Q2 2020 Horizon Technology Finance Corp Earnings Call
<unk> 31, 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 at this time I would like to turn the call over to Rob Pomeroy.
Good morning, Thank you for joining us and for your continued interest in horizon.
We hope you and your family's remains safe and healthy.
As we normally do I will provide some overall perspective on the company. Jerry will then touch on our business development efforts and the market environment, and Dan will detail, our operating performance and financial condition.
The last few months have been extremely challenging times for all Americans at Horizon, we have been hard at work since the beginning of the pandemic closely managing our portfolio and building on our recent accomplishments to further strengthen our overall financial and credit position.
Our efforts in constructing and managing our portfolio, including execution on our predictive pricing strategy produce second quarter results of which we are all proud.
During the quarter, we generated net investment income of 40 cents per share, which exceeded our distributions due to our strong onboarding yields our predictive pricing strategy, resulting in significant prepayment activity and our successful efforts to recover value from our underperforming loans.
We grew the size of our debt portfolio for the ninth consecutive quarter.
We achieved the debt investment portfolio yield of 16.9%.
We maintained a stable credit profile, despite the ongoing volatility in the market.
We increased our net asset value as of June Thirtyth $211.64 up 16 cents from March 30 Onest.
Considering the significant persistent economic effects of Cobot 19, we're very pleased are any of the increase this quarter.
We also further strengthen and diversified our balance sheet by amending our credit facilities with New York Life insurance and Keybanc and ended the quarter with over $200 million of capacity to support our portfolio companies and to selectively make new investments.
All in we are weathering, the storm well and remain confident in our ability to navigate the challenges presented by the pandemic.
That said, we are well aware that there remains a considerable amount of and ongoing uncertainty.
And macroeconomic risks outside of our control.
Thus, we continue to take a measured and thoughtful approach with respect to our portfolio and new originations.
On our last call we discussed at some length, our process for managing our investments and our consistent communication with our portfolio companies as they deal with the new normal.
During the quarter, we continued to employ our three legged stool approach, which has worked for us in both good times and bat.
The first leg of the stool consists of meaningful discussions with the management teams of our portfolio companies about employing a realistic and achievable outlook, when making business plans, especially in light of the president environment.
We ensure management teams remain focused on streamlining operating expenses and rightsizing their businesses in order to successfully navigate the real and potential challenges that lie ahead.
The second leg is the investors willingness and ability to support their portfolio companies with additional new capital now and in the future.
One of the key criteria of our underwriting process is the quality and resources of the potential borrowers Investor group.
When times are difficult this is even more critical.
The third leg of the stool is aligning horizons interests with the other legs of the stool to provide a plan to help of portfolio company through difficult times.
While increasing the credit quality of the investment.
To do so we can differ principal payments ease performance covenant covenants or make additional loans all of which we have utilized in the past.
The three legged stool approach served us well in the quarter as we maintained strong relationships with our companies and many were able to raise capital despite the economic environment.
Turning to our investment activity in the second quarter, we funded six new loans totaling $40 million and consolidated $15 million in loans from our former joint venture onto our balance sheet, which resulted in our ninth consecutive quarter of portfolio growth.
We're also pleased to see $30 million in prepayment activity in the quarter, a testament to the success of our predictive pricing strategy, even during challenging times.
During the third quarter are committed backlog and overall pipeline continued to remain active despite the pandemic.
We continue to see strong demand for venture debt within our target industries as companies seek additional liquidity and funding sources, we will continue to selectively pursue new investment opportunities in companies that meet our higher bar for liquidity.
We also maintained our current monthly distribution level at 10 cents per share through December. It is our board's policy to set our distribution, where it can be covered by Eni overtime.
The distribution fusion level reflects our outlook for the balance of 2020, and our spillover income at June Thirtyth.
We have now covered our distributions within III for the past two and a half years.
While our overall outlook remains measured in light of the ongoing pandemic. Our team has continued to perform quite well.
We will continue to focus on closely managing our portfolio and supporting our portfolio companies, while we look to opportunistically fun new investments.
By doing so we look to continue to generate additional long term value for our shareholders.
Ill now turn the call over to Jerry.
Thanks, Rob and good morning, I hope, everyone has remained healthy and safe since our first quarter investor call.
In the second quarter, we operated in a volatile and uncertain covert 19 environment, which impacted both health care and economic conditions. This required horizon to carefully navigate the environment and execute on its venture lending strategy by relying on its experience and ingenuity.
The good news is that the expectations about our markets that we shared on our first quarter investor call largely held true.
Gross the life science market remains healthy and strong with significant support from both equity and debt providers. The heightened awareness of our country's need to focus on vaccines and treatments for unmet medical needs is as high as as it has ever been in my 35 years of financing life science and related companies.
Second as we anticipated later in the quarter, we saw significant improvement in the healthcare market as healthcare facilities reopened and resumed providing non essential health care treatment.
Our confidence remains strong with respect to the life science market, while we were becoming more optimistic with respect to the healthcare technology market.
However, I will continue to remain cautious on the consumer related Internet technology markets. We are beginning to observe positive developments in certain sectors, such as online education, which is experiencing significant demand for its products and services and my what me well become the new normal.
Learning market.
Due to favorable outlook toward the life science market at the end of the first quarter and our strong brand and the second quarter. We originated several quality investments to life science companies with unique technologies top management committed investors and ample liquidity.
As Rob mentioned in the quarter, we made a total of 40 million and investments to four new life science portfolio companies and two existing life science portfolio companies. This helped resulting growth in our portfolio for the ninth consecutive quarter.
On boarding yield for the investments we made in the second quarter was 11.1%.
We also experienced for loan prepayments during the quarter totaling $30 million, which significantly contributed to our anti and further validated our predictive pricing strategy, despite an adverse economic environment.
Prepayment and accelerated income from these events helped drive a debt portfolio yield for the quarter of 16.9%.
Our debt portfolio yield leads the BDC industry and in second quarter helped deliver income in excess of our distributions and helped increase our undistributed spillover income to 42 cents per share.
During the quarter. We also received proceeds of $500000 from warrants in our portfolio company, how hedge which experienced in M&A transaction as previously discussed structuring investments with warrants and equity Reits as a key aspect of our venture debt strategy and an additional value generated to that end.
One of our portfolio companies in the process of closing a large round of equity priced at a significant increase and it's pretty money valuation as a result, we recorded a significant mark to market increase on the warrants we hold in the company as of June Thirtyth, we held warrants and equity positions and 71 portfolio companies.
The fair value of 13 million.
The second quarter, we closed 100 million in new loan commitments and approvals and ended the quarter with a committed in approved backlog of 101 million compared to $44 million at the end of the first quarter of 2020, the increase in our committed backlog, mostly resulted from new life science commitments with typical milestones.
Driven and or tranche funding patents, our pipeline of new opportunities as of today is 520 million.
In addition to our origination in prepayment activity, we remain particularly focused on close closely managing our venture debt portfolio by staying in close contact with all of our companies and helping them manage through the government constant current environment.
As a result, our credit profile remained stable during the quarter.
As of June Thirtyth, we had six two rated credits in our portfolio, which is the same number of two rated credits we had as of March 30, Onest further percentage of both the cost and fair value of our portfolio at June Thirtyth. It consisted of one and two rated credits declined from March 30 Onest.
I would now like to provide a brief update on the two credits that were on non accrual as of March 30 Onest.
The Odyssey acquisition was completed during the quarter and we were very pleased to obtain a positive resolution receiving our entire outstanding principal balance of 4.3 million plus additional interest end of term payment and prepayment fees. This was a great outcome for horizon, and a testament to our ability to work through challenging credits.
And achieve a positive recovery.
In addition, we received proceeds of 600000 in full settlement of our loan to sign X.
During the second quarter replaced two investments on non accrual we're working closely with both of these companies as we try to improve the outlook of these investments over the second half of 2020.
Turning now to the venture capital environment. According to pitch book. Despite cobot approximately 34 billion was invested in VC backed companies in the second quarter of 2020. This was still a strong number although the number of deals has lagged from the past quarters, which has no surprise as investors become more selective.
In terms of VC fund raising 22 billion was raised in the second quarter, which is a surprisingly strong number given the environment and puts it on pace to eclipse last years total of 54 billion.
As with deal activity, though the number of funds closed this well below last year's pace, meaning that mostly large funds are able to raise funds in the current environment.
In terms of VC backed exit activity. There were 16 venture backed ipos in the second quarter contributing to a total exit value of 21 billion. While this was well below last year's pace considering the IPO market was shut down for all of April and where we believe the economy was trending at the end of March this was actually a decent before.
Formats, we continue to expect 2020 IPO activity will decrease from 2019 levels, Although we anticipate some healthcare life science sector Ipos later in the year.
With other shooting to return to the private markets for additional fundraising.
Turning now to our core markets as noted previously given the pandemic, we focused our attention our life Sciences market, where we continue to see better investment opportunities during the quarter. We provided funding to four new portfolio companies, a $10 million venture loan to Sarah Bell a developer of an FDA approved.
Rapid response device to diagnose seizures, a $10 million venture loan to Magnolia medical technologies, a developer of an FDA approved broad blood culture collection device.
$10 million venture loan to prohibit which is developing cost effective natural crop protection products and a $5 million venture loan to MPLX Bioscience, which is focuses on treating central nervous system and fluency disorders.
We also funded an additional 5 million to Kate firms one of our existing health care portfolio companies.
Looking ahead, we continue to closely monitor the economic landscape prudently originate new loans that meet our current underwriting criteria and keep a sharp focus on our current and diverse portfolio of senior secured loans. We expect continued demand for venture debt from life Science companies, where we also expect the healthcare tech market.
To pick up steam in the second half of 2020.
While we have strengthened our balance sheet, including this past quarter's amended credit facilities, and raising 5 million of equity under our ATM facility Horizons leverage is still below our target. Thus, we believe our leverage and liquidity position will allow us to navigate through the current environment, while growing our portfolio.
In delivering 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 by reviewing the steps we took to strengthen our balance sheet during the quarter and then I'll provide a quick review of our second quarter 2020 results before opening up for questions.
After consolidating the joint venture portfolio onto our balance sheet by making the joint venture a wholly owned subsidiary of Horizon. We work closely with New York live to amend the 100 million senior secured debt facility that was initially available to the former joint venture and is now available to horizon.
We're successful and in June we extended the investment period of the facility to June 2022.
Which allows us the ability to borrow up to $100 million.
The interest rate on the facility is based on the three year swap rate plus a margin of between 3.5 and 5.1 determined by its rating.
The facility provides us with increased lending capacity and low cost capital to fund new originations.
Additionally, if further diversifies, our sources of debt and enhances our balance sheet to maximize our capital efficiency.
We're very pleased with the outcome and with the additional balance sheet flexibility the facility provider.
As discussed earlier, we amended our keybank facility to extend the period by which we could request advances until September 2021.
LIBOR floors also amended from 75 to 100 basis points.
In short in the quarter, we continue to proactively manage our balance sheet and as a result, we increase our overall capacity at a low cost of capital as well as our overall financial flexibility.
Further our strengthened balance sheet enabled us to play an integral role with our current portfolio investments to help them navigate successfully through the pandemic.
And the balance sheet as of June Thirtyth.
Verizon had 60 million in available liquidity, consisting of 37 million in cash and 23 million in funds available to be drawn under our existing credit facilities.
As of June Thirtyth. It was 45 million outstanding under our 125 million Keybanc credit facility and 13 million outstanding under our New York Life credit facility.
Our debt equity ratio stood at 8.97 to one as of June Thirtyth.
Which is lower than our target leverage ratio of 1.21.
Based on our cash position and our borrowing capacity on our revolving credit facilities are potential DAEC capacity is 204 million at June thirtyth.
For the second quarter 2020.
Verizon are in total investment income of 13.5 million, a 29% increase compared to 10.5 million in the prior year period.
This increase is primarily due to higher interest income on investments given the larger average size of our loan portfolio.
Our debt investment portfolio grew on a net cost basis 352 million and 11% increase from March 30, Onest 2020.
For the second quarter 2020, we achieved onboarding yield of 11.1% compared to 11.2% achieved in the first quarter.
Our loan portfolio yield was 16.9% for the second quarter versus 16.8% for last year's second quarter.
Turning to our expenses for the second quarter total net expenses were 6.8 million compared to 5.5 million in the second quarter of 19.
Our interest expense was up 446000 compared to the prior year period, primarily due to an increase in average borrowings partially offset by a reduction in our effective cost of debt.
Our net incentive fee expense increased 423000, due primarily to higher pre incentive fee net investment income wireless base management fee Rose 300000, driven by an increase in the average size of our portfolio.
Net investment income for the second quarter was 40 cents per share compared to 26 cents per share in the first quarter of 2020.
And 37 cents per share for the second quarter of 19.
The company's undistributed spillover income as of June Thirtyth was 42 cents, an increase from 38 cents as of March 31st.
Given the ongoing pandemic prepayment activity may be muted in the second half of 2020.
Summarize our portfolio activity for the second quarter, New originations totaled 40 million, which were partially offset by 5 million in principle payments and 30 million in principal prepayments.
We also consolidated $15 million of former joint venture investments onto our balance sheet and ended the quarter within investment portfolio of 356 million.
The portfolio consisted of debt investments in 35 companies with an aggregate fair value of just under 343 million in a portfolio of warrant equity and other investments and 72 companies with an aggregate fair value of $13 million.
Based on our outlook for anti our liquidity forecast in our spillover income levels. Our board declared monthly distributions of 10 cents per share for October November and December 2020.
We have now declared monthly distributions of 10 cents per share 48 consecutive months.
We remain committed to providing our shareholders, but distributions are covered by our net investment income over time.
Our Navy as of June Thirtyth was $11 in 64 cents per share compared to $11 in 48 cents as of March 30, Onest 2020.
In $11 in 60 cents as of June 32019.
16% increase in any maybe on a quarterly basis was primarily due to our net investment income and net unrealized gains exceeding our pay distributions and the net realized losses on investment.
As we've consistently noted 100% of our outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase as interest rate rise with library interest rate floors as of June thirtyth. The average LIBOR floor on the entire portfolio is 211 basis points and a 100%.
Some of our portfolio is that their specific floors.
This concludes our opening remarks, we'll be happy to take questions. You may have at this time.
Thank you ladies and gentlemen at this time, we what we did talk to your question answer session.
Good luck to ask a question your way Prostar, what about your telephone keypad.
A couple for makes a total indicate your line is a question Q.
Hey Press Star too if you would like to remove your question for the Q.
For participants using speaker equipment.
It may be necessary to pick up your handset for pressing the star Kay.
Our first question comes from a lot of Tim Hayes with B. Riley FBR. Please proceed with your question.
Hey, good morning, guys, who are all doing well.
My first question here just in terms of cash runway for your portfolio companies can you maybe.
Just give us a little bit in.
Information here just how many of your companies have enough cash to get them through the ended the year or maybe if you can tier four rise in terms of six months or 12 month I don't know get that information in front of the but I know it's a big.
One of one of the bigger credit metrics you guys. We've got so if you can just give us a little bit more color on that I appreciate it.
So yes. Thanks, Tim This is Rob we we do tier our portfolio.
Are you suggest and.
The great majority of the portfolio companies have.
Cash into.
2021, maybe I'd ask.
Dan Devorsetz, our Chief investment Officer does give you had run down on the percentages. So I don't worry that high dollar, but I can tell you that all but six or seven have cash well into 2021 and the ones. That's.
Our in the process of raising capital you can.
Look at the the Q.
Okay.
And when you say well into 2021 does that mean that they have.
More than a.
Our years' worth of cash runway do you know, what what percentage of the portfolio or how many companies might be.
We have enough to get them, there were 12 months or versus.
I guess, we're only really four or five months away from the end of year.
Yes, good dantrolene, so the actual percentages, it's up north of 70, 580% to have cash greater than 12 12 months on balance sheet today.
Got it.
Got it thats helpful. Thanks.
And then you mentioned you added two companies to nonaccrual status this quarter I believe at Cerro Biopharma and Lantos technologies.
You know what drove you to place these credits on nonaccrual status and can you give us an update on your outlook going forward and how conversations with sponsors have been around these companies.
Yes, so in both cases actually.
Our outlook in this scenario analysis that we do for companies.
That are trying to either raise money or.
Sell their businesses.
James from where we were at the end of March Tim in both cases.
They have moved to date certain auctions and so those auctions.
Our confidence that they will return all of our capital.
Is less than it was at March and so as a result, we placed the business. The place these loans on non accrual and we value them based on our scenario analysis of the outcome of those auctions.
We think that both of those auctions should come to ahead in the third quarter maybe.
Gets driven stretched into the fourth quarter.
Okay.
Got it and then.
Could you touch on maybe what's encouraging signs if any that you're currently seeing in your portfolio. Your companies seem less desperate for cash these days and forbearance request declined or is there anything else that you can pass along whether it's just kind of the Ed the talented management team that your as you are catching up.
Hi, tens Terry.
We.
Obviously, we were sticking very close to two our portfolio companies.
And they are investors and I got to say that.
Given.
[music].
Where we felt things were going in March and even April.
We had heightened concern over not just our own portfolio, but the economy in general and the impact of Copel 19.
That will say the response, both from our management the management teams of companies and their investors has been extremely positive.
And along with our help I might add so.
We're feeling very good about where our portfolio companies are now stand Trolio just mentioned most of them have cash well into 2021.
So.
We think we have navigated up to at this point pretty well and we think our portfolio companies and their investors have done a great job up to now.
Obviously.
Given what we're seeing related to the pandemic. We still think there was some significant headwinds going forward. So we are going to continue to be closely monitoring the portfolio and and the company's and continuing to stay in touch with their investors.
The good news is investors.
I have a lot of dry powder.
Going into this so thats has been very helpful and they are very focused on making sure that their portfolio companies.
Kind of.
Get through this period now the question is how long is this period and Thats something.
We still have concerns about and as I think we mentioned in our script. So that's where we are today.
Got it I appreciate the color there and then just one more for me and I'll hop back in the Q.
Yes, how much of the 76 million an unfunded commitments would you say is readily accessible at this point.
So with most of most of our traunch commitments and unfunded commitments. They are milestone based and so there is I would say about 95% event in there needs to be a milestone for the hit and sell that non a concept of where there could be a ron on the bank to call.
Ill.
Liquidity on our revolver or anything like that so we're able to plan out and see throughout the year, where those commitments will come in and when they'll draw those possible unfunded commitments.
Got it got to yes, I figured as much but I just wanted to double check there, thanks, Dan and I'll hop back into queue. Thanks for taking my questions guys.
Thanks, Tim.
As a reminder, ladies and gentlemen, it is still want to ask your question. Our next question comes with a lot of Ryan Lynch with KBW. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
[music].
In your prepared remarks, you gave some statistics I think.
You had mentioned about $34 billion invested in the VC markets in Q2, and 22 billion VC capital raised.
That feels like a very robust environment. It doesn't really heel height, we're operating in appearance and those sort of numbers. We've also seen your portfolio companies in that.
$30 million or prepayment activity, so they're they're.
Giving money back to you early repaid capital back to your early so just as does feel lights and how they kind of statistics you would you would see in repair damaged and so my question is a little bit more of a higher level question is.
No.
From the VC market standpoint.
There seems to be plenty of liquidity moving around that market for borrowers to have plenty of acsix access capital.
You feel that really borrowers.
Portfolio of companies access the capital is really changed significantly during this pandemic versus pre pandemic.
Okay.
I think.
It's a great observation by the way.
Yes.
I think we went into the pandemic.
Really kind of from a very strong market position and so.
I think that helped a lot with companies investors and even the L. piece will invest in VC funds feeling like this was something that.
You know.
It was was temporary if you will that pandemic fit that does it would be an end at some point and so I think the people were basically optimistic still.
All fall.
Right aware of the pandemic, obviously and its impact on the economy with great at double digit unemployment.
To continue to.
Get through this ticket committed to getting through this just as we are.
Hi, My concern is going forward.
So how long can they continued to be optimistic about the circumstances and when do you get to the point where.
They start looking from a idiosyncratic standpoint at each one of their portfolio companies and saying you know in this environment as it continues. This this this great strategy. They had when we made the investment maybe isn't going to be successful going forward and so that is what we're watching very closely as we go forward. So.
So.
We feel good about what has been done at relative to the companys cutting costs relative to investors investing capital.
Ill and even even finding some really good opportunities in the marketplace, but we are.
Quite cautious about.
How long this is going to last and as it does.
Ill.
What is what is the investment mentality going to be going forward. So.
You're correct feel good about how weve navigated so far but I don't.
Not taking the approach that everything is fine and look what happened over the last three months. We're sure that that's going to continue we think at some point if this continues.
Ill mitigated in the end to pandemic continues to grow that this will become an issue for the country level on horizon. So we are we are we are paying very close attention to small science, we see in our market and within our own portfolio.
Okay. That's helpful color and then kind of on that with the $30 million prepayments. This quarter is there any way you guys you could kind of help characterize what was the nature of those companies prepaid where they are there acquisitions or what what was kind of just right.
I mean, those individual prepayments guys wanted to give capital back and prepaid loans in this environment.
Yes, sure Ryan, there's four prepayments that make up that $30 million.
One of the companies I think we mentioned on our last call where they have there was an M&A and it was a very positive event and we actually had warrant proceeds and warrant gains from that activity.
Then we worked out two of our non accruals that were on the book as of March and.
Settled one of them very favorably.
That we've been working on for a number of years and then the last one a company we've been working with four while now.
On base, some significant capital and make sense for them to pass off so kind of run the gamut okay.
And then I think you bench at your Onboarding yield was 11.1% in the quarter versus prior quarters of 11.2% So basically.
Unchanged I know there are other sees that are associated.
Guys add on.
End of term payment.
Warrants things like that would you guys restructuring.
New deals, but but given quarter over quarter, just the onboarding yields didn't change how would you classify the the the quality.
Deal terms that you could strike in this environment I would've thought that.
Onboarding yields would have been pretty meaningfully higher this quarter, although as I mentioned there is other.
Negotiation terms like end of term payments warrant good.
Yes so.
And the reality is.
It's still very competitive market I know this.
This this doesn't.
It doesn't it doesn't feel like that should beat the case, particularly on the life science side there is.
Companies have lots of different financing options, even up until today.
Whether it be.
Additional equity from investors, both new and existing investors, who have a lot of dry powder and want to make sure that the companies that are doing quite well get full support.
If this even an IPO market for life science companies as you probably noticed we expect that actually to continue into the third quarter as well and then there are.
I want to debt debt market. There is still relatively good competition for high quality transactions and so that has mitigated.
Some of what.
I would expect and even I have to say that we expected maybe in March and April and things.
With a little different.
Yes that would allow us to get better terms and conditions I think where we have been able to get better kundera terms and conditions is on the downside.
Given what we know about where we are.
The pandemic and add the uncertainty going forward, we have been able to structure transactions with a little more protection against those the uncertainty of the market going forward.
So that's really where we have been focused we are given the yields we get in now and in our markets.
And the spreads that we have.
Where we were pretty comfortable where we are today, especially with our predictive pricing strategy really over the last couple of years, demonstrating that we incrementally get significantly higher portfolio yields.
So we're comfortable where we are relative to that we're really looking for high quality deals with good investor support lots of liquidity those are the important things for us right now.
Okay.
Understood.
Those are all my questions I appreciate the time today.
Thanks, Ryan Thanks, Ron.
Got a goal that's all we have for questions I'd like to add it back to Rob Pomeroy for closing remarks.
So I. Thank you all for joining us. This morning, we appreciate your continued interest and support and Horizon. We hope you on your families continue to remain safe and healthy and we look forward to speaking with you again in the fall. This will conclude our call. Thank you.
Ladies and gentlemen, this does concludes todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.