8-K: WhiteHorse Finance Completes $298.15 Million CLO Transaction to Bolster Middle Market Lending

WhiteHorse Finance, Inc. has successfully completed a $298.15 million collateralized loan obligation (CLO) transaction, securing significant financing backed by a portfolio of middle market loans.

Summary

• WhiteHorse Finance, Inc. (the "Company") completed a $298.15 million term debt securitization transaction (the "CLO Transaction") on June 10, 2025, through its consolidated subsidiary, WhiteHorse Finance CLO I, LLC (the "Issuer").
• The CLO Transaction involved the issuance of various classes of notes and the incurrence of loans, backed by a portfolio of collateral obligations consisting of middle market loans and participation interests in middle market loans.
• The debt issued includes $164 million of AAA(sf) Class A Notes, $30 million of AA(sf) Class B Notes, $24 million of A(sf) Class C Notes, and $70.15 million of Subordinated Notes. Additionally, $10.0 million of AAA(sf) convertible Class A-L Loans were incurred.
• All secured notes and Class A-L Loans bear interest at a spread over the three-month Secured Overnight Financing Rate (SOFR): Class A at SOFR + 1.70%, Class B at SOFR + 2.15%, and Class C at SOFR + 2.80%.
• The debt is scheduled to mature on May 25, 2037.
• The Company will retain the $70.15 million of Subordinated Notes.
• A reinvestment period is in effect until May 25, 2029, allowing the Issuer to purchase additional middle market loans under the direction of H.I.G. Capital, LLC (the "Investment Manager").
• The secured notes and Class A-L Loans are secured by below investment-grade middle market loans, participation interests, and other assets of the Issuer.
• The notes and loans were not registered under the Securities Act of 1933, limiting their offering and sale to specific exemptions.

Sentiment

Score: 8

Explanation: The successful completion of a significant CLO transaction provides substantial, diversified, and long-term financing for the company's middle market loan portfolio, indicating strong market confidence and strategic execution. The high ratings on the secured tranches are a positive indicator of credit quality. While there are inherent risks in the underlying collateral and regulatory complexities, the overall outcome is highly favorable for the company's financial health and operational flexibility.

Positives

• Successful completion of a substantial $298.15 million debt securitization provides significant, diversified, and long-term financing for the Company's investment activities.
• The transaction leverages the Company's portfolio of middle market loans, optimizing its capital structure.
• The senior tranches of the notes received high credit ratings (AAA, AA, A), indicating strong market confidence in the structure and underlying collateral quality.
• The Company's retention of the $70.15 million Subordinated Notes aligns its interests with the performance of the CLO and offers potential for equity upside.
• The reinvestment period until May 25, 2029, allows for active management and growth of the collateral portfolio, enabling the Investment Manager to optimize returns and manage risk over time.

Negatives

• The underlying collateral for the secured notes and Class A-L Loans consists of 'below investment-grade middle market loans,' which inherently carry higher credit risk.
• The Subordinated Notes, retained by the Company, are not secured and bear the first loss risk in the CLO structure.
• Class C Notes permit deferral of interest payments under certain conditions, which could impact cash flow for holders of this tranche.
• The notes and loans were not registered under the Securities Act of 1933, restricting their transferability and limiting the investor base to qualified purchasers.
• Administrative Expenses can exceed the Administrative Expense Cap in certain redemption scenarios, potentially impacting distributions to junior tranches.

Risks

• Actual results may differ materially from forward-looking statements due to various factors, including those described in SEC filings.
• The CLO is backed by below investment-grade middle market loans, exposing the Issuer to credit risk, including potential defaults and losses on these obligations.
• Floating rate debt means interest payments can fluctuate based on SOFR, introducing interest rate risk.
• The Issuer is subject to various tax risks, including potential withholding taxes, changes in tax treatment (e.g., being classified as a publicly traded partnership taxable as a corporation), and compliance with FATCA and other tax reporting rules.
• The Issuer must comply with complex regulatory requirements, including those under the Investment Company Act, Volcker Rule, EU/UK Securitisation Regulations, and Rule 17g-5, with potential penalties for non-compliance.
• Limitations on the sale of 'Unsaleable Assets' could lead to illiquidity and potential losses if such assets cannot be disposed of efficiently.
• Concentration limitations (e.g., single obligor, industry, foreign domicile) must be maintained; failure to do so could negatively impact portfolio quality and trigger adverse events.
• Material breaches of covenants by the Issuer could lead to an Event of Default, potentially resulting in acceleration of the debt and liquidation of assets.
• Specific provisions regarding bankruptcy proceedings against the Issuer, including the Bankruptcy Subordination Agreement, could subordinate claims of non-compliant holders.
• Operational risks associated with the performance of the Trustee, Loan Agent, Collateral Administrator, and Investment Manager could impact the CLO's operations and performance.

Future Outlook

The document contains standard forward-looking statements disclaimers, indicating that actual results may differ materially from expectations due to various factors. The CLO structure includes a reinvestment period until May 25, 2029, during which proceeds from the collateral portfolio can be used to purchase additional middle market loans, suggesting a continued active management strategy to optimize the portfolio's performance and generate returns.

Management Comments

• The Investment Manager (H.I.G. Capital, LLC) will direct the purchase of additional middle market loans during the reinvestment period, in accordance with the Company's investing strategy and ability to originate eligible loans.
• The Investment Manager will use commercially reasonable judgment in determining the likelihood of recovery on collateral obligations and in classifying certain assets (e.g., Loss Mitigation Obligations, Credit Risk Obligations).
• The Investment Manager will ensure compliance with various tests and limitations (e.g., Eligibility Criteria, Concentration Limitations, Collateral Quality Tests) when directing investment and divestment activities.

Industry Context

This 8-K filing details the completion of a Collateralized Loan Obligation (CLO) transaction, a common form of secured financing in the financial industry, particularly for investment in middle market loans. CLOs allow companies like WhiteHorse Finance to leverage their loan portfolios, providing a diversified funding source and enhancing their capacity for new lending. The use of SOFR as the benchmark interest rate reflects the broader industry's transition away from LIBOR. The extensive regulatory disclosures, including references to U.S. Risk Retention Rules and EU/UK Securitisation Regulations, highlight the stringent compliance environment for structured finance products globally.

Comparison to Industry Standards

• The issuance of AAA(sf), AA(sf), and A(sf) rated tranches aligns with typical CLO capital structures, where senior tranches receive high investment-grade ratings from agencies like S&P, reflecting their priority in the payment waterfall and credit enhancement.
• The specified interest rate spreads over SOFR (e.g., 1.70% for Class A, 2.15% for Class B, 2.80% for Class C) are competitive within the current market for CLO debt, reflecting the risk profile of the underlying middle market loan collateral.
• The various concentration limitations (e.g., 3.5% single obligor, 20% CCC collateral, 20% foreign domicile) and collateral quality tests (e.g., Weighted Average Life, S&P Recovery Rate, Diversity Score) are standard features in CLO indentures, designed to meet rating agency criteria and manage portfolio risk, comparable to those seen in other middle market CLOs issued by peers.
• The inclusion of a reinvestment period (until May 25, 2029) is a common characteristic of actively managed CLOs, allowing the investment manager to rotate the portfolio and seek value over time, similar to structures employed by other asset managers in the CLO space.
• The retention of the Subordinated Notes by WhiteHorse Finance, Inc. (the 'Retention Holder') is a direct compliance mechanism for the EU/UK Risk Retention Requirements and U.S. Risk Retention Rules, a standard practice for CLO sponsors to align interests and meet regulatory mandates.

Related Party Transactions

• WhiteHorse Finance, Inc. (the parent company) will retain the $70.15 million of Subordinated Notes, aligning its interests with the CLO's performance.
• H.I.G. Capital, LLC, as the Investment Manager, directs the purchase of additional middle market loans for the CLO portfolio.
• The Investment Manager, its affiliates, and accounts/funds managed by them are permitted to bid on debt sold by Non-Permitted Holders.
• Transactions with affiliated persons of the Investment Manager must be conducted on an arms-length basis and on terms no less favorable to the Issuer.
• WhiteHorse Finance Credit I, LLC (the Transferor), a Delaware limited liability company, has the right to purchase or substitute certain Collateral Obligations from the Issuer under the Master Participation Agreement.
• The Investment Manager or its affiliate (the Retention Holder) has the right to acquire debt in connection with any refinancing to ensure compliance with risk retention requirements.

Stakeholder Impact

• **Shareholders**: The successful CLO transaction provides significant capital, potentially enhancing the Company's ability to generate returns from its middle market lending activities, which could positively impact shareholder value. The retention of subordinated notes aligns interests with the CLO's performance.
• **Debt Holders (Investors)**: The transaction offers new investment opportunities across different risk tranches (AAA, AA, A, Subordinated) with defined payment priorities and interest rates. Secured debt holders benefit from collateral and structural protections, while subordinated note holders bear higher risk for potentially higher returns.
• **Middle Market Borrowers (Customers)**: The increased financing capacity provided by the CLO enables WhiteHorse Finance to continue originating and investing in middle market loans, potentially increasing access to capital for these businesses.
• **Creditors (Other)**: The CLO structure clearly defines the payment waterfall and limited recourse nature of the debt, which impacts the priority and recovery prospects of other creditors of WhiteHorse Finance, Inc. or its subsidiaries.

Next Steps

• The Investment Manager will direct the purchase of additional middle market loans during the reinvestment period, which extends until May 25, 2029.
• The Issuer will obtain and pay for an annual review of the rating of each class of Secured Debt from the Rating Agency, commencing December 31, 2026.
• The Issuer will request and pay for an annual review of any Collateral Obligation with an S&P Rating derived from a credit estimate.
• The Issuer will continue to comply with ongoing reporting obligations, including monthly and distribution reports, and transparency reports under EU/UK Securitisation Regulations.
• The Issuer may issue additional debt or Junior Mezzanine Notes in the future, subject to specified conditions.
• The Issuer may undertake optional redemptions, tax redemptions, or re-pricings of the debt, subject to the terms and conditions outlined in the indenture.

Key Dates

Recommendation

Keywords

CLO, Collateralized Loan Obligation, Debt Securitization, Middle Market Loans, Secured Notes, Subordinated Notes, Floating Rate Debt, SOFR, Credit Risk, Investment Management, SEC Filing, 8-K, WhiteHorse Finance, Structured Finance, Corporate Debt