Q3 2025 Earnings Call Contradictions: Fee Waivers, Dividend Uncertainty, and Asset Recovery Outlook

Date of Call: None provided

Financials Results

• Revenue: GAAP net investment income and core NII of $6.1M in Q3 2025, down from $6.6M in Q2 2025
• EPS: $0.263 per share in Q3 2025, compared with $0.282 per share in Q2 2025

Guidance:

• Board reset quarterly base distribution to $0.25 per share (Q4-based), payable Jan 5, 2026 (record Dec 22, 2025).
• Declared special distribution of $0.035 per share (record Oct 31, 2025; payable Dec 10, 2025).
• Advisor voluntarily reduced incentive fee on NII from 20% to 17.5% for two quarters ending Dec 31, 2025 and Mar 31, 2026; future extensions subject to board/manager decision.
• Board approved share repurchase program up to $15M; repurchases to be opportunistic and accretive.
• Supplemental distribution framework: lesser of 50% of earnings above base or amount that limits NAV decline to $0.15 over two quarters.

Business Commentary:

* Earnings and Distribution Adjustment: - WhiteHorse Finance reported GAAP net investment income and core NII of $6.1 million, or $0.263 per share, for Q3, compared to $6.6 million, or $0.282 per share, in Q2. - The company reset its quarterly distribution to $0.25 per share, reflecting an implied 8.8% annualized yield. - The adjustment was due to the onset of interest rate cuts, market spread pressure, and markdowns on certain credits.

• Portfolio Performance and Write-Downs:
• The company's NAV per share decreased by 3.6% from the prior quarter, impacted by net realized and unrealized losses totaling $6.7 million, or $0.29 per share.

• Significant write-downs were noted in Alveria and Camarillo Fitness due to underperformance and restructuring expectations.

• Share Buyback Program and Discount:

• WhiteHorse Finance approved a share buyback program of up to $15 million, with the current share price level implying a 40% discount to book value.
• The buyback is aimed at capturing shareholder value given the significant discount of the company's stock price relative to its book value.

• Incentive Fee Reduction:
• The advisor agreed to reduce the incentive fee on net investment income from 20% to 17.5% for the next two fiscal quarters, offering additional financial support for distributions.
• This temporary reduction aligns interests with shareholders amid challenging market conditions and reflects the board's commitment to supporting the company's financial stability.

Sentiment Analysis:

Overall Tone: Negative

• Management: "Our results for Q3 of 2025 were disappointing"; Q3 recognized $6.7M of net realized and unrealized losses ($0.29/share); NAV fell to $11.41, down ~3.6% QoQ; reset dividend to $0.25 and reduced incentive fee to shore up earnings; announced up to $15M buyback to capture discount to book.

Q&A:

• Question from Melissa Wedel (JPMorgan): Should we think of $0.25 as the new base dividend or will it fluctuate quarter to quarter? Also, why reduce the incentive fee to 17.5% for two quarters—why that level and timeframe?
  Response: Management set $0.25 as a new long-term base based on sensitivity analysis of lower rates/spread compression; the 2.5% incentive fee reduction to 17.5% is a temporary two-quarter measure to provide earnings cushion, with any extension decided by the board/manager based on future performance.

• Question from Robert Dodd (Raymond James): What are realistic expectations for fair-value recovery of troubled assets (timing/outcomes)? Also, how do sponsor vs non-sponsor outcomes compare, and what's driving current spread compression in the mid-market?
  Response: Turnarounds are typically multi-year; most non-accruals likely remain so for 12–24 months with stabilization possible thereafter; historically non-sponsor deals show fewer defaults and lower leverage (current non-accruals are primarily sponsor deals); spread compression driven by larger market players moving downmarket and new aggressive entrants.

• Question from Christopher Nolan (Lattenberg Thoman): If EPS continues to underperform beyond Q1 2026, what is the likelihood the incentive fee reduction will be extended? And will the company be aggressive on share repurchases given slow deal flow?
  Response: The board indicated additional forgiveness of the incentive fee is possible if earnings underperform; the $15M repurchase program is intended to be opportunistic and will be used when repurchases are accretive to shareholders.

Contradiction Point 1

Fee Waiver and Dividend Strategy

It involves the company's strategy regarding fee waivers and dividend payments, which are crucial for shareholder remuneration and confidence in the company's financial health.

Can you explain the fee waiver amount and duration? - Melissa Wedel (JPMorgan)

2025Q3: The fee waiver was decided between the board and manager to align interests with shareholders and provide earnings support. The waiver is for the next two quarters, with potential for extension based on future BDC performance. - Stuart Aronson(CEO)

How long will the 1-3% fee waiver last into 2026? - Christopher Nolan (Ladenburg Thalmann)

2025Q2: We expect that all fees would remain in place for the remainder of 2025 and 2026. It's an annual contract. - Joyson Thomas(CFO)

Contradiction Point 2

Dividend Strategy and Consistency

It involves the company's dividend strategy and consistency, which are critical for shareholder expectations and the company's reputation.

Is the $0.25 per share dividend the new base level or will it fluctuate? - Melissa Wedel (JPMorgan)

2025Q3: The new base dividend of $0.25 is set based on market conditions and interest rates, considering BDC's earnings power. It is intended to be a consistent, long-term base dividend for the company if projections are correct. - Stuart Aronson(CEO)

Does spillover income make you reluctant to adjust the dividend in the current spread environment? - Melissa Wedel (JPMorgan)

2025Q2: We expect BDC dividend in Q2 to be $0.25 per share. On a full year basis, we expect full year 2025 dividend to be approximately $1.00 per share. - Joyson Thomas(CFO)

Contradiction Point 3

Dividend Strategy and Consistency

It involves the consistency and expectations of dividends, which are critical for investor confidence and company financial planning.

Is the new $0.25 per share dividend a fixed base or will it fluctuate? - Melissa Wedel (JPMorgan)

2025Q3: The new base dividend of $0.25 is set based on market conditions and interest rates, considering BDC's earnings power. It is intended to be a consistent, long-term base dividend for the company if projections are correct. - Stuart Aronson(CEO)

What is the potential near-term effect of reinstating Telestream to accrual status? - Melissa Wedel (JPMorgan)

2025Q1: We expect dividends per share to exceed $1.52 in 2025, which is an increase from the $1.44 per share that we have distributed through the first half of 2022. This increase is based on strong core earnings growth as we continue to benefit from the turnaround at Telestream and other improvement in our portfolio. - Stuart Aronson(CEO)

Contradiction Point 4

Fair Value Recovery and Asset Capacity

It involves expectations regarding the recovery of fair value in stressed assets and their impact on BDC capacity, which directly affects the company's financial outlook and strategic decisions.

What are your expectations for fair value recovery from stressed assets and their impact on BDC capacity? - Robert Dodd (Raymond James)

2025Q3: Turnarounds are a multi-year effort. While improvements are being seen in most credits, a return to accrual status may take 12-24 months. Recovery of these assets can potentially increase BDC capacity. - Stuart Aronson(CEO)

Can you clarify the short-term impact of returning Telestream to accrual status? - Melissa Wedel (JPMorgan)

2025Q1: We expect Telestream to be in accrual status by the end of May 2023, which would increase our asset capacity by approximately $95 million. And we remain confident in our ability to grow our portfolio this year and next. - Stuart Aronson(CEO)

Contradiction Point 5

Spread Stability and Market Conditions

It involves the stability of spreads and the impact of market uncertainties, which are crucial for understanding the company's financial outlook and risk management strategies.

What drives mid-market spread compression? - Robert Dodd (Raymond James)

2025Q3: Mid-market spread compression is driven by large market players entering the mid-market due to reduced volume in their segment, and new organizations deploying aggressive pricing strategies in the lower mid-market. - Stuart Aronson(CEO)

Can spreads widen as risk perception rises amid market uncertainties? - Mickey Schleien (Ladenburg)

2024Q4: While acknowledging increased volatility and uncertainties, spreads have remained stable from Q4 to Q3 and into Q1 2025. The market's lack of balance between supply and demand, as well as the absence of significant M&A activity, has not induced upward pressure on spreads. - Stuart Aronson(CEO)