Good afternoon, everyone. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance fourth quarter and full year 2022 earnings conference call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer. Today's call is being recorded and will be made available for replay beginning at 4:00 P.M. Eastern Time. The replay dial-in number is 402-220-6071. No passcode is required. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two.
It is now my pleasure to turn the floor over to Jacob Moeller of Rose & Company. Please go ahead.
Thank you, operator. Thank you everyone for joining us today to discuss WhiteHorse Finance's fourth quarter 2022 earnings results. Before we begin, I would like to remind everyone that certain statements which are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks and uncertainties, these are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statements. Today's speakers may refer to material from the WhiteHorse Finance fourth quarter 2022 earnings presentation, which was posted to our website this morning.
With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.
Thank you, Jacob. Good afternoon, thank you all for joining us today. As you're aware, we issued our press release this morning prior to market open, I hope you've had a chance to review our results for the period ended December 31st, 2022, which can also be found on our website. On today's call, I'll begin by addressing our fourth quarter and full year results and the current market conditions. Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail. Afterwards, we'll open the floor for questions. This afternoon, we are pleased to report strong results for the fourth quarter and for the full year of 2022.
In 2022, core net interest income totaled $35.5 million or $1.526 per share, representing a 19% increase from 2021's core NII of $29.7 million or $1.405 per share. Full year core NII exceeded regular shareholder distributions by $0.106 per share or $2.5 million. These results demonstrate the continued strength of WhiteHorse's lending platform and strong origination activity, highlighted by $221 million in gross deployments for the year. In Q4, GAAP net investment income and core NII was $11.1 million or $0.476 per share, which more than covered our quarterly dividend of $0.355 per share. This marked our highest quarterly NII since the company's IPO.
Assuming no unforeseen factors emerge, as long as base rates continue to be in excess of 4%, we expect the earnings power of the BDC's current portfolio to exceed our current dividend level. NAV per share at the end of Q4 was $14.30, representing a $0.46 decrease from the prior quarter after accounting for the $0.05 per share special dividend that was paid in Q4. This decline was largely the result of market pricing during the quarter that led to WhiteHorse marking performing assets primarily due to valuation factors. Two of our portfolio companies were marked down due to performance, as I will discuss shortly. Turning to our portfolio activity for the quarter, gross capital deployments in Q4 totaled $49.8 million.
Of this amount, $42.1 million was funded into six new originations, and the remaining $7.7 million was funded into six add-ons to existing portfolio accounts. In addition to the add-ons, there was $4 million in net fundings made for revolver commitments. Of our six new originations in Q4, three were sponsored deals and three were non-sponsored deals with an average leverage of approximately 4x. I note that all these deals were first lien loans and had an average expected all-in rate of 12% and an effective yield of almost 13%, which was higher than the Q3 portfolio average. At the end of Q4, 96.8% of our portfolio was first lien and 100% of our debt portfolio was senior secured. During Q4, total repayments and sales were $40.7 million, primarily driven by three complete realizations.
These largely offset the BDC's originations activity, leading to net deployments of $13.1 million for the quarter. In addition, one deal was transferred to the STRS Ohio JV in exchange for $8 million of cash. With originations slightly outpacing repayments, net effective leverage increased to 1.26x at the end of Q4 as compared to 1.22x at the end of Q3. At this leverage level, we remain at the low end of our target leverage range of 1.25x-1.35x. As I shared on prior calls, so long as our portfolio remains heavily concentrated in first lien loans, which have lower risk than second lien loans, we expect to continue to run the BDC at up to 1.35x leverage.
Regarding the three complete realizations, we earned $2.6 million from interest and prepayment fees and $1.6 million realized gain on the sale of warrants, which generated an aggregate IRR of 18.8% on the $38.1 million of aggregate capital invested in these deals. This attractive return for senior secured loans demonstrates the power of our sourcing model in the lower and mid-markets. Fourth quarter realizations included Escalon Services, CHS Therapy, and Access U.S.A. Shipping. In the first quarter, there's only been one full realization to date, and we anticipate repayment activity to remain relatively low through the first half of 2023. Given the change in marketplace pricing, which I will discuss shortly, we believe that repayments of historical investments will likely allow WhiteHorse to redeploy that capital into higher-yielding investments.
With that in mind, I'll now step back to bring our entire investment portfolio into focus. After $13.3 million in net mark-to-market decreases, $1.6 million in realized gains, $1.6 million of accretion, and the effects of the STRS JV asset transfers, the fair value of our investment portfolio was $760.2 million at the end of Q4. This is down marginally from $764.6 million at the end of Q3. The weighted average effective yield on our debt investments was 12.6% as of the end of Q4, which reflects an increase from Q3 level of 11.4%. The increase was primarily driven by a rise in the portfolio's base rate. Addressing the STRS Ohio joint venture, we continue to utilize our JV successfully.
The JV generated investment income to the BDC of approximately $4 million in Q4 as compared with $3.8 million in Q3. This increase was driven by modestly higher interest and dividend income from the JV in Q4. During the quarter, the company transferred one new deal, Max Solutions Inc., into the STRS JV. As of December 31st, the fair market value of the JV's portfolio was $284.3 million, and at the end of Q4, the JV's portfolio had an average unlevered yield of 11.3% above Q3's average yield of 10.1%. The increase in unlevered yield is primarily due to rising base rates. Additionally, as announced on February 6th, we together with STRS Ohio have increased our capital commitments to the JV by $25 million.
The increased commitment, comprised of an incremental $15 million investment from WhiteHorse Finance and an incremental $10 million investment from STRS Ohio, brings total capital commitments to the JV to $175 million. The JV produces average annual return on equity in the low to mid-teens to the BDC. We believe WhiteHorse's equity investments in the JV provides attractive return for shareholders. Given the JV's return on equity, we look forward to utilizing the new capital commitment as we seek to increase our exposure to highly accretive and conservative earning streams. Transitioning to the BDC's portfolio more broadly, as mentioned earlier, there are some markdowns in the portfolio as a result of the continued broad market price increases in Q4. I will elaborate on specific market dynamics shortly, but would note that we see credit pressures as most acute in consumer-facing companies.
This is partly because many retailers overstocked inventory during the worst of the supply chain disruptions and are now seeking to reduce those inventory levels materially. The vast majority of our deals have strong covenant protection, and we are finding that private equity owners are behaving very well and supporting their credits with new cash or contingent equity as needed. Other than consumer-facing borrowers, the majority of our portfolio is performing well. Notably, our investment in PlayMonster Inc. was marked down $2.7 million during the quarter and remains a troubled asset. Our team is working hand-in-hand with experts in private equity as well as external advisors to turn the company around for sale, and we anticipate that process will take two-three years. Given new information since quarter end, we expect to move the original senior debt for PlayMonster to non-accrual status beginning in Q1.
It is worth noting, however, that even with PlayMonster on non-accrual, less than 1% of the BDC's portfolio at fair value would be on non-accrual status. In the second half of 2022, the general direct lending markets experienced a material correction stemming from a combination of economic weakness, significant inflation, and rising interest rates. Despite these pressures, we are comfortable with the performance and quality of our borrowers. In general, we have observed an increase in borrower revenues, which can be attributed in part to inflationary pressures and higher prices. In about half our portfolio, companies have been able to maintain margins and successfully pass through increased costs with price increases. In the other half, there's been an uptick in leverage, thus far, this has only had a modest impact on our typical borrower's debt service coverage.
While the portfolio is holding up well, we are keeping a careful eye on demand characteristics, especially in the consumer sector, although our exposure to consumer-facing companies represents less than 50% of our portfolio based on fair value. In most of our consumer-facing accounts, we've seen evidence of demand weakness. However, this has not appeared in other areas, including general industrial, B2B, healthcare, TMT, and financial services, which have all been surprisingly strong. Additionally, our portfolio remains mostly represented by non-cyclical or light cyclical borrowers as we hold no direct exposure to oil and gas, auto or restaurants, and a very small exposure in the construction sector. While many borrowers have been dealing with inflationary pressures, in our portfolio, those pressures appear to be moderating, evidenced by lower transportation costs and a stabilization of labor costs.
Regarding rising interest rates, we've always underwritten deals with the expectation that interest rates were gonna rise. We have avoided deals with excessive leverage. During much of 2022, a number of lower mid-market lenders failed to adjust to the move in the broader market and continued to do deals on aggressive terms and surprisingly low price. Through the fourth quarter, we saw these players finally correct to the market. However, we understand that many lenders who underwrote at 6 times or more leverage are now having issues with their portfolio companies' ability to service debt. Meanwhile, WhiteHorse has consistently and deliberately chosen to deploy capital into deals with more conservative terms and with premium pricing, and as such, has built a portfolio that we believe is better equipped than many to withstand a potential economic downturn.
The credit market is largely reset to levels one would expect to see in a downturn. Deals for cyclical companies are no longer being underwritten at aggressive leverage levels, and pricing, even for non-cyclical assets, have seen an upward adjustment. In the mid to lower end of the market, which is our main focus, loans are now being issued on more conservative credit terms with tighter documentation and covenants in addition to increasing prices. From a lending perspective, the current market environment offers exceptionally attractive terms. Nonetheless, we are being cautious in the face of a weakening economy and remain focused on credits with compelling risk-return characteristics. Our base case assumption is that we will see recessionary conditions in upcoming years, and we want to ensure that the companies we invest in can weather that storm.
The investments in our existing portfolio were underwritten at modest leverage levels and generally are well-positioned to withstand even another 100 basis points of rate increases. WhiteHorse is equipped to take advantage of these lender-friendly market conditions as our pipeline activity levels remain high and our three-tier sourcing architecture continues to provide the BDC differentiated capabilities. The overall pipeline is over 150 deals. We continue to derive significant advantages from the shared resources and affiliation with H.I.G., who is a leader in the mid-market. The strength of the pipeline enables us to be conservative in our deal selection. The current primary limiting factor for origination is the BDC's investing capacity. Our strategy and competitive advantages continue to result in momentum in our originations business.
Thus far in the first quarter, the company has closed three new deals, two of which will be transferred to the JV, as well as four add-on transactions. We currently have visibility for several additional new deals, although there can be no assurance that any of these deals will close, nor that the BDC will have capacity to fund any of these deals. We anticipate utilizing the capacity provided by repayments to continue to rotate into higher-yielding assets that, combined with portfolio growth and the potential for increasing our investment in the JV, should ultimately lead to higher income and greater coverage for our dividend. Regarding dividends, as announced this morning, in addition to our normal quarterly distribution of thirty-five and a half cents per share, our Board has declared a special distribution of $0.07 per share for the quarter ended December 31st, 2022.
We will continue to assess future special distributions based on the company's earnings levels and the interest rate environment. The management and board of the BDC will also examine the ongoing improved earning power of the BDC portfolio, given increases in spreads and base rates, to assess whether there should be an increase in the core dividend from $0.355 per share. I should have more detail to share on this topic by the next earnings call. As we start the new year, we remain cautiously optimistic. Despite expectations of economic softening, we believe WhiteHorse is well-positioned to continue executing on our three-tiered sourcing approach and rigorous underwriting standards in the new year and beyond. With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition. Joyson, go ahead.
Thanks, Stuart. Thank you everyone for joining today's call. During the quarter, we recorded GAAP net investment income and core NII of $11.1 million or $0.476 per share, compared with a quarterly distribution of $0.355 per share. In Q3, GAAP NII was $9.8 million or $0.42 per share, and core NII was $8.6 million or $0.372 per share. Q4 fee income increased quarter-over-quarter, up to $1.9 million from $0.4 million in Q3, and was driven by prepayment fees generated from two of the full realizations that occurred during the quarter.
In the fourth quarter, we recorded a decrease in net assets resulting from operations of $1.2 million, a decline of $5.1 million compared to Q3, which was primarily driven by our mark-to-market losses recognized in the portfolio this quarter, partially offset by the realized gains and net investment income earned in excess of our distributions declared. Our risk ratings during the quarter showed that 74.8% of our portfolio positions carried either one or two rating, lower than 83.5% reported in the prior quarter.
The decline was driven by three portfolio companies that were fully realized during the quarter that had been rated a one in the prior quarter, in addition to investments in five portfolio companies which were downgraded to a three rating in Q4. As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a two rating indicates a company is performing according to initial expectations. Regarding the JV specifically, one portfolio company fully realized and one new asset was transferred during the fourth quarter in exchange for cash of $8 million. As of December 31st, 2022, the JV's portfolio held positions in 28 portfolio companies with an aggregate fair value of $284.3 million, compared to 28 portfolio companies at a fair value of $280.9 million in Q3.
The investment in the JV continues to be accreted to the BDC's earnings. As we have noted in prior calls, the yield on the investment in the JV may fluctuate period over period as a result of a number of factors, including the timing and amount of additional capital investments, the changes in asset yields in the underlying portfolio, as well as the overall credit performance of the JV's investment portfolio. Turning to our balance sheet. We had cash resources of approximately $26.3 million at the end of Q4, including $16.8 million restricted cash. As of December 31st, 2022, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 174.7%, which is above the minimum asset coverage ratio of 150%.
Our Q4 net effective debt to equity ratio after adjusting for cash on hand was 1.26x as compared to 1.22x in the prior quarter. Before I conclude and open up the call to questions, I'd like to again highlight our distributions. On November 14, 2022, we declared distribution for the quarter ending December 31st, 2022 of $ thirty-five and a half cents per share to stockholders of record as of December 21st. The dividend was paid on January 4th, 2023, marking the company's 41st consecutive quarterly distribution. This speaks to both the consistent strength of the platform as well as our resilient deal sourcing capabilities in being able to create a well-balanced portfolio generating consistent current income.
In addition to this quarterly distribution, we did declare a special distribution of $0.05 per share for stockholders of record as of October 31st, 2022. The distribution was paid on December 9th, 2022. Inclusive of this special distribution, total distributions paid in 2022 amounted to $1.47 per share. Finally, this morning we announced that our board declared our first quarter distribution of $0.355 per share to be payable on April 4th, 2023 to stockholders of record as of March 24th, 2023. This will mark the company's 42nd consecutive quarterly distribution paid since our IPO in December 2012, with all distributions consistent at the rate of $0.355 per share per quarter. In addition to the quarterly distribution, our board declared a special distribution of $0.07 per share.
Timing of this special distribution is concurrent with the Q1 regular dividend and is to be payable on April 4th, 2023 to stockholders of record as of March 24th, 2023. As we've said previously, we will continue to evaluate a quarterly distribution and future special distributions both in the near and medium term based on the core earnings power of our portfolio, in addition to other relevant factors that may warrant consideration. With that, I'll now turn the call over to the operator for your questions. Operator?
Thank you, sir. The floor is now open for your questions. If you would like to ask a question at this time, please press star one. If you need to remove yourself from the queue, you may do so by pressing star two. Again, to ask a question, please press star one. Our first question will come from Mickey Schleien with Ladenburg Thalmann.
Yes. Good afternoon, everyone. Stuart and Joyson, thanks for your really thorough remarks. It's quite helpful. I just have a couple of questions. Could you give us a sense of where the cash interest coverage ratio was of the on-balance-sheet portfolio based on fourth quarter interest rates?
Joyson, do you have that information or is that something we'd need to get for a later sharing?
The cash interest coverage ratio on the underlying portfolio... Apologies, Mickey, we don't actually have that readily available. Let us see if we can try to get this for you during the call.
Okay. Meanwhile, could you tell us what kind of trends you're seeing in revenues and EBITDA of the on-balance-sheet portfolio and where the average EBITDA level stands today?
Mickey, we just completed a full portfolio review for all the deals in our organization, both performing and troubled. The ratio that we saw compared to closing leverage was about 40% of our deals are experiencing higher EBITDA and have lower leverage than closing. About 40% of our deals have lower EBITDA and higher leverage than closing, and about 20% of our deals are about static with closing leverage and EBITDA levels. Very balanced performance with the caveat being that the consumer-facing accounts have seen anywhere from moderate to severe demand decreases and leverage on those consumer-facing accounts is up significantly.
Okay, I understand. Thanks, Stuart. My last question. If I'm not mistaken, you have some unsecured notes due this year. Just curious whether the terminology and the credit facility will allow you to repay those from the credit facility or will you have to divest some assets to pay those off?
We have the availability under our existing credit facility to borrow to replace
The unsecured notes in their entirety. Whether we will do that under our secured facility or whether we will issue new unsecured notes has not yet been determined. Again, we do have the ability under our facility to fund the full amount that is maturing, without having to sell any assets.
Okay, that's helpful. That's it for me. Joyson, I'll follow up with you on the cash interest coverage ratio a little later today.
Thanks, Mickey.
Thank you, Mickey.
Thank you. Our next question comes from Bryce Rowe with B. Riley.
Thanks. Good afternoon. wanted to maybe start on the comments you just made to Mickey's question there, Stuart. the portfolio review you just finished, the financials that you get from the portfolio companies, were they as of the end of September or end of December?
The vast majority of our companies, because they're mid-market and lower mid-market, we get reporting that is quicker than what you see in the upper mid-market and large cap deals. We timed our portfolio review this week because the vast majority of the companies had already reported their December numbers to us. Not for all the companies, but I would say for over 90% of our companies, we had year-end results.
Okay. That's helpful. And certainly reassuring to know that. Around the dividend, Stuart, you know, you obviously in your prepared remarks talked about, you know, the potential for an increase, you know, and some discussion around a dividend increase, you know, at the board level. What would kind of put you in a position to actually increase as opposed to maybe taking, you know, a construct of a base plus a supplemental that we've seen many BDCs employ here?
Yes. What we're looking at is we're looking at the earnings health of the overall portfolio, offset by any accounts that we think have a risk of going on non-accrual. As I mentioned already, one of our accounts will go on a non-accrual in Q1, although it'll be a very small position in the overall portfolio. If we determine that based on the term structure of interest rates and the strength of the portfolio that we can consistently generate returns above the thirty-five and a half cents, then the board and management will probably be okay with a long-term increase to the base dividend. If we conclude that there's gonna be more variability quarter to quarter in earnings, then we would probably stick with the thirty-five and a half cents, and then just declaring supplemental distributions when the earnings are higher.
Based on the modeling that we're doing so far, it does look like the BDC, as long as interest rates certainly stay above 4%, that the BDC should be able to generate income in excess of the current dividend level.
Okay. Then maybe a follow-up to that. You know, as we think about the portfolio yield, the weighted average portfolio yield having climbed with higher base rates, is there a timing mismatch in terms of when assets reset in terms of a rate versus when liabilities reset?
Not much of one. Joyson, do we really have any delay there at all?
Yeah. That's correct, Stuart. Not much. The way to think about it, Bryce, is the majority of our portfolio assets either reset monthly or quarterly. Then with respect to draws on the borrowings on the facility, that would in theory reset quarterly in conjunction with the waterfall.
Okay. Okay. Appreciate the comments. That's it for me.
Thanks, Bryce.
Thank you.
Thank you. Once again, if you would like to ask a question, please press star one. Our next question comes from Erik Zwick with Hovde Group.
Good afternoon. First, just a bit of a follow-up on the kind of the discussion on the dividend from that prior question. If I look at the futures curve for three-month LIBOR, it looks like, you know, it potentially falls below 4%, sometime in the second or third quarter of 2024. Not this year, but, you know, six quarters out, not that far from here. Just curious about, you know, is there anything you could do or strategies you have in place between now and then to potentially improve earnings? Because as you mentioned, you're considering increasing the regular dividend, and my guess is you would not wanna have to cut that at any point. Just trying to kind of connect the dots there.
Maybe, you know, you've got a different view on market rates and think they'll stay higher longer than the market's currently anticipating. Just curious if you could provide some color there.
Well, Erik, we're in a very, very attractive spread environment right now. When you take base rates and spreads, you know, senior debt is yielding 11.5%-13%, which is a world away from where we were a year and a half ago. I don't personally believe that spreads will stay this high for an extended period. I think this is evidence of a disrupted market with disrupted liquidity and people being very concerned about economic softening in the marketplace. We also look at the yield curve. The things that we're doing to improve earnings are, number one, operating at the 1.25-1.35 leverage, and number two, we've increased our allocation to the JV, which will create more core income coming out of the JV in the future.
As I mentioned on my prepared remarks, the IRRs on the JV investment are in the low to mid-teens. We just wanna run sensitivity downside cases, including with SOFR going below 4% to make sure that if we increase the dividend, that that dividend should be able to be maintained through at a minimum, an extended period of projected performance. Again, if we don't believe we can do that, then we'll stick with the $0.355 and do supplemental dividends as we did this quarter.
I appreciate the additional color there.
By the way, if our analysts have views as to which is a better path, if you know, you understand the risks and rewards of you know, what we can do, we'd be very happy to take your feedback from both analysts and shareholders as to what you guys think the right path is. Definitely during the current period with current rates and current base rates, we are seeing excess income as evidenced by the $0.07 special dividend this quarter.
Got it. Just looking at the concentration of the portfolio, the mix between sponsored and non-sponsored, you know, for a number of years that sponsored portion was growing steadily. It did come back a little bit here last year in 2022. I'm curious if that was a reflection of intent on your part or maybe just market dynamics, and how you would expect that to trend in future quarters.
In general, our originations activity is about 75% sponsor and 25% non-sponsor. But for the BDC balance sheet, we're only including assets that are priced at 700 or higher, SOFR 700 or higher. To the extent we're doing sponsor assets that are priced at 650 or 675, which historically would have gone on the BDC balance sheet, but in today's market environment they're not, those deals, if they don't fit in the JV, don't fit into the BDC. The BDC gets more of the non-sponsor deals, which have a generally higher yield profile. Sponsor deals in today's market, we see pricing in a range of 650-750, and non-sponsor deals in today's market, we see pricing at a range of 700-900.
Pretty much all the non-sponsor deals we're looking at are priced at a level that fits onto the BDC balance sheet, assuming that that balance sheet has room.
That makes sense. I appreciate the clarity. Just one last one from me on the kind of credit quality front. I'm curious, have you seen any uptick in amendment requests from any of your portfolio companies?
Absolutely. We have companies. Again, the companies that have been affected by the consumer-led slowdown have tripped covenants. Where covenants have been tripped, we are generally looking for a combination of equity support and higher rate. That's the beauty of having covenants, is that when you trip a covenant, you're able to get both credit protection to the downside and typically a higher rate. As I mentioned in my prepared remarks, the private equity firms that own the companies we've lent to have been remarkably supportive. I would say with the exception of PlayMonster, where the private equity firm walked away from the company because of fraud, pretty much every heavily impacted private equity-based account we've had, has demonstrated support for the company with either cash or contingent equity. It's been pretty much universal.
Thanks for taking my questions today.
No problem. Have a good day, Erik.
Thank you. Our next question comes from Robert Dodd with Raymond James.
Hi, guys. I have a couple of housekeeping ones first, if I can. On the prepaid fees, or prepaid and related fees, right, I think, Stuart, in your prepared remarks, you said I think it was $2.6 million from a couple of assets. The other income line is $1.9 million. Is it fair to say that maybe one and a half of that was in other income and then one, you know, just over $1 million was embedded explicitly in interest income?
Joyson I'll pass that to you in terms of the characterization of how the numbers work through.
Yeah, Robert, fee income for Q4 was $1.9 million. As we mentioned, that was predominantly due to prepayment fees that were generated on Escalon Services and CHS Therapy.
Got it.
Was there any accelerated amortization related to those...
There was
that showed up.
Yeah
... interest income? Yeah. How much?
That is correct. The accelerated amort, about $700K.
Got it. Thank you. On how much, in terms of talking about dividend policy and everything, how much taxable spillover or do you have currently? Because obviously, it starts as quite high, and that could affect your decision-making as well.
As of the end of Q4, the spillover was a little over $24 million. Based on that number related to our distribution requirement for the tax year 2022, we do not envision a required special dividend. As Stuart alluded to earlier in regards to 2023 and forecasted potential earnings, we do expect earnings in excess of our distributions. That, as he had mentioned before, is gonna factor into our determination on how we do dividends going forward, i.e., do we increase the regular dividend or do some supplemental dividends.
Yeah. Yeah.
during the year.
one of your response to Mickey's question on EBITDAs, Stuart, I mean, you said 40% of the portfolio is has EBITDAs that's lower than under at underwriting. If I look at your investment ratings, you've got 25% that's category three, four, or five, which. You know, there's a discrepancy there between 40 and 25. Is it fair to say that a portion of those portfolio companies that have lower EBITDA than at close were expected to have lower EBITDA? I mean, can you give us, you know, any reconciliation between the 25% that are rated, you know, higher risk, so to speak, but the 40% that have lower EBITDA?
It's a matter of magnitude, Robert. If we did a deal at four times leverage, and it's currently at four and a quarter times leverage, that would be a part of the 40% where the EBITDA is down and the leverage is up. Going from four to four and a quarter times leverage would not trigger a company to become a three. The company would need to materially underperform before that would happen. If the leverage had gone from four times to, call it, five and a half times, then it would probably become a three. For small decreases in EBITDA and small increases in leverage, those assets are generally still rated a two.
Got it. Thank Thank you for that clarification.
No problem.
The last one from me. I mean, you've mentioned, obviously that the sponsors are being quite responsive, with the exception of PlayMonster, when necessary. How are you looking at the for the non-sponsor book? Obviously, there is no sponsor to put in more cash or contingent equity. So how are you evaluating those non-sponsor businesses that may be having a few issues in this situation? Are the owners willing to, you know, the equity holders, willing to step up even though they don't necessarily obviously have a fund or anything like that? I mean, so what's how's the non-sponsors segment looking in terms of cash needs, and are they getting it?
That's a really good question, Robert. The answer is that there is not a single answer. In many cases, non-sponsor companies are owned by either very wealthy individuals or wealthy family offices. In those cases, we are generally finding that the owners are injecting capital into the companies the same way private equity firms are. There are other non-sponsor companies that are owned by entrepreneurs that don't have deep pockets and don't have the wherewithal to support their companies through the economic turbulence that is going on right now, especially in the consumer sector. In those companies, we are generally willing to provide incremental capital. In return for that incremental capital, we take minority and/or majority equity stakes in the company.
A part of non-sponsor lending, where there are owners that either can't or won't support their companies, is playing the long-term game of investing those companies during the downturn, getting equity in those companies during the downturn, and then managing those companies back towards economic health when a downturn doesn't exist, and then generating, hopefully, nice equity gains off of those equity positions we took in the downturn. That's again, less true in sponsor deals because the sponsors are almost uniformly willing to put up equity to protect a good company. On the non-sponsor side, it really breaks into two camps, where, you know, just directionally, about half of the companies have owners that can support the companies, and about half the companies have owners that can't support the companies.
Thank you for that. Appreciate it.
No problem.
Appreciate it.
Thank you. At this time, we have no further questions in queue. I'll turn the call back over to management for any additional or closing remarks.
I'd justu say in closing that the market environment that we're in right now is a little bit more liquid than it was in Q4. We've seen pricing moderate in Q1 by about 25 basis points. If that held on, that would imply that the mark on performing assets in Q1 could be a little higher than the mark was in Q4. Again, we mark to whatever the market prices are. And in Q4, we saw especially the lower mid-market adjust, as I said on my prepared marks, as a number of lower mid-market lenders finally adjusted to the market shift. It's an attractive market environment right now. Modest leverage, limited add backs and synergies in the analyses that our buyers are doing.
We are looking forward to putting money to work in what is a, attractive market environment so far of 2023, which again, has worked out to be pretty much as attractive as Q2, Q3, and Q4 of 2022. With that, hope we've given you transparency. Anything that you wanna hear about on the next call, either shareholders or analysts, please let us know so we can make sure that these calls are as useful to everybody as, they possibly can be. Thank you for taking the time.
Thank you. This concludes today's WhiteHorse Finance fourth quarter and full year 2022 earnings conference call. You may disconnect your line and have a wonderful day.