A7f896973a04a760
By Nicholas Marshi
A BDC Reporter Publication. Last updated November 1, 2018

OVERVIEW

At 6/30/2018 WHF had 36 portfolio companies with a portfolio value of $511mn, and an annualized Net Investment Income of $18.4mn.  35 companies were performing and 1 was  under performing with a FMV of $11.3mn. This Watch List company is Puerto Rico hospital operator Grupo Hima San Pablo which had one loan on non accrual (written down to next to nothing) and one loan performing. Income at risk on the still performing $14.250mn (cost) First Lien loan is $1.6mn. 

REVIEW

WHF's portfolio has improved since our last review in  9/30/2017 when the Watch List included 6 names.  Names from the prior report include Outcome Health, which has settled internal wrangles and is valued just inside our threshold for performing status; Oasis Legal Finance, still on books but taken off the Watch List, lawsuit pending notwithstanding. The Aretec Group investment has turned into a major likely equity gain, with a FMV of $37mn on a cost of $20.7mn as the financial services company is in the process of being sold. (Still, Aretec remains the only out performing portfolio company and will shortly be off the books). the NMFC Senior Loan Program JV investment has been marked up 3 quarters in a row and has been removed from the Watch List and is valued at only a 6% discount to cost. Caelus Energy , an oil and gas exploration company, which was once written down by nearly 30% is only valued at a 8% discount and returned to performing status, thanks to higher oil prices. Loan exposure - due to a repayment - has been reduced by two thirds.

Overall, the Watch List has a value of $11.3mn compared to WHF's own valuation of $68.8mn in their internal rating (albeit virtually all in the least risk 3 level on the 5 level scale). We estimate the income at risk - Grupo Hima - is material at 8.7% of Net Investment Income but is concentrated in one senior loan and the BDC was optimistic about the outcome on the latest Conference Call. The risk to NAV - should the loan default - we calculate at around $4mn or about $0.20 a share. However, outside of a small change up or down from Aretec or Grupo Hima there seems to be little upside potential as WHF has few equity stakes and just about all other investments are carried at full value. 

LONG TERM RISK PROFILE 

The portfolio remains relatively well diversified with no obvious industry or company over concentration. We like that management actively seeks to reduce outsized positions to reduce single company risk. The portfolio yield, though, at 12.0% suggests credit risks are above average notwithstanding both WHF's historical credit performance (virtually no net Realized Losses since going public) and the current portfolio performance. We note 8 companies out of the 35 performing with one or more loans bearing yields over 12.0% , including as high as 14.33%. On the other hand, unlike many of its peers with high yields, WHF has little in the way of Pay In Kind income. Likewise a positive, 92% of the portfolio is in debt instruments and likely to go higher after the Aretec sale (that investment began as a bad loan and debt converted to equity). Also a positive for the moment, WHF's net debt to equity is 0.65x and no maturities due till 2020. 

We worry about the BDC's decision to leverage up the portfolio as approved by shareholders. Without any stated Target Leverage going forward from the BDC we are assuming a potential top of 1.5x debt to equity, which would result in around $240mn-$250mn in higher assets/debt. That's a 50% increase in the former and 116% increase in the latter. Management has indicated the focus of new assets will be on less risky first lien assets. Nonetheless, even assuming a 1% annual loss provision, that's still a potential hit of $2.5mn to book value annually to go with the 2% provision we carry on the current portfolio (about $10mn a year). Over a 5 year period that means WHF is risking a 20% loss to book. Those are very theoretical numbers and the BDC might struggle to ever reach the limit we've ascribed. Moreover, the historical credit performance to date is above average and if this continues in the future may further mitigate losses in book value and income. Nonetheless - in the face a potential 50% increase in assets all funded by debt - we have to be concerned about longer term credit results. In the interim - until we see how the portfolio plays out - we rate WHF as LOW RISK at the moment, our top category, which is remarkable given the relatively small size of the BDC and its higher yield portfolio. 

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See prior summaries here.