WhiteHorse Finance(US:WHF)2024-03-05 21:34Investment Advisory Agreement - The Investment Advisory Agreement was amended and restated on November 1, 2023, and will remain in effect annually if approved by the board of directors or a majority of outstanding voting securities[89]. - The board of directors unanimously approved the amendment based on factors including the quality of advisory services and comparative fee structures with similar companies[91]. - The investment advisory fee rates were deemed reasonable in relation to the services provided, with expectations for similar reviews in future amendments[93]. - The Investment Advisory Agreement allows for termination by either party with a 60-day written notice, ensuring flexibility in management relationships[89]. - The board of directors considered the anticipated profitability of the relationship with the Investment Adviser as a key factor in their decision-making process[92]. Administrative Services - WhiteHorse Administration provides essential administrative services, including financial record maintenance and NAV determination, under an agreement renewed on November 1, 2023[94]. - The company may receive fees for managerial assistance provided to portfolio companies through WhiteHorse Administration[108]. Investment Strategy and Compliance - The company may invest up to 100% of its assets in privately negotiated transactions, potentially classifying it as an "underwriter" under the Securities Act[102]. - The company has claimed an exclusion from the definition of "commodity pool operator," affirming this status through the fiscal year ending December 31, 2024[103]. - The company must ensure that qualifying assets represent at least 70% of total assets to comply with the 1940 Act[105]. - The company intends to continue qualifying as a RIC by distributing at least 90% of its investment company taxable income annually[130]. - The company must qualify as a RIC and satisfy the Annual Distribution Requirement to maintain its tax status[134]. - At least 90% of the company's gross income must derive from specific sources, including dividends and interest, to meet the 90% Income Test[134]. - The company is required to diversify its holdings, ensuring that no more than 25% of its assets are invested in securities of a single issuer[135]. - The company must distribute dividends to avoid a 4% nondeductible U.S. federal excise tax on undistributed income[132]. Financial Risks and Market Conditions - Rising interest rates are expected to increase the company's interest income, as most of its portfolio bears interest at variable rates[211]. - The company is exposed to risks from inflation, which has increased costs for its portfolio companies, potentially affecting their ability to pay interest and principal[216]. - The company engages in hedging transactions to mitigate risks associated with currency and interest rate fluctuations[217]. - The company may face tax implications if it fails to qualify as a RIC, including being taxed at regular corporate rates[147]. - The company’s portfolio primarily consists of fixed and floating rate investments, which are subject to market price fluctuations[213]. - The company may experience fluctuations in quarterly results due to various factors, including interest rates and default rates on securities[251]. - Economic downturns could lead to increased non-performing assets and decreased portfolio value, adversely affecting revenues and net income[290]. Portfolio Composition and Investment Risks - The company primarily invests in below investment grade securities, which are viewed as speculative investments due to concerns regarding the issuer's capacity to pay interest and repay principal[271]. - The company’s portfolio may be concentrated in a limited number of portfolio companies and industries, increasing the risk of significant loss if any of these companies defaults[282]. - The company invests in "unitranche" senior secured loans, which combine senior secured and subordinated financing, generally in a first-lien position, providing a blended yield between senior secured and subordinated debt[273]. - The company may hold debt securities and loans of leveraged companies that could enter bankruptcy proceedings, posing significant risks to investment returns[285]. - The company’s investments in mezzanine loans are generally subordinated to senior loans and may involve above-average risk and volatility[275]. - Portfolio companies may face financial distress, leading to uncertainty regarding the satisfaction of distressed debt, which could result in losses for the company[288]. - Rising interest rates may hinder portfolio companies' ability to repay loans, increasing the risk of defaults and negatively impacting the company's financial condition[289]. Regulatory and Compliance Challenges - Changes in laws or regulations may require the company to alter its business strategy, potentially incurring significant compliance costs[252]. - The company incurs significant expenditures to comply with Section 404 of the Sarbanes-Oxley Act, which may negatively impact financial performance and ability to make distributions[267]. - The company is restricted from participating in certain transactions with affiliates without prior approval, limiting investment opportunities[238]. - The company has adopted compliance policies to prevent violations of federal securities laws and reviews them annually[112]. Debt and Financing - The company must meet a borrowing base test of less than or equal to 60% and a market value test of at least 167.5% to make new borrowings under the Credit Facility[322]. - An event of default under the Credit Facility could prevent the company from making distributions to stockholders, adversely affecting its ability to maintain RIC status[323]. - The Private Notes and Public Notes are unsecured and effectively subordinated to any secured indebtedness incurred by the company or its subsidiaries[327]. - The company may not receive cash from WhiteHorse Credit if it does not generate sufficient cash to make distributions, impacting its ability to distribute to stockholders[319]. - The Credit Facility restricts the portfolio manager's ability to purchase and sell investments, potentially impairing performance[324]. - The company may lose management control of WhiteHorse Credit if an event of default occurs, which could lead to performance issues[325]. Valuation and Conflicts of Interest - The valuation process for non-publicly traded securities may create conflicts of interest, as the Investment Adviser determines fair value[232]. - The fair value of portfolio investments is based on unobservable inputs and significant management judgment, which may lead to material differences from actual realizable values[245]. - The company may face conflicts of interest due to arrangements with H.I.G. Capital and the Investment Committee, which may not align with stockholder interests[222]. - The allocation policy for investment opportunities will be periodically approved by the Investment Adviser and reviewed by independent directors[239]. Indenture and Note Risks - The indenture for the 4.000% 2026 Notes offers limited protection, allowing the company to incur additional indebtedness without restrictions[333]. - The company may face risks related to credit or market value deterioration in its portfolio companies, which could harm operating results[318]. - The 7.875% 2028 Notes indenture offers limited protection and does not restrict the company from incurring additional debt or engaging in corporate transactions[339]. - Upon a change in control, holders of Private Notes may require prepayment at 100% of the aggregate principal amount plus accrued interest, which could adversely affect the company's financial condition[344]. - The company may choose to prepay Private Notes when prevailing interest rates are low, specifically on or after set prepayment dates[345].