Q2 2020 Hercules Capital Inc Earnings Call
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Capital Q2, 2020 earnings conference call at this time, all participants are in listen only mode.
Following the presentation, there will be a question and answer session.
We'll be taking questions via the phone line. That's a question via the phone line. Please press star and the number one on your telephone keypad.
Please be advised this conference is being recorded I would now like to hand, the conference over to your speaker today Mr. Michael Hara. Thank you. Please go ahead Sir.
Thank you Laura good afternoon, everyone and welcome to Hercules Conference call for the second quarter 2020.
Well that's on the call today for Hercules or Scott, boosting CEO and Chief investment Officer concept Meyer CFO.
Hercules second quarter 2020, <unk> financial results released just after todays market close and it can be accessed for Hercules Investor Relations section. The H.T.D.C. Dot com, we've arranged for a replay of the call at Hercules web page or by using the telephone number can pass code provided in todays earnings release.
During this call we may make forward looking statements based on current expectations.
Actual financial results, followed with external with the Securities Exchange Commission may differ from those contained herein.
The timing delays between the data this release I named the confirmation final audit results.
In addition, the statements contained in this release that about purely historical are forward looking statements.
These forward looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results could differ materially from those expressed in the forward looking statements, including without limitation, the risks and uncertainties, including the uncertainty surrounding the current market turbulence caused by the covert 19 kind of fabric.
And other factors, we identified from time to time in our volumes with the FCC.
Although we believe that the assumptions on which these forward looking statements are reasonable any of those assumptions can prove to be an accurate and as a result for the forward looking statements based on those assumptions also can be incorrect.
You should not place undue reliance on these forward looking statements to forward looking statements contained in this fleets are made as of the date hereof.
And Hercules assumes no obligation to update the forward looking statements or subsequent events.
To obtain copies of related SEC filings. Please visit our website and with that ill turn the call over to Scott.
Thank you Michael and thank you all for joining US today, we hope that everyone is staying safe and healthy.
Continuing with the theme of our Q1 Twentytwenty earnings call I'm going to provide an overview of our performance in Q2, and then discuss key areas of the business that we continue to believe require more attention.
I would like to start by once again, acknowledging and thinking our employees management teams and financial partners, who continue to diligently performed their jobs with commitments and resiliency. Despite the challenging operating environment that we are all facing as a result of the cobot 19 pandemic.
Q2 was a solid quarter for Hercules capital, where we largely where we were largely successful in the three specific areas of our business that we prioritized to a greater degree during the quarter.
Prudent originations.
Balance sheet enhancement and credit management.
Our industry, leading investment team and originations platform closed a number of new deals that we believe were high quality opportunities.
We were able to improve our liquidity position and delever, our balance sheet and despite one new nonaccrual loan our overall credit performance during the quarter was solid.
Let me recap some of the key highlights of our performance in Q2.
We originated more than 266 million of new debt and equity commitments and delivered gross fundings of 132 million.
In Q2, our investment related activity reflected our focus on diversification controlled growth and continuing to position the portfolio best given the current environment.
Our second quarter fundings included seven new and nine existing portfolio companies.
As our portfolio companies have continued to perform we're seeing more opportunities to expand and enhance our funding relationships with existing borrowers.
Our knowledge of these companies the management teams and the assets make underwriting to these companies in this environment more advantageous.
We saw strong performance from both our technology and life Sciences teams with respect to new debt commitments, although our funding and commitment that commitment activity was skewed more towards life Sciences companies.
During the second quarter, we had debt investment portfolio growth of 36 million at cost.
Early loan repayments were 85.4 million, which was down from 150.5 million in Q1, but consistent with our guidance of 50 to 100 million.
The reduction in early loan repayments during Q2 resulted in 3 million less fee income as compared to Q1.
In Q2, we generated total investment income of 68 million and net investment income of $35.7 million.
For 32 cents per share, resulting in 100% coverage of the based cash distribution.
The full impact of the to March fed funds rate cuts was reflected in our quarterly results.
As of today over 95% of our debt portfolio is now at its contractual interest rate floor.
Year to date, we have generated total investment income of 141.6 million.
An increase of 10.6% year over year, and net investment income of 73.6 million, an increase of 18.6% year over year.
Credit quality on the debt investment portfolio improved slightly in Q2 with a weighted average internal credit rating of 2.30 as compared to 2.34 in Q1.
Overall, we changed credit ratings on 27 of our portfolio companies with a general positive shift towards our rated one and rated two credits primarily due to the recovery in the public and private markets as well as several positive credit events that took place during the quarter.
Since the end of Q1, we have seen several of our watchlist credits complete capital raises strategic transactions and otherwise improve their credit profile. Despite the ongoing impact of depend demick.
Our rated four and rated five credits make up less than 5% of the entire debt portfolio at cost and 2% of the entire debt portfolio fair value.
During the quarter, we added one new company patron technology to our non accruals, giving us five debt investments on nonaccrual with a cumulative investment cost and fair value of approximately 61.1 million and 11.5 million, respectively or 2.4%.
And 0.5% as a percentage of the company's total investment portfolio at cost and fair value respectively.
While it is now clear that the cobot 19 pandemic will be with us for some time, the ultimate duration and long term impact to the economy and ecosystem remains unknown at this point.
Again this quarter I would like to provide an update on three specific areas of our business that we believe are important for our shareholders and stakeholders in this environment and detailed a specific things that we're doing to best position the company.
First employee wellbeing and the continuity of our business.
Our emphasis remains on the wellbeing of our employees and the continuity of our business operations, while the pandemic continues.
Our Boston office reopened in June with limitations on capacity, while our California office remains closed.
Today, we have not experienced any material interruptions to our business or our ability to operate and we are currently assuming that the majority of our workforce will remain in a work from home setting through the duration of Q3 and perhaps longer.
Second liquidity and balance sheet strength.
We are continuing to prioritize liquidity.
We ended Q2 with a record $510.9 million of liquidity.
Which provides us with substantial coverage of our available unfunded commitments of 165 million.
And the ability to fund our ongoing anticipated business activity.
This also gives us the ability to be aggressive on new deals and take advantage of any potential market dislocation. When we believe that it is prudent to do so.
Our liquidity was supplemented in June by the 70 million that we received from our delayed draw private placement executed in February as well as raising an additional 39 million of equity at a premium to net asset value throughout the quarter via our equity ATM program.
Early pay offs and ordinary course principal payments have always been a source of liquidity for our business and was again the case in Q2, where we received approximately 102 million of early pay offs and amortization.
At this time, we expect early payoff in Q3 to be between 100 million and 150 million. Although this number could still change materially.
Our balance sheet with strong heading into this crisis and it remains strong today with record liquidity and no near term liability maturities in our debt stack.
Finally portfolio and credit quality.
We continue to believe that it will take time to ascertain the true impact of this crisis and that a diversified balance sheet, both with respect to assets and liabilities will serve us well.
Although liquidity does not guarantee accompanies ability to succeed in the future for our companies having ample liquidity remains an important factor that we're closely monitoring.
When looking at our entire outstanding debt investment portfolio, we estimate that approximately 82% of the portfolio. Currently has 12 plus months of liquidity with another 9% of the portfolio with six to 12 months of liquidity on the balance sheet.
Loans, which have three months or less of liquidity make up less than 4% of our outstanding debt portfolio.
Of the loans with 12, plus months of liquidity over 72% or approximately 59% of our entire debt portfolio. Currently has 18 plus months of liquidity on balance sheet.
Within our life Sciences portfolio, we now have 13 debt investments with a cost basis in excess of 25 million.
Each of these companies currently has cash on hand to fund their business for at least the next 12 plus months.
Within our technology portfolio nine of our 10 largest investments at cost now have cash on balance sheet for at least the next 12 months, while all of those companies have current liquidity through year end based on our most recent reporting available.
Capital raising activity across our portfolio remains strong.
As we saw during the period between late February and our last earnings call in early May many of our debt portfolio companies, including several of our watch list credits have continue to raise new capital and execute on strategic transactions.
Since our last earnings call 27 of our debt portfolio companies raised new capital totaling over 1.7 billion.
Since the beginning of the Coven 19 outbreak in the United States. We have had 40 of our current debt portfolio companies raise a total of nearly 3.3 billion of new capital.
In addition, we have had four new M&A events, one of which has closed and five companies that have filed registrations for their initial public offerings. In addition to several of our companies currently working on either new capital raises or strategic transactions.
Our top 10 debt investments currently make up only 30% of our debt portfolio at cost.
As we indicated on our last call while each of these companies will continue to be impacted two of varying degree by the current situation all but one have at least 18 months of liquidity on balance sheet as of the most recent reporting and each of them have current liquidity on balance sheet for at least the next 12 months.
Our debt portfolio continues to be overweight towards drug discovery drug delivery and software companies three sectors that we expect to perform better on a relative basis. During this period and based on what we know as of today.
Approximately 80% of our life Sciences debt investments at cost are in publicly traded companies as at the end of Q2.
These public companies have a weighted average public market capitalization of approximately 1.3 billion as of June Thirtyth.
Based on the public equity market capitalization for these companies the weighted average ratio of public equity value to our debt at cost equals 35.1 times as of June Thirtyth.
In our technology portfolio, approximately 51% of our companies are classified as either software or have a software driven contractual recurring revenue model.
Of these companies are estimated weighted average debt to annual recurring revenue attachment point as of the most recent reporting period that we have his 0.99 times, which we continue to believe it's conservative.
The venture capital ecosystem continues to raise funds and make investments as we have seen in the latest reports.
Through the first half of the year venture capital funds raised a total of 42.7 billion and invested over 69 billion in the U.S. According to data gathered by pitch book and the National venture Capital Association.
That cash continues to put them in a strong position as the pandemic indoors.
This data also reflects the many portfolio companies that we work with that have raised capital during the quarter.
Our focus continues to be on maintaining an appropriate level of liquidity actively managing our credit book and working with our companies and financial partners proactively.
Our investment team has been incredibly busy evaluating an active deal pipeline that currently exceeds 1 billion of potential investments, but our bar for new deals remains high and we continue to be extremely selective with capital deployment.
Q3 is typically a slower quarter in terms of newer a new originations and we expect that trend to continue this year.
There has been an abundance of equity capital flowing into the stronger credits, which pushes off the need for debt financing in some cases.
The operating environment overall remains challenging for prudent credit managers, who are focused on quality deals and appropriate risk adjusted returns.
We continue to expect the quality and profile of new investment opportunities to get better with time and we are optimistic that this will happen.
We want to be positioned to take advantage of that opportunity when it arises as we believe that it will.
Finally, I would like to discuss our shareholder distribution.
With our debt investment portfolio at 2.28 billion at costs are Eni per share in Q2 generated 100% coverage of our quarterly based distribution of 32 cents per share.
We're not making any changes to our current based distribution and have declared our fifth consecutive quarterly cash distribution of 32 cents per share.
In addition to our quarterly net investment income in Q2, covering our base distribution. We are also fortunate to have undistributed earnings spillover of approximately 73 million or 64 cents per share subject to final tax filings.
This provides us with additional flexibility with respect to our variable based distribution going forward.
And the ability to continue to invest in our team and platform.
With our spillover and current operating outlook, we do not currently see or anticipate any near term downward changes to our quarterly based distribution.
I am also very pleased and proud to have announced that we have now surpassed over $1 billion in cumulative distributions since our public debut in June 2005.
It is a testament to the sustainability of our franchise combined with our shareholder aligned internal management structure that has allowed us to reach this significant milestone.
These continue to be unique and challenging times for everyone I would like to acknowledge and thank each of our dedicated and talented employees for maintaining their spirit effort and focus.
We send our most sincere wishes to all of those who are being affected by this unprecedented pandemic and we hope for the wellbeing for all.
Thank you very much everyone and I will now turn the call over to set.
Thank you Scott and good afternoon, ladies and gentlemen.
Given the anticipated duration of this pandemic and the and long dated impact that it is likely to have on our brighter in economy. We continue to think ahead and focused on strengthening our balance sheet, enhancing our liquidity position and maintaining a well diversified portfolio.
The steps, we've taken to strengthen the balance sheet and improve the liquidity have been very well timed and we will continue to be proactive as we look to further improve our position.
In the second quarter, we successfully raised $39 million of equity at a premium to net asset value and drew the previously arrange 70 million in unsecured debt priced at a fixed rate of 4.31%.
We also received a green light letter from the ASP for a new SP IP license, which upon final licensing will provide us with additional attractive financing.
Today I'll focus on the following areas the income statement performance and highlights any the unrealized and realized activity.
Leverage and liquidity.
And finally the outlook.
That lets turn our attention to the income statement performance and highlights.
Net investment income was 35.7 million or 32 cents per share in Q2 inline with the quarter over quarter guidance of May where I am I guided that we would have a 1% to 2% share.
Decrease related to the fed rate cuts.
And a reduction in the prepayment activity, which resulted in eni per share.
Reduction by another three cents.
As mentioned before we raised $39 million of equity and premium 10 Navy.
Which reduced our quarterly earnings by one cents per share due to dilution.
Total investment income was 68 million a decrease of 7.7% compared to the prior quarter.
Two main drivers for the lower total and net investment income during Q2, where a decrease in fee income and the full quarter impact of the March fed rate cuts. The decrease in fee income was driven by lower playoffs, and the payoff of loans with a more normal vintage compared to what we saw in Q1.
The effective in core yields in the second quarter were 12.2% and 11.5%, respectively compared to 13.6% and 11.8% in the first quarter.
The primary driver for the decrease in the effective yield was again related to the lower pay offs and the size of the one time and unamortized fees associated with the loans that paid off.
The core yield reduce due to the full quarter impact of the fed rate cuts in the prior quarter and the addition.
The single loan that we placed on non accrual as Scott mentioned.
Turning to expenses, our total operating expenses for the quarter decreased to 32.3 million compared to 33 million in the prior quarter consistent with my guidance in May.
Interest expense and fees increased slightly to 16.7 million from 16.3 million in the prior quarter commensurate with the greater use of the credit facility and additional unsecured notes issued during the quarter.
SGN a expenses decreased to 15.6 million from 16.7 million in the prior quarter. The decrease was driven by lower variable compensation expense commensurate with the lower fundings compared to Q1 and the seasonal decrease of payroll taxes, where Q1 is generally higher than Q2.
Yeah.
Our weighted average cost of debt was 5% a small decrease compared to the prior quarter.
Now, let's switch over to any the unrealized and realized activity.
During the quarter are any of the decreased by sorry increased 27 cents per share to $10 in 19 cents per share. This represents an NPV per share increase of 2.7%.
The main drivers for the increase where the net change in the en route realized appreciation of 25.9 million and 38.7 million of new equity raised at a premium to NPV.
The net change of unrealized depreciation of 25.9 million represents a 34% recovery of the first quarter unrealized depreciation.
Our 25.9 million of and rent realized depreciation was driven by the mark to market of the equity and warrant portfolio as well as the yield adjustments on our debt portfolio.
The key drivers for the unrealized depreciation were approximately 40.8 million of mark to market appreciation, including reversals of prior depreciation due to sale and or write off and the equity in warrant portfolio, partially offset by 15.9 million depreciation on the.
Loan portfolio, which included 24.4 million of collateral based impairment.
Largely attributable to one portfolio company.
Excluding the collateral based impairments and reversal of prior depreciation on loans paid off the loan portfolio experienced an 8.4 million yield based depreciation.
Net realized gains in Q2 were 141000 compared to 2.5 million comprised of $2.5 million of gains from disposal of an equity position offset by 2.4 million of net losses from the write off or expire ration of certain legacy War.
Fronts.
Next I'd like to discuss our leverage.
At the ended the quarter, our GAAP and regulatory leverage was 110% and 100.5% respectively.
Which decreased compared to the prior quarter due to the equity raised the our ATM program as well as the unrealized depreciation increasing the equity base.
Netting out cash on the balance sheet, our GAAP and regulatory leverage was 106.9 and 97.4, respectively.
We continue to manage the business with a targeted leverage.
Ceiling of approximately 125% on a regulatory basis.
We ended the quarter with record liquidity of more than half a billion supported by 475 million of credit.
Capacity.
And 70 million of private placement announced in February and drawn in June.
Our liquidity continues to be enhanced by our normal course monthly principal and interest collection.
As well as early payoffs.
As a reminder, our early pay offs and normal amortization provide us with significant monthly inflows that we can use to de lever when and as needed.
Finally on the XP expectations on outlooks.
Our core yield guidance of 11% to 12% continues to apply for the remainder of 2020.
In Q2, our net investment income reflected the full quarter impact of the 150 basis point Q1 fed rate cuts.
As of the ended the quarter, 100% of our prime based loans and 95% of our variable rate loans are at their contractual floor.
As a result, we do not expect further rate decreases to have any material impact on our quarterly net investment income.
For the third quarter, we expect SGN, a expenses of 15, and a half to 16 and a half million consistent with my prior guidance.
We expect our third quarter borrowing costs to remain relatively stable compared to the second quarter.
Although very difficult to predict we expect a 102 150 million in prepayment activity in the third quarter.
And finally as mentioned earlier, we received a green light letter from the ASP for and New SP IC license. The timing of the final approval is likely to be before year end subject to the priorities of the SBA and the numerous programs that are currently managing.
This will not only help us increase our available liquidity, but also contributed to our decreasing weighted average borrowing costs.
In closing we delivered a solid Q2.
And going forward, we will continue to focus on things that we believe will position us best given the current operating environment.
I will now call the turn the call over to Warren and to begin the Q in a partner worn over to you.
Yes, Sir ladies and gentlemen, and just as a reminder, tested the question. Please press star and the number one on your telephone keypad.
Pause for just Mohmed compiled culinary roster.
And our first question comes from Kristen level from Piper Sandler.
Hey, guys. Thanks for taking my questions.
Our first can you talk a little bit about how working from home and less traveling has impacted.
Activity in the different types of be activity are you more focus on working with legacy clients are smaller deals are able to come source new investments this but despite not being able to meet with management teams in person I did hear your commentary about the seven new portfolio companies and nine existence.
Good thing just curious how that would relate to pass more normal quarters.
Sure so with respect to the numbers specifically you every quarter is really different depending on what the pipeline looks like them in Q2, we definitely placed a greater emphasis on funding the fundings across our portfolio and there's really two primary reasons for that number one within our existing portfolio.
We already have the relationship we have familiarity and comfort with the management teams and the assets and the diligence can really be confirmatory.
That's very different than being able to go are being havent, having having having to go out and do due diligence in person them in the current environment. The second thing that we're seeing and we mentioned this in Q1 as well a number of our portfolio companies are achieving performance milestones and looking.
For additional capital to help fund some growth initiatives. So we're seeing attractive opportunities on the funding side across the portfolio that we're really looking to take advantage of there is no question that the current environment has an impact in terms of our ability to complete new debt financings were very pleased with what we did in Q2, adding so.
Seven new portfolio companies, providing nearly $270 million of new commitments, but the bar is very high for us and in an environment, where you can't go and travel and you can't go and meet the company in person and get us familiar of familiarity with the business and the operations, it's just simply more challenging.
Okay, and then just one more for me so seeing the decline in total investment income in the second quarter relative for Stan.
Your views on what you see forward trajectory could be there do you believe it can be stable or trend, even a little bit lower or you would you expect some improvements in the second quarter levels.
Sure. So we don't provide some eni guidance and so we're not going to provide go forward guidance, but I think what we tried to do in the prepared remarks is really sort of provide a bridge between Q1 in Q2 in Q1, as we announced we had 37 cents of Eni.
We had a three cents.
Reduction in Eni in Q2 directly attributable to a lower amount of payoffs and the vintage of the loans that paid off during the quarter and then we had about a one to two cents impact from the March fed funds rate cuts.
We're obviously.
Announcing that 95% of our entire portfolio is now at its contractual floor. So we don't see any further yield compression coming from any further rate cuts on a go forward basis and on the fee income side going forward. It will largely be driven by the amounts of prepayments in the vintages the prepayments that we have.
On a quarterly basis.
Okay. Thanks for taking my question.
Sure.
And our next question comes from a finian with Wells Fargo.
Hi, guys. Thanks for taking my question and good afternoon. So.
Scott just first one on the.
Hi level environments.
A couple of your comments.
One was that a lot of the high quality companies were getting funding.
He also mentioned yet a very strong pipeline.
If you dovetail that for US are you getting more aggressive on the credit side, while versus maybe just a couple.
Larger opportunities that expand your pipeline.
Any color there would be appreciated.
Sure. So I think it's the two things that you just mentioned so number one and we're certainly looking at evaluating upset some larger transactions right now, which does boost that pipeline up considerably.
But I think the second thing is despite the fact that many companies are raising equity capital. There are a lot of companies some of them good companies and some of them not so good that are currently exploring debt financing and as we always do in the market. It's our teams job to look at Kansas and evaluate the entire landscape, we want to make sure that.
We're seeing evaluating speaking to every company that's out there that's in our addressable market that is looking for debt financing and then we're just being incredibly selective in terms of the ones that were converting from active pipeline into actual closed transactions.
Okay. That's helpful and in just a follow the that are you seeing any I know you've done. This in the past for example on Aries portfolio are you seeing any portfolios.
Being shopped around is there any opportunity on that front.
We are aware of a few smaller things, but nothing that has been attractive to us about the current time.
Okay. Thanks.
One final small one on the Spa the third US via you have a green light core.
I think the remaining US via you have is being paid down.
But the new family limits of course higher 350 million can you what are the available on the anticipated.
Commitments, assuming you are finally approved on on an FDIC debenture.
So it.
And in a assuming that were approved will.
The arranging 175 million for the license.
Which is above the 150 million that we had on the existing license, we pay that down to 110 million.
At the moment, we paid that part of it down in February is that what you are looking for.
Yes.
Looking for.
What you will have.
Going forward, what the the new one I think you said, the new ones 175 and.
And.
The current one is being amortized it sounds like right.
In the deck on on our web page you can see.
When those amounts come due the most significant amount in the near term is in 2022, it's about $60 million amount due in 2010, one is a small amount.
So we'll pay that okay as the portfolio runs off and as they come due.
Okay. That's that's all for me thanks, so much.
Thanks.
Our next question comes from Me Mr., Chris York with JMP Securities.
Hey, guys. Thanks for taking my questions. So first I'd like to begin to talk about the competitive environment for a moment.
Scott how would you characterize the terms the we're receiving a new deals today.
Hey versus the beginning of the year, which is called January Onest have you seen its new operating environment reduce either bank or non bank competition.
Sure. Thanks, Chris So with respect to comparing current terms to what the terms we were seeing at the beginning of the or I would say they are largely consistent with each other.
At the beginning of co bid so in sort of the March and April time period, we did see.
Some opportunities that presented themselves with more attractive terms, we were getting slightly better pricing and we were able to be a little bit more conservative on terms I would say over the last sort of 30 to 60 days, we've seen that come back a little bit and right now I would sort of characterize the environment that is consistent with where it was.
At the beginning of the year, so in kind of the pre co bid environment.
The competitive landscape sort of continues to be as it has been historically there are there are a couple of players that we tend to see in certain transactions as we've always said, we don't chase the market. Our team I think is very good at making sure. We do the deals that we want to do we have a strong enough balance sheet.
Now, where we can get incredibly aggressive to win the deals that we think we want to win and we're perfectly comfortable letting the deals that we think are more marginal go to somebody else who is willing to be more aggressive.
In our remarks, we've said this now two quarters in a row based on everything that we are seeing at our current assessment of the operating environment. We continue to expect deals to get better with time as we get a little bit deeper into the pandemic in a little bit closer to the end of the pandemic, we think the opportunities will be better and that's why we're emphasizing.
Liquidity and really trying to position the firm's take advantage of those opportunities when they come.
Got it.
Very helpful color.
Just maybe drilling down on one Perm have you seen any changes in I O periods, and maybe back to 12 months say to 18 or 24 months and then borrowers apps for extensions of Io periods.
Sure. So take the first question first so we've actually seen the opposite so there are there are couple of players that have come into the space over the last year or so that that are actually going the other way in terms of interest only provisions.
We've seen a lot of deals that have essentially been structured as bullet loans for cash flow negative companies, if thats something that we've talked about historically, we've seen that on occasion. We saw in 2015 2016, we saw it again in 2018 and we've seen that over the last couple of months.
Again, Thats just not a game that we're going to we're going to play unless we think it's truly an exceptional some opportunity and we can put some other creative structuring mechanism in place to get ourselves comfortable.
With respect to the second part of the question, we really haven't seen a change at all from a bank and nonbank perspective, I think some of the the bank players in the space really pulled back at the beginning of Covidien kind of that March April time period, but weve.
Seem them it will be fairly aggressive over the last 30 or 60 days is as good as I think they're probably trying to defend our current portfolios.
With respect to the of the final part of the question on the interest only up question.
We've had a small number of amendment requests, but it is not a material number and we've actually made some changes and completed amendments with respect to extensions of interest only periods on less than a handful of companies across the entire portfolio.
Great.
Again very helpful and insightful thing on the topic of just maybe.
DC.
Has the increase of enterprise value into late stage to recurring revenue Tech companies and then we've seen a consequential robots funding.
Fundraising environment by the season that later stage, which appeared to be on it pays for a record does that increase your desire to be more active in growth stage lending today.
It does and if you look at what we've done over the last two years or so we've really transitioned a significant part of our technology book into kind of later stage growth stage opportunities.
Greater than 50% of our technology book, which is right now about 1.2 $1.3 billion in sort of later stage recurring revenue businesses.
That's a different profile underwriting than kind of our traditional venture stage technology opportunity and so with the influx of equity capital into that space. We've certainly seen an influx in terms of the number of companies that were speaking to and actually closing financings with.
The other thing that we've seen across the market that's not specific with respect to sort of late stage Tech. It was just a tremendous influx of close equity capital into the biotech. If you look at kind of a year to date numbers on the biotech side of things you've had 40 biotechnology ipos year to date that.
Have raised $7.2 billion of new equity capital when you combine what the Vcs and the public markets have funded into biotechnology year to date, you are looking at over $40 billion of equity capital flowing into that space. So theres just been a tremendous amount of equity support for later stage tech and for us.
Biotech year to date, and we don't see that trend changing near term.
Great. Okay last question for me and then I'll hop back in the queue I saw.
Brawl third finance in larger deals.
Than they normally do in the second quarter and suspect the demand for the company's debt capital as to be pretty robust in this market. So could you update us on that business and then your expectations for growth.
Sure. So as we've said historically given that it is a portfolio company, we don't disclose specific information them on their on their business and performance outside of high level commentary and what they announced themselves.
I think you serve described the situation the situation accurately that business continues to perform very well their pipeline right now is very strong.
It should not be a surprise to anybody but given the current environment. The demanded interest in NPL of his extensive.
They are a very well capitalized.
Credit shop, and that business continues to perform at or above our initial expectations.
Okay fair enough.
For me Thanks, guys.
Thanks, Chris.
And ladies and gentlemen, our next question comes from a Mr., Tim Hayes from B. Riley.
Hey, guys. This is actually Mike on for Tim Congrats on a good quarter.
If I'm wondering if taken back in 2016, Hercules kind of slowed down and one on pause a little bit around the election.
I was wondering can you provide any color on how you're thinking about the upcoming election.
I guess and typically how it relates to origination activity.
Sure I don't think Theres anything specific with respect to the election.
We've been very clear in our commentary in Q1 and again in Q2 that were being very selective in terms of new originations were obviously very pleased with what we were able to do in Q2 265 million of new commitments 132 million of fundings added seven new portfolio companies to the portfolio when we were able to support new.
Nine existing portfolio companies with some additional financing so we're going to continue to take.
As a conservative approach to the market in the second half of the year, but we're seeing a number of of attractive opportunities and we're confident that we're going to be able to get those deals.
Structured in a way that will be appropriate for what were looking to do.
Thats great Thats very helpful. Thank you very much and then just one follow up.
As we think about the other side of the eventual economic rebound Im just wondering what portfolio side can you support today, given your current infrastructure and as deep as you prepare for the next level of a record portfolio.
And the Great question, one of the things that we've talked about pretty openly over the last year or so the fact that we have been and we continue to invest in our platform and our team and the coal bid into the situation has not changed that over the course of the last six months. We have continued to both invest in the plan.
Form and invest in our team we've added to virtually every group within the company investment team finance team credit team operations legal and support.
We're going to continue to make sure that we have a platform that is able to support us and our growth objectives on a go forward basis. The portfolio right now is that a record 2.2 $2.25 billion from a cost perspective, we currently believe the existing infrastructure that we haven't place and the additions that we've made can support.
Us into the $2.53 billion portfolio level.
That's helpful. Thank you for taking my question.
And our next question comes from Mr. John from Jefferies.
Hey, guys.
Good good quarter and thanks for taking my questions.
It really appreciate the color Scott with respect to their liquidity portfolio level.
For for your company level after those very helpful.
But just on credit.
Do you know or can you tell us is there are the companys your financing to date any then get any access to like the PPP program or any other stimulus program.
So with respect to any other stimulus program not that we are aware of with respect to PPP. Specifically, we did have several companies applied for and receive PPP loans, we estimate that number is somewhere.
Roughly between 10 and 12 companies there were some other ones that also applied and receive funds, but ended up making the decision to return the funds. We don't have a 100% them confirmation with respect to those final numbers, but our estimate is about.
You have 10 to 12 companies received and kept PPP funds.
Okay, and then you talked about so that given the current environment. I mean, you talked about it's tough to get bigger deals going because it just do I could go to do it person diligence and so forth.
And then ill make some kind of sense.
Yes.
You'd given that these are innovation high tech companies growth companies that typically don't have.
Kind of like correlation to.
Factors.
How much do sort of the economy way on your deal judgment now versus other factors like inability to due diligence and so forth.
Yes, I think it's sitting at the combination of the too.
We are definitely being im a little bit more cautious in terms of new originations given the current environment. This is a this is a a global crisis that it's just difficult to predict the ultimate impact from right. We don't know if the if theres going to be a vaccine in Q4 in Q1, and this will kind of go away in the near term.
Furthermore, if this is something that we're going to be dealing with.
For an elongated period of time, so there is certainly.
A cautious approach with respect to originations and new underwriting based on kind of our concerns about the broader economy.
But I would also say despite the fact that these are innovative technology companies that we are financing.
This.
This from was built as as an old school traditional credit organization Thats, how weve always operated and Thats, how we will continue to operate.
And there is nothing that can replace in person due diligence when you consider crop and look a management team in the high and ask the tough questions. We've certainly.
We've made some changes we've we've adapted to the current environment. We're obviously using zoom and teams a lot more frequently than we did historically and it's not impacting our ability to get deals done, but we're certainly not going to do the same level of originations that we did last year. When we were able to travel and go see meet every company in person and do some extensive in person do delay.
Yes.
Okay.
Thanks, and then.
Your final question, Yes I.
I mean is the result of this we've seen seismic shift.
In consumer behavior payments Finpac and.
Obviously pharmaceuticals and bio.
Biotech and so for that Im just wondering is it too earlier or have you guys been thinking about how these these with changes will impact kind of sectors, you're focused on and.
Are there any emerges sectors that you're increasing your side.
So, yes, and yes, we as an investment team has spent a considerable amount of team time, both on the technology side and on the life Sciences side really trying to sort of get our hands around the exact question that you just outline what does the future look like and what type of changes are we going to seeing sort of the overall landscape from a technique.
Allergy and from an innovation perspective. So it is something that we are actively thinking about exploring and looking at we have started to make some changes in terms of our internal screens with respect to newer agents originations focusing on a couple of areas that we think are very attractive obviously I don't want to provide too much information in terms of what those.
Areas are because then everyone's going to follow us into them, but there are a couple of specific areas that we are intrigued by that we're actively diligencing and speaking to a number of companies, but assuming the diligence holds could turn into transactions in the second half of the year for us.
Thanks, guys and congratulations.
Thanks, John.
And our next question comes from Mr. Christopher Nolan.
Hey, guys on new deals that you're doing that was put pricing in terms of yields you are getting relative to.
Those already on the books.
So again I think very consistent with what we were seeing in 2019 and in the beginning of 2020.
If you look at what our core yield guidance is across the portfolio, it's 11% to 12% core the new deals that were bookings all sort of fall within that range.
Okay, given everything going on in the World right now is really an 11% to 12% yield.
Is that really your risk adjusted return or you're okay with or is that simply to.
The market with a mark who will bear.
Look I think when you look at how well capitalized the companies that we are Onboarding right. Now are we do think that it's an appropriate risk adjusted return.
In some cases, if you look at the seven companies that we provided capital two in Q2. These are companies that are sitting on hundreds of millions of dollars of liquidity in some cases with 12 to 24 months of runway and so I.
I think when you sort of think about that but when you put in context and you compare that to what you're looking at from a yield perspective in in lower middle market or upper middle market lending, which people historically has viewed as safer and the yield environment. There is several hundred basis points.
Tighter than what it is across our portfolio. We do think that it is appropriate now would we love to have.
You know some higher yield opportunities of course, but what I can tell you is and we've seen this now consistently for the last couple of years.
We're not going to book weaker credits just to book higher yields.
We as a firm thinks that that's a very dangerous game I'd, rather have the team focused on quality opportunities strong credits and companies that we are confident in over the next several years at that yield is slightly lower than what it is for some of the more challenging aggressive structure deals were perfectly okay with that.
And.
Kevin This is 1.25 times fill the target threshold for that equity. It is on up from a regulatory perspective right now we're at 100% regulatory leverage about 97% net and the target ceiling for us is 125% regulatory great. Okay.
And our next question comes from me Mr. Henry from Wedbush.
Good good afternoon, everyone and thanks for taking my call.
Great quarter lots of good news to look at.
When.
When we look at the personnel.
For the last six months you still are in unrealized loss position, obviously market factors have improved dramatically since march, but when we and you've given us a great update on the liquidity of your companies, but from a point of view of just skoda strict fundamental performance.
When you start thinking of of your portfolio companies is.
We in a situation, where we're seeing in other sectors where.
Total market appreciation is running way ahead of.
Actual changes in fundamentals.
Or do you think you're in a situation where.
In addition to the cash.
Runway that you suggested for your companies that that in them.
In some percentage of all cases fundamentals are actually holding up fairly well.
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And and the market to end the disconnect is not there I mean there.
The market is good.
The fundamentals are good and the marks are favorable.
So I can answer that question two different some ways. So as a firm we absolutely believe that there is a disconnect and a dislocation between what the equity markets are saying and what the real economy is saying and we think it will take time for that to play out so.
That's something that we absolutely believe is the case based on what we're hearing and what we're seeing and lot of the companies that were talking to in terms of what they're hearing and seeing with respect to serve the real economic impact from this crisis relative to what the equity markets are telling us.
In terms of the stock market with respect to our portfolio, specifically I would say two things number one liquidity and fund raising is actually holding up much better than we had anticipated at the beginning of this crisis.
The fact that we've had over 40 companies raised over $3.3 billion of new capital since cobot hit the United States in late February is significantly higher than what we had anticipated in the first sort of 30 days of evaluating what the impact was going to be from this crisis.
In terms of the more sort of fundamental impact it really depends on the sector right in our portfolio. We are highly diversified by sector in stage, 50% of our book is technology, 50% of our book is life sciences on or about within the life Sciences space. The vast majority of our companies are in drug discovery drug.
Development, and we really havent seen any fundamental impact there outside of some pretty immaterial delays in terms of ongoing clinical activity on the tech side. We've had a number of companies who have actually performed very well and above expectations. In this crisis and we obviously have a small number of companies who are in the industry.
That are being hit very hard and there the fundamental performance has been a lot worse than expected, but the good thing for us at a portfolio level is that makes up less than 4% of the portfolio as we talked about in our prepared remarks.
So and then on the SBA license, obviously lots of advantage to that capital, including the fact that you don't have to keep it in your regulatory leverage ratio.
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Hi, good I get mixed comments from people about the advantages of an ESP SP IC license in your case do you do you think you have enough in the way of portfolio companies to invest that capital fairly quickly or what is your thought process and in terms of the.
The connect between VSP, IC, and and and year expected origination.
Sure. So we've had a 13 plus year relationship with the FDA. It's a relationship that's been very good and it's now crossed three different funds.
The FDA program has been very accretive to the Hercules platform and Hercules franchise.
We see and we come across a number of financing opportunities that would be SP IC eligible that we believe we would be able to put into that new funds should we get it so from a big picture perspective, we view it as a very attractive.
Financing source for the company.
It is having NSPI seen license.
A new one a new pool of of funds is that just going to allow you to service your existing expected originations or does it open up a few new doors for you.
Primarily the former but there will be some additional opportunities that we hope to be able to take advantage of as well.
And then.
No thats very helpful. Thank you for answering my questions.
Thanks Henry.
And our next question comes from a Casey Alexander with with Compass point.
Hi, Good afternoon first of all so I I may have missed I mean, you mentioned 100 150 million of early payoffs in Q3 did you give a range for.
Expected originations are fundings for Q3.
I did not now.
I had to 150 on payoffs is what we indicated yes.
Okay.
Secondly for a broader level your portfolio has.
Pretty good sized allocation to software companies and and that has been a good area, but just.
My experience has been listening glass couple of quarters that that.
Almost every BDC, including the more traditional cash flow bdcs are chasing software companies as pricing and competition in that area changed and.
And our you potentially kind of slowing down what you're looking at and software companies because of it because it just seems like everybody in the rather thinks that software is just that place to be.
Thanks, Casey so so we certainly agree with.
With that with your observation there that everyone.
Is it sort of saying that they're doing software and is actively chasing software.
Well, we will we define as software is pretty specific. So these are businesses that have contractual annual recurring revenue models for the large part to part of the market that we tend to be more aggressive in is a little bit below the part of the market that you've seen some of the later stage more traditional lower middle market Bdcs go. After if you look at the average.
Average debt financing that we are making in the software space were somewhere between 20 and $35 million and that's an average that's generally speaking going to be below the threshold, where some of the larger later stage asset managers are going to play and so we've seen a little bit of of yield compression in the soft.
Were part of the market that we plan, but we really have not seen its any material degree.
Okay. Thank you thats.
That's helpful.
Going back to the originations are fundings would you would add at least.
Give us some sense as to whether you expect the portfolio to grow our contract versus payoffs in the quarter.
So we're not going to provide any quarterly guidance with respect to.
The portfolio, we generally speaking im not done that historically and it's not something that we're going to do now the largest driver of what growth will or will not be is going to be from the prepayment side of things and that's just a number that's very difficult to predict we've tried to provide some guidance with respect to Q3 as anticipated prepayments and we gave a range of 100 to.
150, but as we've seen historically that number can vary materially from that guidance and that will ultimately determined whether we have growth or not longer term, we're not concerned about our ability to grow this portfolio. If we see attractive opportunities in Q3 and there are a number that we currently have in closing in the under.
Siting process will get those deals closed subject to diligence and we'll book them and if we don't see opportunities that we think are attractive for our franchise. We're not interested in growth just for the sake of growth.
Understood. Thank you very much for taking my questions sure. Thanks Casey.
And our next question comes from a Ryan Lynch with KBW.
Hey, good afternoon, and thanks for taking my questions.
First one I had a little more of a higher level question. You know you guys provided some statistics regarding on page 40 of your slide deck regarding venture capital investment activity and venture capital fund raising that seems to be very strong.
You also provided some commentary mentioned 27 companies have raised 1.7 billion since your last earnings call. These your portfolio companies at high levels of cash runway.
So as I look at these statistics you you've provided both on just the general venture capital market as well as your specific portfolio.
To six don't really match really the sharp declines we've seen in U.S. economic data.
VP and unemployment rates, so I would just love to hear your opinion on why the venture capital.
Funding ecosystem really seems to be operating on a baited and do you feel that the access to the to the capital markets for your portfolio companies has has really changed much from from pre pandemic levels.
Sure. So couple of great questions. There. So number one I think we said this in response to a prior question, but fundamentally we believe that there's a disconnect between the public equity markets and what the real economic impact is.
On this crisis I think Theres a couple of reasons why you're seeing sort of contrary indicator with respect to the DC market number one the VC ecosystem tends to be incredibly resilient. If you look at the VT ecosystem and you go back through several crises. So you had the Internet crisis you.
And crisis and you've had a couple of starts and stops along the way, including the global financial crisis broadly speaking the DC ecosystem has proven to be very resilient there have been periods, where you've seen equity inflows into companies pull back youre not seeing that this time and I think a large driver of that is.
People are looking at technology people are looking at innovation as sort of one of the ways out of this crisis, whether it be on the biotechnology side in terms of therapeutic solutions or vaccine solutions or whether it be on the technology side looking at just the changing way that consumers are going to interact.
And that's going to really changed the fabric fabric of society and make things more technologically driven and so companies that have technology enabled solutions are right now much more attractive opportunities and I think thats why you're seeing the tremendous amount of equity flow into those parts of the market.
Okay. That's helpful color and good commentary on that.
You know kind of kind of.
Spinoff from there.
Given you kind of talked about the environment being very uncertain.
Hi.
It's a much more difficult environment to due diligence companies you have a higher bar just given the uncertainty and some of the focus on existing portfolio companies.
Do you think it's fair to expect that been Hercules portfolio will will.
Show net repayments or or continue to contract until really we get out of its pandemic.
That's certainly wasn't the case in Q2 in Q2, we had 35 $36 million of portfolio growth from a cost perspective, and again as we indicated I think what you'll see in Q3 in Q4 is largely going to be driven by the level of prepayment activity across the portfolio. We are confident in our ability to continue around.
In eight new deals.
We expect new deal activity to pick up as we've indicated a couple of times as we get a little bit later into the pandemic and when the end is closer than it is now and so we're very optimistic and confident in terms of the origination side of the business and we're prepared with our current liquidity position of 500 million to step on the gas pedal once we see.
Steve.
Opportunities that we think are attractive to us and whether that whether the portfolio grows or contracts in any given quarter again is not really a focus for us. We are an internally managed BDC, we're not focused on growing the book just for the sake of growing the book, we're going to book the deals that we think are attractive and we've got a strong enough balance sheet.
Where we can be very aggressive and book deals very quickly if we see an opportunity to do so.
Okay got it and then you mentioned earlier you guys are in the process of evaluating some deals with some larger companies does it make sense to kind of maybe shifting focus to have some more larger companies in larger deals just given the limited amount of resources that you have been everybody has.
And the harder in the harder.
The hard at a time it is to due diligence companies.
You can focus on some larger companies and larger deal sizes were essentially if you do and a closing on one of those.
It has much more of a meaningful impact to Hercules. So one that's kind of part one of that question should that be have spoken of yours and then number two.
What is.
The level of deal size that you all feel comfortable of holding on your balance sheet for a single portfolio company.
Sure. So those are three things there number one.
We absolutely do not have a resource problem I think we have if you look at the venture lending or growth stage lending landscape I think we have the deepest team in the business.
The company today is we have about 80 full time employees, we have over 40 individuals on our investment team.
Core we've we've we've expanded and added to our finance team our operations team our credit team and our legal team year to date. So we're not resource constrained in any way with respect to the later stage opportunities look Theres. No question. If you do one or two large deals you can put some points on the board.
Pretty quickly and Thats attractive, but I would also say we built this business with a focus on diversification and so being highly diversified by sector stage geography, and sponsor has always been a focus for us and it's going to continue to be a focus for us. So we don't want to be affirmed its just going to do a couple of large deals we.
I would much rather build our business slowly and methodically and make sure that we're building it in a way that's diversified given that we think thats the right way to grow a venture lending platform.
And on that what was the largest hold side do you feel comfortable holding on your portfolio or holding it in your portfolio for single borrower. So we've done several commitments that are in the 100 $250 million ranged from a commitment size perspective, and with our balance sheet, where it is today, we could hold 100 and.
$50 million of fundings in any one portfolio company and that wouldn't be a concern for us.
Okay understood.
I appreciate the time today those are all my questions sure. Thanks Ron.
And ladies and gentlemen, again, if you like to ask a question that is star and the number one on your telephone keypad.
And our next question is from Chris York with JMP Securities.
Hey, guys just one quick follow up.
Don Port Folio company liquidity, one approach it from another perspective, how has funded utilization on revolving credit facilities by your portfolio companies changed sequentially.
Sure. So we actually have very little exposure to traditional revolving credit facilities. If you look across our entire portfolio, it's less than $50 million that we would classify as sort of true revolving credit facilities, and we really haven't seen any change at all in terms of behavior from our.
Borrowers with respect to utilizing those revolving credit facilities.
In terms of sort of unfunded commitments or term loans that are sort of delayed draw features that may or may not be available. We also have not seen any material change in behavior. I think when you look at our portfolio. When you look at our balance sheet every one of our borrowers looks that understands the strength of our balance sheet. So theres no concern.
About our ability to fund those unfunded commitments and so we just haven't seen companies.
Yeah.
Create this traditional or or concerning run on the bank type atmosphere, where they're all asking us to borrow we have more than enough liquidity to cover a multiple of our unfunded commitments and I think all of our borrowers know that.
Great. That's it for me Thanks again, thanks, Chris.
And we have no further questions at this time.
Thank you operator, and thanks to everyone for joining our call today.
We look forward to reporting our progress on our Q3 2020 earnings call. Thank you.
Ladies and gentlemen, this does conclude today's conference call. Thank you very much for participating you may now disconnect.
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