April 26, 2019 - 6:03pm EST by
2019 2020
Price: 14.44 EPS 1.45 0
Shares Out. (in M): 21 P/E 10 0
Market Cap (in $M): 297 P/FCF 0 0
Net Debt (in $M): 180 EBIT 0 0
TEV (in $M): 477 TEV/EBIT 0 0

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  • BDC
  • Discount to NAV


This is a recommendation of a small cap stock appropriate for PA's and small investment accounts.

WhiteHorse Finance, Inc (WHF) is a BDC. It IPO'ed in 2012 at $15.00. It is externally managed by H.I.G. Capital, LLC., a $30Bn alternative asset manager with multiple areas of activity in the US, South America and Europe. For WHF, the manager originates mainly senior secured loans to private lower middle market companies with enterprise values between $50MM to $350MM. The investments are sourced through the advisor's network of professionals who are unaffiliated with it - local accountants, lawyers, etc. In addition, H.I.G. has 375 professionals in some 20 offices who are incentivised to source loans. Last, H.I.G. employs about 25 professionals who solicit deals telephonically. The company believes that their sourcing network is a business advantage.

At 12/31/18 the portfolio had a value of $469.6MM against a cost of $477.8MM - a 3.9% markdown. It held investments in 39 companies. The average debt holding was $10.1MM. The largest position was $25.2MM in Sigue Corp debt and equity. Of the entire debt portfolio, 76.5% were first lien, 20.7% second lien, and 100% was floating rate. 2.8% of the portfolio was in equity. A $1MM second lien loan to Grupo HIMA was the only position in non-accrual and has been written down to $100M.

From its inception, WHF has had very few loan losses and non-accruals have been de minimis with one exception. In 2015 the portfolio had a $20.7MM second lien position in RCS Capital which filed for bankruptcy. The position was written down and converted into the common stock of RCS's successor, Aretec. The position was sold in 2018 for a gain of $33MM. As a result of this, the portfolio has undistributed income of $13.7MM for future distribution.

In 2018 WHF invested $277MM and had repayments and sales of $285.8MM. As a result of repayments and the Aretec sale proceeds, WHF is modestly levered. It had equity of $315.3MM against total net debt of $176MM. The company has a $200MM line with JP Morgan Chase against which $115MM was drawn. This facility bears an interest rate of LIBOR plus 2.75% In addition the company has a $35MM publicly traded subordinated note due November 30, 2025 with a coupon of $6.50%. It trades as WHFBZ on the NASDAQ. Last, the company has a $30MM 6% privately placed note due August 7, 2023.

Subsequent to its IPO, WHF has raised equity twice. On October 23, 2015 the company issued a one-for-one non-transferable rights for the purchase of 3.3MM shares at $13.55 which was the market price for WHF on October 16, 2015. The rights included an over-subscription for unsubscribed shares. The offering was fully subscribed. On June 30, 2017, WHF offered 2.2MM shares at $13.97 a share. The investment advisor bore a portion of the expenses of the offering so that the proceeds per share were at or above NAV at the time of the offering.

In January 2019, WHF entered into a LLC with the State Teachers Retirement System of Ohio (STRS Ohio). STRS Ohio will provide $50MM and WHF will provide $75MM, for $125MM of equity and subordinated debt. The joint venture intends to leverage this with $250MM of senior debt. This is an interesting and attractive investment vehicle for WHF.

The most interesting part of the WHF situation is its ownership structure. Bayside is an affiliate of H.I.G. which concentrates its efforts in the fixed income area. H.I.G. Bayside Debt & LBO Fund II, L.P. and H.I.G. Bayside Loan Opportunity Fund II, L.P. invested $176.3MM to purchase 11,752,383 shares of WHF at $15.00 a share. As of March 11, 2019 those entities continue to hold 10,530,000 shares or 51.2% of the outstanding. Hamilton Lane has filed a 13G reporting ownership of 1,075,244 shares or another 5.2% of the outstanding. I think that this related party concentrated ownership provides protection to outsiders.

The least attractive aspect of WHF is its fee structure. H.I.G. gets 2% of the gross carrying value of assets up to assets purchased at 200% leverage when the fee is reduced to 1.25%. In addition, the manager is entitled to 20% of income in excess of 7%. Last the manager is entitled to 20% of capital gains. It is rich, but so far it has been deserved as it has been earned.

At $14.44 WHF trades at a modest 6% discount to 2018 year end NAV of $15.35. Since going public the company has paid a dividend of $1.42 which it has more than earned. The yield is 9.8%.


1) General credit market conditions impair the fund's investments.

2) The manager is unable to source attractive investments.

3) The manager makes bad investments.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


The 9.8% yield is comforting. If H.I.G. continues to perform well as the manager, WHF shares will do well.

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