10-Q: WhiteHorse Finance Q3 2025: Net Assets Decline Amid Restructurings

WhiteHorse Finance reports a decrease in net assets and net investment income for Q3 2025, alongside a new CLO securitization and a stock repurchase program.

Summary

• Net assets decreased to $265.2 million as of September 30, 2025, from $286.1 million at December 31, 2024.
• Net investment income for the three months ended September 30, 2025, was $6.1 million, down from $9.2 million in the prior year period.
• Net investment income for the nine months ended September 30, 2025, was $19.5 million, down from $29.3 million in the prior year period.
• Net realized losses on investments and foreign currency transactions were $1.8 million for the three months and $24.2 million for the nine months ended September 30, 2025.
• Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions was a depreciation of $4.9 million for the three months and an appreciation of $10.7 million for the nine months ended September 30, 2025.
• Earnings per share for the three months ended September 30, 2025, was $(0.02), compared to $(0.30) in 2024.
• Earnings per share for the nine months ended September 30, 2025, was $0.26, compared to $0.30 in 2024.
• Completed a $298.15 million term debt securitization (2025 CLO Securitization) on June 10, 2025.
• The 5.375% 2025 Notes were fully repaid on September 29, 2025.
• The Credit Facility availability was reduced to $100.0 million from $335.0 million on June 27, 2025.
• The investment adviser voluntarily agreed to waive and reduce the incentive fee on net investment income from 20.00% to 17.50% for the next two fiscal quarters ending December 31, 2025, and March 31, 2026.
• The board authorized a stock repurchase program of up to $15.0 million of common stock on November 10, 2025.

Sentiment

Score: 3

Explanation: While there are some positive developments like the CLO securitization and incentive fee waiver, the significant decline in net investment income, net assets, and substantial realized losses indicate a challenging period. The reduction in credit facility availability also points to tighter liquidity. The overall financial performance for the period is negative, despite some improvements in EPS for the quarter, the nine-month EPS is still down.

Positives

• Net change in unrealized appreciation on investments for the nine months ended September 30, 2025, was positive $10.7 million, a significant improvement from a depreciation of $16.6 million in the prior year.
• The 2025 CLO Securitization provides long-term balance sheet financing, diversifying funding sources.
• The investment adviser voluntarily waived and reduced the incentive fee from 20.00% to 17.50% for two fiscal quarters, potentially improving net investment income.
• The board authorized a stock repurchase program of up to $15.0 million, indicating confidence and a potential return to shareholders.
• Earnings per share for the three months ended September 30, 2025, improved to $(0.02) from $(0.30) in the prior year.

Negatives

• Net assets decreased to $265.2 million as of September 30, 2025, from $286.1 million at December 31, 2024.
• Net investment income decreased by $3.1 million for the three months and $9.8 million for the nine months ended September 30, 2025, compared to the prior year periods.
• Total investment income decreased by $5.2 million for the three months and $16.5 million for the nine months ended September 30, 2025, primarily due to lower yields, non-accrual investments, and reduced portfolio size.
• Net realized losses on investments and foreign currency transactions were substantial at $24.2 million for the nine months ended September 30, 2025.
• The Credit Facility availability was reduced from $335.0 million to $100.0 million, potentially limiting future borrowing capacity.
• Several investments were placed on non-accrual status or underwent restructuring, including Honors Holdings, LLC, Telestream Holdings Corporation, and MSI Information Services, Inc., indicating portfolio stress.
• The weighted average effective yield on the total portfolio decreased to 9.5% as of September 30, 2025, from 10.2% at December 31, 2024.

Risks

• Credit risk: The risk of default on investments resulting from an issuer's inability or unwillingness to make contractually required payments.
• Market risk: 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.
• Foreign currency fluctuations and revaluations, and future adverse political, social, and economic developments in foreign markets, could cause investments to be less liquid and prices more volatile.
• Illiquid investments: Valuations of privately held investments are inherently uncertain, may fluctuate over short periods, and may differ materially from realized values.
• Interest rate fluctuations: Floating interest rates on loans can have a substantial negative impact on investments, common stock value, and return on invested capital.
• Dependence on investment adviser: Future success depends on the investment adviser's ability to locate suitable investments and monitor them effectively.
• Conflicts of interest: The investment adviser and its affiliates may have obligations to other clients, potentially leading to conflicts in investment allocation.
• Cybersecurity incidents: Dependence on communication and information systems of the investment adviser and third-party service providers to prevent cybersecurity incidents.
• Asset coverage requirements: Failure to maintain the 150% asset coverage ratio could limit the ability to issue senior securities or make distributions.
• Covenant compliance: Failure to meet covenants under credit facilities could lead to acceleration of outstanding debt and other obligations.
• Dilution risk: Future issuance of common stock at a price below net asset value per share could result in immediate dilution to stockholders' interests.

Future Outlook

The company expects to fund a portion of its investments through future borrowings and may obtain borrowings under other credit facilities and from issuances of senior securities. It may also issue common stock to finance operations and intends to make distributions on a quarterly basis to stockholders.

Management Comments

• We expect to generate current income through the receipt of interest payments, as well as origination and other fees, capital appreciation and dividends.
• We actively monitor and manage our portfolio with regard to individual company performance as well as general market conditions.

Industry Context

The company operates as a direct lender targeting debt investments in privately held, lower middle market companies (enterprise values between $50 million and $350 million). It primarily focuses on originating senior secured loans with floating interest rates (SOFR plus a spread). The industry is characterized by relatively illiquid investments and relies on active portfolio management and credit risk assessment, with performance susceptible to changes in interest rates and macroeconomic conditions.

Corporate Governance

Legal Proceedings

• The company, WhiteHorse Advisers, and WhiteHorse Administration are not currently a party to any material legal proceedings, though they may be involved in litigation incidental to ongoing operations.

Related Party Transactions

• WhiteHorse Advisers (Investment Adviser) manages day-to-day operations and provides investment management services, receiving base management fees and incentive fees.
• WhiteHorse Administration (Administrator) provides office facilities, equipment, and administrative services, receiving allocable overhead reimbursement.
• The company has a license agreement with an affiliate of H.I.G. Capital to use the WhiteHorse name.
• WhiteHorse Advisers and its affiliates may have other clients with similar or competing investment objectives, leading to potential conflicts in investment allocation.
• Sold $24.18 million of investments to STRS JV for the three months ended September 30, 2025, and $64.03 million for the nine months, recognizing net realized losses.
• STRS JV is a joint venture with State Teachers Retirement System of Ohio, co-managed with equal board representation, and the Company provides capital in the form of LLC equity interests and subordinated notes.

Stakeholder Impact

• Shareholders are impacted by decreased net asset value and lower net investment income, but may benefit from the stock repurchase program and temporary incentive fee reduction.
• The Investment Adviser's incentive fees are temporarily reduced for two fiscal quarters.
• Portfolio companies have undergone restructurings, indicating potential challenges for some underlying businesses.

Next Steps

• Continue to fund investments in portfolio companies in accordance with investment objective and strategies.
• Potentially issue additional debt or equity securities to finance operations.
• Implement the stock repurchase program of up to $15.0 million.
• WhiteHorse Advisers will waive and reduce incentive fees for the next two fiscal quarters (ending December 31, 2025, and March 31, 2026).
• Actively monitor and manage the investment portfolio, including assessing risk profiles and grading investments.
• Determine and pay quarterly distributions to stockholders.

Key Dates

Recommendation

The company faces headwinds with declining net investment income and significant realized losses, indicating portfolio stress. However, strategic actions like the CLO securitization, incentive fee waiver, and stock repurchase program demonstrate management's efforts to stabilize and create value. The BDC structure and focus on senior secured loans offer some stability, but the recent performance warrants caution. A 'Hold' recommendation allows investors to observe the impact of these strategic initiatives and the broader market conditions on the company's future performance before making further investment decisions.

Keywords

Business Development Company, BDC, SEC Filing, 10-Q, Financial Results, Investment Portfolio, Senior Secured Loans, Private Credit, Direct Lending, Credit Facility, CLO Securitization, Net Asset Value, Investment Income, Unrealized Gains, Realized Losses, Stock Repurchase, Incentive Fees, Corporate Governance, Risk Management, Lower Middle Market