July 18, 2012: Horizon Technology Finance (ticker:HRZN), one of two BDCs which specialize in lending to venture-capital backed early stage companies, announced yesterday a new equity offering. See the press release for details. The new equity was ultimately priced at $16.20. The stock is at $16.38. HRZN was able to place the equity at a multiple of 10.2x the $1.59 calendar year analyst consensus (4 analysts).
ANALYSIS: No great surprise that HRZN is raising new equity. First of all the capital raising window is open, and has been for weeks. Second, the company is having no problem deploying the capital raised from its initial equity offering, subsequent tradeable debt issuance (check out the unsecured Notes trading under the ticker HTF) and it’s Revolver. In a recent press release providing a snapshot of second quarter activity, HRZN reported $37.3mn in incremental new loans, spread out over 11 transactions, and bringing total assets to just under $200mn from $168mn at March 31. That’s a 17% increase in 3 months (thanks also to no pre-payments or repayments in the quarter after just the opposite in the first quarter). To date, credit quality has held up. There was only 1 non-accruing loans on the books out of 35 in portfolio at March 31,2012.
THE BDC REPORTER-LIKE AN ELEPHANT-NEVER FORGETS
We’re encouraged by this new capital raise, which strengthens the funding of a balance sheet which, just 1 year ago, included one new Revolver lender and one other lender being paid off. More permanent or long term capital such as this equity offering and the HTF Notes are transforming the long term outlook for the company, which would otherwise be very much at the mercy of its bank lenders. The history of technology-related BDCs such as TICC Capital (TICC) and Hercules Technology (HTGC) is replete with examples of lenders having a change of heart about the technology sector and running for the exits. Both TICC and HTGC survived their respective lender defections, (which occurred in 2008) but the short term result was a shrinkage in portfolio size over multiple quarters and a high degree of uncertainty for management and shareholders alike.
IT’S ABOUT RISK-ADJUSTED RETURNS
Investors may be excited by the equity offering for the prospect of higher earnings and distributions down the road. That’s possible but not guaranteed. As of the first quarter, HRZN’s Net Investment Income Per Share was running at an annual rate of $1.76. As management pointed out in the recent press release about it’s second quarter preview, the absence of any repayments this quarter will mean lower pre-payment fees. Add that to the dilution from from the new equity, and it might take HRZN a few quarters to be fully earning the $1.80 a share annual dividend currently being paid. As we noted earlier, the Analyst Consensus for 2013 is $1.59 a share, and that’s before the new equity raise was announced. The BDC Reporter’s main take-away,though, is that Horizon’s unexpected access to relatively inexpensive long term capital in recent months has permanently altered its risk profile, and the outlook for reaching and maintaining the existing dividend and surviving the next recession have both greatly improved.
POSITION: We are Long HRZN, and are considering initiating a position in HTF