Q1 2020 Earnings Call
Greetings and welcome to the Horizon Technology Finance Corporation first quarter 2020 earnings call. At this time, all participants are in listen only mode.
Question answer session will follow the formal presentation, if any water to acquire operator assistance. During the conference. Please press star zero under telephone keypad. As a reminder, this conference is being recorded so my pleasure control over to Megan Beacon. Please go ahead. Thank you and welcome to the Horizon Technology Finance first quarter two thought.
20 conference call, representing the company today, or Rob Pomeroy, Chairman and Chief Executive Officer, Gerry Michaud, President Dantrolene, <unk>, Chief Financial Officer, and the on divorce, that's Chief investment Officer, I would like to point out that the Q1 earnings press release and form 10-Q are available on the company's web.
<unk> at Horizon Tech Finance Dot com.
Before we begin our formal remarks I need to remind everyone that during this conference call Horizon technology Finance will make certain forward looking statements, including statements with regard to the future performance of the company.
Words, such as believes expects anticipates intend or similar expressions are used to identify forward looking statements. These forward looking statements are subject to the inherent uncertainties in predicting future results and condition.
Certain factors could cause actual results to differ on a material basis from those projected in these forward looking statements and some of these factors are detailed in the risk factor discussion in the company's filings with the Securities and Exchange Commission, including the company's form 10-K for the year ended December 31st 2019.
The company undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
This time I would like to turn the call overt to Rob Pomeroy.
Good morning.
These are extraordinary times, we are experiencing and our hearts go out to all of those suffering from both the Corona virus pandemic and the economic shutdown.
When we last spoke to everyone. In early March Cobot 19 was just beginning to reach the U.S. and we felt the gathering store.
The rapidity in depth of its onset has had a dramatic impact on all of our lives non businesses worldwide.
Everyone now has had a family member or friend touched by the disease and many families are suffering from a loss of income.
I would like goes on and we must carry on so I'd like to thank you for taking time today to hear horizons update.
The events of the first quarter ever come on as quickly and unexpectedly.
We believe our efforts over the past few years to grow and diversify our portfolio and to strengthen our balance sheet have placed us in a position to navigate through these unprecedented times.
Against this backdrop, we did have a productive first quarter.
During the quarter, we grew the size of our debt portfolio for the eighth consecutive quarter, we generated net investment income of 26 cents per share.
Below our distribution due to traditionally lower prepayment activity in the first quarter.
Our debt investment yield was 13.2%.
Our Navy as of March 31st was $11.48 down approximately 3% from year end.
Most of this reduction is the result of stress on some of our portfolio companies related to the cobot 19, pandemic and the resulting shutdowns economic impact.
We ended the quarter was $119 million capacity to support our portfolio companies and to selectively make new investments.
As it became clear that cobot was going to may have a major impact on the economy, we took certain steps to prepare.
During early March we borrowed an additional $30 million on our key credit facility to boost our balance sheet liquidity.
In April we acquired the 50% interest of our partner in our joint venture.
The former joint venture is now wholly owned by Horizon and in future reporting periods, it's assets will be consolidated with the assets of horizon.
This acquisition will allow us to fully control the management of these assets through this uncertain time.
From a credit standpoint, the cobot situation and the economic shutdown have been impacted the credit profile of our portfolio.
We have been communicating regularly as we always do with all of our portfolio companies, we're prepared to support our portfolio companies as appropriate in concert with their investors support and their management's necessary cost cutting.
The liquidity of our borrowers is paramount in the current environment.
Accordingly, the credit ratings and fair values of our investments reflects the increased risk that our borrowers may not be able to access additional capital and their operations, maybe negatively impacted by the economic shutdown.
Turning to our investment activity in the first quarter, we funded six new loans totaling $51 million and increased our debt investments on a net cost basis by $25 million from December 30 Onest.
This first quarter activity carried over from the momentum generated in the second half the 2019.
Entering the second quarter of 2020 are committed backlog and overall pipeline remain active despite the pandemic.
Demand for venture debt within our target industries continues to be strong and in fact, maybe increasing as companies seek additional liquidity and funding sources and these uncertain times.
We're selectively pursuing new investment opportunities in companies that meet our high bar of liquidity.
New originations may slow if the economics shutdown continues in recession worsens.
Well our outlook is cautious we're maintaining our current monthly distribution level at 10 cents per share through September.
It is our board's policy to set our distribution, where it can be covered by anti overtime.
The distribution level reflects our outlook for the balance of 2020, and our spillover income at March 31st.
I'm proud of the entire horizon team as they have been working remotely since it started the pandemic in the U.S., while maintaining the same high levels service to our customers and stakeholders.
We will continue to focus on managing our portfolio and supporting our portfolio companies, while we look to Opportunistically fund new investments.
By doing so we look to generate a to continue to generate additional long term value for our shareholders.
Well now turn the call over to Jerry who will update you on our business development efforts and market environment, and then to Dan will detail, our operating performance and financial condition.
Thanks, Rob Good morning, everyone first let me say that I share, Rob sentiment and I hope everyone remain safe and healthy.
The first two months of the quarter, we're very active for horizon. However activity slowed in March as many technology and life science companies or distracted by the dislocation in complexity of the impact of covert 19 on their business from March through today, we have continued to carefully reviewed.
Oh opportunities through the lens of the Colgate 19, pandemic and the resulting impact of a rapidly changing economic environment that said, we continued to observe significant activity in competition and the venture lending market for investments in high quality companies with strong liquids.
The management investor support as well as products and surfaces that are relevant and in demand today.
There are some segments of our market review with caution such as consumer oriented tech companies, while other segments, we view with more optimism such as life science vaccine or drug development companies. These companies appeared to be seeing continued demand for new drugs in vaccines and have strong balance sheets to further develop.
Well into 2021.
We are seeing some near term dislocation in the healthcare technology market as hospitals are focused on called good 19, and private practice physicians are essentially closed for business, but we believe demand for healthcare Tech products will bounce back as the economy opens up over the next few months and penta.
Up demand for healthcare services Reemerges.
In the quarter, we made a total of 51 million in investments to three new portfolio companies and three existing portfolio companies. This resulted in growth in our portfolio for the eighth consecutive quarter or 25 million on a net cost basis.
The onboarding yield the investments we made in the first quarter was 11.2%.
We experience to loan portfolio prepayments during the quarter totaling 16 million, which contributed to our and I are.
In addition, a prepayment and accelerated income from these events helped drive a debt portfolio yield for the quarter of 13.2%.
Our debt portfolio yields continues to lead the BDC industry.
Additionally, as Rob noted on our last call structuring investments with warrants and equity Reits as a key aspect of our predictive pricing strategy warrants or cashless investment horizon, which served as an additional value generated during the quarter, where we see proceeds of over 5.5 million.
From warrants in portfolio companies, it experienced M&A transactions and from the equity and public company.
In Q1, we closed 55 million in new loan commitments and approvals and ended the quarter with a committed backlog a 44 million compared to 50 million at the end of 2019.
Our pipeline of new opportunities as of today is 440 million. In addition post quarter end, we increased our loan approvals and commitments from approximately 44 million to approximately 104 million today.
All of the increase in our committed backlog is from life science or healthcare related transactions with typical milestone driven or tranched funding patterns.
From a portfolio perspective.
Despite the economic environment, we believe we remain well position with our committed backlog and pipeline to select do a grow our portfolio in the first half of the year.
As of March 31st we held warrant and equity positions in 70 portfolio companies with a fair value of 10 million during the quarter one of our warrant portfolio companies. Since Tech was long had been repaid in 2017 completed an M&A transaction and horizon received approximate.
2.3 million in warrant proceeds bridge to solutions was also acquired in the quarter and along with the repayment of our principal balance and accelerated income in fees arising receive warrant proceeds of approximately 2.8 million.
Post quarter end, our portfolio company held to edge, we sold to Blackstone, along with repayment of our principal balance and accelerated income in fees arising see received warrant proceeds of approximately $500000.
The first two months of the first quarter seemed like business as usual it was very much business as unusual in March as we've communicated previously we always engage with all of our venture debt portfolio companies on a regular and as needed basis as the economy essentially shut down the ability of company stores.
No capital became less certain accordingly, we ramped up contact with our portfolio companies in their investors you get a keen sense of the near term needs expectations and financing plans.
A few of our portfolio companies have clearly been impacted by the national shutdown as of March 30, Onest. We have six two rated credits in our portfolio. We are consistently in touch with those portfolio companies and we'll work with them as much as necessary to help them managed through the short and medium term dislocation.
On their business.
One other ways, we have done so it's too quickly respond to requests, but necessary consensus and waivers for our borrowers to access the SBH Paycheck protection program. The covert 19 situation remains very fluid. Thus, we will continue to closely manage our portfolio.
I would now like to provide a brief update on some credits we have discussed last quarter.
We collected a 5 million dollar paydown on our ignition one loan in February and placed on non accrual.
The balance of alone remains secured by private stock valued well in excess of our balance.
Verizon kept its odyssey loan on non accrual as of March 30, Onest and carries the loan at fair value of 1.8 billion an increase on December 31, due to some favorable regulatory approvals the transaction to acquire Odyssey continues and is expected to close later this year.
Subsequent to quarter end, we receive proceeds of 600000 doors and settlement of our loan to sign next which loan was fair valued at $500000 at March 31st.
Turning now to the venture capital environment. According to pitch book approximately 34 billion was invested in VC backed companies in the first quarter of 2020.
But as one would expect the last few weeks are a significant reduction in activity to be clear, though investment activity has not stopped and we believe there remains opportunities for selective investment despite the market dislocation.
In terms of VC fundraising 21 billion was raised in the first quarter a strong start to the year. However, we would obviously not expect similar numbers in the near term.
The positive note is that VC funds have 120 billion of dry powder available for investing.
In terms of VC backed exit activity that were 10 venture backed ipos in the first quarter contributing to a total exit value of 19 billion.
With Cobot 19, we expect 2020 IPO activity will decrease considerably from 2019, although we could still anticipate some healthcare life science sector Ipos later in the year.
Turning now to our core markets in the first quarter, we saw a greater activity in our life science and healthcare technology markets, providing funding to two new portfolio companies, a 20 million dollar venture loan to Castle Creek Bio Sciences, a developer for of gene therapies, and a $15 million venture loan.
Digital health company, providing remote cardiac patient monitoring.
We also funded an additional 4 million to see us a medical one of our existing life science portfolio companies.
Finally, we made one select investment in the technology sector during the quarter funding a $10 million venture loan to a new portfolio company. It is creating access for high quality online education.
As we look ahead.
We will continue to closely monitor the economic landscape and prudently originate new loans that meet our current underwriting criteria why we keep a sharp focus on our current and diverse portfolio of senior secured loans.
Our actions to strengthen our balance sheet over the past couple of years, including raising $16 million of equity early in the first quarter under our ATM facility put horizon and a solid liquidity position with a leverage below our target. We believe our liquidity position will allow us to navigate through the current environment and alike.
Currently deliver additional long term shareholder value with that I will now turn the call over to Dan.
Thanks, Jerry and good morning, everyone I'll start with review on our balance sheet and portfolio and then ill provide a quick review of our first quarter 2020 result, before opening up for questions.
On the balance sheet as of March 31st Verizon had 52 million in available liquidity, consisting of 39 million in cash and 13 million in funds available to be drawn under our existing facility.
At the cover 19 volatility impact the market, we do down further on our credit.
Early to enhance liquidity and as of March 31st It was 45 million outstanding under our 125 million Keybanc credit facility. As a reminder, keybank facility has a LIBOR floor of 75 basis point.
Our debt to equity ratio stood at 5.94 to one as of March 31st lower than our targeted leverage of 1.2 to one based on our add to this end and a capacity on our Keybank facility up retention capacity was 119 million at March 31.
Our asset coverage ratio for Bart amount as of March 31st was 206%.
We continue to believe we have ample capacity at the company to navigate through the current environment and selectively invest so we see opportunity the significant enhancement of our balance sheet and capital structure over the past couple of years has enhanced our overall position.
For the first quarter of 2020 horizon, our in total investment income up 10.1 million, a 22% increase compared to 8.3 million in the prior year period.
This increase is primarily due to higher interest income on investment given the large dravet sides of our loan portfolio.
Our debt investment portfolio grow on a net cost basis to 317 million a 9% increase from the end of 2019.
For the first quarter of 2020, we achieved onboarding yield of 11.2% compared to 12.2% achieved in the fourth quarter.
Our loan portfolio yield was 13.2% for the first quarter versus 14.4% for last years first quarter.
Turning to our expenses first quarter total net expenses were 5.8 million compared to 5.1 million in the first quarter of 2019.
Our interest expense was up $114000 compared to the prior year period, primarily due to an increase in average borrowings partially offset by 10% reduction in our effective cost of debt.
Our net incentive fee expense increased $263000 due primarily to higher pre incentive fee net investment income.
While our base management fee rose $285000, driven by an increase in the average size of our portfolio.
Net investment income for the first quarter with 26 cents per share compared to 43 cents per share in the fourth quarter of 19, and 28 cents per share for the first quarter 19.
The company's undistributed or spillover income as of March 31, 38 cents.
Compared with 42 cents as of December 31st.
As noted on our prior call the first quarter typically our lowest quarter for anti as we usually see lower prepayment activity in the first few months of the year.
And the cover 19 pandemic in March further impacted potential prepayment as portfolio companies pivoted to shoring up liquidity.
We expect prepayment activity will continue to be muted in the near term.
Based upon our outlook for Eni, our liquidity forecasts in our spillover income level.
Board declared monthly distributions of 10 cents per share for July August and September 2020.
We have now declared monthly distributions of 10 cents per share for 45 consecutive month.
We remain committed to providing our shareholders, but distributions that are covered by our net investment income over time.
Our NPV as of March 31st was $11.48 per share compared to $11, an athree sense as of December 31st 2019, and $11.55 as of March 31st 2019.
35 cents reduction in any on a quarterly basis was primarily due to net unrealized loss on investments due to the economic environment.
Summarize our portfolio activity for the first quarter, new originations totaled 51 million.
Which were partially offset by 9 million in principle payments and 17 million in principal prepayments.
We ended the quarter when investment portfolio of $335 million consisting of that investments in 36 company with an average of fair value of 308 million.
Portfolio of warrant equity and other investments and 71 company with an aggregate fair value of 10 million.
In an equity investment in our JV with a fair value of 17 night.
As Rob mentioned last week, we purchased arenas, both they and our joint venture and it is now wholly owned by Horizon.
Well be consolidating the asset of the former joint venture into our financial statements beginning in the second quarter 2020.
As we consistently noted 100% of our outstanding principal amount of our debt investment bear interest at floating rates with coupons that are structured to increase as interest rate rise with a LIBOR interest rate floor.
At March 31st the average LIBOR floor on the entire portfolio, the 197 basis point a 90%.
And 90% of our portfolio is that there are specific floors. As a reminder, this provides interest rate margin protection in a decreasing rate market.
That concludes our opening remarks, we'll be happy to take questions. You may have at this time.
Thank you will not be conducting your question answer session. If you like to be placement question Q. Please press star one under telephone keypad, a confirmation tone will indicate your wireless in the question Q.
The press star to if you'd like to move your question for the Q.
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First question today is coming from Tim Hayes from B. Riley FBR. Your line is that alive.
Morning, guys. Thanks for taking my questions and.
Appreciate your comments and hope, everyone and horizons doing well given the circumstances.
My first question here and I know you touched on this a little bit but the unrealized depreciation recognized this quarter was was it more function of actual credit deterioration in the book that you've seen so far or into the markdowns incorporate more adverse economic assumptions going forward just trying to understand at the portfolio is somewhat roughly.
In future loss potential given the increased likelihood of a recession and or if thats going to be more layered on as you actually see it impact businesses overtime.
Thanks, Kevin This is Rob.
I think it's a combination of all of those things but.
There there are specific.
Companies in our portfolio that we felt due to.
Markets that they operate in that they were.
Significantly or potentially significantly impacted by co bid and so.
Those are the ones that we moved into the two rated bucket.
We have as Jerry and and down and said I mean, we're in constant contact. These companies were looking at the plans that they have to raise capital and.
Almost all of them are in process of raising capital they needed or they have capital well into 2021. So it's a is that we have a few historic twos that have been having issues raising capital or operationally and those continue but the impact of the covenant.
Pandemic and the economic downturn.
Heightened our.
Interest and up in looking at a few of those companies downgrading of the too.
Mhm and and I know you said you have six two rated companies now, but can you just give us an idea of how many companies were downgraded this quarter.
Maybe I'll ask Dan divorce. It's just so we're pleased to have the end of worse, it's on our call today, our Chief investment Officer, Dan It's been a.
Key member of our senior management team for a long time and.
[music].
I want to give him some exposure to everybody and welcome aboard.
Dan you want to just going to summarize sort of.
How many we had the moves ins and outs.
Sure Good morning, everybody. Thanks, Thanks, Rob.
Six twos in the portfolio this quarter.
Three of them were two rated credits in prior quarters in Q4 Sparrow decision and ignition one and then we moved three.
Q3 companies that were three ready credits in previous quarters to add to this quarter Encore cannistraro and updater for the reasons that Rob mentioned.
Got it okay.
And you can can you touch on the types of if any to things you've had to do to work with portfolio companies to provide some type of relief or forbearance have you seen.
Have you had to extend loans more than usual have you had to waive fees or our move more interest from cash to pack or done anything else again to provide forbearance at this time and how is that you know that translated to I get to that impact your debt yield at all this quarter.
So it's a long good question lots of parts to it Tim.
Maybe I summarize by say when when we're in these kinds of situations and.
Fortunately or unfortunately, our management team has been through some of these that crises before including all eight or nine and back in the tech boom and bust.
We usually try to employ what we call the three legged stool, which is to work with the companies and the three legs or have management be real about the.
Severity of the outlook and make appropriate cuts in operating expenses and.
Do everything they can to rightsize the business for the difficulty of the current environment second leg is to have investor support to companies through this process by providing additional capital or are having commitments to have standby capital than the third is to have the lenders joined those other two.
To help the company through the problem the tools, we use primarily our.
Principal deferral.
Lessening of performance covenants, if thats necessary.
And.
On occasion, making additional loans.
We have not yet experience having to transfer.
Our interest payments to pick but that would be another possible tool that we would have.
So right now we're working with that's what we're doing just trying to be sure everybody is focused on.
Raising liquidity of the company's through.
2021 into that timeframe.
And we're really engaged with the investors and the management teams.
Mhm.
And then this is a granular question.
Sorry, if you don't have in front I mean do you have an idea how many companies you've had to employ some of these.
Legs of the.
The store here so far.
Well I think you can be sure the ones that are in the two bucket and some of the others, where we're in constant conversation with them.
But the once into two were having dialogues with.
Spending.
Interest only periods or are those kinds of things, it's a handful right now too.
Mhm.
Okay.
Got it.
And then how conversations with sponsors Dan I had to over the past couple of months have you seen them step in the support portfolio companies, so far and and would you say that the the lack of fiscal laid for sponsored companies incentivizes.
The VC sponsors to to be more proactive at this time.
Well as Jerry to answer that one it.
He is on the front line with several of our company. So.
Jerry take your phone on mute.
I am sorry.
The problem.
Yes, so it's been a pretty ever.
[music].
Busy process relative to working with the investors I think generally speaking.
They are all.
Very focused as we are.
I don't think any of them are.
I don't understand the economic condition of the portfolio companies, they're very focused on them.
Our conversations with them have been.
I'd say extremely good and for the most part almost across the portfolio.
A couple of companies once we've moved to too obviously.
Those are taking a little bit more their time in our time, but we're working through those.
You know, we kind of our portfolio companies raise money in the first quarter or got.
Signed term sheets that there will be closing shortly so the funding is coming in.
And you know.
Drops point.
With that.
We're trying to help the companies with the interest on the extensions and things like that with the I hear getting everybody well into 2021 and I think we made great progress in a very very short period of time I would just mentioned everybody you know we're in a second inning of.
I hope, it's only a night UK.
So we've got a ways to go but.
The Vcs are definitely focused on.
They are portfolio companies and what they need to do to support them, what what making sure. The management teams are focused on toward Rob's point cutting costs and things like that.
And then get out whatever how we can we can provide I did mention in the script that unlike 2008 really.
We see a capital is at a much higher level right now and going into that period. So they have they have capital plenty of capital and it's a question of which companies are they going to support its not unusual in times like this that DC stock for shrinking their portfolio companies, it's kind of a naturals.
Thing you do with like they take a step back and say, okay. When it difficult time, you know how our portfolio companies doing but what we've seen generally speaking is a very supportive group of investors.
Okay. That's helpful.
I've asked a few hear something hop back into queue, but thanks again for taking my questions and get a nice to meet again over the phone.
[music].
Thank you. My next question today is coming from Ben Zucker from Aegis capital. Your line is that life.
Good morning, guys. Thanks for taking my questions can can you hear me right.
We are good Ben.
Cool I wanted to touch on Tim did a nice job covering kind of the landscape in the portfolio real quickly on share repurchases. I think you have a remaining authorization for a little over 3 million, which would come out to about like 2% of the company's outstanding shares at these current prices.
I saw that you extended that were there any discussions around potentially increasing the size of that authorization or or kind of what were those conversations like.
So we didn't have a discussion about it appreciate the question.
Both with the senior management with our board.
I think theres, a real strong emphasis here on liquidity and conserving cash.
As stated or a few days when the stock price was extremely low that it was a topic of conversation.
But we did decide to extended.
We have had it in place I think two or three years anyway, and so at the current we bought about a million six where the shares since we initiated it and it's there if we need it and want to use it but right now where our focus is on conserving cash on the balance sheet.
Oh that makes sense definitely it feels like an environment, where thought where cash is king. So I guess you'd have a similar response to if I were to ask about your ability or interest in may be buying back. Some of the 2022 notes that seem to be trading out like 90 cents on the dollar right now what would your with your comments around the share repurchase usage.
Hold true for that as well.
Same same question same answer yes.
But if it's at $60 I have to say, but.
But that only lasted for a few days, but yeah, you're right Yeah I hear you.
Do you have any idea what how many companies or what percentage of your portfolio companies applied for some kind of government aid or believe program.
We're aware of about a little less than half of them that are either in the process or have received the.
Enroll protection.
No loans.
We know they usually require our consent under our loan agreements. So that's how we become aware of and Weve been willing to grant those concerns.
Gotcha.
If I heard you are right in the press I think I saw in the press release and Dan's comments that your that the first quarter has the typical slowdown in prepayment activity and given the market you're expecting that trend to may be persist for the next few months now I guess that negatively impacts your eni yields.
But but that does give your portfolio more duration. So I'm just kind of curious what your thoughts on this dynamic and how do you guys feel about kind of the trade off between the the outsized debt yields we've we've been seeing previously verse, adding a little bit more duration to the portfolio.
Well I'll take a an initial stab at then that stand to give you little trolio, given a little bit more color.
Yes typically.
The first quarters lighter, we actually had.
A good prepayment from bridge to solutions I was a very profitable selects exit for us.
Including a warrant gain.
But some of the fee impact was a little less than we thought we'd hope that the health edge acquisition, which happened in early April was scheduled to happen in March and so it it got.
Delayed in March because of the goal that uncertainty and ultimately close a couple of weeks after the end of the quarter.
But looking forward, we expect it to be modest only because refinancing is one of the sources for prepayments for us and our outlook for that is.
No. So uncertain. So that's why we're being cautious about that Dan do you want to add some additional color to that.
No I think it yet you hit it right on add there.
Yes.
That's helpful. The the fit you bought out the arena interest I think I saw for just over 17 million is that I mean is that just kind of simple math mean, you're bringing over 17 million of of assets in that transaction onto the balance sheet that will be consolidated.
Yeah, Ben that basically how it works is a little bit more nuanced based on timing the help that repayment was in the JV also.
So when how you might think about it going forward and that the dividend line income coming in will be gone, but on a portfolio basis on the horizon balance sheet they'll be 30 million of additional investments net positive to horizon of a 15 million increase in portfolio on it.
Income basis.
Got you and could you just remind me was the decision to kind of collapse that or buy them out was that just you guys had some excess liquidity you had these interest earning assets already there. So it was just a nice kind of immediately accretive way to deploy that capital into assets you've already underwritten.
Yes, that's part of it I think weve been signaling to us for a while the JV was originally the concept of doing it.
Is there.
Genesis of it was back before there was even a two to one leverage boat. So it was.
Originally thought to be a way to increase leverage on balance our off balance sheet for horizon.
The portfolio Didnt grow as fast as we'd hoped it would.
As a result, we didnt meet certain requirements for minimum number five cores and the New York life.
Credit facility, we have their went into a rapid amortization explained this last quarter.
And then just like him.
They became a good opportunity for us.
To take control of the assets by them out and.
Now with those will be on our balance sheet and.
The JV had a small.
Arenas portion, but if you think about it was a small percentage of each of the loans because the loans in the JV were shared with the rise. So now we can truly have all of the assets and all the bonds and its this uncertain time, we thought it was really key thing for us to them.
Got your that makes sense and then lastly, I got stasis for Dan I, just I missed your comments did you say and I can look at your quantitative and qualitative disclosures and I can see that based off of where library. As you guys are kind of in a nice position with your floors, but what was that what did you say was the weighted average floor in the percentage of debt assets that are already at that level.
The the weighted average score right now on the entire portfolio is 197 basis points.
And 90% of the current portfolio our app.
Very helpful. Alright, guys. Thanks for taking my questions I. Appreciate your time this morning.
Thanks, Ben Thanks Bye.
Thank you as a reminder, that star one to be placed under question Q. Our next question today is coming from Ryan Lynch from KBW. Your line is not a lot.
Hey, good morning, guys and thanks for taking my questions.
I first had one regarding your guys liquidity position today.
In the press release, you guys talk about.
12.8 million funds available on the existing credit facility commitments, but then I also know that you guys have capacity in your credit facility for up to $80 million of additional capacity. So can you just talk about given the balance sheet construction today and the portfolio.
With a cash today.
Do you guys anticipate do you guys will be able to access thats for additional $80 million of additional capacity or is the 12.8 billion. What we should kind of think about as far as leverage capacity available to yourselves on your credit facility.
Yeah. Ryan This is Dan the 12.8 million is a snapshot of what is available at the balancing dates on March 31st and capacity is on our opportunity to borrow on the facility and to answer your question as we forecast out through the year.
And as we find new investment that increases the unveiled availability with new investment that we put into the SPV. So as it's currently constructed and where we stand today, we do have the ability to reach that 18 million capacity.
Okay. So you think as you guys put newer assets into that you guys were able to drawdown the full additional $80 million okay correct.
And then regarding your unfunded commitments about 44 million.
Today can you talk about what percentage of those are.
Based on some sort of milestone.
So I think generally.
The commitments I would say the majority of them, how some sort of either performance.
Equity event revenue milestone clinical milestones to draw very little of that is actually opened available.
The drop.
Okay.
And then regarding.
The your guys valuation process.
You know you guys only had about a 1.6% you know mark down in your portfolio this quarter, which was well wonder what.
Several other you know middle market Bdcs have have kind of pre announced this quarter.
As I look through your portfolio it looks like.
There are some select investments that had some meaningful mark Downs I.
I would assume that they are related to some underperformance or credit issues, just as we head into this very very uncertain and unprecedent environment, but it looks like the vast majority of your portfolio.
Basically marked at 100%, so which was a little bit surprising because they're not any sort of.
Active yield component as credit spreads widened out that you guys incorporated into pricing down even well performing loans in your portfolio as of March 30 Onest.
That's a really good question and it was the essence of what we spent a lot of the last three or four weeks with both internally with our outside count valuation consultants and with our board on this topic.
Unlike some of the middle market.
Almost zero percent of our portfolio is.
As a market or are traded.
Loan syndicated loans so.
There is no direct indication for that I think we've talked about this in the past that the.
We do this on a granular basis, all owned by long basis, we look at the risk ratings and the things that we think are important and then we do a discounted cash flow based on what we think the market rate for that risk would be.
This tends to be much less volatile in the venture lending market has been over long period of time because the.
All in yields that we're able to charge in this market really not impacted by credit rates as much.
As they are by what the competition has and it stayed pretty stable between 10 and 13% for as long as I've been doing this was a long long time.
And the reason for that is that it's it's a.
There's a cost of funds that the players in this market have that protect the downside of this you can't be profitable and eventual any business, if you're not charging certain range and on the high end. The alternative is for the venture capitalist put the money and if we charged too much.
So.
Our valuation consultants understand us and agree with us they use.
Risk migration factors as they look at individual transactions and there was discussion about overall risk migration factors for the current environment, but in the end we did our our evaluations and there's were.
Very solidly within the range there was some up and down.
Variations between our remarks and theirs, but they tended to be both positive and negative and so that's supported our.
The ultimate valuations that.
We have an art our Q.
Okay did you could solve with a third party valuation term for all of your investments this quarter.
So.
We have to outside valuation firms Sterling and Lincoln.
They look at 100% of our portfolio on an annual basis and this particular quarter, we had more than usual because we wanted to look at them.
All of the ones that we had issues with had been looked at in a while or had meaningful movements. So they looked at probably close to 40% of our portfolio in this particular quarter alone.
Okay bar have looked at it as as recently as as March for the year end.
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And then a one question about ignition one that loan was placed on non accrual you guys still have that marked at a 100% of costs can you just talk about what's going on and assume that they stopped and interest income, but not sure. If there was the outlook is high for repayment or something like that just why was that the non accrual core.
Responding with.
A stable and unchanged fair value mark debt at cost.
Yes. This loan was honored on accrual at 12 31.
It was a balance of $12 million, we received a five day the company has basically been sold.
The assets of the company and its operations and.
Through a assignment for the benefit of creditors in.
In.
The first quarter middle of first quarter received a $5 million pay down on that loan.
That we used.
To offset some of the interest that's why was on accrual in the fourth quarter. Once we have that payment. What's left is in a trust is.
We're the only lender and there's only two senior secured lender and there is multiples of Theres private stock from the sale of the company.
Thats secures our outstanding balance.
Several times, our outstanding balance our balance about $7 million, but because there are no operations and there is no.
Cash flow at the company, we put the loan on non accrual, but we're working through trying to monetize the collateral that supports our loan.
Could take a couple of quarters.
Certainly would be helped with the environment was a little better.
But we do believe it will have a full recovery.
Recovery on that Ryan that's why we carried at 100%.
On the remaining balance because there's a private stock in a operating company that has value.
Three or four times that.
Okay that makes sense.
Those are all my questions I appreciate that there are times. It I hope you guys I'll stay a healthy.
Thanks Ryan.
Thank you next question is from Tim Hayes from B. Riley FBR. Your line is not a life.
Hey, guys just a couple of quick follow ups.
Can you remind me what needs to happen for assets to fall out of the borrowing base for lower middle market companies. It could be result of leverage multiples increasing the certain levels, but given you don't really have.
Most of your company's our EBITDA negative just wondering if it to a function of investments moving to non accrual or if there any other multiple German factors that can result in a decline in the borrowing base.
Sure taking now that has definitely something we're focused on right now there is no over overriding one covenant are not that well, we'll take it out there's certain buckets and concentration based on performance.
No it in our rating system from a Florida would too it's still eligible to be borrowed against on the line when it becomes a wine or becomes insolvent.
Then it starts getting kicked out of.
Ability requirements.
One other item that has come into play or we're looking at closely is the loan to value percentage is the area that may cause a.
Yeah eligible on becoming ineligible, but some of the public companies in the way the public market has been acting there's a little pressure there and we're watching that closely but no overriding one thing that.
Were running and sale.
Okay.
Got it and then I just wanted to make sure I'm thinking about your comments on the dividend correctly I just so.
I'm going to paraphrase and just let me know if I'm thinking about this right around way, but it sounds like you're setting the dividend at a level that you believe will be covered by Eni.
Well plus 38 cents of spill over you have right now so doesn't necessarily mean, you're going to cover the dividend with Eni over the course of the full year, but you think that given the cushion you have at the spillover I guess, you're expecting that the dividend could be or I guess core earnings could be 37 cents lower than and I hypothet.
Radically, but you'd still be able to cover it with a with spillover that way and that's why you're maintaining at the level that is that it might think about that correctly or if you're going to provides more context around that'd be helpful.
Yes, I know you've got to you got to pretty much right. I mean, I think we continue to believe that we can achieve eni that will cover the current 30 cents.
Per share.
We won't do it every quarter.
The third and fourth quarter last year, we had.
Outsized earnings and above 40 cents this quarter, we were below.
For a combination of things that were a little Miss.
We need prepayment activity to achieve those large.
And I numbers, but over time, the sort of core earnings are close to or will cover the dividend.
Okay and does that take into account both you know recent rate movements.
You know any Anne.
And I guess your your outlook for slower repayment activity and the potential for increased credit losses in the Buck or is it is it a combination of all three that's factored into this analysis or is it kind of what you're.
Yeah, when we I mean its C.
I'm sure you'll have this answer on every call you have but it's very very hard to know exactly what's going to happen tomorrow.
Maybe even this afternoon, so it's very difficult to do modeling with high confidence in this environment here, but we know how our business sort of works. The important levers are drivers for us to achieve that level, then I API or to have.
In a modest level of prepayments.
To get at or near our leverage real leverage meaning not.
Too much cash on the balance sheet for liquidity purposes, but to have invested portfolio. That's levered, you know one to one or better and.
And have performing logs and so those are the drivers for us and as we look out from today, we were comfortable maintaining our dividend distribution through September in our board concurred.
Mhm based on on the way, we look at the future.
Got it okay. Thanks, Rob I guess, just one last one.
Just on target leverage is the range still unchanged and do you kind of expect to be at a certain part of that range, what you've kind of been on the lower end of that for a while you expect that to kind of reach the the higher end given potential.
Headwinds to that asset marks or are you going to attempt to stay at the lower end in anticipation of that.
So the function of being at the lower end of that was twofold, we were able to grow our portfolio very steadily now three quarters, but we're also able to raise quite a bit of capital last year on the equity side, so our ability to get towards our target of 1.2.
It was hurt and we would say helped by the fact, we were able to raise equity yet.
Good value that was accretive to our shareholders.
We don't actually have any expectation of raising capital.
In the near term so we would expect that it if we can continue to modestly grow our portfolio is Jerry indicated that we will move from the low end of the range towards the middle maybe the high we want to keep a lot of liquidity available to support our companies. That's really critical to us is to help this portfolio.
We will get through into 2021 so.
That's the offset if we are at.
One to one two and approaching our target leverage is 1.2 to one.
With the spreads that we get the yields that we charge.
We can be extremely profitable.
Got it that's helpful Alright, well, thanks again for the for taking the follow ups.
Okay.
Thank you we returned about question answer session, how that's true for that quarter, Rob putting further closing comment.
So thank you all for joining us. This morning, we appreciate your continued interest and support and Horizon. We hope you and your families continue to remain safe and healthy and we look forward to speaking with you again soon this wind our call.
Thank you that does conclude today's teleconference. You may disconnect your lines as time another wonderful day, we thank you for your participation today.