Good afternoon. My name is Chloe and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance first quarter 2026 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 a replay is available through a webcast in the investor relations section of our website at whitehorsefinance.com. 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 at any point your question has been answered, you may remove yourself from the queue by pressing star two. If you should require operator assistance, please press star zero.
It is now my pleasure to turn the call over to Robert Brinberg of Rose & Company.
Thank you, Chloe, and thank you everyone for joining us today to discuss WhiteHorse Finance's first quarter 2026 earnings results. Before I begin, I'd 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. Because 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 first quarter 2026 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, Rob. Good afternoon, everyone, and thank you for joining us today. As you're aware, we issued our earnings this morning before the market opened, and I hope you've had a chance to review our results for the period ending March 31st, 2025, which can also be found on our website. On today's call, I'll begin by addressing our first quarter results and current market conditions. Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail, after which we will open the floor for questions. At a high level, our first quarter results reflected three main themes. One, previously flagged credit marks drove net realized and unrealized losses for the quarter. Two, core earnings moderated, reflecting a lower portfolio yield in Q1, driven in part by one additional investment being placed on non-accrual. Three, share repurchases provided a meaningful offset through NAV accretion.
More specifically, our results for the first quarter of 2026 included net realized and unrealized losses that were largely consistent with the markdown we had forewarned investors about on our last shareholder call. As we shared on that call, we had three accounts where we expected markdowns this quarter, Honors Holdings, Outward Hound, and Lumen LATAM. Those positions drove the bulk of our net realized and unrealized losses for the quarter. Q1 GAAP net investment income and core NII were $5.6 million or $0.253 per share, compared with Q4 GAAP net investment income and core NII of $6.6 million or $0.287 per share. NAV per share at the end of Q1 was $11.47, compared with $11.68 at the end of Q4, a decrease of approximately 1.8%.
The change in NAV reflected the net realized and unrealized losses of approximately $0.284 per share, partially offset by share repurchases that were accretive to NAV by approximately $0.08 per share. NAV was also impacted by distributions paid during the quarter, which included a $0.01 per share of supplemental dividend. We will continue our distribution policy framework that was previously discussed, where the company intends to distribute a quarterly base distribution of $0.25, as well as make potential supplemental distributions above the base level in the future pursuant to our distribution policy. Turning to shareholder value, our shares have continued to trade at a meaningful discount to NAV, and both management and the board remain focused on actions that we believe can help enhance shareholder value over time.
That focus has included disciplined portfolio positioning, selective capital deployment, accretive share repurchases, and steps to support distributable earnings. As we discussed on our last call, the board expanded the company's share repurchase program, and late in the first quarter, we also implemented a 10b5-1 plan to allow us to continue executing on that authorization outside of our normal trading window in accordance with the plan's terms. We remained active under the program during Q1 and into Q2, those repurchases were accretive to NAV, as I mentioned earlier. Joyson will provide additional detail on the quarter's repurchase activity. More broadly, while our stock continues to trade at a substantial discount to book value, we believe repurchasing shares remains one of the most attractive uses of capital available to us.
At the same time, we're continuing to balance that opportunity against new investment activity and our targeted leverage levels. In addition, the advisor has agreed to extend its temporary voluntary waiver of the incentive fee for the second quarter of 2026, reducing the applicable fee rate from 20% to 17.5%. We view that extension as another constructive step to support distributable earnings and shareholder value. As we have said previously, this fee waiver is temporary, and any decision regarding future periods will be revisited based on the then current conditions and in consultation with the board of directors. We have been encouraged by the alignment shown through open market purchases by certain officers and directors, which we believe further reflects confidence in the underlying value of WhiteHorse Finance.
Turning to our portfolio activity, we had gross capital deployments of $25.4 million in Q1, which was more than offset by repayments and sales of $38 million, resulting in net repayments of approximately $12.6 million before the effects of transferring assets into the STRS JV. Gross capital deployments consisted of three new originations totaling $18.5 million, and the remaining accounts were deployed to fund add-ons to 12 existing investments. In addition, there was $0.7 million in net fundings on revolver commitments during the quarter. Of our three new originations in Q1, 1 was a non-sponsor deal and two were sponsored. The sponsored deals are targeted to be transferred to the STRS JV. Our new originations in Q1 had an average leverage of approximately 5.5x EBITDA.
All of our Q1 deals were first lien loans. Pricing reflected competitive market conditions, and our focus remained on structure and credit quality. Total repayments and sales were primarily driven by complete or partial realizations in three portfolio companies, Trimlite, Monarch Collective Holdings, and Lumen LATAM. During the quarter, the BDC transferred two new deals and two existing investments to the STRS JV, totaling $18.9 million. At the end of Q1, the STRS JV portfolio had an aggregate fair value of $327.1 million and an average effective yield of 9.9%. We continue to successfully utilize the STRS JV and believe WhiteHorse Finance's equity investment in the JV continues to provide attractive returns for our shareholders.
After net repayments and JV transfer activity, as well as realized and unrealized losses recognized during the quarter, total investments decreased from the prior quarter by $35.6 million to $543 million. This compares to our portfolio's fair value of $578.6 million at the end of Q4. During the quarter, we recognized $4.7 million in net realized losses and approximately $1.6 million of net unrealized losses for an aggregate total of $6.3 million in net realized and unrealized losses in Q1, approximately $0.284 per share.
The net mark-to-market losses were primarily driven by a $2.8 million unrealized loss in Honors Holdings, a $2.1 million unrealized loss in Outward Hound, partially offset by a $2.6 million gain from the reversal of unrealized losses on investment realizations and approximately $0.4 million of net markups across the portfolio. In addition, we recognized realized losses primarily driven by $3 million from Lumen LATAM sale, as well as $1.1 million from a foreign exchange loss on the repayment of the Trimlite Canadian term loan and $2.2 million from the sale of the Therm-O-Disc asset. Importantly, the markdowns on Honors Holdings, Outward Hound, and Lumen LATAM were the same three credits we identified for investors on our prior call as situations on which we expected to occur markdowns on the quarter.
At the end of Q1, 98.8% of our debt portfolio was first lien, senior secured, our portfolio continued to reflect the balanced mix of sponsor and non-sponsor investments, with non-sponsor representing approximately 38% of the portfolio at fair value. The weighted average effective yield on our income-producing debt investments decreased to 10.8% at the end of Q1 compared to 11% at the end of Q4. The weighted average effective yield on our overall portfolio also decreased to 8.7% at the end of Q1 compared to approximately 9.1% at the end of Q4, which was affected by the one new investment being put on non-accrual during the quarter.
With respect to non-accrual status, Outward Hound was placed on non-accrual during the quarter. With the final sale of our residual position occurring this quarter, Therm-O-Disc was removed from our non-accruals. Excluding the STRS JV, non-accrual investments represented 3.6% of the total debt portfolio at fair value, compared with 2.4% at fair value at the end of the prior quarter. The four issuers on non-accrual at quarter end were Honors Holdings, Newsc ycle Solutions, Outward Hound, and PlayMonster. As always, we continue to do actively managed activities on our underperforming credits, leveraging our dedicated restructuring resources and the broader capabilities of H.I.G. With respect to Outward Hound, we continue to work with the borrower and believe a debt restructuring is likely in coming months, with an expectation that part of that asset will return to accrual status based on the new structure.
Given the complexity of the process, we believe that outcome is more likely to occur next quarter than this quarter, although there can be no assurance until the restructuring is completed as to what will happen and when. On Honors Holdings, also known as Camarillo Fitness, the company continues to struggle, and we do not yet know whether we will have a further markdown this quarter. Lumen LATAM is now completely exited, so that situation is resolved. At this time, we are not aware of any further material markdowns beyond what I have just described. Aside from the credits on non-accrual, our portfolio continues to perform well. In our portfolio reviews on any companies where there is underperformance, we are seeing private equity owners support those credits with new equity, which is an indication from the private equity firms that they have confidence in those companies and borrowers.
I would also note that consistent with what we shared last quarter, we have modest exposure to the internet or software companies. The BDC software exposure across six portfolio names represents approximately 11.1% of the portfolio at cost and 9.9% at fair value. Market conditions remain competitive, although for several months geopolitical events had slowed the M&A market, with transaction volume being lower than normal. Over the past few weeks we've seen a recovery in deal flow volumes, and our team is currently working on deals at close to 100% of capacity. Negative press around direct lending and private credit has resulted in a shift in supply and demand, particularly on larger deals.
On the smaller deals as a result, pricing is up 25 to 50 basis points, on the midsize and larger deals, pricing is up more like 50 to 100 basis points, with most of that movement being on sponsor side where prices had compressed and we had previously shared with the market that pricing was very aggressive. In the lower mid-market, we're seeing pricing of SOFR 475 to 525. In the mid-market, sponsor pricing is SOFR 500 to 550. In the larger cap market, pricing of SOFR plus 500 to 575. The non-sponsor market remains stable at pricing of SOFR plus 600 and above. We are also highly focused on minimizing liability management execution risk in new investments and our portfolio.
For investors less familiar with the term, LME risk refers to the risk that a borrower can move assets away from the existing lenders and pledge them to new lenders, effectively subordinating the original senior debt. We are working to ensure that structures and documentation provide adequate protection against this risk. Looking forward, there's too much geopolitical and consumer sentiment uncertainty to have any clarity as to where the market is going to be in the balance of the year. What I would say is that the mid-market and lower mid-market that we participate in continue to function. Other than the slight price increase and conservatism on credit standards, including extremely high conservatism on anything software related, the markets are functioning. In the non-sponsor market, conditions remain stable and less competitive than in the sponsor market.
Average leverage is approximately 4x to 4.5x . Pricing continues to be generally at SOFR plus 600 and above with our non-sponsor portfolio performing as well as or better than our sponsor portfolio. We continue to focus significant resources on the non-sponsored market where there is better risk return in many cases and much less competition than what we're seeing in the sponsor market. We currently have 21 originators covering 12 regional markets. Given market conditions, we are looking for good risk return across the market and finding surprisingly good opportunities. Additionally, we continue to expect a normal level of repayment activity over time, although actual repayment timing will be driven by M&A, refinancing activity, and company-specific situations. As for our pipeline, we currently have 10 deals mandated. Of those 10 deals, four are non-sponsor and six are sponsor.
All of the non-sponsor deals are priced at SOFR plus 600 or above, and all of the sponsored deals will be targeted for the STRS JV, and all of the non-sponsor deals are targeted for the balance sheet of the BDC. While there can be no assurance that any of these deals will close, or whether we have room in the BDC for any of all of those deals. We will be assessing capacity based on repayments and the availability of capital to continue the share buyback. Subsequent to quarter end, no deals have closed in the BDC. With capital reserved for share buybacks, the BDC's remaining capacity is very limited at approximately $15 million for new assets, and the balance sheet after reserving roughly $11 million for the share repurchase program.
At the end of the first quarter, the STRS JV's remaining capacity was approximately $35 million, and pro forma for recently mandated deals to eventually be transferred and anticipated repayments. The JV's capacity is approximately only $10 million. With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition. Joyson?
Thanks, Stuart, and thanks everyone for joining today's call. During the quarter, we reported GAAP net investment income in core NII of $5.6 million or $0.253 per share. This compares with Q4 GAAP NII and core NII of $6.6 million or $0.287 per share. As well as our previously declared first quarter base distribution of $0.25 per share and a supplemental distribution of $0.01 per share. Q1 fee income was approximately $0.4 million, compared with $0.8 million in the prior quarter, driven primarily by a $0.1 million prepayment fee from Monarch Collective and a $0.1 million amendment fee from U.S. Petroleum Partners.
The prior quarter's fee income included a non-recurring prepayment fee of $0.3 million received in connection with the prepayment exit of ELM in that quarter. For the quarter, we reported a net decrease in net assets resulting from operations of $0.7 million. Our risk ratings during the quarter showed that approximately 88.3% of our portfolio positions either carried a 1 or 2 rating, an increase from the 85.9% reported in the prior quarter. Upgrades during the quarter included our investments in Claridge, which were upgraded from a 3 to a 2 rating, while downgrades were primarily driven by moving our position in UserZoom from a 2 to a 3 rating.
As a reminder, a 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a 2 rating indicates a company is performing according to such initial expectations. Regarding the JV specifically, we continue to utilize the platform as a complement to the BDC. As Stuart mentioned earlier, we transferred two new deals and two existing investments during the first quarter to the STRS JV, totaling $18.9 million. During the quarter, the JV had three portfolio investments fully repaid, and as of March 31st, 2026, the JV's portfolio held positions in 42 portfolio companies with an aggregate fair value of $327.1 million, compared to an aggregate fair value of $323.6 million as of December 31st, 2025.
Leverage for the JV at the end of Q1 was 1.08x , compared with 1.07x at the end of the prior quarter. The investment in the JV continues to be accretive for the BDC's earnings, generating a low teens return on equity. During Q1, income recognized from a JV investment aggregated to approximately $3.6 million, compared to approximately $3.8 million reported in Q4. As we have noted in prior calls, the yield on our 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, changes in asset yields in the underlying portfolio, and the overall credit performance of the JV's investment portfolio.
Turning to our balance sheet now, we had cash resources of approximately $49.4 million at the end of Q1, including $37.6 million restricted cash, representing interest and principal proceeds received at quarter end, as well as approximately $11.8 million at the fund level reserved for the quarterly distribution that was paid in early April as well as for share repurchases. Cash balances at the end of Q1 were elevated due to realizations on our investments as well as the JV transfers outpacing deployments during the quarter. As of March 31, 2026, the company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 176.2%, which was above the minimum asset coverage ratio of 150%.
At quarter end, gross leverage was 1.31x , compared with 1.26x in the prior quarter. While our net effective debt to equity ratio after adjusting for cash on hand was 1.12x compared with 1.15x in the prior quarter. The decline in net effective leverage relative to the increase in gross leverage primarily reflected higher cash amounts on the balance sheet at quarter end as a result of the repayments that Stuart and I noted earlier. In regards to our share repurchase program, the company repurchased approximately 412,000 shares during Q1 at a weighted average price of approximately $7.31 per share, which was accretive to NAV by approximately $0.08 per share.
Subsequent to quarter end and through the market close of yesterday, the company has repurchased an additional approximately 210,000 shares. Cumulatively, since the inception of our share repurchase program beginning in the fourth quarter of 2025, we estimate that our buybacks have contributed to approximately $0.31 per share of NAV accretion, demonstrating our commitment to creating shareholder value. As Stuart noted earlier, certain company insiders and affiliates also purchased shares in the open market during the quarter.
Further demonstrating our view of WhiteHorse Finance's current market valuation. Before I conclude and open up the call to questions, I'd like to discuss our recent distributions and corresponding distribution policy. This morning, we announced that our board declared a second quarter base distribution of $0.25 per share. The distribution will be payable on July 6th, 2026 to stockholders of record as of May 21st, 2026. As we said previously, we will continue to evaluate our quarterly distribution 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 back over to the operator for your questions. Operator?
Thank you. If you would like to ask a question press star one on your keypad. To leave the queue at any time press star two. Once again that is star one to ask a question. We'll pause for just a moment to allow everyone a chance to join the queue. Once more that is star one for your questions. We'll move first to Heli Sheth with Raymond James. Your line is open.
Good afternoon. Thanks for the question. On the buybacks, how are you considering repurchasing shares on a go-forward basis, in terms of weighing buybacks versus deployments, especially if the more muted M&A market that we've seen recently persists?
Yes. Again, the M&A market has picked up in the last three to four weeks. Pricing is higher than we've seen on deals in about two, 2.5 years. The assets that we're seeing right now are on a relative basis, pretty attractive. That said, with our shares trading at roughly a 35% discount to NAV, we do get more lift from deploying money into share buybacks. With the shares where they are now or close to where they are now, my anticipation is we will continue to buy back shares, and we do have plenty of capacity left, after having increased the allocation to share buybacks last quarter.
Got it. Appreciate the color. Then on the pipeline, what are you sort of expecting for the pipeline for the remainder of the year? Are you seeing anything different there in terms of industry sector, mix of incumbent versus new borrowers, anything along those lines?
We're seeing a good flow of opportunities in both the sponsor and non-sponsor market. It's a little bit surprising that due to market liquidity issues, the pricing on smaller deals is as low or lower than the pricing on larger deals. That has us currently biased towards the mid-market and upper mid-market deals, where the structures are more conservative based on geopolitical disruption, and the pricing, again, is higher than on the smaller deals. That said, we think the geopolitical situation is highly unpredictable, and notwithstanding the fact that until today, the stock market has been very optimistic about what's going on, we think there's a lot of volatility risk. As I mentioned in my prepared remarks, we really can't give you an assessment of where the market will be going forward.
The only assessment I can offer is that today's market, in terms of pricing and deal structures, tends to be more conservative than what we've seen in the past couple of years. Again, it's more attractive. In terms of industries, we're not seeing very much on the software technology side. And the things we are seeing, we're being very, very cautious about, given the ongoing concerns with what AI will do to displacing existing leaders in the technology community. We are seeing a nice mix of both industrial credits and business service credits with volatility, economic cyclicality risk that ranges from anywhere moderate down to very low. Again, we are seeing better deal flow now by far than what we were seeing two or three months ago.
Got it. Thanks for the time.
Once more, that is star one for your questions. We'll move next to Christopher Nolan with Ladenburg Thalmann. Your line is open.
Hi. Is there any limit to what you can take the percentage of the total portfolio occupied by the JV?
Yeah. The, the equity in the JV is considered a bad asset vis-a-vis the 30% bad asset limit we have, and all BDCs have. That said, we are nowhere near that limit right now. We have the BDC representing most of the use of the capacity of that 30%. We think it would be unlikely that we would change the size of the JV in the near future though.
Well, your portfolio is $578 million. 30% of that is $173 million, and your equity in the JV is roughly $55 million, $57 million. You have a lot of space to grow that JV. I guess my real question is, it seems that you're running off first lien loans, the percentage that the JV occupies is higher. Also given the JV is generating attractive returns, you're sort of in this interesting spot where, you know, it's accretive to actually not only buy back your own shares, but because the increasing percentage from the JV that, you know, you're getting a higher yielding asset overall. Is that the way you're looking at it or am I missing something?
We see the JV as positive and accretive, which is why we have grown the JV over time. Yes, as we buy back shares, using on balance sheet liquidity, the JV is a slightly larger percentage of the overall portfolio. Again, in terms of dollars committed to the JV at the moment, we do not intend to make any changes.
Okay. Should we expect the overall size of the BDC investment portfolio to decline in coming quarters?
We, at current share price levels, see buybacks as highly accretive. If we start running short on buyback capacity, the management company and the board will discuss whether it makes sense to allocate additional capital, into share buybacks. At the moment, as I mentioned earlier, there's plenty of capital for the share buybacks, and so we have not taken any additional actions from last quarter.
Okay. Thank you.
Chris, I was just going to just add.
No problem. Thank you, Chris. Go ahead, Joyson.
I was just going to add, with respect to the JV specifically, it's a total $175 million program between ourselves and STRS Ohio, of which of the $175 million commitments, we still have $14 million that's uncalled. That includes both the traditional equity investment as well as that subordinated debt investment that's structured as part of our $175 million commitments in total.
Okay. Is the plan to tap that additional equity?
That's correct. Right. If you think about it, for instance, with the prior quarter, we had three realizations in the STRS JV portfolio. By and large, the transfers that we had sent down to the JV were funded by those excess proceeds. As we kind of tap out on leverage and any excess cash available at the JV level, we would then call and deploy that remaining $14 million.
Okay. Thanks.