On Friday, Raymond (NS:RYMD) James adjusted its stance on WhiteHorse Finance (NASDAQ:WHF), moving its rating from Outperform to Market Perform. The change follows the company's third-quarter results for 2024, which did not meet the expectations set by Raymond James, particularly in terms of earnings and net asset value (NAV) per share.
The investment firm pointed out that WhiteHorse Finance's earnings for the third quarter were below their projections. Additionally, the NAV per share also fell short of group trends. These factors have raised concerns about the company's credit outlook in the near future. Raymond James analysts have expressed skepticism about the sustainability of the company's base dividend, which is currently set at $0.385 per share each quarter.
According to Raymond James, the base dividend at WhiteHorse Finance was previously projected to be sustainable throughout their 2025 forecast period. However, the firm has revised this view due to the recent performance and now believes that the dividend is no longer earnable over the forecast period. Despite this, the dividend is expected to be fully covered due to spillover income, though this comes at the cost of NAV per share attrition.
The spillover income, which is income not distributed in the current period and carried over to future periods, is substantial enough to cover the dividend payments for the time being. Raymond James estimates that the current spillover income equates to three quarters of the existing base dividend, indicating that the dividend could be maintained through at least the summer of 2025 without any immediate reductions.
In other recent news, WhiteHorse Finance reported its Q2 2024 earnings, which revealed a net investment income (NII) surpassing the company's base dividend, despite a slight decrease in net asset value (NAV) per share. The company's GAAP net investment income and core NII for Q2 stood at $9.3 million, or $0.40 per share, exceeding the quarterly base dividend of $0.385 per share. However, the company's NAV per share saw a minor decrease of 0.4% from the previous quarter, ending at $13.45 at the close of Q2.
WhiteHorse Finance also reported gross capital deployments totaling $55.8 million in Q2, with a mix of 60% sponsored deals and 40% non-sponsored deals. The fair value of the investment portfolio was $660 million with a weighted average effective yield of 13.8%. The company's cautious outlook due to a potential economic slowdown has led to a focus on deals with positive free cash flow, limited cyclicality, and strong owners.
The company expects refinancing activities to continue throughout the year, influenced by borrower-friendly market conditions and anticipated interest rate reductions by the Fed in Q4 2024. Also, WhiteHorse Finance has significant capacity for new assets, with $60 million available for the BDC and $30 million for the JV. Lastly, the company closed three new originations in Q3, totaling approximately $18 million, with more in the pipeline.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on WhiteHorse Finance's (NASDAQ:WHF) financial situation. The company's market capitalization stands at $269.62 million, with a P/E ratio of 11.82, indicating a relatively low valuation compared to earnings. This aligns with Raymond James' concerns about the company's performance and future outlook.
One of the key InvestingPro Tips highlights that WhiteHorse Finance "pays a significant dividend to shareholders," which is reflected in its impressive dividend yield of 15.39%. This high yield supports Raymond James' focus on the dividend sustainability issue. Another InvestingPro Tip notes that the company "has maintained dividend payments for 13 consecutive years," underscoring its historical commitment to shareholder returns despite current challenges.
It's worth noting that WhiteHorse Finance remains "profitable over the last twelve months," according to InvestingPro. This profitability, combined with the substantial spillover income mentioned in the article, may provide some cushion for maintaining dividends in the near term, as Raymond James suggests.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and metrics beyond those mentioned here. The platform currently lists 8 more tips for WhiteHorse Finance, providing a deeper dive into the company's financial health and prospects.
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