What changed in this filing

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Item 1A. Risk Factors

2021-05-10 compared with 2020-11-09 · 115 added, 203 removed, 13 unchanged (96% of the section changed)

In addition to the below risk factors

and other information set forth in this report on Form 10-Q, you should carefully consider the “Risk Factors”

discussed in our annual report on Form 10-K for the year ended December 31, 2019, which could materially affect our

In addition to the below risk factor and

other information set forth in this report, you should carefully consider the “Risk Factors”

discussed in our annual report

on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition and/or operating results.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our

business, financial condition and/or operating results.

Additional risks and uncertainties not currently known to us or that

we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

We intend to continue to finance our investments with

borrowed money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in

The use of leverage, including

through the issuance of senior securities, magnifies the potential for gain or loss on amounts invested.

We have incurred

leverage in the past and currently incur leverage through the Credit Facility, 2023 Private Notes, 2025 Notes and the 2025

Private Notes and from time to time, intend to incur additional leverage to the extent permitted under the 1940 Act.

leverage is generally considered a speculative investment technique and increases the risks associated with investing in our

In the future, we may borrow from, and issue senior securities, to banks, insurance companies and other lenders.

Holders of these senior securities will have fixed dollar claims on our assets that are superior to the claims of our common

stockholders, and we would expect such holders to seek recovery against our assets in the event of a default.

borrowed money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.

The use of leverage, including through the

issuance of senior securities, magnifies the potential for gain or loss on amounts invested.

We have incurred leverage in the past

and currently incur leverage through credit facilities and issuance of public and private notes.

From time to time, we intend to

incur additional leverage to the extent permitted under the 1940 Act.

The use of leverage is generally considered a speculative

investment technique and increases the risks associated with investing in our securities.

In the future, we may borrow from, and

issue senior securities, to banks, insurance companies and other lenders.

Holders of these senior securities will have fixed dollar

claims on our assets that are superior to the claims of our common stockholders, and we would expect such holders to seek recovery

against our assets in the event of a default.

WhiteHorse Credit

has pledged, and expects to continue to pledge, all or substantially all of its assets.

WhiteHorse Credit has granted, and may

in the future grant, a security interest in all or a portion of its assets under the Credit Facility.

In addition, under the terms

of the Credit Facility, we must use the net proceeds of any investments that we sell to repay amounts then due with respect to

our debt and certain other amounts owing under the Credit Facility before applying such net proceeds to other uses, such as distributing

them to our stockholders.

We may pledge up to

100% of our assets and may grant a security interest in all of our assets under the terms of any debt instruments into which we

In addition, under the terms of any credit facility or other debt instrument we enter into, we are likely to be required

by its terms to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility

or instrument before applying such net proceeds to any other uses.

If the value of our assets decreases, leverage

would cause our net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses

or eliminating our equity stake in a leveraged investment.

Similarly, any decrease in our revenue or income will cause our net

income to decline more sharply than it would have had we not borrowed.

Such a decline would also negatively affect our ability

to make distributions on our common stock or preferred stock.

Our ability to service our debt will depend largely on our financial

performance and will be subject to prevailing economic conditions and competitive pressures.

In addition, our common stockholders

will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase

in the management fee payable to WhiteHorse Advisers.

As a business development company, we generally

are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our

borrowings and any preferred stock that we may issue in the future, of at least 150%, subject to certain disclosure requirements,

WhiteHorse Credit has granted, and may in the

future grant, a security interest in all or a portion of its assets under the Credit Facility.

In addition, under the terms of the Credit

Facility, we must use the net proceeds of any investments that we sell to repay amounts then due with respect to our debt and certain

other amounts owing under the Credit Facility before applying such net proceeds to other uses, such as distributing them to our stockholders.

We may pledge up

to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instruments into which we may

In addition, under the terms of any credit facility or other debt instrument we enter into, we are likely to be required by its

terms to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instrument

before applying such net proceeds to any other uses.

the value of our assets decreases, leverage would cause our net

asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses or eliminating

our equity stake in a leveraged investment.

Similarly, any decrease in our revenue or income will cause our net income to decline more

sharply than it would have had we not borrowed.

Such a decline would also negatively affect our ability to make distributions on our

common stock or preferred stock.

Our ability to service our debt will depend largely on our financial performance and will be subject

to prevailing economic conditions and competitive pressures.

In addition, our common stockholders will bear the burden of any increase

in our expenses as a result of our use of leverage, including interest expenses and any increase in the management fee payable to WhiteHorse

As a business development company, we

generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of

our borrowings and any preferred stock that we may issue in the future, of at least 150%, subject to certain disclosure requirements,

as is specified in the 1940 Act.

If this ratio declines below 150%, we cannot incur additional debt and could be required to sell

a portion of our investments to repay some debt when it is disadvantageous to do so.

This could have a material adverse effect

on our operations, and we may not be able to make distributions to our stockholders.

As of September 30, 2020, our total outstanding

indebtedness was $296.2 million and our asset coverage was 206.2%.

The amount of leverage that we employ

will depend on WhiteHorse Advisers’

and our board of directors’

assessment of market and other factors at the

time of any proposed borrowing.

We cannot assure you that we will be able to maintain our borrowings under the Credit

Facility, the 2023 Private Notes, the 2025 Notes and the 2025 Private Notes or obtain other credit at all or on terms

acceptable to us.

If this ratio declines below 150%, we cannot incur additional debt and could be required to sell a portion

of our investments to repay some debt when it is disadvantageous to do so.

This could have a material adverse effect on our operations,

and we may not be able to make distributions to our stockholders.

As of March 31, 2021, our total outstanding indebtedness was $339.6

million and our asset coverage was 192.6%.

The amount of leverage that we employ will

depend on WhiteHorse Advisers’s and our board of directors’

assessment of market and other factors at the time of any

proposed borrowing.

We cannot assure you that we will be able to maintain our borrowings under our existing indebtedness or to

obtain other credit at all or on terms acceptable to us.

For information regarding a reduction in the asset coverage ratio

applicable to us, see Item 1A.

Risk Factors -- “

The SBCAA allows us to incur additional leverage, which may increase the

risk of investing with us ”

in our most recent Annual Report on Form 10-K.

In addition, the

terms governing the Credit Facility and the 2023 Private Notes, the 2025 Notes and the 2025 Private Notes and any

indebtedness that we incur in the future could impose financial and operating covenants that restrict our business

activities, including limitations that may hinder our ability to finance additional loans and investments or make the

distributions required to maintain our ability to be subject to tax as a RIC.

Each of the 2023 Note Purchase

Agreement and the 2025 Note Purchase Agreement governing the 2023 Private Notes and the 2025 Private Notes, respectively,

contains additional terms and conditions for senior unsecured notes issued in a private placement, including minimum

terms governing our existing indebtedness and any indebtedness that we incur in the future could impose

financial and operating covenants that restrict our business activities, including limitations that may hinder our ability to finance

additional loans and investments or make the distributions required to maintain our ability to be subject to tax as a RIC.

The instruments governing

our existing indebtedness contain terms and conditions for senior unsecured notes issued in a private placement, including minimum

stockholders’

equity, minimum asset coverage ratio, maximum debt to equity ratio and prohibitions on certain of our

fundamental changes or the fundamental changes of any subsidiary guarantor.

Each of the 2023 Note Purchase Agreement and the

2025 Note Purchase Agreement also contains customary events of default with customary cure and notice periods, including,

without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under

other indebtedness of the Company or certain significant subsidiaries, certain judgements and orders, and certain events of

equity, minimum asset coverage ratio, maximum debt to equity ratio and prohibitions on certain fundamental changes

of the Company or any subsidiary guarantor.

These instruments also contain customary events of default with customary cure

and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default

under other indebtedness of the Company or certain significant subsidiaries, certain judgements and orders, and certain events of bankruptcy.

The breach of any of the covenants or restrictions,

unless cured within the applicable grace period, would result in a default under the applicable indebtedness arrangement that would

permit the lenders thereunder to declare all amounts outstanding to be due and payable.

In such an event, we may not have sufficient

assets to repay such indebtedness.

unless cured within the applicable grace period, would result in a default under the applicable indebtedness arrangement that would permit

the lenders thereunder to declare all amounts outstanding to be due and payable.

In such an event, we may not have sufficient assets to

repay such indebtedness.

As a result, any default could have serious consequences to our financial condition.

of default or an acceleration under these arrangements could also cause a cross-default or cross-acceleration of another debt instrument

or contractual obligation, which would adversely impact our liquidity.

We may not be granted waivers or amendments to these arrangements

if for any reason we are unable to comply with it, and we may not be able to refinance such arrangements on terms acceptable to

us, or at all.

At our annual meeting of

stockholders held on August 1, 2018, our stockholders approved the reduced asset coverage requirements applicable

to senior securities from 200% to 150%, effective on August 2, 2018, such that our maximum debt-to-equity

ratio increased from a prior maximum of 1.0x (equivalent of $1 of debt outstanding for each $1 of equity) to a maximum of 2.0x

(equivalent to $2 of debt outstanding for each $1 of equity).

An event of default or an

acceleration under these arrangements could also cause a cross-default or cross-acceleration of another debt instrument or contractual

obligation, which would adversely impact our liquidity.

We may not be granted waivers or amendments to these arrangements if for any reason

we are unable to comply with them, and we may not be able to refinance such arrangements on terms acceptable to us, or at all.

The reduction of our asset coverage requirement from 200% to 150% increases

the amount of debt that we are permitted to incur, such that the Company’s maximum debt to equity ratio increased from a prior maximum

of 1.0x (equivalent of $1 of debt outstanding for each $1 equity) to a maximum of 2.0x (equivalent to $2 of debt outstanding for each

$1 of equity).

Increased leverage could amplify the risks associated with investing in the Company.

For example, if the value of the Company’s

assets decreases, although the asset base and expected revenues would be larger because increased leverage would permit the Company to

acquire additional assets, leverage will cause the Company’s NAV to decline more sharply than it otherwise would have without leverage

or with lower leverage.

Any decrease in the Company’s revenue would cause its net income to decline more sharply, on a relative

basis, than it would have if the Company had not borrowed or had borrowed less.

The following table illustrates the effect

of leverage on returns from an investment in our common stock as of September 30, 2020, assuming that we employ leverage such

that our asset coverage equals (1) our actual asset coverage as of September 30, 2020 and (2) 150%, each at various

annual returns, net of expenses and as of September 30, 2020.

The purpose of this table is to assist investors in understanding

the effects of leverage.

The calculations in the table below are hypothetical and actual returns may be higher or lower than those

appearing in the table below.

Return on Our Portfolio (Net of Expenses)

Corresponding

return to common stockholder assuming actual asset coverage as of September 30, 2020 (1)

Corresponding

return to common stockholder assuming 150% asset coverage (2)

(1) Assumes $625.8 million in total assets, $296.2 million in debt outstanding and $314.6 million in net assets as of September 30,

2020, and an average cost of funds of 3.5%, which is our weighted average borrowing cost as of September 30, 2020.

(2) Assumes $1,075 million in total assets, $629.1 million in debt outstanding and $314.6 million in net assets as of September 30,

2020, and an average cost of funds of 3.1%, which would be our weighted average borrowing cost assuming 150% asset coverage as

of September 30, 2020.

Based on our outstanding indebtedness

of $296.2 million as of September 30, 2020 and an average cost of funds of 2.8%, 6.0% and 6.5%, which were the effective

annualized interest rates of the Credit Facility, 2023 Private Notes and 2025 Notes, respectively, as of that date, our

investment portfolio must experience an annual return of at least 1.8% to cover annual interest payments on our outstanding

indebtedness.

outstanding indebtedness of $629.1 million on an assumed 150% asset coverage ratio and an average cost of funds of 2.8%, 6.0%

and 6.5%, which were the effective annualized interest rates of the Credit Facility, 2023 Private Notes and 2025 Notes,

respectively, as of that date, our investment portfolio must experience an annual return of at least 2.2% to cover annual

interest payments on our outstanding indebtedness.

Global capital markets could

enter a period of severe disruption and instability due to disease pandemics and other serious health events, future

recessions, political instability, geopolitical turmoil and foreign hostilities.

These market conditions have historically

had and could again have a materially adverse effect on debt and equity capital markets in the United States, which could

have a materially adverse impact on our business, financial condition and results of operations.

and global capital markets have,

from time to time, experienced periods of disruption characterized by the freezing of available credit, a lack of liquidity in

the debt capital markets, significant losses in the principal value of investments, the re-pricing of credit risk in the broadly

syndicated credit market, the failure of major financial institutions and general volatility in the financial markets.

periods of disruption, general economic conditions deteriorated with material and adverse consequences for the broader financial

and credit markets, and the availability of debt and equity capital for the market as a whole, and financial services firms in

particular, was reduced significantly.

These conditions may reoccur for a prolonged period of time or materially worsen in the

In addition, continuing uncertainty arising from the United Kingdom’s decision to leave the European Union (commonly

known as “Brexit”) could lead to further market disruptions and currency volatility, potentially weakening consumer,

corporate and financial confidence and resulting in lower economic growth for companies that rely significantly on Europe for their

business activities and revenues.

Furthermore, uncertainty between the United States and other countries with respect to trade

policies, treaties and tariffs, among other factors, have caused disruptions in the global markets, including markets in which

we participate, and we cannot assure you that these market conditions will not continue or worsen in the future.

We may in the

future have difficulty accessing debt and equity capital markets, and a severe disruption in the global financial markets, deterioration

in credit and financing conditions or uncertainty regarding U.S.

government spending and deficit levels, Brexit or other global

economic and political conditions, including future recessions, political instability, geopolitical turmoil and foreign hostilities,

and disease, pandemics and other serious health events, could have a material adverse effect on our business, financial condition

and results of operations.

In December 2019, COVID-19 was first

detected in the city of Wuhan in the Hubei province of China.

The spread of COVID-19 has resulted in governmental orders imposing

travel restrictions and prolonged closures of many corporate offices, retail stores, manufacturing facilities, factories and other

common places of public congregation around the world, which has materially disrupted the demand for our portfolio companies’

products and services and is making it more difficult for our portfolio companies to conduct their businesses.

In addition, supply

chains worldwide have been interrupted, slowed, or rendered inoperable as a result of the COVID-19 pandemic, and an increasing

number of individuals are becoming ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental

restrictions.

Governmental mandates to control the outbreak have resulted in forced shutdowns of our portfolio companies’

facilities for extended periods.

These prolonged disruptions in the business of our portfolio companies, including disruptions

in their supply chains, have adversely affected their ability to obtain the necessary raw materials or components to make their

products and caused a decline in the demand for their products or services.

This may require, or in some cases already has required,

our portfolio companies to furlough or lay off employees, terminate relationships with service providers or otherwise significantly

curtail their standard business operations, which would likely cause, or already has caused, a negative impact on their operating

The global impact of the COVID-19 outbreak

continues to evolve and is adversely affecting our operations and the operations of our portfolio companies.

The COVID-19 pandemic

has resulted in, and will continue to result in, among other things, the following:

(i) increased draws by borrowers on revolving

lines of credit;

(ii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default,

increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans;

(iii) volatility and disruption of markets including greater volatility in pricing and spreads, difficulty in valuing loans

during periods of increased volatility, and liquidity issues;

(iv) reduction in certain interest rates by the U.S.

Reserve and other central banks and decreased LIBOR;

and (v) unfavorable economic conditions that would be expected to increase

borrowers’

funding costs, limit borrowers’

access to the capital markets or result in a decision by lenders not to

extend credit to borrowers.

These factors are limiting our portfolio companies’

access to capital in a time of great economic

While government authorities have introduced creative proposals to address the needs of businesses, such actions may

not adequately address the problems facing our portfolio companies.

The outbreak is likely to have a

continued adverse impact on economic and market conditions and has triggered, and will likely continue to trigger a prolonged

period of global economic slowdown.

The full impact on global markets from COVID-19 is difficult to predict, and the degree

to which COVID-19 will continue to negatively affect our operating results or the duration of any potential business

disruption remains uncertain.

In addition, the financial conditions and results of operations presented in this report,

including our financial statements, reflect our financial position as of September 30, 2020, and may not be indicative

of the full fiscal year as we expect the adverse effects of COVID-19 to be more pronounced in future periods.

negative impact of COVID-19 on our business and results of operations will depend to a large extent on future developments

and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and

other entities to reduce the spread of the virus and prevent another wave of infections, all of which are beyond our

These future events, while unpredictable, will likely adversely affect our operating results and the operating

results of our portfolio companies.

We are currently operating in a period of capital markets

disruption and economic uncertainty.

capital markets have experienced

extreme volatility and disruption following the global outbreak of COVID-19.

in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting

in illiquidity in parts of the capital markets.

Such disruptions are adversely affecting our business, financial condition, results

of operations and cash flows, and future market disruptions and/or illiquidity will continue to negatively impact us.

These unfavorable

economic conditions are also increasing our funding costs and limiting our access to the capital markets, and may result in a decision

by lenders not to extend credit to us in the future.

These events have limited and will continue to limit our investment originations,

limit our ability to grow and negatively impact our operating results and the fair values of our debt and equity investments.

Unregistered Sales of Equity Securities and Use of

of leverage on returns from an investment in our common stock as of March 31, 2021, assuming that we employ leverage such that our asset

coverage equals (1) our actual asset coverage as of March 31, 2021 and (2) 150%, each at various annual returns, net of expenses and as

of March 31, 2021.

The purpose of this table is to assist investors in understanding the effects of leverage.

The calculations in the

table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.

Assumed Return on Our Portfolio (Net of Expenses)

Corresponding return to common stockholder assuming actual asset coverage as of March 31, 2021 (1)

Corresponding return to common stockholder assuming 150% asset coverage (2)

(1) Assumes $670.5 million in total assets, $339.6 million in debt outstanding and $314.3 million in net assets as of March 31, 2021,

and an average cost of funds of 3.9%, which is our weighted average borrowing cost as of March 31, 2021.

(2) Assumes $959.6 million in total assets, $628.7 million in debt outstanding and $314.3 million in net assets as of March 31, 2021, and

an average cost of funds of 3.3%, which would be our weighted average borrowing cost assuming 150% asset coverage as of March 31, 2021.

Based on our outstanding indebtedness of

$314.3 million as of March 31, 2021 and an average cost of funds of 2.69%, 6.00%, 6.50%, 5.375%, 5.375% and 5.625%, which were the

effective annualized interest rates of the Credit Facility, 2023 Private Notes, 2025 Public Notes, 2025 Private Notes, 2026 Private

Notes and 2027 Private Notes, respectively, as of that date, our investment portfolio must experience an annual

return of at least 2.1% to cover annual interest payments on our outstanding indebtedness.

Based on our outstanding indebtedness of $959.6

million on an assumed 150% asset coverage ratio and an average cost of funds of 2.69%, 6.00%, 6.50%, 5.375%, 5.375% and 5.625% which

were the effective annualized interest rates of the Credit Facility, 2023 Private Notes, 2025 Public Notes, 2025 Private Notes, 2026

Private Notes and 2027 Private Notes, respectively, as of that date, our investment portfolio must experience an annual return of at

least 2.3% to cover annual interest payments on our outstanding indebtedness.

Unregistered Sales of Equity Securities and Use of Proceeds

Defaults Upon Senior Securities

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors