance sheet, we had cash resources of approximately $20.9 million as of June 30, 2020, including $18.6 million of restricted cash, and approximately $57.8 million of undrawn capacity under our revolving credit facility. Excluding the $100 million accordion under the revolver.

As of June 30, 2020, the company’s asset coverage ratio for borrowed amounts as defined by the 1940 Act was 216.7% at the end of the second quarter, well above our requirement under the statute of 150%. Our net effective debt-to-equity ratio after adjusting for cash on hand was 0.79 times as of the end of the quarter.

Next I’d like to highlight our quarterly distribution. On June 2nd, you declared a distribution for the quarter ended June 30, 2020 of $0.355 per share for a total distribution of $7.3 million to stockholders of record as of June 19, 2020.

The distribution was paid to stockholders, July 3, 2020. This marks the company’s 31st consecutive quarterly distribution paid since our IPO in December, 2012, with all distributions at the rate of $0.355 per share per a quarter.

Finally, this morning, we announced that our Board declared a third quarter distribution of $0.355 per share to be payable on October 2nd to stock holders of record as a September 21st. Consistent with what we have said in prior quarters, we will continue our quarterly distribution, both in the near and medium-term, based on the core earnings power of a portfolio in addition to other relevant factors that may warrant consideration.

I will now turn the call over to the operator for your questions.

Question-And-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Mickey Schleien with Ladenburg.

Mickey Schleien

Hi. Yes. Good morning, everyone. Stuart, with respect to fee income, it was weaker than I had expected probably looks like weaker than the consensus. I think a lot of us were expecting amendment fees given the COVID pandemic to sort of buoy that line. And I think in your prepared remarks, you mentioned that deal volume is close to pre-COVID levels. Can you give us a sense whether fee income can regress back to a sort of historical call it $2 million a quarter or should we expect it to remain suppressed sort of at these levels for some time?

Stuart Aronson

So Mickey good day and great questions. We went through a number of significant modifications during the quarter. We were very focused on maximizing the equity injections to stabilize the credits as much as possible. And because for COVID, impacted credits, cash is short. In general, we focused on pricing increases on the deal more than we focused on amendment fees.

So, we did pricing increases in five of the eight major modifications we did. And we are working on some other modifications with more price increases, but the waiver and amendments fees were lower. And on the loan that we paid CDA. It was a very old loan, so there were no prepayment penalties on that.

In general, waiver and amendment fees will be collected. I don’t expect a lot of prepayments between now and year end on accounts. And those prepayment penalties are typically a source of significant income for us. So I think fee income will be consistent, but not at the peak levels that we saw for several quarters last year.

As an offset to that, as you mentioned, deal volume is strong, and pricing on the deals that we are closing. All of them being first lien deals are much higher than we were getting pre-COVID. And as we deploy more capital at these higher returns, that should set us up to move towards a sustainably higher NII number with a goal once again of being at about 1.25 times leverage.

So we are fairly far from that goal at the moment. But with a pipeline of seven mandated deals and two add-ons, we should be able to move significantly in the right direction during this quarter.

Mickey Schleien

That is very helpful, Stuart. And in terms of deal terms, your comments are certainly consistent with what we are hearing across the space. But, obviously LIBOR is much lower than it was a few quarters ago. So there is continued pressure and portfolio yield and I suspect there is also demand for good deals which could limit the upside in those credits as well. So to help offset potential pressure on the portfolio yield, what is the outlook for your company to tap into the investment grade debt market to help reduce your cost of capital, particularly since you are part of such a large credit platform in the first place?

Stuart Aronson

At the moment, the most attractive capital from a pricing perspective is our secured credit line at LIBOR 250. While we do have an investment grade rating on our unsecured debt. Unsecured debt prices in the marketplace right now, while the absolute levels aren’t bad, the spread to treasuries is very high.

And so we continue to monitor the opportunity to diversify our funding basis into more unsecured Mickey, but candidly, we are going to wait until market conditions are such that we can add that unsecured debt at an attractive spread and until that time, are most likely to rely on our secured credit line where candidly we have tons of untapped liquidity.

And if we needed to, we could trigger additional borrowing capacity, under the accordion line. And we have confirmed that with JPMorgan very recently, that they would increase the accordion and they would do so at a price that is, at the moment, much more attractive than unsecured borrowing would be.

Mickey Schleien

Okay, I understand. One last question for me maybe Joyson. Could you update us on the amount of undistributed taxable income, and, in particular, the deadline to distribute whatever that amount is?

Joyson Thomas

Yes, hi, Mickey. So, if you recall from last quarter’s earnings call, I believe we had mentioned that the undisputed amount was approximately 17 million at that point in time taking into account the distribution that we just paid in July, that number is now under 10 million and does not factor in obviously this upcoming distribution that we will make.

Mickey Schleien

Okay, and is there a what’s the timeframe for requirements for distributing undistributed taxable income?

Joyson Thomas

The distribution requirements are just at the end of the year, obviously, in terms of any declaration there is a timeframe in Q4, but the actual distribution just needs to be made before the fourth quarter.

Mickey Schleien

Okay, I understand. Those are all my questions at the moment. I appreciate your time. Thank you.

Stuart Aronson

Thanks, Mickey.

Operator

The next question comes from the line of Tim Hayes with B. Riley FBR.

Timothy Hayes

Hey, Stuart. Good afternoon. I hope you are doing well. But my first question here, just I want to kind of piggyback on Mickey’s question here about earnings power and just in the context of the dividend, what went into the Board’s decision to maintain the dividend here.

And I know you mentioned that the deal pipeline is picking-up and spreads are better today than what you were seeing several months ago, but it seems like it is going to take some time for you to grow the portfolio and increase your leverage in a prudent manner, while getting NII back up to a level that is consistent with where the dividend is.

So, just wondering, again, kind of what were in the Board decision if there is kind of a timeline that the Board has in mind that they would like to see, you get back to a level commensurate with the dividend or, anything else. Any other context you can provide around that?

Stuart Aronson

Sure. The starting point, Tim, is whether or not we feel we have the resources to be able to earn the dividend on an ongoing basis. In Q1, there were a huge number of questions about what was going on in the economy and what would go on in the economy. And candidly, there was at the time, a lack of clarity not only as to what NII would look like, but what the value of the portfolio would be, and therefore the sustainability of earnings power of the BDC would be.

Increase in NAV in the quarter, looking at the amount of money we have to deploy and looking at pricing in the market place. We see a path that is available to us to be able to invest in a manner that we can consistently earn the dividend, and that was what led the Board in part to make the decision to pay a full dividend, despite the fact that the NII was lower.

And then the second piece is, as Mickey made reference, our taxable income situation is such that, if we did not distribute this money, we would be subject to significant income taxes, which would be inefficient for our shareholders.

So, it is the combination of the tax situation and the fact that, we believe that we are in a position to redeploy into a mix of mostly first lien, but maybe some second lien assets and to be able to earn the dividends as we reinvest. Now, obviously in Q3 we are in the process of doing that reinvestment. So, it will be into Q4 and Q1, before we see that improvement in the NII.

Timothy Hayes

That is helpful. Thanks Stuart. I guess, just on that last point there. The Q3 investment activities so far, I think you said that was all first lien, if I remember correctly. Could you maybe just give us – would you be able to size maybe, how much wider spread are on these deals versus what you were doing earlier in the first quarter, if these are all sponsored deals or non-sponsored deals and any other kind of characteristics you might be able to share.

Stuart Aronson

Of the seven mandated deals, about half of it – well three of them are non-sponsor, four of them are sponsored. And most of the deals carries spreads that range from 750 to 900. So, if you think about where pricing was pre-COVID, which was much more sort of between 600 and 700, there is a clear premium price.

Also, please note, we now have 20 originations professionals in 12 cities across North America who are directly originating business. So, we are not beholden to the large banks or even the midsize banks who were syndicating assets in order to find flow.

We are directly originating flow, and even though there are more people back in the market, who are actively originating deals, there are still a number of competitors who have severely impaired portfolios, who are out of the market.

And so, a lot of the crazy behavior that we had seen pre-COVID in terms of people lending off of adjusted, adjusted, adjusted synergized EBITDA has gone away. And we are seeing, in general, tighter documents, tighter covenants and lower leverage.

Our leverage on average is down half a turn to a turn, which is why I was able to say that overall, the deals that we are working on and trying to close are as attractive as anything that I have seen since the 2012 or 2013 vintage.

Timothy Hayes

Got it. That is good color. I appreciate that, Stuart. And then maybe just on the new credit that was added to non-accrual, the Sure Fit Home Products. There is some other home good stores out there that seemingly performs well through this crisis. Just wondering if you can give us an update there, if that is a sponsored credit. And, any other. I know, you are alluded in what you could say since you are a private company, but just any other kind of pivots you can share would be helpful.

Stuart Aronson

It is sponsored credit. And the sponsor has injected equity into the credit. But the venues which are largely brick and mortar that the company sells through, have had COVID impact and the COVID impact frankly has gotten more severe not less severe.

And we are working with the sponsor to figure out how to best address that. It is a small position. But, based on how the company is doing right now, we felt it was prudent to take it on non-accrual as at the end of the quarter.

Timothy Hayes

Okay, got it. That is it for me. Thanks again for taking my questions.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer.

Chris Kotowski

Yes, good afternoon. When I look at the AG Kings position, I see the cost went up about $4.9 million and the and the CAR went up 13.25. So that tells me you bought that position at around 37% of PAR. Am I doing my math right there?

Stuart Aronson

Again, the numbers are out, but I really can’t comment or won’t comment on exactly where we bought. Other than it was a situation where we felt there was a significant value to our shareholders in executing the secondary market trade.

And so and so we did. And as that account moves to a resolution, based on the fact that as I have already shared grocery stores across the country, across the world are doing much, much better in the face of COVID. I’m hoping that we will demonstrate to our investor base that was a wise secondary trade.

Even though it temporarily increases out reported non-accrual. So it is a catch 22 when we made that trade, we knew that the optic would be not great for some period of time, but we believe that that is a value enhancing move for our shareholders.

Chris Kotowski

Okay, alright I didn’t catch it quite when you first started talking about your non-accruals. And I think I assume that was less brands that you were talking about? As you said that, I mean I guess that that is credit looks like it has been restructured. I mean, it looks like your cost in it went from $10 million plus to $8 million plus. Is that one where you said that you thought there was a resolution after the quarter or I’m not sure I caught exactly what you said.

Stuart Aronson

There is a resolution, the owner of that company has injected a very significant equity check into the company and the restructure debt goes back on accrual as of the beginning of Q3. So in Q2 it was still on non-accrual because we were doing the workout, but as of the beginning of Q3, that will go back on accrual or restructured that will go back on accrual. And that will improve our non-accrual numbers going forward.

Chris Kotowski

Okay, perfect. And that was Lyft right? I mean, I’m, I’m right on that right?

Stuart Aronson

Yes.

Chris Kotowski

Yes. Okay. Alright. That is it for me. Thank you.

Stuart Aronson

No problem. Thanks, Chris.

Operator

Your next question comes from the line of Rick Shane with J.P. Morgan.

Melissa Wedel

Hey, guys, it is Melissa on for Rick today. A couple of questions for you. On loan originations, definitely I hear your point about some new deals came ended in this quarter with a fair amount of them, too. It sounds like new portfolio companies. Can you talk about how your due diligence process has evolved in this environment when it is much harder to do on-site due diligence?

Stuart Aronson

Absolutely. It is a great question. It was very unclear when COVID hit, how the business would operate with everyone being remote. And what we have found and what I have heard from my peers across the industry is that is that people have been amazed at how well, technology has resolved issues of an inability to travel and to deal with folks.

We executed the restructuring of Lyft brands, which normally would have involved many in person meetings through zoom, and we have been doing our management meetings and even plant tours by use of video technology.

And while I certainly miss the ability to physically be with management teams, and our team does as well. We have found that it works quite well to use modern technology to substitute for in-person meetings and discussions.

And while things are slower, there is certainly a pacing that has been different, especially during COVID period. We have recently seen a very significant surge in our deal flow. In fact, at the bottom of the COVID period, we were down about 40% or 50%. And at the moment, the most recently posted quarter and maybe we are down 10%. And deals are happening.

There are a number of theories as to why transactions are suddenly popping back up on the radar screen. Some of them have to do with the election and the potential for higher taxes next year. But the good news is that those deals are consistently being done on terms that are much easier to get comfortable with than what we were seeing in 2018 and 2019.

Melissa Wedel

Got it. Thank you for that. And my follow-up question is around just the issue of sponsor versus non-sponsor deals. I think until recent history, the idea of the benefit of going unknown foster path was that it was easier in a lot of cases, and given the environment that we are in now and what you have seen some of the modifications that you have talked about, you have seen equities before come in, has that changed your thinking about what makes an attractive investment right now, whether it is sponsored versus non-sponsored?

Stuart Aronson

It doesn’t. I will tell you that a lot of people who engage in the sponsored business exclusively point to the non-sponsor business and say that it is riskier. And yet, I wanted to make a point in my prepared remarks, and I will follow-up on that point that, if you do the non-sponsored business properly, it is done at very low leverage multiples, much lower than sponsored, at lower LTV, with tighter documents and tighter covenants.

And as a result, as we have hit a very significant economic correction, if you go through our accounts, you will see that the average mark on the non-sponsored deals is better than the average mark on the sponsored deals. And so, while it is great that sponsors inject equity and support their companies, that is needed because the structure on the sponsor deals is more aggressive to start with.

And directionally speaking, when you do a sponsor deal, if you lose 30%, 40%, 50% of your EBITDA, you need an equity injection. When you do a non-sponsored deal, the leverage is so low that even if you lose 30% or 40% or 50% of your EBITDA in many cases, you are still okay. So, we think and I think that, both markets are potentially very attractive. But I think it is really noteworthy that our non-sponsor loan book has held up so solidly during this COVID period.

Melissa Wedel

That is very helpful. Thank you guys.

Operator

Your next question comes from the line of Robert Dodd with Raymond James.

Robert Dodd

Hi guys. First, a few questions, AG Kings and you have talked about a couple of the issues that occurred during the quarter, why you did the secondary market purchase that I need to cost obviously now 120%. So if you collected that mark, I think people will be pretty happy with this secondary purchase, provided it happens in the not too distant future. Obviously, it is a $20 million number fair value on your investment, that is not producing income right now.

Last quarter, you talked about a potential resolution may be this year. Can you give us any more color on that and what impact, if any, that did have into expectations for example, with that dividend catching up, maybe NII catching up to the dividends late this year maybe early next year.

Stuart Aronson

Our activities on that account are in a highly delicate moment, which prevents me from providing any detail on it. But, I can say that we of course in possession of a lot of knowledge about the situation and about the performance of the company that allowed us to make what we believe was a well-informed decision about that secondary purchase.

And we would never have added to an non-accrual account unless we believed that that was a smart thing to do for our investors. And hopefully before too long, it will become come evident that that was a good decision.

Robert Dodd

Got it. I appreciate that. Always delicate situation. On the JV, the target ROIC you have talked 15% or you talked about in prior quarters about how to get them, if needed more scale, more diversification of portfolio to optimize the luckiest structure within that facility and how that can be utilized. Obviously, it is grown. Where would you say that stands now in terms of the diversification within the JV portfolio necessary to fully utilize the credits that was restructure within it?

Stuart Aronson

We have made great progress. There is more diversity, we are using more leverage in that structure. There is still another tip of leverage that you will be able to access as we continue to improve the diversity in that portfolio. But we remain confident that we will be able to generate the returns that were projected.

And in fact, with higher priced deals available to go into the JV now and with a very competitive leverage price, I think our leverage price is LIBOR 255. We could easily end up at the high end of the range in terms of the economics of the JV assuming we hit the original projected leverage.

Robert Dodd

Got it. I appreciate that and then just one more on the dividend. Obviously heading into – and you currently expect it to catch earnings up to the dividend level. But in the prior quarters we have talked about the temporary alignment this year not really feasible given the spillover rules.

But going into 2021, once the full distribution you made this year. This spillover heading into next year is obviously going to be materially lower and won’t be having quite the influence on determining or directing where the dividend comes out.

So can you give us any comment about whether that was taken into account as well? And is there any reason to think that once we kind of click over into the news spillover here, so to speak The dividend view has any material risk of change.

Stuart Aronson

So Robert. I shared with the market, the risk of realigning the dividend, it was twice at moments in time, when there was a massive amount of uncertainty about the future. We did our best to mark our assets realistically at the end of Q1, but Q2 was a huge question mark. Obviously, the stock market thinks that there is no issue at all, but we are working through a significant reality of impact on a bunch of COVID impacted names and the risk of recession in 2021.

But the best data that we have now says that our NAV is 1461. And if you make a projection that we resolve our non-accrual accounts, and that we invest our available capital at the current market returns, depending on what your model generates. There is every ability of the BDC to get to a position where it earns its dividends.

And so we certainly feel better. I mean, just as evidenced by the NAV. We feel much better about our ability to get back into a position of earning the dividend now than we did three months ago, with the caveat that there is still uncertainty in regards COVID and a second wave and a recession in 2021 and 2022. And so we have kept the language in our comments, but things are clearly better now than they were three months ago in terms of credit quality and in terms of liquidity.

Robert Dodd

Alright. I appreciate that clarity. Thank you.

Operator

[Operator instructions] The next question comes from the line of Bryce Rowe with National Securities.

Bryce Rowe

Thanks good afternoon. Hey Stuart. I wanted to hear your comments about the direct origination network and the boots on the ground, so to speak. And I have kind of gone back and looked and it is interesting to see if you have been adding some folks, maybe a couple of folks in that function over the last – even just six months so just kind of wanted to get a feel for, what you are doing to attract those folks and how you are going about adding and where what markets you are looking to add, add people in? Thanks.

Stuart Aronson

Sure. We have added in both the non-sponsor local market and also in the sponsor market. And our goal is to not have to rely on major financial institutions to deliver us our deal flow we want to find our own deal flow.

And we have now found consistently for years, that directly originating away from the competition allows us to command higher fees, lower leverage and just better overall price. We are up to 20 originators in 12 markets across North America our most recent additions is a principal hire focused on the sponsors space.

One of the reasons we are increasing our focus on the sponsor space is because the on the run sponsors, who we really hadn’t done a ton with over the past couple of years, are now doing deals on terms that are much more realistic and much more balanced in terms of risk reward.

And so, we have seen a significant increase in access to the sponsor market, driven by the fact that WhiteHorse direct lending as an overall organization can now deliver $200 million commitments and hold positions as high as 150 million, which allows us to be a real solutions provider in the mid market, lower mid-market and that benefits very significantly the BDC that takes its pro rata share of each one of those deals.

But it is because of that increase flow, that we have been able to increase diversity significantly.

I have shared with the market that the typical asset we put in is 5 million to 20 million and in fact, it is would have been more like 5 million to 15 million on most.

So, over the last three or four years, you have seen the BDC get a much more diversified portfolio and then shift from about 40% or 45% second lien to now being 94% first lien. Now that said, there is almost too much first lien in the portfolio right now, I would like to find a good couple of second lien loans. But as much as we have hunted, we have not yet found those down to the portfolio.

Bryce Rowe

Okay. Wanted to ask about maybe another topic similar to what or maybe in line with what were you just talking about their second lien versus first lien. So you have clearly shifted away from that second lien exposure, and we have seen the portfolio yield come down with that shift and with the move lower in rate. So now that we are at a portfolio yield – weighted-average yield of 9.6%, does it feel like we have reached a point of stability, and especially with pricing post-COVID being as high as it is.

Stuart Aronson

There are going to be two things that are going to bias yield upward: one is that, on accounts that have had covenant defaults even if liquidity has been injected, we have increased price on all the deals, actually five of the eight so far has that increased price, all right of the eight that we modified had new equity injected.

So, first you are going to see existing deals start to have higher yield. And then in the current market environment, all the deals that we are adding in are a higher price by 75 to 150 basis points than they would have been a pre-COVID.

In addition, we are getting LIBOR floors on all the deals we do. So, while LIBOR is hovering around 25 basis points, we have very few accounts in our portfolio that don’t have LIBOR core protection. So, LIBOR whether it is at 50, 25 or zero will have very little impact on our portfolio.

I will also say that the low LIBOR does have a side benefit vis-à-vis our LIBOR floors where our leverage line does not have a LIBOR floor. So, we are borrowing at LIBOR plus 250, which is about 2.75%. And in a deal that will be priced at LIBOR 750 has a LIBOR floor 1% so, we are getting 850.

So, we are going to get extra play, out of that leverage. And then as we bring our leverage back above one times, as I think you all recall, we have lowered our fees on assets beyond one times leverage. So, when you look at the earnings power of what can be generated by booking assets in today’s environment, it is quite significant in terms of what gets generated down to the bottom-line.

Bryce Rowe

Yes. Okay. Thanks for that comment Stuart. I appreciate it.

Stuart Aronson

No problem Bryce.

Operator

Your next question comes from the line of [indiscernible].

Unidentified Analyst

Hey, guys. I appreciate your comments on non-sponsor book relative to the sponsor book, and also appreciate the opportunistic non-accrual purchase. I apologize if I missed it. But, could you provide a further breakdown on the risk rating buckets and just to clarify that those are forward-looking ratings as opposed to just backward historical?

Stuart Aronson

We do a risk rating on each asset based on everything we know at the end of the quarter. If we have information looking forward that would cause it to be worse than it has been historically. We take that into account in assigning the risk rating.

Joyson, do you happen to have handy the breakdown of the risk ratings?

Joyson Thomas

We do. Just as a note to what Stuart just said, right, so obviously this is as of 630. And so, it takes into account the performance subsequent to the original underwriting, as he had mentioned. So, as of 630, we had $12.7 million of the portfolio rated a one. $338.7 million rated a two. $160.7 million rated a three, $14 million, rated a four and then $21.3 million rated a five. And as we said in our prepared remarks, in the aggregate, 64.2% of the portfolio is either a two or a one.

Unidentified Analyst

Okay, thanks very much.

Operator

Your next question comes from the line of Tim Hayes with B. Riley.

Timothy Hayes

Just a couple of quick follow-up, Stuart. I think you threw out a couple of data points out there just the unfunded commitments and the non-accruals as a percentage of the portfolio, ex-the new AG Kings investment and the Lyft brands being removed from non-accrual as well.

Stuart Aronson

The question being what Tim?

Timothy Hayes

Sorry. I’m just looking to confirm a couple of data points you threw out there. I think you mentioned the unfunded commitments. I think it was $2.4 million, but I just wanted to confirm that. And then the other data point was just the pro forma and non-accrual as a percentage of the portfolio.

Stuart Aronson

Yes, I believe the pro forma non-accrual, if you adjust for Lyft and you adjust for Kings was 3.3%. Is that right Joyson?

Joyson Thomas

That is correct. If you factor out the secondary purchase of Kings, 3.3%. And then the unfunded commitments $2.4 million of which only $1.1 million relates to revolvers.

Timothy Hayes

Got it. thanks for that.

Stuart Aronson

So, we have had an ongoing focus that predates the COVID situation, that our unfunded revolvers are a risky liability during the downturn. And as you saw in the public market, several people got caught with those revolver funding. So we have actively sought to minimize both the size of the revolvers and our exposure to them. Banks are much better situated to provide those, and in as many cases as possible, we either don’t have revolvers in our deals or we outsourced those revolvers to next.

Operator

And at this time, there are no further questions. I would now like to turn the call back over to management for closing remarks.

Stuart Aronson

Thank you. Really simply put, we are going to do our very best to reinvest in a series of assets that we have both mandated and in pipeline during Q3 and Q4. I would like to be DC to be operating at approximately 1.25 times leverage. And I invite any of our shareholders and analysts to run the math based on current market conditions to assess what that should allow us to do.

We can’t project what will happen in the coming months. But certainly based on current market conditions, we are seeing a really steady flow of very attractive first lien deals. And I haven’t shared yet but I will share, we are getting good prepayment penalties on those deals.

So if we book them now and if they go away next year, which is always a risk. We will get paid nice fees on the exit for those deals given that we have provided liquidity to companies during a more volatile moment in the economy.

If other questions arise please send them through and we look forward to talking to you next quarter.

Operator

This concludes today’s conference. You may now disconnect.





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