Q4 2022 Horizon Technology Finance Corp Earnings Call
Speaker 1: We reation.
Speaker 1: F.
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Speaker 2: A brief question and answer session will follow the formal presentation.
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Speaker 2: It is now my pleasure to introduce you to Megan Bacon, Director IR and Marketing. Please go ahead.
Speaker 3: Thank you and welcome to Horizon Technology Finance Corporation's fourth quarter 2022 conference call. Representing the company today, a Rob Pomorai, Chairman and Chief Executive Officer, Jerry Mischau, President and Dan Trollio, Chief Financial Officer. I would like to point out that the Q4 earnings press release and foreign 10K
Speaker 3: Believes, expects, anticipates, intends, or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Some factors could cause actual results to differ on a material basis.
Speaker 3: from those projected in these forward-looking statements. And some of these factors are detailed in the risk faster discussion in the company's filings with the Securities and Exchange Commission, including the company's Form 10K for the year ended December 31, 2022. The company undertakes no obligation to update or revise.
Speaker 3: any forward-looking statements, whether as a result of new information, future events, or otherwise. At this time, I would like to turn the call over to Rob Pomeroy.
Speaker 4: Welcome everyone and thank you for your interest in Horizon. As we always do on our quarterly calls, I will update you on our performance and our current overall operating environment. Today, I will also provide an update on our advisors exciting new strategic development.
Speaker 4: Jerry will then discuss our business development efforts, our portfolio events, and our markets, and Dan will detail our operating performance in financial condition. We will then take some questions.
Speaker 4: Horizon and our advisor, Horizon Technology Finance Management, performed well in the fourth quarter, capping off a strong 2022 in the face of a challenging macroeconomic environment. Our earnings exceeded our distributions for the quarter and year. We grew the size of our portfolio to over $700 million.
Speaker 4: We bolstered our balance sheet and we maintain solid credit quality. We are very pleased with how we successfully navigated through 2022. And I'm proud of our advisors and its team's efforts throughout the year as they further validated the earnings power of our portfolio.
Speaker 4: our predictive pricing strategy, and our disciplined investment approach. Turning to our accomplishments in 2022, our portfolio at year end stood at $720 million, an increase of 57% from the end of 2021.
Speaker 4: Our significant growth resulted from both our advisors ability to originate high quality venture debt investments and the increasing power of the Horizon brand in the venture debt community.
Speaker 4: We finish the year with a committed and approved backlog of $220 million, which provides us with a solid base of opportunities to grow our portfolio in 2023.
Speaker 4: We generated net investment income of $1.46 per share, well in excess of our distribution level for the year, due largely to higher interest rates on our floating rate investment portfolio and the growth in our portfolio.
Speaker 4: I would note that last quarter, based on our strong performance and the confidence in our outlook, we increased our declared monthly distributions by 10 percent to 11 cents per share, as well as paid a five cent per share special distribution for our third consecutive year.
Speaker 4: This quarter, based on our outlook and our undistributed spillover income of 68 cents per share as of year end, we declared monthly distributions of 11 cents per share through June of 2023. We achieved a portfolio yield on our debt investments for the quarter of 14.5 percent.
Speaker 4: and a full-year debt portfolio yield of 14.4% at or near the top of the BDC industry. We maintain the stable credit profile throughout the year in the face of the challenging macro environment with 95% of our debt portfolio rated three or higher at the end of the year.
Speaker 4: As always, we are consistently and actively managing our portfolio of investments.
Speaker 4: to maintain its credit quality. We ended the year with a net asset value of $11.47 per share. Finally, we continued to fortify our balance sheet during the year, raising approximately $50 million of equity in 2022 from our ATHLE market program.
Speaker 4: all at a premium to NAV. Additionally, we raised nearly $90 million from our overnight equity offering in March and our notes offering in June . While we have adequate liquidity and capacity to fund our current backlog, we will opportunistically and strategically seek new debt and equity capital.
Speaker 4: as our portfolio and backlog continue to grow.
Speaker 4: In our interim 2023, with concerns about higher interest rates, inflation and a possible global recession, we continue to closely manage our portfolio and will remain selective in originating new investments. We believe our portfolio and backlog is positioned to generate strong NII in 2023, which may exceed our distributions.
Speaker 4: On the strategic front, last week we were excited to announce that our advisor has agreed to be acquired by an affiliate of Monroe Capital, one of the premier boutique asset managers in the country, with over $16 billion in assets under management. Please note that the transaction is subject to certain closing conditions.
Speaker 4: including shareholder approval of a new investment management agreement due to the change of control in the advisor. The new investment management agreement is substantially similar to the existing agreement between our advisor and HRZN, and the Board of Directors is unanimously recommending approval of the new agreement.
Speaker 4: including all of our independent directors. We believe that Monroe's platform, culture, and values are well aligned with those of the advisor, making this a natural fit for the advisor. Most importantly, the entire team that currently staffs our advisor is expected to remain and continue to manage horizon.
Speaker 4: To be clear, Monroe has agreed to acquire the advisor, not Horizon, the public company. We also believe that Monroe's purchase of the advisor will create more value over time for Horizon shareholders.
Speaker 4: because the advisor's ability to access Monroe Capital's platform and infrastructure will lead to increased investment opportunities and greater portfolio diversity for Horizon, while potentially reducing expenses through economies of scale and access to more efficient capital. The advisor and its existing management have strong incentives to grow and strengthen Horizon.
Speaker 4: all economic cycles to smartly executed strategy and remains well-positioned to navigate through the current credit cycle while taking advantage of new opportunities to originate high-quality investments. With that, I will now turn the call over to Jerry and Dan to give you more details and color on our performance.
Speaker 4: cycles to smartly executed strategy and remains well positioned to navigate through the current credit cycle while taking advantage of new opportunities to originate high-quality investments. With that, I will now turn the call over to Jerry and Dan to give you more details and color on our performance. Jerry?
Speaker 4: Thanks Rob and good morning to everyone. Despite continued macroeconomic headwinds in Q4, we grew our portfolio by 85 million in the quarter and 260 to 2 million for the year ending 2022 with a record high portfolio of 720 million. In the fourth quarter we funded 10 transactions totaling 104 million including 73 million in debt investments to four new portfolio companies consisting of investments in two new tech companies.
Speaker 4: and two new life science companies providing further diversification to our portfolio. Our onboarding yield of 13.3% during the quarter was above Q3 yield and continues to reflect our discipline in structuring and pricing transactions which will produce strong net investment income. We experienced one loan prepayment and one partial pay down during the quarter totaling eight million. We expect prepayments to continue to be lower in the first half of 2023.
Speaker 4: compared to our historic levels as the IPO and M&A markets remain muted. Our debt portfolio yield of 14.5% for the quarter was a testament to the value of our floating interest rate structures and a rising rate environment which helped us generate one of the highest portfolio yields in the BDC industry.
Speaker 4: As of December 31st, we have warrant and equity positions in 98 portfolio companies, with a fair value of 32 million. As we've consistently noted, Structuring Investments with Lawrence and Equity Rights is a key aspect of our venture debt strategy and an additional value generator. Thank you.
Speaker 4: In the fourth quarter, we closed 133 million in new loan commitments and approvals. By we maintained our selective approach to new opportunities and ended the year with a committed and approved backlog of 220 million compared to 252 million at the end of the third quarter. We're pleased with the size of our committed backlog as it positions us to grow up.
Speaker 4: 95% of our debt portfolio consisted of three and four rated debt investments as of December 31st. We had three one rated debt investments at the end of Q4 representing 1.2% of our total debt portfolio and we had two rated debt investments.
Speaker 4: We continue to closely follow and regular communicate with all of our portfolio companies, as well as monitors the overall macro environment. Subsequent to the end of Q4, Horizon funded two new transactions, totaling 25 million, received two prepayments, totaling 10 million.
Speaker 4: and receive one partial pre-payment totaling $3.2 million. In addition, upon the closing of Cadreno Therapeutics' initial public offering on January 24, 2023, Horizon received 600,000 shares of stock, of Cadreno stock, which closed at $2.06 on Monday.
Speaker 4: We have recorded no investment for Cadmino at the end of Q4. Turning now to the venture capital environment, according to Pitchport, approximately 238 billion was invested in VC back companies in 2022. Well, not the record shattering year of 2021. It was still the second highest year of VC investment on record. With that said,
Speaker 4: VC Investment Activity continued to soften in the fourth quarter and given the current market environment with lower M&A activity and a virtually closed IPO market, VC investors will likely continue to reduce the pace of investment in the first half of this year. We know, however, that despite the lower level of investment of 2020,
Speaker 4: 2022, a record. However, only 12 billion was raised in the fourth quarter, which could signal considerably lighter VC fundraising for 2023. At the same time, VC's dry powder of just under 300 billion remains at record levels.
Speaker 4: Meanwhile, BCBAC exit activity remains modest, given the permanent environment and the closed IPO window. Total exit value for the quarter was just $5 billion, and the $71 billion exit value for the year was the lowest since 2016. Given the uncertainty environment.
Speaker 4: We certainly would expect VC-backed exit activity to remain muted for the first half of 2023. The man for venture debt remained relatively solid as venture back companies continue to seek alternative financing options while they wait for the M&A and IPO markets to emerge from their slumber.
Speaker 4: We have seen tech-oriented banks begin to tighten their activity in the venture debt market. This lack of alternative financing sources creates additional opportunity for our advisor to source and originate high-quality venture debt loans. Given our advisor's strong and active lending platform and solid investment capacity of horizon, we believe horizon remains well situated to compete for and win high-quality
Speaker 4: We remain focused on credit quality to ensure optimal outcomes for our portfolio. We believe the challenging environment may persist for at least the first half of 2023, but there will continue to be attractive quality companies looking for venture debt solutions, which we enable us to selectively grow our portfolio.
Speaker 4: our committed backlog and our advices pipeline. Thus we believe we remain well-positioned to continue delivering additional long-term shareholder value. With that, I will now turn the call over to Dan.
Speaker 4: Thanks, Jerry. Good morning, everyone. As Ravigeri mentioned, the fourth quarter tapped off a very solid year for her eyes. We significantly grew our portfolio, and once again, generated NII some more than covered our distribution, while further strengthening our balance sheet to maintaining stable credit quality. Thank you.
Speaker 4: To recap 2022, we grew our portfolio by 57% to 720 million. In February , we expanded the capacity of our New York Life Credit Facility by 100 million to 200 million and expanded its maturity date to June 20, 20, 28.
Speaker 4: In March, we successfully raised over 34 million in net proceeds from our common spot offering. Before the strength in our balance sheet in June , by completing our 6.25 note offering, we raised over 50 million in net proceeds. In November , we closed 100 million loan securitization with a 7.56% coupon rate.
Speaker 4: which read up capacity in our key bank credit facility and increase our capacity to make new debt investments. Finally, we successfully and equitably sold nearly 4 million shares to our ATM programs earned a year, raising over $50 million. This includes receiving net proceeds of approximately 17 million from the program in the fourth quarter, demonstrating our continued ability to opportunistically access the equity markets.
Speaker 4: We believe our thoughtful and proactive balance sheet management keeps us well positioned for additional growth and shareholder value creation in 2023. As of December 31st, we had 91 million available equities consisting of 28 million in cash and 63 million in funds available to be drawn under our existing credit facility.
Speaker 4: In addition, there was only 5 million upstanding under 125 million key bank credit facilities and 177 million upstanding on our 200 million New York-life credit facility, leaving us with ample capacity to grow the portfolio. Our debt equity rate shows that at 1.38 to 1 as of December 31st.
Speaker 5: December 31st with 107 B1 million.
Speaker 5: For the fourth quarter, we earn total investment income of 23 million in increase of 37% compared to the prior period.
Speaker 5: Interest income on investments increased primarily as a result of the higher average size of our earning debt and best portfolio for the quarter and increases in the variable interest rates on our debt investment. Our best investment portfolio on a net cost basis so that $701 million as of December 31st, a 14% increase for September 30th, 2022. For the fourth quarter of 22, we achieve onboarding yields of 13.3% compared to 12.9%.
Speaker 5: and higher interest rate on our barrens.
Speaker 5: Our rates may admit that the worth 3 million, up from 2 million in last year's fourth quarter, due to an increase in the average size of our portfolio.
Speaker 5: A performance based in fantasy decline to 1.4 million from 2 million for last year's fourth quarter. And I'm asking for the fourth quarter of 22 was 40 cents per share compared to 43 cents per share in the third quarter of 22 and 39 cents per share for the fourth quarter of 21.
Speaker 5: For the full year 2022, we generated NII at $1.46 per share, more than covering our total distributions during 2022 of $1.25 per share. The company's understributed spillover income as of December 31 was 68 cents per share.
Speaker 5: We anticipate that our larger portfolio along with our predicted pricing strategies will enable us over time to generate NII that covers our increased distribution. To summarize our portfolio activities for the fourth quarter, new of Regenations total to 104 million, which are partially offset by 4 million in scheduled principal payments and 8 million in principal pre payments to impartial paydown.
Speaker 5: We ended 2022 with a total investment portfolio of 720 million. Given the macroenvironment and recent prepayments, we would expect to see lighter portfolio growth in the first quarter than we saw in the fourth quarter. At December 31st, the portfolio consisted of that investment in 60 companies with an AgriFair value of 686 million. Any portfolio of warrant, equity, and other investments in 100 companies with an AgriFair value of 34 million.
Speaker 5: as of September 30th, 2022, and $11.56 as of December 31st, 2021.
Speaker 5: The 19th century reduction in NAB on a quarterly basis was primarily due to our paid distributions, including the 5 cents per share, special distribution, and adjustments to fair value.
Speaker 5: partially offset that net investment income. As we consistently noted, 100% of all outstanding principal amounts of our net investments, their interests at floating rates with coupons that are structured to increase as interest rates rise with interest rate floors.
Speaker 5: As of December 31st, 97% of our debt investments will benefit from additional increases in their applicable base rates. This concludes our opening remarks. We'll be happy to take questions you may have at this time.
Speaker 2: Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. Finally, I am pó?niejktion. Please you may continue the session.
Speaker 2: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen we will wait for a moment while we poll for questions.
Our first question comes from the line of Rhyme Lens from KBW. Please go ahead.
Our first question comes from the line of Ryan Lynch from KBW. Please go ahead.
The first one I had was regarding the transaction of the advisor. So in my experience in the BDC sector, the external manager has typically been majority owned by the founders and executives. And in this case, that would be you and Jerry. I'm not asking you to reveal any personal financial information, but can you confirm that if you and Jerry are the majority shareholders?
of the private manager, can you give shareholders comfort that the liquidity that in the private manager doesn't signal a potential change in horizons of management in the near or immediate term? Thanks Ryan. This is Rob. As we've said in the press releases and we said in our script, we're all staying and we have long term strong incentives to continue to grow.
Horizon, the public company, as we also grow the Horizon platform, we're not going to any place. Okay. All right.
The other question I had was, was this deal shopped around or was this an exclusive talk with Monroe?
We're really not going to comment on the process. This was a mutually opportunistic opportunity for them to get into a business that they've been looking at for a long time. And we saw an attractive large platform to move our franchise to with strong capabilities to help us grow.
and raise capital for both the public company and our overall platform. Okay. I guess then moving to just the fourth quarter results, a couple of questions with that.
It looks like you guys made a new investment in, I sure if I'm saying this right, but Avalo, Bio Sciences in the fourth quarter. It's a fairly large investment of about $45 million. It's marked at par in the fourth quarter. It looked like there was some pretty big misses in, in, in, um,
In some of these trials, and they cut their head count by a huge amount, and other stock is down significantly down to 62 cents. Was the results and the trial data that they posted in the first quarter? Was that taken into consideration when you guys made the investment? And?
is that new data that was published in the first quarter of 2023, is that been reflected in the fair value of your investment in the fourth quarter?
Hi Ryan, this is Jerry. So we, ifelo did put out a press release on all this sort of public company, so I can talk about it a little bit. Yeah, they had a disappointing results on a phase 2 trial for dermatitis.
They didn't meet the endpoints of the protocol for the clinical trial for that. That was disappointing to all stakeholders and certainly to us too. But to get to your specific question, yes, we took that into consideration that that was a possible outcome when we underwrote.
This is a platform technology if you read the press releases and they just put out another one to see the other day by the way on clinical update. They actually have a number of ongoing clinical trials including a phase 2 trial for pariasis which is a pill which would be a market change because there is no pill.
diseases related to inflammatory indications. And there is a significant unmet need in that particular area. So there's a lot going on there. I would also note that, then again, this is public information. The flagship ventures, why the company is public, is a...
The majority shareholder here, they own a significant amount of the company. They've been extremely supportive of the company. They were the ones that actually developed a technology and in case you're not familiar with the fact that they're one of the biggest life science investors in the United States, back companies like Moderna and things like that.
The underwriting won't well be on just what could potentially happen in one clinical trial.
ready well beyond just what could potentially happen in one clinical trial.
understood. Just my last question then, this is kind of just a broader question on the VC lending landscape, not necessarily specific to your portfolio, but with a significant amount of with a significant decline in the level of exit activity.
occurring in the VC markets as well as valuations going lower. How do you foresee the level of new venture investments being made in the space, either to new companies or maybe more importantly supporting existing companies with additional rounds of capital obviously venture capital?
on. On one side of the equation, there is a lot of capital committed to VC funds, and ultimately, the VCs need to get that capital invested. So, there's going to be pressure. I think maybe not in the first half of this year, but by the second half to really start doing that, it was actually...
an interesting article from Bain, I think was yesterday, the day before they just raised two very large funds and their quote was something to the effect on paraphrase and he said, you know, they're going to lean forward into the market right now. They think valuations are good and they're going to be investing. So.
You've got that on one side of it. On the other side, to your also good point, the IPO market is still very much distracted with everything else that's going on in the economy and there are very few IPOs getting done. M&A is not actually in much better shape. There has been some M&A activity.
One of the things we have noticed, first of all, high quality companies still are raising capital. We have a handful of companies in our own portfolio that have raised $75 million or more in 2022.
as it relates to kind of everybody else, fundraising is still happening, but instead of the, you know, let's grow our business, raise a big round, it's gonna get us through, you know, get us through 18 months and, you know, a significant growth spread. What we're more seeing today...
is companies being far more focused on getting to cash flow positive. They're raising smaller rounds, so it's not so much getting to a big event like an IPO or an M&A. It's about getting to kind of better market conditions. So we see a lot of companies that are raising 6, 9, 12 months of capital where you know, you know, are really...
you know, good market, they may raise more than that and be really focused on the growth part of it. So we are seeing companies still being supported by investors for the most part.
There are some idiosyncratic situations that obviously can be impacted by, in part, by the macro situation. But I think that's what we're going to see for the first half of this year. We'll see continued investment. They want to keep their portfolios companies.
funded and keep them on some kind of track, but it isn't necessarily a big growth track and kind of waiting for better market conditions, better valuations, more M&A, and a better IPO market. And that's the world we're living in right now. And so...
We obviously are aware of both the macro and who the investors are and things like that. So that's a helpful background in the, you know, your guys view into the space, which is obviously much closer than somebody like me.
I kind of from the outside so that's all for me today.
wanted to ask about balance sheet leverage. Obviously you all finished the year over the high end of your target. You're now at 128 from a net debt perspective. Just any thoughts on continuing to.
I guess operate it above the target. Do you feel comfortable doing that or should we expect you all to try to move back down into that target range over the course of 23?
Yeah, Bryce, we do. Watch that very closely and just want to point out that's just a snapshot of point in time at the end of the quarter and that will fluctuate up and down throughout the quarter. But being at 1.28 times net of cash is a place that yes, it's likely above what we say our target is 1.2.
But we're very comfortable at that level with the cushion between 1.28 and the regulatory cap of two times. So I would say you could expect to be around that level throughout 2023.
That is helpful. Maybe just a bit of a question around portfolio yield and pricing. When you get a change in the prime rate, can you remind us when that change in rate goes into effect for your various loans? That would help me out a lot better and in my head I do think you can create whereas
or the first of the month following the rate change.
Okay, okay. And then maybe last one for me, from again, on the yield side of things, when we're looking at where floors are today, do you have a good sense for kind of what the weighted average pricing floor on your loan does?
Yes, we do with a significant of our pork snake, the amount of our portfolio funded at the 3.25 prime rate and the longer period with lower prepayments. We're looking at the floor rate which will continue to grow as the portfolio changes as we put new loans on at the...
Thank you.
Our next question comes from the line of Velas Abraham from UBS. Please go ahead.
Hi everyone, thanks for taking the question. Can you guys comment a little bit on the negative migration in the corridor, particularly the couple of one-rated credits that picked up there? Yeah. Basically we had two transactions that...
had a kind of idiosyncratic event specific to the companies, one related to a strategic deal that was about to get done and then didn't, so we downgraded that and it's still very early in the process, so we felt it would be appropriate to and it's still very early in the process,
market down and we'll see how that goes. We'll be working on both of those transactions over the coming quarters. Hopefully we can get something resolved by the third quarter and both of them. So it really was nothing more than that.
You know, we have to work them and we took a conservative approach relative to the evaluation given, you know, the macroeconomic circumstances a better market than may have been, you know, better or more opportunities for the companies to do to get something else more positive done, but that didn't happen yet. So that's what we are today with them.
Okay, and then maybe just more broadly as you look across the industries in your portfolio, are you seeing any particular industries more, you know, more stressed than others or are kind of all feeling in a similar fashion with the broader pressures?
Yeah, that's a good question. I think the reality is that it's not one specific industry which at times in our business it has because there can be some cycles in life science as an example that is very specific to that market versus, you know, more broader.
macro issues. What we're seeing is that
The dislocation in the broader markets is causing a slow down, take your time, take a step back kind of environment where it's not so much that anyone is concerned about a specific market or even a specific company.
but they're taking a very slow approach to when the market's going to change. So I think that in this case, just as macro environments have kind of lowered the tide for all boats, I think when the market turns around, you'll see it'll raise most boats because
There really hasn't been any specific event in any of the markets that we serve that would suggest that something is going on in those markets that are outside of macro dislocation events.
And one of the things that founders and venture backed companies started doing early last year was trying to control their cash burn. And you kind of think about how that's progressed to this point. What in and do you think wherein these companies getting to where they need to adapt to the new environment here?
Yeah, again, a pretty good question because usually what happens, and this is a historical perspective having been doing this for 30 years. By the time you're asking the kind of questions you're asking, you know, 90% of the cuts and are putting up in this tradition, putting up in the way that you've all been doing, having seen times.
and reduction in burn have already taken place. And that's what we're seeing in our market. We saw in the fourth quarter, kind of the whole venture ecosystem kind of slowed down. Companies were very inwardly focused on cutting their costs, reducing expenses. So we think a lot of that, in fact, has happened.
And even in the new opportunities we're seeing, the companies have already kind of gone through a process where they've cut costs and they're managing their business trying, with a focus on getting to cashflow break even versus on significant growth. So a lot of that has happened.
And I think during the first half of this year, most of the transactions that we will see will be companies that have already gone through that and now the venture capitalists and the investors in these companies are focused on what the next.
Step is for the company getting back to kind of a growth scenario over time. Maybe not in the first half of this year but going forward. And so that's really what we have definitely seen a lot of that already happen.
Okay, that's helpful. And if I could squeeze one more in here on the synergies with the advisor, I think you mentioned that there are some expense saves that could be realized here. Can you quantify that at all or give any timing around that?
Thanks. And the answer really is not yet, but you know the transaction just announced. Spent a lot of time working on it, but we don't have any defendant advances for that answer. That could be it for the reason to catch up later today.
time. Okay, thanks guys. Thank you.
Ladies and gentlemen, there are no further questions in the queue. I would like to turn the conference over to Robert Pomoroi, Chairman and CEO for closing comments.
Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon and we look forward to speaking with you again soon.
This will conclude our call. Thank you. Thank you. The conference of Horizon Technology Finance Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.
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