WhiteHorse Finance's Q3 2025: Contradictions Emerge on Dividend Strategy, Deal Flow, Tariff Impact, and Investment Capacity

Date of Call: None provided

Financials Results

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

Guidance:

• Board reset quarterly base distribution to $0.25 per share for Q4 (implied 8.8% annualized on Q3 NAV).
• Declared special distribution of $0.035 per share (payable Dec 10, 2025); Q4 base payable Jan 5, 2026 (record Dec 22, 2025).
• Adviser voluntarily reduced incentive fee on net investment income from 20% to 17.5% for two fiscal quarters ending Dec 31, 2025 and Mar 31, 2026; extension discretionary.
• Board approved share repurchase program up to $15M to buy back shares at market prices given >40% discount to book.
• Supplemental distribution formula: lesser of excess quarterly earnings over base distribution and amount that limits NAV decline to $0.15 over two quarters.
• Remaining BDC capacity approximately $40M (pro forma for anticipated Q4 deals ~ $20M).

Business Commentary:

* Dividend Policy and Market Conditions: - WhiteHorse Finance reset its quarterly base distribution to $0.25 per share, representing an implied annualized yield of 8.8% based on Q3 NAV, reflecting the impact of lower interest rates and spread compression. - The decision was necessitated by the current earnings power of the BDC and expectations for lower interest rates and continued spread compression in challenging market conditions.

• Portfolio Performance and Realized Losses:
• The company recognized $6.7 million in net realized and unrealized losses in Q3, affecting NAV per share by $0.29, primarily driven by write-downs in Alberia and Camarillo Fitness.
• 

• The losses were attributed to ongoing restructuring efforts and underperformance in certain portfolio companies.

• Capital Deployment and Market Strategy:

• WhiteHorse Finance had net repayments of $31.2 million in Q3, with gross deployments of $19.3 million offset by repayments and sales of $50.5 million.

• The company focuses on the nonsponsor market due to better risk-return profiles and less competition, with nonsponsored deals pricing at SOFR plus 600 and above.

• Share Repurchase Program:

• The Board approved a share buyback program of up to $15 million, reflecting a significant discount of the company's stock price relative to book value.
• This decision was driven by the belief that share repurchases at current levels are accretive to shareholder value.
  

  Sentiment Analysis:

  Overall Tone: Negative

  • Management: "Our results for the third quarter of 2025 were disappointing." Q3 NAV per share fell to $11.41 (~3.6% quarter-over-quarter). Management recognized $6.7M in net realized and unrealized losses in Q3 and reset the base distribution to $0.25 while the adviser cut its NII incentive fee from 20% to 17.5% for two quarters — actions signaling material earnings and valuation pressure.

Q&A:

• Question from Melissa Wedel (JPMorgan): Should we be thinking about the announced $0.25 per share as the new base level or will it fluctuate quarter-to-quarter outside of the supplemental component?
  Response: Management set $0.25 as the new base based on sensitivity analysis of rates, spreads and earnings power and expects it to be sustainable long-term if market conditions follow current projections.

• Question from Melissa Wedel (JPMorgan): Why did the adviser reduce the incentive fee to 17.5% (from 20%) and why is it limited to two quarters — is there longer-term consideration?
  Response: The Board and manager agreed to forgive 2.5 percentage points for the next two quarters to provide immediate earnings cushion; any further extensions will be decided based on future BDC performance and Board discussions.

• Question from Robert Dodd (Raymond James): What are realistic expectations for fair value recovery from troubled assets and timing for potential recoveries that could help reinstate the dividend?
  Response: Turnarounds are generally multi‑year; management expects most nonaccruals to remain off accrual for 12–24 months, with some accounts stabilizing (e.g., Playmonster) but broad recoveries will be gradual.

• Question from Robert Dodd (Raymond James): Can you comment on track record and outcomes sponsor versus nonsponsor — are returns higher but outcomes worse for sponsor deals?
  Response: Nonsponsor deals typically carry lower leverage, showed fewer payment defaults historically, and current nonaccruals are predominantly sponsor‑backed, indicating stronger relative performance in nonsponsor deals.

• Question from Robert Dodd (Raymond James): Is mid‑market spread compression driven by large players moving downmarket or by existing competitors getting aggressive?
  Response: Compression is driven both by large players moving into the mid‑market and by new aggressive entrants discounting price; lower mid‑market variability is driven by many smaller PE firms competing on price and leverage.

• Question from Christopher Nolan (Ladenburg Thalmann): If EPS/core earnings continue to underperform beyond the next two quarters, is management/Board inclined to further lower the incentive fee?
  Response: The Board would consider additional fee forgiveness if core dividend earnings underperform; any extension will depend on future market conditions and BDC results.

• Question from Christopher Nolan (Ladenburg Thalmann): Given slow deal flow, should investors expect aggressive share repurchases?
  Response: Management will opportunistically repurchase shares up to the $15M authorization while purchases are accretive given the current >40% discount to book, acting only when it materially benefits shareholders.

Contradiction Point 1

Dividend Strategy and Stability

It involves the company's approach to maintaining a stable and reliable dividend policy, which is crucial for investor expectations and shareholder value.

How should we view the new base dividend level for Q4, and will it vary quarter-over-quarter excluding the supplemental component? - Melissa Wedel(JPMorgan)

20251111-2025 Q3: The new base dividend level was set after considering interest rates, deployments, market spreads, and the earnings power of the BDC. It aims to be a long-term reliable quarterly dividend even if interest rates decline as projected. - Stuart Aronson(CEO)

Update on spillover and near-term dividend changes? - Robert Dodd(Raymond James)

2025Q1: The Board is evaluating potential dividend changes, considering future earnings from balance sheet assets, JV income, lower borrowing costs, and potential improvements in accounts like Telestream and MSI. A decision will be made based on the core earnings stream of the BDC. - Stuart Aronson(CEO)

Contradiction Point 2

Deal Flow and Market Conditions

It relates to the company's assessment of the current deal flow and market conditions, which directly impact the BDC's ability to generate new business and maintain its investment capacity.

Are you nearing full investment capacity? What is the potential for fair value recovery from troubled assets? - Robert Dodd(Raymond James)

20251111-2025 Q3: The BDC is close to full capacity, and nonaccrual deals will likely remain so for at least 12 to 24 months. - Stuart Aronson(CEO)

How are bid-ask spreads and market volatility affecting transactions? - Robert Dodd(Raymond James)

2025Q1: The company's pipeline remains strong. Quality of deals is lower, and closure rates are expected to be slower. - Stuart Aronson(CEO)

Contradiction Point 3

Dividend Strategy and Earnings Support

It reflects changes in the company's dividend strategy and the measures taken to support earnings, which are crucial for shareholder expectations and financial stability.

How should we interpret the new base dividend level for Q4, and will it fluctuate quarterly excluding the supplemental component? - Melissa Wedel(JPMorgan)

20251111-2025 Q3: The new base dividend level was set after considering interest rates, deployments, market spreads, and the earnings power of the BDC. It aims to be a long-term reliable quarterly dividend even if interest rates decline as projected. - Stuart Aronson(CEO)

Was American Crafts an exit or a restructuring? - Christopher Nolan(Ladenburg Thalmann)

2025Q2: We continue to focus on maintaining the $0.36 per share dividend rate, which represents a 77% payout ratio of distributable earnings to the overall dividend rate. - Joyson Thomas(CFO)

Contradiction Point 4

Tariff Impact and Consumer Pricing

It involves the company's response to tariff pressures and their impact on consumer pricing, which are critical for understanding the financial and operational effects of external factors.

How will the incentive fee reduction change after the first two quarters? - Christopher Nolan(Ladenburg Thalmann)

20251111-2025 Q3: Companies are raising prices in response to tariffs not fully absorbed by suppliers. - Stuart Aronson(CEO)

Which parts of the portfolio are affected by tariff pressures, and what steps have been taken to address this? - Melissa Wedel(JPMorgan)

2025Q2: Companies are negotiating with suppliers to absorb tariff amounts, with about half the amount being absorbed in many cases. - Stuart Aronson(CEO)

Contradiction Point 5

Mandate Activity and Investment Capacity

It pertains to the company's investment capacity and mandate activity, which are important indicators of financial health and growth potential.

Are you near full investment capacity? Is there potential for fair value recovery in troubled assets? - Robert Dodd(Raymond James)

20251111-2025 Q3: The BDC is close to full capacity, and nonaccrual deals will likely remain so for at least 12 to 24 months. - Stuart Aronson(CEO)

What explains the increased mandate activity post-quarter-end? - Melissa Wedel(JPMorgan)

2025Q2: The BDC balance sheet is expected to be fully deployed this quarter, with a balance between repayments and new mandates. - Stuart Aronson(CEO)