WhiteHorse Finance(WHF)2025-03-07 12:32Incentive Fees - The incentive fee cap for Year 1 is set at 120.0 million, less 6.0 million, representing 20% of the cumulative net capital gains of 150.0 million[81]. - For Year 3, the incentive fee cap remains at 7.0 million paid, reflecting 20% of cumulative pre-incentive fee net return of 9.2 million, which is 20% of cumulative pre-incentive fee net return of 21.0 million of cumulative incentive fees paid[81]. - The incentive fee structure may create misaligned incentives for the Investment Adviser, potentially leading to riskier investments[221]. - The management fee is based on consolidated gross assets, which may result in lower returns for common stock investors due to debt and leverage[221]. - The Investment Adviser may receive incentive compensation even if the company incurs a net loss, with no recovery of previously paid fees[229]. Investment Advisory and Administration Agreements - The Investment Advisory Agreement was re-approved on October 30, 2024, and remains effective from year to year if approved annually by the board of directors[82]. - The board of directors determined that the investment advisory fee rates were reasonable in relation to the services provided, considering factors such as investment performance and anticipated costs[86]. - The Administration Agreement was renewed on October 30, 2024, allowing WhiteHorse Administration to provide necessary office facilities and administrative services[88]. Compliance and Regulatory Requirements - The company must ensure that qualifying assets represent at least 70% of its total assets to comply with the 1940 Act[98]. - The company is required to distribute at least 90% of its investment company taxable income to qualify as a RIC for U.S. federal income tax purposes[123]. - A 4% nondeductible U.S. federal excise tax applies to undistributed income unless certain distribution requirements are met[125]. - The company intends to make sufficient distributions each taxable year to satisfy the Excise Tax Avoidance Requirement[125]. - The company must derive at least 90% of its gross income from specific sources, including dividends and interest, to qualify as a business development company under the 1940 Act[127]. - At the end of each quarter, at least 50% of the company's assets must consist of cash, U.S. government securities, and other specified securities, while no more than 25% can be invested in securities of a single issuer[127]. - The company must maintain a bond issued by a reputable fidelity insurance company to protect against larceny and embezzlement[116]. - The company has adopted written compliance policies and procedures to prevent violations of federal securities laws[105]. - Changes in laws or regulations may require the company to alter its business strategy, potentially incurring significant compliance costs[246]. Investment Strategy and Risks - The company may invest up to 100% of its assets in privately negotiated transactions, and it does not intend to exceed the limits imposed by the 1940 Act on investments in registered investment companies[95]. - The company primarily invests in below investment grade securities, which may present special tax issues and affect the distribution of sufficient income to avoid U.S. federal income tax liabilities[133]. - Rising interest rates could adversely affect the company's net investment income, as the cost of funds may increase while interest income from investments may not rise correspondingly[207]. - Inflation has negatively impacted the operating results of portfolio companies, increasing costs and potentially affecting their ability to pay interest and principal on loans[212]. - The company engages in hedging transactions to mitigate risks associated with currency and interest rate fluctuations, but such transactions do not eliminate the possibility of losses[213]. - The company has entered into transactions to reduce currency exchange rate and interest rate risks, but unanticipated changes may lead to poorer investment performance[214]. - The company’s portfolio investments are recorded at fair value, with significant uncertainty regarding the valuation of non-publicly traded securities[238]. - All investments, except cash and cash equivalents, are classified as Level 3 under FASB ASC Topic 820, indicating reliance on unobservable inputs for valuation[238]. - The company adjusts the valuation of its portfolio quarterly, with changes recorded as net change in unrealized appreciation or depreciation in consolidated statements[240]. - The lack of liquidity in investments may adversely affect the company’s ability to sell investments quickly, potentially realizing significantly less than previously recorded values[241]. - Price declines and illiquidity in corporate debt markets may lead to increased net unrealized depreciation, adversely impacting the company’s NAV[243]. - The company may experience fluctuations in quarterly results due to various factors, including interest rates, default rates, and general economic conditions[245]. - The company may face operational disruptions if the Investment Adviser resigns, potentially affecting financial condition and market price of shares[258]. Conflicts of Interest - The valuation process for non-publicly traded securities may create conflicts of interest, as the Investment Adviser determines fair value[226]. - The company is restricted from entering certain transactions with affiliates without prior approval, limiting investment scope[233]. - The allocation policy for investment opportunities may not guarantee fair or equitable access for the company compared to other accounts managed by the Investment Adviser[234]. - The company may face conflicts of interest due to arrangements with H.I.G. Capital and the Investment Committee, affecting investment returns[217]. - The Investment Adviser controls the timing of capital gains recognition, which may impact the company's financial performance[222]. - The Investment Adviser’s liability is limited under the Investment Advisory Agreement, which may lead to riskier behavior on behalf of the company[263]. Portfolio Company Risks - Portfolio companies may experience financial distress, leading to uncertainty regarding the satisfaction of distressed debt, which may not yield anticipated returns[280]. - Rising interest rates could hinder portfolio companies' ability to make periodic loan payments, increasing the risk of defaults[281]. - Economic downturns may lead to increased non-performing assets and decreased portfolio value, adversely affecting revenues and net income[282]. - Defaults by portfolio companies could trigger cross-defaults and jeopardize the ability to meet obligations under debt securities held[293]. - The company may not have controlling equity interests in portfolio companies, limiting its ability to influence management decisions that could affect investment value[292]. - Portfolio companies may incur debt that ranks equally with or senior to the company's investments, potentially impacting recovery in insolvency situations[294]. - The value of collateral in liquidation scenarios is subject to market conditions, which may not be sufficient to satisfy loan obligations secured by second-priority liens[297]. - The company may face risks associated with syndicated loans, where it may lack sufficient influence to direct actions taken by the loan agent[285]. - The company may not realize gains from equity investments, as the value of such interests may decline instead of appreciating[289]. - Failure to make follow-on investments could impair the value of the portfolio and jeopardize the viability of portfolio companies[291]. - The ability to prepay loans may reduce yields if capital returned cannot be reinvested in transactions with equal or greater expected yields[300]. Debt and Financing Risks - WhiteHorse Credit's equity interests are subordinated in priority of payment to its obligations to debt holders and service providers[307]. - A payment default on a loan to a portfolio company could lead to a defaulted obligation under the Credit Facility, adversely affecting distributions to stockholders[308]. - WhiteHorse Credit must meet two coverage tests under the Credit Facility: a borrowing base test (≤ 60%) and a market value test (≥ 167.5%) to make new borrowings and distributions[310]. - The Private Notes and Public Notes are unsecured and effectively subordinated to any secured indebtedness incurred by the company or its subsidiaries[315]. - An event of default under the Credit Facility could prevent distributions to stockholders and may lead to liquidation of WhiteHorse Credit's assets[312]. - Investments in foreign companies may involve significant risks, including political instability and less liquid markets[303]. - The company may co-invest through joint ventures, which could involve risks specific to third-party management and inconsistent objectives[305]. - The indenture for the 4.000% 2026 Notes offers limited protection to holders, allowing the company to incur additional debt without restrictions[321]. - The indenture does not require the company to adhere to any financial tests or ratios, which could negatively impact the holders of the 4.000% 2026 Notes in case of adverse financial changes[323]. - The indenture for the 7.875% 2028 Notes similarly provides limited protections, allowing the company to issue additional debt and engage in various corporate transactions[326]. - Holders of the Private Notes may require the company to prepay upon a change in control, which could adversely affect its financial condition[333]. - The company may choose to prepay the Private Notes and redeem Public Notes when prevailing interest rates are lower, impacting holders' ability to reinvest at comparable rates[340]. - If the company defaults on its obligations, it may be unable to make payments on the Private Notes and Public Notes, potentially leading to bankruptcy or liquidation[341]. - Payments under the Private Notes and Public Notes to foreign entities may be subject to a 30% U.S. withholding tax under FATCA provisions[343].