Q3 2020 Horizon Technology Finance Corp Earnings Call
The next available conference specialist will be with you momentarily.
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Turning to update or revise any forward looking statements.
As a result of new information.
No.
Or otherwise.
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This time I would like to turn the call over to Rob Pomeroy.
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And for your continued interest and horizon.
The center in Mexico.
I am sure it was a late night.
You momentarily.
So on and so do we.
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We will provide an overview.
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Perspective on horizon.
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Operating environment.
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Yeah.
Benefited as well as challenges we face as we continue to navigate.
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Teen economic downturn.
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And touch on our business.
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From an efforts and the market environment.
[laughter] Center.
And Dan will detail our operating performance.
Hi, I'm entirely.
Syndication.
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Take some questions.
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So acknowledge and commend our dedicated.
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New to perform during the.
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April to seamlessly work remotely.
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Financial partners and stakeholders.
On to the Vivek comfort.
To this team's dedication that we have been able to work so well under the circumstances.
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Many fronts.
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Net investment income as a result of our predictive pricing strategy.
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Musicians and maintained an industry leading debt portfolio yield.
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Sheet appropriate for the current environment.
Yes.
Moderate leverage.
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Could it be to grow.
Welcome.
We also continue to closely manage our portfolio and though our portfolio declined in the third quarter to quarter due to higher than expected prepayments, we remain well positioned to grow our portfolio based upon our strong and deep pipeline of quality opportunities.
During the quarter, we generated net investment income of 34 cents per share, which exceeded our distributions we.
We achieved the debt investment portfolio yield of 15.1%.
We realized proceeds and gains from the exercise from sale of warrants during the quarter.
Important part of the horizon venture lending model region.
We judiciously utilized our aftermarket stock offering during the quarter and raise nearly $13 million and low cost and accretive net equity.
At the end of the quarter, we had over $104 million and available liquidity and over $200 million of capacity to support our portfolio companies and to selectively make additional investments.
As we enter the fourth quarter under Cobot, 19, and the economic downturn associated with the pandemic, we're learning more about how these conditions impact our portfolio companies early in the pandemic, we anticipated that certain firms could be negatively impacted by the shutdown Paul.
While others might actually thrive under the same conditions during.
During the third quarter this reality manifested itself in our portfolio.
On the downside companies that were underperforming entering the pandemic have been forced to retreat.
This is challenged their investors to make a difficult choice.
Either support these companies with an uncertain outcome or to put these companies up for sale those.
Those that have chosen the sale route have met with a difficult M&A market for underperforming companies.
As a result horizon downgraded its debt investments and three companies at the end of the third quarter and place them on non accrual in the fourth quarter.
Because we are engaged in sale and liquidation efforts with these companies and their outcomes are uncertain.
We have appropriately reduced the fair value of such investments as of September Thirtyth, which has negatively impacted our navy.
At the same time seven of our portfolio companies raise new equity one of which also completed a successful M&A exit in the quarter.
And year to date, our portfolio companies have raised over $500 million and fresh capital. These.
These positive portfolio events, partially offset the negative impact from the downgrades.
As a result, we have 89% of our portfolio of performing as well or better than expected at the time of underwriting and a record level of top rated credits.
We are continuing to take a measured and thoughtful approach with respect to managing our portfolio and originating new transactions importantly, we remain in constant communication with our portfolio companies employing the three legged stool approach.
That approach involves first engagement with our portfolio management teams to ensure they are maintaining a realistic and achievable outlook, including where appropriate by rightsizing their staffs and expenses to preserve liquidity.
We are encouraged by the responsible way our borrowers have faced this reality.
Second seeking to ensure investors are willing and able to support portfolio companies with additional new capital now and in the future I.
I would note that with our portfolio companies raising over $500 million and new capital and 2020. The response from investors has been overwhelmingly positive.
And third 18 companies when they are at their most challenged through various means including deferrals easing covenants or making additional loans. We have done our part to support these companies in concert with management and investors.
As a result of these combined efforts over 90% of our portfolio companies have adequate cash resources to execute their business plans.
Over 80% of the portfolio has cash into mid 2021.
And over 50% have runway into late 2021 and beyond.
Over 70% of our portfolio of companies that have raised capital during 2020 again, showing the continued support of the investors.
Entering the fourth quarter, our committed backlog and overall pipeline continued to remain active.
We continue to see strong demand for venture debt within our target industries as companies simultaneously explore various paths for additional liquidity and funding we will continue to selectively pursue new investment opportunities.
With respect to distributions, we maintained our monthly distribution level at 10 cents per share through March of 2021.
It is our board's policy to make distributions and amounts that can be covered by eni overtime.
The distribution level reflects our outlook for the remainder of 2020 and beginning in 2021 and our spillover income at September Thirtyth.
We have now covered our distributions with Eni for the past three years.
Last week, we marked our 10th anniversary as a public company, we're very proud of our team's performance in the portfolio. We've collectively constructed over the years as well as the success, we have shared with our shareholders. We will remain measured and proactive with respect to our portfolio as we look to Opportunistically fund new investor.
To further expand and diversify our portfolio and ultimately generate additional long term value for our shareholders.
With that I will turn the call over to Barry.
Thanks, Rob Good morning, we continue to hope you are all healthy state as we all triggers the health and economic impact of the pandemic.
We did begin to see some improvement in economic conditions in the third quarter, but overall the uncertainty caused by coal continued to be a factor as a result, we maintained a cautious approach to our venture lending strategy, including elevating our underwriting.
Vestments, we include a code 90 impact and now.
However, with knowledge based understanding of market risk comes opportunity.
We continue to selectively invest where we see significant strength.
On our last call. We noted that we were beginning to see positive developments in certain technology sectors that are benefiting from the impact of COVID-19, and that trend continued into the third quarter.
Utilizing our strong brand, we originate quality investments to two tech oriented companies that provide software platforms. Both companies have strong management teams committed investors ample liquidity and have demonstrated growth even through the current uncertain economic cycle.
In the quarter, we made a total of 16 million new investments.
The two new technology companies I, just mentioned as well as two existing life science portfolio companies, the onboarding yield to such investments was 11.9%.
Rob.
We had strong prepayment activity in the quarter, which reflects the overall strength of our portfolio and borrowers to raise additional equity or complete M&A transaction.
During the quarter, we experience for loan prepayments totaling $43 million, which significantly contributed to our Eni and continue to validate our predictive pricing strategy notwithstanding the challenging economic environment.
Prepayment.
And accelerated income from these events helped drive debt portfolio yield for the quarter of 15.1% our debt portfolio yield remains at the top of the BDC industry and once again helped us deliver income in excess of our distributions further increasing our undistributed spillover income.
The 45 cents per share.
During the quarter. We also received proceeds of 1.8 million warrants, new signature, which experienced an M&A transaction and then on track a public company, where we exercise singed.
Strategically sold out of our warrant holdings as we.
No.
Pressuring investments with warrants and equity Reits is a key aspect of our venture debt strategy and an additional value cannery year to date 2020, we generated 7.9 million in proceeds from warrants a clear indicator of our successful strategy, including warrants and the structure of our investments as well as further.
At work continue to be important value generating aspect, our overall business strategy as of September Thirtyth, we held warrant and equity positions in 68 portfolio companies with a fair value of $13 million.
In the third quarter, we closed $36 million in new loan commitments and approvals and ended the quarter with a committed and approved backlog of $96 million compared to 101 million you ended the second quarter.
Moving ahead, and that's pretty good I previously mentioned, we have approximately 96 million and our committed backlog of which 60 million is committed to current life science portfolio companies as the key milestone value drivers in their development. In addition, we have added $77 million in new awarded and.
Proved transactions through our backlog in October.
Our pipeline of new opportunities as of today is $372 million. Thus, we believe we are we are well positioned to generate growth of the portfolio.
Quarter.
Turning to our portfolio management activities, we continue to proactively manage our venture debt portfolio and very challenging economic environment. Some of our debt portfolio companies have demonstrated solid growth and value enhancement Osama bin challenge. So I am not to take time to discuss some of the notable specific portfolio.
Activity that took place during the quarter.
In addition to the four positive portfolio excess mentioned earlier three credits were downgraded one of which encore dermatology was materially impacted by call. It.
It was less placed on non accrual another nanosteel was downgraded after a field effort to complete an M&A transaction.
Core steel downgrades impact and then maybe in the quarter. We also ended the quarter with a record level of credits with our highest credit rating the floor.
Turning now to the venture capital environment.
Turning to pitch book approximately 38 billion was invested in VC backed companies in the third quarter, which was relatively on par with the.
Year quarter, despite cold and the number of deals remain fairly steady with an increased number of late stage companies funded terms.
Terms of VC fundraising 14 billion was raised in the third quarter and a total of 57 billion relates to date in 2020 already surpasses 2019 total of 55 billion number of funds closed continues to be well below last year's pace I mean, mostly large funds are able to raise funds in the current.
Environment.
In terms of VC backed exit activity. The IPO, we opened up considerably in the third quarter were 37 venture backed ipos contributing to a total value of 104 billion. The second highest total on record.
With the IPO window is still open we are seeing other firms looking at ipos as another path to generate additional liquidity.
Turning now to our quarter four markets, we remain focused on the technology life Science and healthcare technology markets, where we continue to see selectively seek investment opportunities during the quarter. We provide funding to two new portfolio companies, a $10 million venture loans Utopia developer of global Cowen.
Mobility software.
$5 million venture loan to bright core developer of cloud native software from property and casualty insurance. We also funded an additional 1 million to two of our existing portfolio companies.
We enter the last quarter of 2020 with a strong balance sheet characterized by ample liquidity and lower leverage and a strong pipeline of new investment opportunities. We believe this positions us well to navigate through the current environment, while selectively growing our portfolio and delivering additional long term shareholder value.
With that I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone I'll provide a quick review of our third quarter 2020 results before opening up for questions.
As mentioned on our last call, we successfully strengthened our balance sheet during the year, which provides us increased liquidity in lending capacity in part. These efforts led to a strong liquidity position at the end of the quarter.
On balance sheet as of September Thirtyth Horizon had 104 million in available liquidity, consisting of $57 million in cash and $47 million in funds available to be drawn under our existing credit facilities.
As of September Thirtyth, there was 15 million outstanding under our 125 million Keybank credit facility and 13 million outstanding on our 100 million, New York life credit facility, leaving us with ample capacity to grow the portfolio.
Additionally, during the third quarter, we issued 1.1 million shares under our ATM program, receiving 13 million in net proceeds.
Our debt to equity ratio stood at <unk> 0.81 to one as of September Thirtyth, which is lower than our targeted leverage of 1.2 to one.
Based on our cash position and our borrowing capacity on our revolving credit facility our potential capacity is $254 million at September thirtyth.
For the third quarter horizon or in total investment income of 12.3 million, an 8% increase compared to $11.4 million in the prior year period. This.
This increase was primarily due to a 21% increase in interest income on investments given the larger average size of our loan portfolio.
Our debt investment portfolio on a net cost basis stood at 319 million as of September Thirtyth, a 10% reduction from June 32020.
For the third quarter of 2020, we achieved onboarding yields of 11.9% compared to 11.1% achieved in the second quarter.
Our loan portfolio yield was 15.1% for the third quarter versus 17.7% for last years third quarter.
Turning to our expenses for the third quarter total net expenses were $6.5 million compared to $5.6 million in the third quarter of 19.
Our interest expense was up 561000 compared to the prior year period, primarily due to an increase in the average borrowings partially offset by a reduction in our effective cost of debt.
Our base management fee rose $222000, driven by an increase in the average size of our portfolio.
Net investment income for the third quarter was 34 cents per share compared to 40 cents per share in the second quarter of 2020, and 42 cents per share for the third quarter of 19 as.
As Rob mentioned, we have now covered our distributions with Eni for the past three years.
The company's undistributed spillover income as of September Thirtyth was 45 cents, an increase from 42 cents as of June Thirtyth.
To summarize our portfolio activities for the third quarter, New originations totaled 16 million, which were offset by $6 million in principle payments and 43 million in principal prepayments.
We ended the quarter with an investment portfolio of $312 million.
The portfolio consisted of debt investments in 34 companies with an aggregate fair value of just under 299 million.
Portfolio Warren equity and other investments in 69 companies with an aggregate fair value of $13 million.
Based upon our outlook for Eni, our liquidity forecast and our spillover income levels. Our board declared monthly distributions of 10 cents per share for January February and March 2021.
We have now declared monthly distributions of 10 cents per share for 51 consecutive months.
We remain committed to providing our shareholders with distributions that are covered by our net investment income over time.
Our Navy as of September Thirtyth was $11.17 per share compared to $11 or 64 cents as of June 32020.
And $11.67 as of September 32019.
The 47% reduction in NPV on a quarterly basis was primarily due to our distributions and then net unrealized loss on investments exceeding our net investment income and net realized gains.
As we've consistently noted 100% of the outstanding principal amount of our debt investment bear interest at floating rates with coupons that are structured to increase as interest rates rise with interest rate floors.
As of September Thirtyth, 100% of our portfolio is at their specific floors discount.
This concludes our opening remarks, we'll be happy to take questions. You may have at this time.
Thank you if you would like to ask a question. Please press star one on your telephone keypad a confirmation till indicate your line is in the question queue. You May press star two if he would like to move your question for the Q.
Participants using speaker equipment, it may be necessary to pickup you had said before pressing restart Keith.
Our first question is from Mike Smith with B. Riley Securities. Please proceed.
Hey, everyone hope you're doing well.
So I guess my first question is on early payoffs really outpaced originations in the quarter and you mentioned your pipeline current kits around $372 million and expectation for growth in in the fourth quarter. So I was wondering if you could just talk a little bit about your expectation for repayments, how that kind of relate to your expectations for portfolio growth in the fourth quarter.
Peter.
Yes, Hi, Mike This is Jerry.
Yeah, we were actually.
Pleasantly surprised by.
The exits we had in the quarter actually three out of those floor two of them. We were paid out true equity raises the company's did at significantly higher valuations.
So basically cheaper equity.
And really.
Allowed them to repay our debt and we hold warrants.
And one of those companies.
Actually Bill Lawrence, who both of those companies. So those those were positive and then new signature that completed in a previously announced M&A transactions. So that was also a very positive event. So those were great.
The equity once we're a little unexpected we.
We werent really expecting to be paid off but.
It was probably prudent.
Those companies to lower leverage and that was that was fine.
As we as we look forward until right. So.
So we funded 16 million in the quarter.
I would say that.
That was fine by us.
We definitely have slowed our underwriting process and added to that process. So thats, taking a little bit longer to get transactions through pre screens, and then from underwriting and so.
I think previous nine quarters, we've grown the portfolio. So we weren't too concerned about the fact that the portfolio didnt grow.
The third quarter, but there were a lot of transactions in the pipeline and Thats and that is the good news is I mentioned I think we have about 77 million in just new rewards approve transactions just in October so our expectation for the fourth quarter is it looks very positive relative to growth, we expect to see growth in the fourth.
Quarter does.
As it relates to prepayments going forward.
Now I would say that.
We don't expect to have prepayments at the levels that we had in the third quarter is as I sit here today, but.
Obviously those those two.
Tend to come up later in the quarter, So we'll see what happens but.
Im fairly confident that the portfolio will grow in the fourth quarter.
That's helpful color and then how are yields that covenant its kind of et cetera, looking on some of the new investment you're looking at has the co. Good premium spread kind of disappeared any color you can provide in the marketplace.
It would be helpful.
Yeah.
Terms of in terms of pricing not really not much change where everything has been pretty consistent through the old.
COVID-19 thing and not just speaking for horizon, but we obviously.
Look at the competitive marketplace and.
We continue to be competitive in pricing has held up.
Pretty well I think that.
As we look at a transaction, we do and as I mentioned earlier, we do actually have a kind of a cohort analysis that we do not want every transaction not only for looking at the prospect of new prospect company, but also the markets that they serve and so on.
As it relates to things like covenants I would say our covenant position is a little stronger than it has historically had to beat.
Given the uncertainty really of COVID-19, we don't feel like were where we are you know that storm is over yet we feel like we're still in it.
We need to be cautious because of it and so on.
Most of the transactions, we are moving forward with I do require a little bit higher level of coverage.
Sure.
That's helpful.
So another question would be leverage came down a bit can you just talk about kind of how you think about that in the near term given your expectations for for origination and repayment activity.
Ill, let Dan My guess is.
Hi, This is Dan I appreciate that yet.
You mentioned the prepayments.
He did a.
Originations for this quarter and with the ample cash we paid down the facility to maximize cost.
And so looking forward our target leverage is still within a 0.81 0.2 to one we have ample capacity and liquidity and so we will tap the ABS facilities, when we need to.
To find our pipeline so our target is still within 1.8 to 1.2.
Gotcha Thats helpful and just one more from me and forgive me forgive me if I missed this but three companies were downgraded to one ratings I think you mentioned nanosteel and encore I'm just wondering if you could provide some more color on the third one.
Third one was Titan pharmaceuticals.
Thanks.
And is there any color you can provide.
Actually taken.
Yes, so actually tightened was a deal that we.
We had on our books I think we owed about 1 million nine it at cost we have actually.
Settled that account, it's right in the process, all but signs and deliver it at.
The fair value, we carried out at September Thirtyth.
Yes.
One of our other non accrual knows we've also settled we're right in the process of selling right now so that we marked all of the markets, where we have agreements to settle these on most of these we expect them to take place in the.
Fourth quarter.
That's helpful. Thank you for taking my questions.
Thank you.
As a reminder, it is star one on your telephone keypad. If you would like to ask your question. Our next question is from praised ROE with National Securities. Please proceed.
Thank you good morning.
Good morning.
Dan I wanted to ask you about the.
The availability based on the borrowing base with that New York life facility just fall into Q.
That.
That availability, which was just $2.2 million.
So kind of curious.
Why it seems kind of that low relative to $100 million line.
And what what what was it at the end of June.
Just for comparative purposes.
Yes, so the if you recall in New York Life facility is a new facility, we put on play put in place in the second quarter and.
Though it started off with close to 30 million.
With that in that specific facility availability was.
North of that that we have maybe about 10 15 ish available one of the factors relating to the reason the availability came down this quarter is that a number of the prepayments that happened in the quarter were specifically in that facility. So the pool of al.
Assets in there came down and the funding and the movement of assets going into or later in the quarter just didn't get completed until after the quarter and so.
You know Thats. The reason why the availability is down from from June but at the facility is.
It is in a good position and as we add new originations will add to the pool and that availability will come up.
Okay. That's great. That's helpful and then Rob just wanted to clarify.
I guess the answer to the to the last question that was just asked about the one rated the one rated credits.
And then being under under contract. So there is some there is some expectation here in the in the fourth quarter that they will get resolved and moved out or he expect them to come back on to accrual status with with whatever resolution you've got in place. So as I said as I said in my.
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In the end of it.
Introductory comments, we're actually.
Sales liquidation process on these accounts and we expect them to settle for cash.
And not returned to accrual status. So we'll have cash.
To redeploy in new assets.
Okay. That's helpful. Thank you.
That's all I had.
Thank you.
Our next question is from Ryan Lynch with KBW. Please proceed.
Hey, good morning.
EPS for taking my questions I, just had a couple ones.
Just wanted to make sure I heard it's correct did you say in your prepared comments that Nanosteel that was one of the investments that was marked down but it's still on accrual status.
Did you say that that was placed on non accrual status in the fourth quarter and you said that that was marked down.
To the company.
Failing to complete M&A transaction is that process.
You guys are still pursuing with that company.
Different sort of M&A or what's the outlook on that.
Yeah. Thanks Ryan.
Got it.
Point the Nanosteel. It was one of the account got downgraded to one but was current through the end of the quarter and it was information that came after the quarter that required us to downgrade and so it was on accrual as of September 30, it but in the fourth quarter.
It is on non accrual that we continue to work through the process.
Settling that account.
Okay.
And.
The other one I had was on a current non accrual ignition wine.
I know you said you guys are in the process of potentially actually to non accruals that one's been on non accrual for a while back still marked at 100% of your guys costs can you just.
Remind me of.
Of why that investment is mark so high relative to some of your other non accruals.
Yes, so Brian this is Rob.
Just to refresh your memory ignition one was a company that.
Was.
Had some difficulties, but they ended up selling parts of the company to another private company.
And in that process.
We were.
Secured creditors were paid down.
And we are the only remaining six.
Secured creditor against the estate of ignition, one which holds a substantial amount of private stock in the acquiring company of ignition, one which secures our loan.
Value of that stock is multiples of our debt. Unfortunately is also a liquid and so we're waiting for an opportunity to.
Either transact that stock in a secondary sale or for that company to.
Effect, a transaction that would make that stock more liquid okay.
Okay, I do believe that our balances.
Secure so we've rated that credit although it's on non accrual because we're not getting paid anything.
We we continue to.
Right that is a two rated credits.
Got it makes sense.
And then just finally I had one more can you just talk about the.
ATM equity capital raised this quarter I mean, you guys had very strong prepayments in the third quarter.
Well outpaced your guys' origination. So you guys have had net repayments in the portfolio.
In the third quarter. So can you just talk about why you guys chose to raise additional equity capital year to date came on top of that and actually further push your guys' leveraged down this quarter.
I'd say, it's a good question is there any parts of the answer a been a given already but I'll put it all together for a one.
The ATM has been in place and operating and so when the stock trades well, we take advantage of the opportunity to issue stock that's accretive to our existing shareholders. So we are raising that money during the quarter.
We were a little bit as Jerry said, a little bit surprised by the companies that raised the equity at very high valuations that they actually were going to repay us. We thought there was a chance that we would either roll new loans or are.
Extend.
Terms on our existing ones, so that took us a little bit by surprise, having said that we have a very strong pipeline, we expect to grow the portfolio and we're trying to take advantage, where we can have.
Raising additional equity as well to support of the good debt facilities that we've obtained as well.
Okay.
That's all from me I appreciate the time this morning.
Thank you.
Thank you with no further questions I would like to turn the call back over sales offer Sunrise, chairman and CEO for closing state.
So I. Thank you all for joining us. This morning. We appreciate your continued interest and support in Horizon. We hope you and your families continue to remain safe and healthy and we look forward to speaking with you again soon this will end the call.
Thank you you may disconnect your lines at this time and thank you for your participation.
Okay.