WhiteHorse Finance, Inc. Stock

Good afternoon, everyone. My name is Bo, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance Second Quarter 2026 Earnings Conference Call.

Our host for today's call are Mr. Stuart Aronson, Chief Executive Officer; and Mr. 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.

[Operator Instructions] It is now my pleasure to turn the call over to Mr. Robert Brinberg of Rose & Company. Please go ahead, sir.

Thank you, Bo, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Second Quarter 2026 Earnings Results. Before we 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 Second Quarter 2026 earnings presentation, which was posted on our website yesterday.

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 yesterday after market close, and I hope you've had a chance to review our results for the period ending June 30, 2026, which can also be found on our website.

On today's call, I'll begin by addressing our second quarter results and current market conditions. Then 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 second quarter results reflect 3 main themes: one, net asset value per share increased, primarily driven by unrealized gains in one of our existing workout accounts; two, share repurchases during the quarter, again provided a meaningful benefit to NAV per share accretion; and three, core earnings moderated relative to the prior quarter, reflecting a portfolio yield that was impacted as a result of a smaller average portfolio size as well as our loan investment in Outward Hound going on to nonaccrual status in the first quarter.

Touching more specifically on unrealized appreciation in the portfolio and following the markdowns that weighed on the first quarter's results that we had previously flagged, our portfolio marks turned net positive for this quarter. Gross unrealized depreciation of $7.1 million, was offset by just $1.4 million of gross depreciation, with the substantial majority of the portfolio unchanged quarter-over-quarter.

Net markups were led by our position in Starco, also known as Chase Products or Pressurized Holdings where the markup on our equity investment contributed approximately $4.8 million or roughly $0.22 a share. I will provide more detail on the markup in Chase as well as provide an update on the number of other investments in our portfolio later in this call.

Turning to our financial results. Q2 GAAP net investment income and core NII were each $4.7 million or $0.217 per share compared with Q1 GAAP net investment income and core NII of $5.6 million or $0.253 per share last quarter. NAV per share at the end of Q2 was up to $11.77 compared with $11.47 at the end of Q1, an increase of approximately 2.6%. The change in NAV reflected net realized and unrealized gains of approximately $0.265 per share in the aggregate as well as share repurchases that were accretive to NAV by more than $0.06 per share, partially offset by the approximate $0.033 per share NII shortfall as a result of the distribution paid during the quarter that exceeded the net investment income for the period.

A detailed bridge of the quarter-over-quarter change in the NAV per share is provided on Slide 15 of our earnings presentation. Even though our NII this quarter was below the quarterly distribution rate, as I've shared in the past, we have a number of restructured credits that have been equitized that are not producing NII, but are likely to be realized either later this year or in 2027. Those realizations should add to the BDC's NII generating capability.

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. So far, that focus has included disciplined portfolio repositioning, selective capital deployment, accretive share repurchases and steps to support distributable earnings. Management and the Board continue to explore other options as well.

We remained active under the Board's expanded share repurchase program through the first 2 months of the second quarter, and those repurchases were accretive to NAV, as I mentioned earlier. We paused repurchase activity in late May. That decision reflects the balance we took -- we look to strike between buying back shares at a meaningful discount to NAV, which is accretive, and the corresponding reduction in equity, which raises our leverage ratio levels and competes with the capital we can put into newly originated investments.

Capacity remains available under the repurchase program and we will continue to assess recommending repurchases as a part of our broader strategy of seeking ways to create shareholder value. Joyson will provide additional detail on the quarter's repurchase activity.

In addition, the advisers agreed to extend the temporary voluntary incentive fee waiver for the third quarter of 2026, reducing the applicable rate from 20% to 17.5%. We view the fee waiver as a 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.

We have also been encouraged by the alignment shown through continued open market purchases by our officers and directors during the second quarter and is disclosed on Form 4 filings. We believe that reflects our confidence in the underlying value of WhiteHorse Finance.

Turning to portfolio activity. We had gross capital deployments of $25.4 million in Q2. Repayments and sales were muted during the quarter and offset gross deployments by approximately $2.2 million, resulting in net deployments of approximately $23.2 million before the effects of transferring assets into the STRS JV.

Gross capital deployments consisted of 3 new originations totaling $23.1 million, with the remaining amount deployed to fund add-ons to 5 existing portfolio companies. The 3 new originations were headlined by 2 former WhiteHorse borrowers, Empire Office for $10.1 million and Intermedia Cloud Communications for $6.6 million as well as 1 new portfolio company borrower, Vibration Mountings & Controls for $6.4 million.

Of our 3 new originations in Q2, 1 was nonsponsor and 2 were sponsor. The sponsor deals are targeted to be transferred to the STRS JV. Our new originations in Q2 had an average leverage of approximately 4.2x EBITDA and were all first-lien loans. Total repayments and sales of $2.2 million were driven by partial paydowns with no full realizations during the quarter.

During the quarter, the BDC transferred 2 new deals to the STRS JV totaling $7.8 million. The transfers were headlined by Industrial Service Solutions at $5.1 million and Trimlite at $2.7 million. We continue to successfully utilize the STRS JV and believe that WhiteHorse Finance's equity investments in the JV continues to provide attractive returns to our shareholders.

After net deployments in JV transfer activity as well as net realized and unrealized gains recognized during the quarter, total investments increased from the prior quarter by $26.2 million to $569.2 million. This compares to our portfolio's fair value of $543 million at the end of Q1.

During the quarter, we recognized approximately $0.1 million in net realized losses and approximately $5.8 million of net unrealized gains for aggregate net realized and unrealized gains of approximately $5.7 million or approximately $0.265 per share.

The net mark-to-market gains were driven primarily by a $4.8 million markup on Chase, a $0.4 million markup on PlayMonster, and approximately $0.5 million of other net markups across the portfolio.

For those unfamiliar, Case Products is a developer and manufacturer of bulk consumer and industrial chemical and aerosol products in the United States. We assumed ownership of the business in March of 2023. Since then, the company has improved EBITDA from negative levels to a run rate in the low positive double digits, supported by new customer wins and added production capacity, and it continues to track ahead of plan this year. The markup this quarter reflects the improvement in operating performance and the updated valuation inputs that follow from it. We are cautiously optimistic about the prospect of a liquidity event on this asset over the next 6 to 12 months.

PlayMonster, you may recall, is a toy and games company with owned and licensed brands, including Hacky Sack, Spirograph, Taco vs. Burrito and 5-Second Rule, we assumed ownership alongside a co-lender in January of 2022. The business has returned to positive and growing adjusted EBITDA with meaningful year-over-year improvement and continued momentum into 2026 and the markup reflects that trajectory.

PlayMonster is at in earlier stage than Chase with respect to any realization, and we would expect any process to follow the finalization of full year 2026 results at the earliest. Both positions generate limited cash income today, a realization in either case would convert to full realized value into cash available for future redeployment into income-producing investments, which would positively contribute to help support core NII over time.

At the end of Q2, 98.8% of our debt portfolio was first-lien senior secured, and our portfolio continued to reflect the balanced mix of sponsor and nonsponsor investments, with nonsponsor representing approximately 40% of the portfolio at fair value. The weighted average effective yield on our income-producing debt investments was 10.8% at the end of Q2, consistent with the 10.8% at the end of Q1. The weighted average effective yield on our overall portfolio was approximately 8.8% at the end of Q2 compared to approximately 8.7% at the end of Q1.

With respect to nonaccrual status, there were no additions to or removals from nonaccrual during the quarter. Excluding the STRS JV, nonaccrual investments represented 3.6% of the total debt portfolio at fair value, consistent with the 3.6% at the end of the prior quarter and 6.9% at cost compared with 7.2% at costs at the end of the prior quarter. The 4 issuers on nonaccrual at quarter end were Camarillo Fitness Holdings, Newscycle Solutions, Outward Hound and PlayMonster.

Turning to Outward Hound, we completed the restructuring of the business subsequent to quarter end in early July, working alongside the other lenders in the group. We recapitalized the company with a new revolver and term loan, converted a substantial portion of the outstanding debt into equity and extended the maturity. WhiteHorse now holds the majority ownership and control of the Board and the restructured term loan returned to accrual status upon closing, which will be positive for Q2 NII -- Q3 NII.

The company continues to operate in a challenging environment for pet products where category demand has softened and retailers have maintained lean inventory positions. Consumer sell-through has held up better than peers, but that has not yet translated into improved orders. With a materially deleveraged capital structure and control of the Board, we are working closely with management on various operating initiatives to drive incremental top line growth and optimize the company's cost structure. We will continue to evaluate both organic and inorganic paths to build value in the position and improve our ultimate recovery over time.

Regarding Newscycle, this is a small position for the BDC, representing less than 0.5% or 1% of the portfolio at fair value. Management has been focused on stabilizing financial performance and on cost reduction initiatives, and the company is currently preparing for a sale process. We will provide an update as that progresses.

Finally, regarding Camarillo Fitness, formerly known as Honors Holdings, our mark reflects the expected proceeds from the sale of the underlying locations. That process is actively underway. And as locations are sold and cash is returned, we'll redeploy that capital into income-producing investments. As always, we continue to actively manage underperforming credits, leveraging our dedicated restructuring resources and the broader capabilities of HIG.

Aside from the credits on nonaccrual, our portfolio continues to perform well. Consistent with what we shared last quarter, our exposure to software companies remains modest at approximately 10.5% of the portfolio at cost and 9.3% at fair value across 6 portfolio companies.

Turning to the market conditions. The market conditions are interesting and different from those a quarter ago. The volume of M&A activity is only moderate, similar to last year. However, the supply-demand imbalance we experienced last year is much improved due largely to the negative press surrounding the direct lending market. This negative press has had multiple effects. One effect has been to scare retail investors, resulting in capital outflows that have reduced the appetite of some of the largest players in the marketplace. Another effect is that increasing criticism of the asset marketing policies of direct lenders and BDCs has led to greater scrutiny of both, where assets are marked down and the types of credits in which people are investing. In particular, the software sector, which was strongly in favor 1.5 years ago, is now strongly out of favor because the market recognizes that some software and technology companies face significant downside risk from potential AI disruption.

Those factors have resulted in more conservative market environment. Deals are being completed at headline multiples that are generally more reasonable that is certainly true in the technology and software sector, but we think we are seeing it more broadly as well. Previously, out-of-favor sectors, such as industrials, have come back into favor because they do not face the same AI risk.

Overall, what we're seeing in the market, depending on the sector, is leverage that is 0.5x to a 1x lower than a year to 1.5 years ago with pricing 25 to 50 basis points higher. This is particularly true in the sponsor market. As I shared before, the sponsor market cycles up and down, but the nonsponsor market does not cycle very much. We are seeing lower leverage multiples and higher pricing on sponsor deals with most deals below 50% loan-to-value and some even below 40% loan-to-value.

In general, we are also getting better documents, including protection against LMEs, or liability management executions. Without LME protection, instead of equity coming into a troubled credit, companies may issue super senior debt, strip existing lenders of collateral and install the super senior debt at the top of the capital structure. We have been vigilant in avoiding those situations ever since the Aspect Software deal that led to a loss of the BDC. And the vast majority of the deals we have completed over the past 3 years, we have limited, or we believe, eliminated the downside risk from LME.

As geopolitical tensions rise and fall, M&A activity slows when tensions are high and tends to pick up when tensions are lower. Across the WhiteHorse direct lending platform, we are doing about 40% to 50% more volume this year than we did last year because we find current market conditions more attractive, we are seeing better credits, lower leverage and better documents. We are also getting covenants on most of our deals. In fact, the vast majority of our middle market credits have covenant protection.

Spreads in the middle market and upper middle market are generally as higher, higher than spreads in the lower mid-market. Again, this fact applies primarily to sponsor deals. Intuitively, that does not make sense because, on average, smaller companies carry greater risk and historically have commanded a pricing premium. However, third-party data from an investment bank that performs independent valuations for our portfolio validates what we are seeing. Pricing for midsized and larger deals is as high or higher than pricing for smaller deals.

We are, therefore, trying to improve the risk return trade-off. Most of the deals we are working on now are middle market or upper middle market credits, where we see a better risk return dynamic. Current market pricing for sponsor deals is SOFR plus 475 to 550, approximately 50 basis points higher than a year ago.

As I mentioned, we're getting covenants on the vast majority of deals we are doing. We are not -- sorry, we are doing senior secured debt almost exclusively. The nonsponsor market is relatively stable. Nonsponsor middle market, lower middle market deals generally command pricing of SOFR plus 600 and above with 2-point upfront fees or higher.

Larger nonsponsor deals are priced more in the range of 550 to 650. If we believe those are good credits, we will participate in them as well. Deals size to 600 and above are still targeted for the BDC balance sheet, deals below 600 are generally targeted for the JV.

With that said, and subsequent to our quarter end, we closed on 1 new deal in the BDC. We also transferred positions in 5 portfolio companies to the STRS JV. Pro forma for those transfers, the STRS JV's remaining capacity has been fully utilized. So no deals -- so new deals will generally be added to the JV only as repayments occur on existing JV investments. The BDC balance sheet currently has capacity for approximately $10 million of additional assets. And similarly, we will create additional capacity there as we receive repayments.

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 recorded GAAP net investment income and core NII of $4.7 million, or $0.217 per share. This compares with Q1 GAAP NII and core NII of $5.6 million, or $0.253 per share as well as our previously declared second quarter base distribution of $0.25 per share.

Q2 fee income was approximately $0.1 million compared with $0.4 million in the prior quarter, driven primarily by amendment fees from Lift Brands, also known as Snap Fitness and NA Services. For the quarter, we reported a net increase in net assets resulting from operations of $10.4 million. Our risk ratings during the quarter showed that approximately 86.6% of our portfolio positions either carried a 1 or 2 rating, a slight decrease from the 88.3% reported in the prior quarter.

As a reminder, a 1 rating indicates that the company has seen its risk of loss reduced relative to initial expectations, and a 2 rating indicates the 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 2 new deals during the second quarter to the STRS JV totaling $7.8 million in exchange for a net investment in the STRS JV of $2.3 million as well as cash proceeds of $5.5 million.

During the quarter, there were no full realizations in the JV. At the end of Q2, the STRS JV's total portfolio had an aggregate fair value of $340.3 million across 43 issuers, of which 14 are common issuers with the company at an average effective yield of 9.8%. This compares with an aggregate fair value of $327.1 million at an average effective yield of approximately 9.9% across 41 portfolio companies as of March 31, 2026.

Leverage for the JV at the end of Q2 was approximately 1.10x compared with approximately 1.08x at the end of the prior quarter. The investment in the JV continues to be accretive for the BDC's earnings, generated a low teens return on equity. During Q2, income recognized from our JV investment aggregated to approximately $3.2 million compared to approximately $3.6 million reported in Q1. 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 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. We had cash resources of approximately $28.1 million at the end of Q2, including approximately $19.6 million in restricted cash, primarily representing interest and principal proceeds received at quarter end in our securitized leverage facilities, and approximately $8.5 million at the fund level reserved for the quarterly dividend paid in early July.

We have $85 million of unsecured notes maturing in December of this year, consisting of $10 million or 5.375% notes due December 4 and $75 million or 4% notes due December 15. We continue to monitor the debt capital markets and recent offerings in both the retail and institutional space, and we will remain opportunistic in evaluating our alternatives as we approach year-end in addressing these maturities, which may also include a combination of available capacity under our revolving credit facility as well as cash on hand.

As of June 30, 2026, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act, was 177%, which is above the minimum asset coverage ratio of 150%. At quarter end, gross leverage was 1.30x compared with 1.31x in the prior quarter, while our net effective debt-to-equity ratio after adjusting for cash on hand was 1.19x compared with 1.12x in the prior quarter. The increase in net effective leverage primarily reflected lower cash balances at quarter end as deployments outpaced repayments during the quarter.

In regards to our share repurchase program, the company repurchased approximately 345,000 shares during the second quarter at a weighted average price of approximately $7.42 per share, inclusive of commissions, for a total cost of approximately $2.6 million. Those repurchases were accretive to NAV by more than $0.06 per share. We have not repurchased any shares since late May and approximately $9.5 million remains available under the current authorization.

Cumulatively, since the inception of our share repurchase program in the fourth quarter of 2025, we have repurchased approximately 1.8 million shares at a weighted average price of approximately $7.36 per share, and we estimate that our buybacks have contributed approximately $0.33 per share of NAV accretion, demonstrating our commitment to creating shareholder value.

Before I conclude and open the call to questions, I'd like to discuss our recent distributions and corresponding distribution policy. Yesterday, we announced that our Board declared a third quarter base distribution of $0.25 per share. The distribution will be payable on October 5, 2026, to stockholders of record as of September 21, 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 award consideration.

With that, I'll now turn the call back over to the operator for your questions. Operator?

[Operator Instructions] We'll go first today to Hong Zhang with JPMorgan.

Yes. This is Hong on for Rick. I guess on the call, you talked about potentially realizing gains in the second half of the year. I was wondering if you could share some color as to quantity or the timing.

I'm sorry, I couldn't hear you well. Something about the second half of the year?

Yes. You talked about potentially monetizing some realized gains in the second half of the year. I was wondering if you can add some numbers or just timing color to it?

The most likely realization or 2 realizations in the second half of the year are Chase, Starco, Pressurized Holdings, which is 3 different names of one account, and then also Naviga. Chase, Starco is doing very well. It is operating above budgeted levels. As I reported, the company has won new customers and actually built new production lines to accommodate those new customers such that the run rate EBITDA that was negative when we took over the company is now in the low positive double digits.

The mark that we've taken on that asset, while it is positive, is frankly lower than the valuations that the investment banks have told us to expect in the sale process. We have no idea where it will come out, but there's always upside and downside. But if the investment banks are accurate, there could be upside to that valuation.

Naviga, similarly, the bankers have indicated a valuation range. And on that deal, we believe we are marked at or below the low end of that valuation range. So that's another monetization that could occur, where, again, there can be upside or downside, but if you believe the bankers' valuations, there could be upside. If those occur, they will generate cash. That cash can be redeployed into earning assets and/or into shareholder repurchases. And while there's no assurance that will occur by year-end, as Lord knows, there's plenty of geopolitical volatility out there as we sit here today, both of those processes are moving forward.

PlayMonster, as I shared in the call, is having a tremendous year. Hacky Sack is very on trend and is providing a boost even above what we thought the company would be able to do 3 months ago. And if the results at the end of the year are strong, we and the other lender may choose to sell the company. Again, we don't know how that process will go. It's too far away. But that could also generate cash revenues or cash receipts that could be reinvested in earning assets.

Got it. And then I guess as it relates to the buyback, I understand it's always a moving target, but is there a -- I guess, a discount to NAV's threshold that you have in mind that would make buybacks if you are more attractive in the near term?

Obviously, when the share price is lower, it makes the buybacks more attractive. We've completed enough buybacks that even with limited new investment activity, our leverage is at target levels. And so whether there will be more share buybacks this quarter is still a question mark.

We go next now to Robert Dodd of Raymond James.

And you answered that question partly, [indiscernible] there's more potential upside on NAV from these exits. Moving on to Outward Hound, right, when we look at Chase and PlayMonster, I mean it's a process on doing these restructurings. It takes a while sort of work involved. Outward Hound, the restructuring has just occurred. So on that, I mean, is that more likely to be a late '27 or even a 2028 kind of realization as you put some time into maybe hoping that the customer volume flows through and things like that? Or are you looking to monetize some of these things sooner rather than later? Some of them are just working out, obviously, Chase may be in the second half. Is that like are you putting your foot on the gas a little bit? Or is that just how it's working out? And what are your thoughts on Outward Hound?

Robert, there's always the chance that a strategic buyer comes in and offers us a price that we think makes sense in terms of a quicker redeployment of capital. But if we manage the turnaround process for Outward Hound the same way we've been managing a successful turnaround process for Chase and PlayMonster, that is a 2- or 3-year process. So certainly, the balance of '26 and '27 would be years where we'd be implementing in conjunction with management both potentially organic and inorganic growth initiatives, and also we're already working with management to optimize on cost, keeping the long-term perspective on value. But I would not expect an exit absent a strategic approaching us anywhere before 2028 on that deal.

Got it. Got it. Moving on to a different topic. To your point, I mean, spreads on new deals in the lower middle market, smaller companies, yes, I mean, go back years, right? You used to get a real premium, and that's largely evaporated. I mean that's having that across the market. What do you think changes that? To your point, in -- the supply-demand dynamics changed a little bit more upmarket and spreads are widening there. But I mean, is there anything that you think can materially change where that premium at the lower end versus the $100 million EBITDA deals can return to a noticeable premium for the incremental risk that you're taking?

Robert, I'll start by answering your question with the fact that if the lower mid-market is under pricing risk, we have the ability as a fairly large player of pivoting and that's the sponsor market in the lower mid-market where risk is arguably being underpriced. We have the ability to pivot to the nonsponsor market, the middle market, the upper middle market, and if we wanted to even the large-cap market, although there are things about the large-cap market that we don't like very much, including the LME risks that I talked about on the call.

So we don't need the lower mid-market to come back to premium pricing for the BDC to do well because we have strong tentacles into other market sectors, and we always pivot to where we see the risk return being the best. I would tell you that the things that I think would shift the dynamic in the lower mid-market would be, number one, fewer new entrants into that market. What you see -- I've spoken to bankers who told me that they'll want to process where they'll go out to 30 lower mid-market players to get pricing on a deal and 28 or 29 of those players will come back with pricing and a structure that reflects the fact that the company is so small, but 1 or 2 players will come back and undercut the market. And in those smaller deals, you typically only need 1 or maybe 2 players to get the deal done.

So those players who are, in my opinion, largely new entrants, who are not strong on the origination side and desperately need to deploy capital are the reason you're seeing that dynamic. And if they either successfully deploy the capital they need to, or fail to raise new capital, then I think you will see a balancing out of the price premium that we historically have seen in the lower mid-market.

But even looking at deals that I was talking to my team about earlier today, that dynamic has certainly not changed as of right now. And as we sit here in August, the lower mid-market deals are pricing at the same price or, in some cases, even lower prices than the equivalent mid-market or upper mid-market deals.

[Operator Instructions] We go next now to Christopher Nolan with Ladenburg.

Yes. I'll echo Robert's sentiment on congrats on the turnarounds. Talking about Chase products, that's an affiliated company. What is your equity ownership there, please?

We own -- other than the amount we've given to management, we own all the equity in the company. So if that company has a successful sale process, as indicated by the bankers, all that upside will flow to WhiteHorse as the owner and the BDC will get its pro rata share of that benefit.

So it's effectively a controlled company?

Yes, it is. We have selected the management team and worked with the management team in terms of strategy, growth and cost containment. And again, it has been very successful. If you look from when we took over the company with negative EBITDA, we took it from negative EBITDA to positive EBITDA in 1 year. We approximately doubled the EBITDA in the next year. And we are on track to have, without giving exact numbers, very strong growth this year. And then because we landed new customers that started shipping this year, if you just annualize those new customers, the EBITDA run rate is even higher.

So the story there has been remarkably positive. And again, even though we took a markup, I want to assure you that based on the data we have from bankers, the value that, that asset is marked at should be conservative. Again, I can't control markets, anything could change, but based on the data we have today, we did not take an aggressive market.

Well, congratulations on that turnaround and progress. That's a sweet victory for your company if you are able to pull off realization.

Yes.

And Chris, I just want to provide 1 point of clarification. To Stuart's point, we do control Starco and across the broader WhiteHorse direct lending platform effectively own 100% outside of management LTIPs and whatnot. With that being said, for purposes of the BDC itself, it is not considered or qualifies as a controlled portfolio company as that definition is noted in the '40 Act. Just wanted to provide that small clarification.

[Operator Instructions] And gentlemen, it appears we have no further questions today. So ladies and gentlemen, that will bring us to the conclusion of the WhiteHorse Finance Second Quarter 2026 Earnings Conference Call. We'd like to thank you all so much for joining us today, and wish you all a great afternoon. Goodbye.

Thank you. Bye-bye.

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. [Operator Instructions]

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 31, 2025 (sic) [ 2026 ], 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. Then 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 nonaccrual; and 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. And 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 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. So far, 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, and 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 adviser 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, one was a non-sponsored deal and two were sponsor. The sponsor 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 3 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's Finance 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 a $3 million -- 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 $0.2 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 recur markdowns in the quarter. At the end of Q1, 98.8% of our debt portfolio was first lien, senior secured and 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 nonaccrual during the quarter.

With respect to nonaccrual status, Outward Hound was placed on nonaccrual during the quarter. And with the final sale of our residual position occurring this quarter, Therm-O-Disc was removed from our nonaccruals. Excluding the STRS JV, nonaccrual 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 nonaccrual at quarter end were Honors Holdings, New Cycle 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 nonaccrual, our portfolio continues to perform well, and 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 6 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. That said, 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. And 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. And 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 is 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 and pricing continues to be generally at SOFR plus 600 and above with our non-sponsored 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, 4 are non-sponsor and 6 are sponsor. All of the non-sponsored deals are priced at SOFR plus 600 or above. And all of the sponsor 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 on 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 and 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 nonrecurring 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 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 the 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 2 new deals and 2 existing investments during the first quarter to the STRS JV totaling $18.9 million. During the quarter, the JV had 3 portfolio investments fully repaid. And as of March 31, 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 31, 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 our 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 in 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 6, 2026 to stockholders of record as of May 21, 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?

[Operator Instructions] We'll move first to Heli Sheth with Raymond James.

On the buybacks, how are you considering repurchasing shares on a go-forward basis in terms of weighing buybacks versus deployment, especially if the more muted M&A market that we're -- we've seen recently persists?

Yes. Again, the M&A market has picked up in the last 3 to 4 weeks. Pricing is higher than we've seen on deals in about 2, 2.5 years. So 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. So 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. I appreciate the color. And then on the pipeline, what are you sort of expecting for the pipeline for the remainder of the year? And 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. And 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. And 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. So 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. But again, we are seeing better deal flow now by far than what we were seeing 2 or 3 months ago.

[Operator Instructions] We'll move next to Christopher Nolan with Ladenburg Thalmann.

Is there any limit to what you can take your -- the percentage of the total portfolio occupied by the JV?

Yes. 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. And 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.

All right. Well, your portfolio is $578 million, no -- 30% of that is $173 million, and your equity in the JV is roughly $55 million, $57 million. So 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. And so the percentage that the JV occupies is higher. And also given the JV is generating attractive returns, you're sort of in this interesting spot where it's accretive to actually not only buy back your own shares, but because the increasing percentage from the JV that 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. And yes, as we buy back shares, using on-balance sheet liquidity. The JV is a slightly larger percentage of the overall portfolio. But again, in terms of dollars committed to the JV at the moment, we do not intend to make any changes.

Okay. And 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. But 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.

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. And so 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? So if you think about it, for instance, with the prior quarter, we had 3 realizations in the STRS JV portfolio. So by and large, the transfers that we had sent down to the JV were funded by those excess proceeds. And so 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.

[Operator Instructions] And it does appear that there are no further questions at this time. Thank you. This does conclude today's meeting. We appreciate your time and participation. You may now disconnect.

Good afternoon, everyone. Welcome to today's WhiteHorse Finance Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note, this call is being recorded.

And it is now my pleasure to turn the meeting over to Mr. Rob Munnings of Rose & Company. Please go ahead, sir.

Thank you, Bo, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Fourth Quarter 2025 Earnings Results.

Before we begin, I would like to remind everyone that certain statements made during this call, which are not based on historical facts, 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 Fourth Quarter 2025 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. I do hope you've had a chance to review the results for the period ending December 31, 2025, which are also beyond on our website.

On today's call, I'll begin by addressing our fourth quarter results and current market conditions, then Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail, after which we will open the floor for questions. Our results for the fourth quarter of 2025 reflected improved earnings and NAV performance relative to the prior quarter, Q4 GAAP net investment income and core NII was $6.6 million or $0.287 per share compared with Q3 GAAP and core NII of $6.1 million or $0.263 per share. NAV per share at the end of Q4 was $11.68 compared to $11.41 at the end of Q3, an increase of approximately 2.4%. The increase in NAV resulted from share repurchases that were accretive to NAV by approximately $0.184 per share as well as net realized and unrealized gains of approximately [ 7.7 ] per share, while also reflecting distributions paid during the quarter of $0.25 per share in base dividends and $0.035 per share in special dividends. 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 this distribution policy.

For the first quarter of 2026, the company declared a $0.01 per share supplemental distribution in addition to our base $0.25 dividend. To the extent our nonaccrual and other troubled situations in our portfolio result in recoveries or if current market conditions improve and/or base rates increase and any of these factors lead to additional earnings, we will be prepared to share those incremental earnings with investors in the form of supplemental or special distributions.

Turning to shareholder value. We recognize that our shares have traded at a persistent discount to NAV, and we've been focused on taking concrete steps to improve earnings power and narrow that gap over time. Over the last several quarters, we have prioritized actions that directly support sustainable net investment income and long-term value. First, we completed a term debt securitization through our CLO vehicle, which included $164 million of AAA-rated notes priced at 3-month sulfur plus 170 basis points. This transaction improves the stability and cost profile of a meaningful portion of our secured leverage. Second, our adviser voluntarily agreed to reduce the incentive fee on net investment income from 20% to 17.5% for the most recently completed fiscal quarter and the first quarter of 2026, providing near-term support for distributable earnings.

In Q4, this voluntary reduction reduced incentive fees by approximately $200,000 and provided additional support for our quarterly distributions. The adviser may extend this voluntary reduction. However, the duration and extent of any future reductions are uncertain and will be subject to ongoing discussions with the Board.

Finally, during Q4, the company repurchased approximately 1 million shares for an aggregate cost of approximately $7.4 million, which was accretive to NAV by approximately $0.184 per share. Given the continued gap in price to book, our Board has approved an incremental authorization to our share repurchase program of approximately $7.5 million, bringing the total authorization to $22.5 million with approximately $15 million still available under the authorization. This expanded program positions us to continue repurchasing shares opportunistically at prices below NAV when conditions warrant. Looking ahead, in addition to executing on portfolio repositioning and disciplined origination and building on the actions we've already taken, we and the Board will continue to evaluate and pursue other potential avenues to enhance shareholder value.

Turning to our portfolio activity. We had gross capital deployments of $77.1 million in Q4, which was partially offset by repayments and sales of $49.6 million resulting in net deployments of $27.5 million before the effects of transferring assets into the STRS JV. Gross capital deployments consisted of 7 new originations totaling $64 million and the remaining amounts were deployed to fund 9 add-ons to existing investments. In addition, there were $1.2 million in net repayments on revolver commitments during the quarter. Our new originations in Q4 included a mix of sponsor and nonsponsor deals at an average underwriting leverage of approximately 4.3x EBITDA. All of our Q4 deals were first lien loans, pricing reflected competitive market conditions, and our focus remained on structure and credit quality. Total repayments and sales were driven by completer partial realizations in 4 portfolio companies. Brooklyn Bedding, Bridgepoint Healthcare, One Call Locators and Contemporary Services Corporation. In the case of Brooklyn Bedding and ELM or in the case is of Brooklyn Bedding and ELM, we lead new financing that took out the old financings.

At the end of Q4, 99.7% of our debt portfolio is first lien, senior secured, and our portfolio continued to reflect a balanced mix of sponsor and nonsponsor investments. The weighted average effective yield on our income-producing debt investments decreased to 11% at the end of Q4 compared to 11.6% at the end of Q3, mainly due to lower spreads and lower base rates. The weighted average effective yield on our overall portfolio also decreased to 9.1% at the end of Q4 compared to approximately 9.5% at the end of Q3. During the quarter, the BDC transferred 2 new deals in 2 existing investments to the STRS JV totaling $19.2 million. At the end of Q4, the STRS JV portfolio had an aggregate fair value of $323.6 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 to our shareholders.

After net deployments and JV transfer activity as well as net realized and unrealized gains recognized during the quarter, total investments increased from the prior quarter by $10.2 million to $578.6 million. This compares to our portfolio's fair value of $568.4 million at the end of Q3. During the quarter, we recognized $11.3 million in net realized losses and approximately $13.1 million in net unrealized gains for an aggregate total of $1.9 million in net realized and unrealized gains in Q4. The net realized and underlying gains of $1.9 million or $0.077 per share were primarily driven by a $1.1 million unrealized gain in Sklar Holdings, also known as Starco, a $0.7 million unrealized gain on motivational fulfillment and other net markups across the portfolio. These items were partially offset by a $0.7 million unrealized loss in Lumen LATAM.

In addition, we recognized realized losses of $11.6 million, primarily driven by an $11.2 million from the Aspect Software investment restructuring and exit and $0.5 million from the partial sale of Therm-O-Disc. Importantly, these investments were already marked down in prior periods and reflected in our fair value. So the Q4 realizations largely converted previously recognized unrealized losses into realized losses, which accordingly also resulted in a corresponding net unrealized gain $11.6 million in the quarter. With the Aspect Software realization, those debt investments were removed from nonaccrual status, our small remaining exposure in Therm-O-Disc was placed on nonaccrual status as of quarter end, with the remaining investment already sold and exited in Q1 of 2026.

Excluding the STRS JV, nonaccrual investments represented 2.4% of the total debt portfolio at fair value. The remaining issuers on nonaccrual at quarter end were Honors Holdings, New Cycle Solutions, Playmonster and Therm-O-Disc. As always, we continue to actively manage underperforming credits, leveraging our dedicated restructuring resources and the broader capabilities of H.I.G. Subsequent to quarter end, we've had some credit specific updates worth noting. We have seen negative developments at Honors Holdings, where New Year sign-ups were below budget. And based on the current information we have, we would expect a markdown in the first quarter of 2026. In addition, Outward Hound is being sold at a price that is below our fourth quarter marks based on weak performance in Q4. The gap between the Q4 mark and the anticipated recovery is approximately $3 million. On Lumen LATAM, we received updated financial information during this quarter, and we exited a portion of that position at current market values, which were below the mark in Q4.

Partially offsetting these items, we've seen positive developments in certain credits, including Telestream, Starco and Playmonster. Aside from the credits on nonaccrual, our portfolio continues to perform well. I would also note that we have modest exposure to Internet or software companies, the BDC software exposure across 6 portfolio names represents 10% of the portfolio at cost and 9% at fair value. Market conditions remain competitive with capital availability continuing to exceed new deal supply. In the mid-market, we're generally seeing sponsor-backed deals, pricing in the SOFR plus 4.50% to 5.25% range and then the lower mid-market and the SOFR 4.50% to 5.50% range with terms varying by credit quality and structure. We have been avoiding certain large cap opportunities where we believe the market has been overheated, both in documentation and pricing.

We are also highly focused on minimizing exposure to liability management executions and new investments. For investors less familiar with the term, liability management execution or 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 provided adequate protections for all the deals we do against this risk. Looking forward, we're seeing somewhat better deal volume than this time last year. The sentiment we hear from bankers and private equity sponsors is for an increase in M&A volumes in 2026, supported by lower interest rates, abundant capital and increased pressure on sponsors from LPs to drive realizations. At the same time, the market continues to recognize the possibility of volatility from political and geopolitical developments, which could disrupt M&A activity.

In the nonsponsor conditions remain stable and less competitive than the sponsor market. Average leverage is approximately 4x to 4.5x and pricing continues to be generally at SOFR plus 600 or above with our nonsponsor portfolio performing as well as or better than the sponsor portfolio. We continue to focus significant resources on the nonsponsored market where there are better risk returns in many cases and much less competition than what we are seeing in the on-the-run sponsor market. We currently have 21 originators covering 12 regional markets. Given the market conditions, these originators are heavily focused on sourcing off-the-run sponsor deals and nonsponsor deals as we look for value in a market where there is limited deal flow and a lot of aggressiveness.

Subsequent to quarter end, the BDC has closed on 2 new deals and 7 add-on investments totaling $20 million and had 1 sale on Therm-O-Disc totaling $1.1 million. Following the net deployment activity to date in Q4, the capital reserve for share buybacks to BDC's remaining capacity is very limited. At the end of the fourth quarter, the STRS JV's remaining capacity was approximately $55 million and pro forma for recently mandated deals to be eventually transferred and anticipated repayments, the JV's capacity is approximately $35 million currently. Additionally, we continue to expect a normal level of repayment activity over time. For 2026, our current estimate is that approximately 30% of the portfolio could repay over the course of the year, consistently with the typical 3- to 3.5-year average life for loans although actual repayment timing will be driven by M&A, refinancing activity and company-specific outcomes.

Our pipeline remains lower than normal for this time of year. We currently have 5 new mandates and are working on 1 add-on to existing deal. Our 5 mandates are all sponsored deals. While there can be no assurance that any of these deals will close, all of these credits could fit into the BDC or our JV should we elect to transact and if there's room for more assets. All the sponsor mandates have pricing of 4.50% to 5.50% over SOFR.

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 recorded GAAP net investment income and core NII of $6.6 million or $0.287 per share. This compares with Q3 GAAP NII and in core NII of $6.1 million or $0.263 per share as well as our previously declared fourth quarter base distribution of $0.25 per share. Q4 fee income was approximately $0.8 million, primarily due to higher prepayment fee activity relative to the prior quarter.

For the quarter, we reported a net increase in net assets resulting from operations of $8.4 million. Our risk ratings during the quarter showed that approximately 85.9% of our portfolio positions either carried a 1 or 2 rating, an increase from the 81.8% reported in the prior quarter. Upgrades during the quarter included investments in Telestream and Max solutions. Downgrades during the quarter included moving our positions in Outward Hound from a [ 4205 ] rating as well as Therm-O-Disc from a [ 3205 ] rating, given those investments anticipated exit values in Q1. 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 the company is performing according to such as initial expectations.

Regarding the JV specifically, we continue to utilize the platform as a complement to BDC. As Stuart mentioned earlier, we transferred 2 new deals in 2 existing investments during the fourth quarter to the STRS JV totaling $19.2 million. As of December 31, 2025, the JV's portfolio held positions in 43 portfolio companies with an aggregate fair value of $323.6 million compared to an aggregate fair value of $341.5 million as of September 30, 2025. Leverage for the JV at the end of Q4 was approximately 1.07x compared with 1.24x 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 Q4, income recognized from our JV investment aggregated to approximately $3.8 million compared to approximately $3.6 million reported in Q3. 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 $29.7 million at the end of Q4, including $22.7 million in restricted cash. As of December 31, 2025, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act was 179.1%, which was above the minimum asset coverage ratio of 150%. Our Q4 net effective debt-to-equity ratio after adjusting for cash on hand was approximately 1.15x compared with 1.07x for the prior quarter. In regards to our share repurchase program, as Stuart noted earlier, our Board approved a $7.5 million increase to the existing authorization, bringing the total share repurchase program to $22.5 million, with approximately $15 million of that still to be used. I'd like to also highlight that in addition to the company's share repurchase activity, certain company insiders and other individuals and H.I.G. affiliate employees also purchased shares in the open market during the prior quarter, including 87,000 shares by certain officers and directors of WhiteHorse Finance as disclosed on Form 4 filings. This demonstrates their view of WhiteHorse Finance's 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 first quarter base distribution of $0.25 per share. Consistent with our existing distribution framework, the Board also evaluated and declared a supplemental $0.01 per share distribution in addition to the regular quarterly distribution. The distributions will be payable on April 6, 2026, and to stockholders of record as of March 12, 2026. As a reminder, the framework of [indiscernible] used to determine supplemental distribution, if any, will be calculated as the lesser of: one, 50% of the quarter's earnings that is in excess of the quarterly base distribution; and two, an amount that resulted no more than a $0.15 per share decline in NAV per share over the current quarter and preceding quarter.

Earnings for the purpose of measuring the excess over the quarter's base distribution is net investment income. The NAV decline measurement is inclusive of the supplemental distribution calculated and to be clear, is measured over the 2 most recently completed quarters. We believe this formulaic supplemental distribution framework allows us to maximize distributions to our shareholders while preserving the stability of our NAV, a factor that we do believe to be an important driver of shareholder economics over time. In assessing distributions, we also consider our taxable income relative to amounts that we have distributed during the year when setting our overall dividend. Our current estimate of undistributed taxable income, sometimes referred to as our spillover as of the end of Q4 2025 is approximately $27.6 million, and pro forma for our distribution already made in January 2026 is approximately $21.6 million.

We continue to believe that having a healthy level of spillover income is beneficial to the long-term stability of our base dividend. We will continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations. As I said previously, we will continue to evaluate our quarterly distribution, both in near and medium term based on the core earnings power of our portfolio in addition to other relevant factors that may award consideration.

With that, I'll now turn the call back over to the operator for your questions. Operator?

[Operator Instructions] And we'll go first today to Rick Shane with JPMorgan.

Look, solid order stock is still trading 40-plus percent discount to NAV. You have announced an increase to the repurchase. I am curious, and this is not going to be a shock given all the questions that I've asked over and over again on earnings calls. How are you balancing the opportunity in terms of what's out there for new deployment versus the attractiveness of your stock? And also, as we think about that, can you just give us a sense of how you're going to be managing leverage as well?

Yes. Thanks for the questions, Rick. And the simple answer is at the current trading levels or really anything close to the current trading levels, we think our stock represents a very attractive purchase which is why the Board originally authorized the $15 million buyback and why insiders, including myself, have been buying shares at or near current levels. given how far the shares have traded down and given the success of the buyback in the last quarter, the Board authorized an increased amount for buybacks. We have very limited availability of capital for new on-balance sheet transactions, the JV generates a higher return. And so we are still doing some JV transactions.

But as long as the shares are continuing to trade at this type of discount, one of the best things we can do with our capital is to buy the shares. And then also that it wasn't in your question, but I'll highlight, we and the Board are viscerally aware of the significance of the discount and are looking at options that we can try to avail ourselves of to improve the earnings of the BDC and/or improve value to shareholders.

I appreciate that. And again, I mean, look, I think the challenge ultimately is, I think you would suggest that of your investment options behind the stock at this discount for yourselves might be the most attractive. But in general, we've seen BDCs struggle with that approach. Is the expectation if we see net runoff in the portfolio that, that capital will largely be redeployed into repurchases at this point? Is that how we should be thinking about things? Or how will you balance that?

The Board is going to continue to evaluate the trading price vis-a-vis the NAV and make decisions with the management to try to optimize performance for the shareholders. That is why even though we had enough capital to continue the buyback into the next quarter, the board wanted to send a message to shareholders by increasing the capital by another $7.5 million. And each quarter, the Board will look at the trading level and the market to determine what it thinks the best use of capital would be. But at the moment, as opposed to putting assets on the balance sheet, we are primarily focused on repurchasing shares at currently, as you said, a 40% or more discount to NAV, which is very accretive to both NAV and also accretive to NII.

I'll go next now to Christopher Nolan with Ladenburg Thalmann.

Following up on the previous question. What measure does the board use to compare the performance of WhiteHorse BDC to its peers?

We look at a whole series of metrics. Joyson, I may pass it to you to highlight what those metrics are. But we look at return on the share price. We look at costs that the BDC incurs versus others, and we look at our trading level vis-a-vis the discount to NAV compared to other BDCs.

Joyson, did I miss any there that are important?

No, I think I would just add also just that the dividend yield relative to NAV, obviously, based on our own analysis on what the core earnings power of the portfolio is.

Okay. Do you guys feel that your exposure to the JV senior loan funds effectively takes a first lien investment on the scheduled investments, puts it into the JV and suddenly, you are in a subordinated position because you're holding equity in the JV. Is that correct to the houses?

We put leverage on the JV, and we are subordinated to that leverage. That is correct.

Okay. So you're in a subordinated position taking higher -- you're getting a mid-teens return. Do you think in the current environment, which is sensitive to the asset quality of private credit that part of the discount in your share price could be the fact that the market is looking at these SLF positions and saying they're second lien and they're given the appropriate haircut?

We haven't heard that from any of our covering analysts nor have we heard that directly from its shareholders. The JV portfolio is remarkably clean in terms of performance. And while we do have leverage on the JV and leverage on the BDC, that leverage is against a pool of first lien assets and modest leverage against first lien assets is, frankly, a very common thing in the direct lending market and the BDC market. And if we heard from shareholders or covering analysts that the JV was a reason or a key reason for the share discount, we would certainly take that information in, communicate it to the Board and make decisions based on that.

But again, so far, I've gotten no feedback that would indicate that, that would account for to the discount to NAV of the trading level.

Got it. Okay. Well, your stock is trading roughly almost a 16% dividend yield on the stock price. On the new NAV, it's roughly trading a 9% yield, which is okay. But your stock price is 50%, 60% of book. I mean, there has to be a real big issue. And the only thing that's left there is most likely the portfolio. I'm just putting it out there. I mean, planning out.

Chris, I would tell you that we strive to be transparent and realistic in our marks. That is why, historically, you've seen some assets that mark down and continue to mark down but other assets that get marked down and then get marked up, which include names like Telestream, [indiscernible], and I mentioned this quarter, we're seeing positive news also on Playmonster, too early yet to know whether there will be a markup. But we agree that the discount to the NAV is extreme. And we are trying to take action to improve shareholder value, starting with the share buyback and also with the refinancing of the leverage at a cheaper rate, and we are talking to advisers about anything else we can do that would improve value for shareholders.

No argument on the marks. And I think what you guys are doing in terms of repurchases is definitely an awesome. And I hope you continue the waiver and the repurchases. I think it's a great use of capital. My point is, this is an elephant in the room, and it's effectively a second lien position. At a time when financial services companies are -- or the sector is under scrutiny, BDCs in my humble opinion, tend to be valued more on a discounted value of their NAV, which leads to haircuts in terms of the type of assets in the book. So that's just my two cents.

[Operator Instructions] We'll go next now to Heli Sheth with Raymond James.

You mentioned an active M&A market, but also a lower than normal pipeline currently. Any further insight into what we should expect in terms of timing or pacing of both repayments and originations for the year? Are there any catalysts down the line that might drive more activity?

Yes. Just to be clear, we have had noticeably better activity and volume in Q1 of this year so far than we had in Q1 of last year. But as we sit here now in early March, the pipeline that we have looking forward March into April is not as strong as it was at this time last year.

Now you'll also remember or I'll remind folks that at this time last year, there was a fair amount of optimism in terms of M&A activity coming back. And then the tariff issues arose, which threw a real monkey wrench into a lot of people's plans on the M&A side. There is, once again, optimism from the bankers we are speaking to and from private equity shops we're speaking to regarding likely activity, M&A activity in 2026 for the reasons that I highlighted in my call, including lower interest rates and abundant capital with pricing on that capital being at or near all-time lows. But as we've seen just in the past couple of days, things can certainly happen on the geopolitical side that were not forecast and can have an impact on M&A activity.

So we currently are projecting based on what we see improved M&A activity for the year. We think that, that could lead to slightly better pricing in the marketplace. But that slightly better pricing is likely to be offset by rate cuts, whether it's 1 or 2, which I think is the current conventional wisdom or whether it's 3 or 4, driven by leadership of the Fed likely changing in May.

Got it. I appreciate the detail. And in that pipeline, is there any sort of shift in the kinds of deals that you're seeing maybe in terms of sponsor, nonsponsor incumbent versus new borrowers or LTVs, anything on those works?

We're seeing fewer deals that are straight repricings because the lower pricing has now been in the marketplace for about 1.5 years to 2 years. So we are seeing more new M&A deals. In terms of sponsor nonsponsor, we finished the year with a couple of non-sponsor deals in Q4. But the nonsponsor pipeline has been lighter than normal here in the first quarter of 2026. We do think that the nonsponsor market in general is more appealing than the sponsor market right now, largely because in the sponsor market, there are over 200 active direct lenders. But in the nonsponsor market, at least in the mid-market and lower mid-market, we see fewer than 10 shops who actively originate non-sponsor mid-market and lower mid-market deals. So it's a much less competitive market and as evidenced by the nonsponsor deals that we did in Q4, we are getting still pricing of 600, 650 or even 700 on nonsponsor deals at modest leverage and modest loan to value.

[Operator Instructions] And gentlemen, it appears we have no further questions this afternoon. So that will bring us to the conclusion of today's conference call. Ladies and gentlemen, I'd like to thank you all so much for joining the WhiteHorse Finance Fourth Quarter 2025 Earnings Call. Again, thanks so much for joining us, and we wish you all a great day. Goodbye.

Thank you.

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 Third Quarter 2025 Earnings Conference Call.

Our host for today's call are Stuart Aronson, Chief Executive Officer; and Joyson Thomas, Chief Financial Officer. Today's call is being recorded and will be made available for replay beginning at 4:00 p.m. Eastern Time. The replay dial-in number is (402) 220-2572. No pass code required. [Operator Instructions] It is now my pleasure to turn the floor over to Robert Brinberg of Rose & Company. Please go ahead.

Thank you, Chloe and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Third Quarter 2025 Earnings Results. .

Before we 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 Third Quarter 2025 earnings presentation, which was posted on our website this morning.

With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Rob, and good afternoon, everybody. Thank you for joining us today. As you're aware, we issued our earnings this morning before market open, and I hope you've had a chance to review our results for the period ending September 30, 2025, which can also be found on our website. On today's call, I will begin by addressing our third quarter results and current market conditions. Joyson Thomas, our Chief Financial Officer will then discuss our performance in greater detail, after which we will open the floor for questions. Our results for the third quarter of 2025 were disappointing and reflect the onset of interest rate cuts, continued pressure on market spreads as well as the impact of material markdowns on some credits that we have previously discussed. Q3 GAAP net investment income in core NII was $6.1 million or $0.263 per share compared with Q2 GAAP and core NII of $6.6 million or $0.22 per share. NAV per share at the end of Q3 was $11.41, representing approximately a 3.6% decrease from the prior quarter. .

In addition to the approximate $0.12 shortfall in NII coverage of our Q3 base distribution, NAV per share was also impacted by net realized and unrealized losses on our portfolio totaling $6.7 million or approximately $0.29 per share, which I'll discuss later in the call. As a result of these earnings and current market conditions, I have 3 important announcements. First, given the current earnings power of the BDC as well as our expectations for lower interest rates and continued spread compression in challenging market conditions, our Board of Directors has taken the prudent measure to reset our quarterly base distribution to $0.25 per share. This adjusted distribution rate represents an implied 8.8% annualized yield based on the company's ending NAV per share as of the end of the third quarter. This was a difficult but necessary decision. Ultimately, we believe the reset puts us in a better position to earn our base distribution going forward.

Given management's expected earnings power of the BDC future base rate movements as well as current market conditions. We will continue our distribution policy framework that was previously announced during our Q1 2023 earnings call on May 9, 2023, where the company intends to distribute its space distribution as well as make potential supplemental distributions above the base level in the future pursuant to this distribution policy. To the extent our nonaccrual and other troubled situations in our portfolio result in recoveries or if current market conditions improve, and/or base rates increase and any of these factors lead to additional earnings, we will be prepared to share those incremental earnings with investors in the form of supplemental or special distributions. Joyson will provide a refresher on how our supplemental distribution policy gets calculated when he speaks in a little while. Second, on the big topics as a result of recent disappointing results and as a part of our ongoing commitment to align interest to the adviser with those of our shareholders, the adviser has voluntarily agreed to reduce the incentive fee on net investment income from its stated annual rate of 20% to 17.5% for the next 2 fiscal quarters ending December 31, 2025, and March 31, 2026, respectively.

This temporary 2.5 point reduction in our income-based incentive fee will provide additional financial support for our quarterly distributions to shareholders. the adviser may extend this voluntary reduction. However, the duration and extent of future reductions are uncertain and will be subject to ongoing discussions with the Board. Finally, given the discount of the company's stock price relative to book value, the Board has approved a share buyback program of up to $15 million. Under the share repurchase program, the company may but is not obligated to repurchase this outstanding common stock in the open market from time to time at the then current market prices at the discretion of WhiteHorse Finance's management team. The company's current share price level implies a discount to its current book value of more than 40%, which we believe will result in very accretive share repurchases.

Turning now to portfolio activity. We had gross deployments of $19.3 million in Q3, which was more than offset by elevated repayments and sales of $50.5 million resulting in net repayments of $31.2 million. Gross capital deployments consisted of 2 new originations totaling $14.3 million and the remaining amounts were deployed to fund 2 add-ons to existing investments. In addition, there was $0.5 million in net fundings made on revolver commitments. Our new originations in Q3 included 1 non-sponsor and 1 sponsor deal at an average -- an average leverage of approximately 3.5x EBITDA. All of our Q3 deals were first lien loans at an average spread of 61 basis points. Total repayments and sales were driven by complete or partial realizations in 5 portfolio positions including Barbecue Guys, Rob logistics, power plant services, coastal TV and Ross Simon.

At the end of Q3, 99.2% of our debt portfolio is first lien senior secured, and our portfolio ownership mix was approximately 65% sponsor and 35% nonsponsor. The weighted average effective yield on our income-producing debt investments decreased to 11.6% as of the end of Q3 compared to 11.9% in Q2 mainly due to lower spreads and lower base rates. The weighted average effective yield on our overall portfolio also decreased slightly to 9.5% at the end of Q3 compared to approximately 9.8% at the end Q2. During the quarter, the BDC transferred 1 new deal and 4 existing investments to the STRS JV. At the end of Q3 the STRS JV portfolio had an aggregate fair value of $341.5 million and an average effective yield of 10.3% compared with 10.6% from Q2. 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 the net realized and unrealized losses recognized during the quarter, total investments decreased from the prior quarter by $60.9 million to $568.4 million. This compares to our portfolio's fair value of $629.3 million at the end of Q2.

During the quarter, we recognized $1.8 million in net realized losses and approximately $4.9 million of net unrealized losses for an aggregate total of $6.7 million in net realized and unrealized losses in Q3. Our mark-to-market losses were primarily driven by write-downs in Alberia which was formerly known as Aspect Software,and in Camarillo Fitness, also formerly known as Honors Holdings. [indiscernible] has continued to underperform and has struggled to service its existing debt levels. At the end of the third quarter we marked down our position in Alberia by approximately $1.7 million based on our expectations of a multitiered restructuring to occur in Q4. Subsequent to the quarter end, a lender group, including White Horse, completed a restructuring of the transaction, in which we extinguished our existing debt position for cash and equity consideration equal to approximately the aggregate fair value we marked to as of the end of September 30.

Amarilla Fitness, which is the largest franchisee of Orange Theory fitness, also continues to underperform. At the end of the third quarter, we marked down our position by approximately $4.4 million in the aggregate. We're making every effort to optimize Camarillo to be well positioned for New Year's sign-up period, which could give the business a boost in performance. As a partial offset to the markdowns this quarter we were able to provide an incremental add-on to motivational marketing subsequent to the end of the quarter to help effectuate the merging of that portfolio company with another portfolio company. As part of the add-on, the sponsor contributed a fresh amount of additional equity cushion behind the debt. And as a result, that has taken leverage of motivational marketing down significantly and led to a slight markup of approximately $0.7 million on that asset.

The BDC also recognized $2.1 million in realized losses, which was partially offset by a reversal of approximately $1.7 million in previously recorded unrealized losses from the restructuring of MSI information systems. With the restructuring of MSI, the restructured debt investments return back to accrual status as we expected it would. Nonaccrual investments now represent 2.7% of the debt portfolio at fair value, an improvement compared with 4.9% of the debt portfolio in the prior quarter. Other deals on nonaccrual are likely to remain that way for some period of time. We are continuing to actively work on getting deals off nonaccrual, leveraging the expertise of our -person dedicated WhiteHorse restructuring team and the resources of HIG Capital. Aside from the credits on nonaccrual, our portfolio is performing quite well.

Turning to the lending market. M&A activity has not picked up as much as the investment banks and private equity shops had hoped for, although there has been a steady trickle of improvement. There is still plenty of capital available to serve the reduced supply of new financings in the market and the environment remains extremely competitive, particularly for companies that are noncyclical and do not have meaningful international sales exposure. Lenders in the sponsor markets are being very aggressive while the nonsponsor markets continue to be less competitive. In the mid-market, pricing for sponsor deals is pretty solidly in the SOFR 450 to 500 range as competition is compressed spreads and OID is typically 1 point to 1.5 points. Lower mid-market sponsor deals are pricing in the $4.75 to $5.75 spread over SOFR, at least a range of that. Leverage multiples are between 4 and 6x. And partial PIK features are being used selectively to make cash flows work on upper mid-cap and large-cap deals.

The nonsponsor market remains much less competitive and has a significant pricing premium compared to the sponsor market. We are generally seeing nonsponsored deals pricing at SOFR plus 600 and above. OID is still generally 2 points or higher compared to sponsor deals. Leverage levels on nonsponsored deals have been consistently lower and in more stable than the sponsor-backed deals. To put the attractiveness of the nonsponsor market in context, our nonsponsor mandates are still levered only 3 to 5.5x, and the highest deal we have priced recently is a SOFR 650 plus a warrant. We continue to focus significant resources on the nonsponsor market where there are better risk returns in many cases and much less competition than what we were seeing, especially in the on-the-run sponsor market. We currently have 22 originators, covering 13 regional markets. Given market conditions, these originators are primarily focused on sourcing off-the-run sponsor deals and nonsponsor deals as we look for value and good risk return in a market where there is limited deal flow and a lot of aggressiveness.

Subsequent to quarter end, the BDC has closed on 1 new deal and 1 add-on investment totaling $16.2 million and had 1 full repayment totaling $22.2 million. Following the net deployment activity to date in the BDC's remaining capacity is approximately $40 million and pro forma for several transactions that we anticipate to close in Q4 of 2025 and the BDC's capacity for new assets is approximately $20 million. At the end of the third quarter, the STRS JV's remaining capacity was approximately $20 million and pro forma for recently mandated deals to eventually be transferred in the JV's capacity is fully deployed. Our pipeline remains lower than normal for this time of the year. We currently have 6 new mandates and are working on 3 add-ons to existing deals. Our 6 mandates comprise -- are comprised of 2 nonsponsor deals and 4 sponsor deals. While there can be no assurances that any of these deals will close, all of these credits would fit into the BDC or our JV should we elect to transact.

All the nonsponsor mandates have pricing of 600 over SOFR or better and would be targeted to go into the BDC's balance sheet. Several of these mandates are large and will help us with asset balances in the BDC. the sponsor mandates have pricing of $4.25 to $5.50 over SOFR.

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 recorded GAAP net investment income and core NII of $6.1 million or $0.263 per share. This compares with Q2 GAAP NII and core NII of $6.6 million or $0.282 per share as well as our previously declared third quarter base distribution $0.385 per share. Q3 fee income was only approximately $0.1 million and was lower than historical quarters due to lower amendment and prepayment fee activity. For the quarter, we reported a net decrease in net assets resulting from operations was $0.6 million. Our risk ratings during the quarter showed that approximately 81.8% of our portfolio positions either carried a 1 or 2 rating, an increase of 76.8% reported in the prior quarter. Upgrades during the quarter included positions in motivational marketing and educational dynamics, which were both upgraded to a 2 and which was upgraded to a 3. As a reminder, 1 rating indicates that the company has seen its risk of loss reduced relative to initial expectations and a 2 rating indicates that company is performing according to such initial expectations.

Regarding the JV specifically, we continue to grow our investment. As Stuart mentioned earlier in the call, we transferred 1 new deal and 4 existing investments during the third quarter to the STRS JV totaling $24.2 million. As of September 30, 2025, the JV's portfolio helped positions in 43 portfolio companies with an aggregate fair value of $341.5 million. compared to 43 portfolio companies with an aggregate fair value of $330.2 million as of June 30, 2025. Leverage for the JV at the end of Q3 was approximately 1.24x compared with 1.6x at the end of the prior quarter. The investment in the JV continues to be accretive for the BDC's earnings generating a mid-teens return on equity. During Q3, income recognized from our JV investment aggregated to approximately $3.6 million, a slight increase from the $3.4 million reported in Q2. As we have noted in prior calls, that 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, the changes in asset yields in the underlying portfolio as well as the overall credit performance of the JV's investment portfolio.

Turning to our balance sheet. We had cash resources of approximately $45.9 million at the end of Q3, including $36.4 million of restricted cash and $100 million of undrawn capacity under our revolving credit facility. Following elevated repayments during the quarter, we repaid in full the $40 million of unsecured notes paying 5.375% interest that were due to mature on October 20. As of September 30, 2025, the company's asset coverage ratio for borrowed amounts as defined by the 1940 Act, was 18.7%, which was above the minimum asset coverage ratio of 150%. Our Q3 net effective debt-to-equity ratio after adjusting for cash on hand was approximately 1.07x compared with 1.22x from the prior quarter. Before I conclude and open up the call to questions, I'd like to discuss our distribution policy. This morning, we announced that our Board declared a fourth quarter base distribution of $0.25 per share.

To supplement Stuart's earlier comments, I note the company still has the ability under our existing distribution framework to issue supplemental distributions. Each quarter, the Board will utilize this framework to determine if a supplemental distribution should be made in addition to the regular base quarterly distribution. The framework the Board will use to determine the supplemental distribution, if any, will be calculated as the lesser of: one, the quarter's earnings that is in excess of the quarterly base distribution; and two, an amount that results in no more than a $0.15 per share decline in NAV over the current quarter and preceding quarter. Earnings for the purpose of measuring the excess over the quarter's base distribution is net investment income. The NAV decline measurement is inclusive of the supplemental distribution calculated and to be clear, is measured over the 2 most recently completed orders. We believe this formulaic supplemental distribution framework allows us to maximize distributions to our shareholders while preserving the stability of our NAV, a factor that we do believe to be an important driver of shareholder economics over time.

The upcoming $0.25 distribution will be payable on January 5, 2026 to stockholders of record as of December 22, 2025. 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. In addition to our quarterly distribution, we elected to declare a special distribution of $0.035 per share for stockholders of record as of October 31, 2025. The distribution will be payable on December 10, 2025. This distribution was related to undistributed taxable income that was earned last year, which would have otherwise been taxable.

With that, I'll now turn the call over to the operator for your questions. Operator?

[Operator Instructions] And we will take our first question from Melissa Wedel with JPMorgan.

I wanted to start with the dividend and understand how you're approaching it with the announcement for the 4Q level of $0.25 a share. Should we be thinking about that as the new base level? Or is this going to be something that will fluctuate a little bit more quarter-to-quarter outside of the supplemental component?

Melissa, we took a look at where interest rates are, what interest rates are supposed to do in the future, where deployments are at the current market spreads are and the earnings power of the BDC, given some losses on accounts that we've taken, both realized and unrealized losses and we came up with a sensitivity analysis that caused us to work with the Board to set a new base dividend that should be a long-term dividend if our projections as to market conditions and interest rates are correct. And we set that at a level that we believe we can earn on a quarterly basis reliably even if interest rates do continue to decline in alignment with the current yield curve.

Okay. I appreciate that. And then as a follow-up, I wanted to touch on the fee waiver. I'm curious about, I guess, 2 aspects of it, the level going to 17.5% from 20% and the 2 quarters for 4Q and 1Q that, that will apply to. I guess the question behind both is why that level and why that time frame? Is there a longer-term consideration the Board is taking under advise on.

Thank you, Melissa. The Board and the manager discussed what we should do vis-a-vis providing some cushion to the earnings capability of the BDC, And it was agreed that we would waive the 2.5% amount for -- or forgive the 2.5% amount for the next 2 quarters. And then based on the performance of the BDC going forward, the Board and the manager will discuss whether additional forgiveness is warranted and appropriate. So 2 quarters are done. And going forward, it will be based on discussions between the Board and the manager and linked to the results of the BDC.

And we'll take our next question from Robert Dodd with Raymond James.

On looking at the BDC and the JV to your comments, Stuart, it sounds like you're really close to full capacity in terms of investments. What, unless, obviously, there's recoveries from some of these stressed assets. So I appreciate all the color you gave us on the situation at some of these businesses. But can you give us any more thoughts on like -- and obviously, some of these turnarounds, they don't happen quick to your point, Camilo, maybe get through Q1 and there's a rebound in activity. But what are your long-term realistic expectations about fair value recovery from these troubled assets because obviously, that's one of the tools that would potentially be reinvestable, maybe rebound the dividend, maybe give the BDC a bit more capacity. Any thoughts on what you can tell us on the real prospects there?

Yes. Robert, the deals that are on nonaccrual right now, as I indicated in the prepared remarks, are likely to remain on accrual for at least the next 12 to 24 months. In a number of cases, we have taken over the management of those companies and our 5-person restructuring team works cooperatively with HIG private equity operating professionals to make sure that we're getting optimal management teams into those companies, cutting costs were appropriate and driving growth strategies. But the turnaround of those credits for the most part is a multiyear effort in certain circumstances as it regards to credit like Playmonster, We have taken it, and that was a credit where there was fraud originally, and we found out that the EBITDA of the company was actually pretty strongly negative. We have turned that company around and the EBITDA is now positive. We believe we have a good management team, and we're hoping for improved results not only this year, but heading into next year.

So that would be a good example of an account that's heading in the right direction. But in order for us to get to a markup and a cash realization, we need to continue to turn that account around more that it has already occurred so far. And the same is true for credits like ArcServe which we're still working on and a couple of the other credits in the portfolio. So in all the cases except for Aspect Software and Camarillo, we're seeing stabilization to improvement in the performance of the company. But we do think it's going to be a significant period of time, again, at least 12 to 24 months before those assets that are on a nonaccrual come back on to accrual.

Got it. On the -- can you give us any color on like the track record of performance sponsor versus non-sponsor? To your point, the sponsor deals carry meaningfully higher spreads, lower leverage. But obviously, if something does go wrong, it's kind of [indiscernible] rather than the sponsor to work through the process. So can you give us any comment the returns are higher, but what the track record of the income returns are high, the track record of outcomes between the 2 different deployment strategies.

Robert, in general, the leverage on the nonsponsor deals is anywhere from a turn lower than on the sponsor deals. Our track record historically has been that we see fewer defaults -- sorry, fewer payment defaults on the nonsponsor deals during COVID. We had a number of sponsor deals that went into payment default and needed equity support, but we did not have any nonsponsor deals that went into payment default during that COVID period. We've had on nonsponsor deal that has resulted in a significant loss. That was American Crafts, which is now fully resolved. But as I think through the nonaccruals and maybe Joyson I'll ask you to double check me on this, but I believe all of the nonaccrual accounts at this point are actually deals that were sponsored deals and none of them currently are nonsponsored deals, which speaks to the relative strength of what we do in the non-sponsor market. And Joyson, am I right on that? Are any of the nonaccrual deals, nonsponsor deals?

Stuart, I think if we're including maybe nonincome-producing restructured assets [indiscernible] brands might be 1 that we considered. I forgot sponsored or nonsponsored deal.

Lift Brands was a sponsor deal. That was a deal that during COVID, the private equity firm injected a significant amount of equity into turning around the company.

Let me double check on the others, and I'll come back on that. But I think that is -- the only other one I could think of is potentially Sklar, again, another nonincome-producing or a portion of the equity, which is nonincome-producing.

But I believe Sklar, which is nonsponsor is on accrual. So correct. Yes. So...

Sklar is also a company that we had to take control of. We have dramatically improved the performance of that credit since taking control of it. That is a credit that if it hits its projected numbers for next year, based on new customers that have been signed up and additional EBITDA we expect to be earning that is a credit again, it's on accrual right now. The debt is paying interest in cash, but we own the equity, and there is potential for an equity gain upon the sale of that credit next year. if we are able to hit our projected numbers.

Got it. Then just 1 more, if I can. On the pricing, to your point, I mean in the low -- even in the lower middle market for sponsored deals, pricing is pretty tough by historic standards. I mean, is that just -- I mean I say just, is it had a consequence of more competition in terms of large market competitors coming down because there's not enough activity at their end of the market? Or is it just -- it's your same long-term competitors just getting much more aggressive?

It's a really good question, Robert. The mid-market spread compression is a result in many cases of large market players not having enough volume and coming into the mid-market and creating additional supply of capital. And so in the mid-market, we're typically seeing pricing of [ 450 to 500 ]. And I would say that has definitely been impacted by the larger players coming down market. In the lower mid-market, we're not really seeing the larger players, but there have been a number of new organizations that have been formed that don't have a track record of relationships in the industry. And some of those shops are trying to buy market share by discounting price and/or doing higher leverage on deals. So the lower mid-market, where, frankly, there are hundreds of private equity firms operating is a much more variable market where we are seeing pricing anywhere from [ 475 up to 575 ] depending on how much competition there is on any given deal and given on the complexity of the credit. But I do not believe that lower mid-market spreads have been significantly impacted by the large shops. And again, when I talk lower mid-market, I'm talking about EBITDA below $30 million. .

And we will take our next question from Christopher Nolan with Ladenburg Thalmann.

It revisits the incentive fee reduction. Once we're beyond first quarter 2, if the EPS continues to underperform, what's the, I guess, state of mind or head space in terms of lowering the incentive fee or continuing it?.

So the Board of Directors has provided us a perspective that the forgiveness of the incentive fee or the temporary reduction of the incentive fee is aligned with trying to make sure that we are earning the dividend. And so if there is underperformance in terms of core dividend earnings, I would expect that the Board would take a view that they would seek additional forgiveness or additional waiver of that 2.5 for additional quarters. But 6 months is a significant amount of time in the market, and we all need to see what is going on with M&A volume, spreads in the marketplace and core interest rates in terms of what the Fed is doing to have a better sense of what earnings will be out 3 and 4 quarters or more from now.

Understood. And I guess on the share repurchases, if I am to read your comment earlier, it seems like deal flow seems to be slow. Should we read into that, that the company will be aggressive on share repurchases?

Chris, we're trading at a very significant discount to NAV even off of the reduced NAV that I showed you today of $11.41 buying back shares at levels anywhere around today's price is highly accretive for shareholders, both in terms of NII and NAV and given limitations in how many shares we can purchase in any given day or week, we felt the $15 million allocation made a lot of sense to recapture shareholder value if the shares did not materially trade higher. So we, as a manager, are going to try to act in the interest of the holders and repurchase shares so long as there is a material benefit to the shareholders in doing so.

And it does appear there are no further questions at this time. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.

Thank you.