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Hercules Capital: Assigns Loan

BDCs:
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On July 10, 2017 Hercules Capital (HTGC) filed an 8-K regarding an agreement an assignment of its loan to Immune Pharmaceuticals, Inc. to an “accredited investor”. The BDC News Of The Day provides  the details, a brief analysis and speaks to what the transaction says about market conditions and opportunities available to BDCs. (Unfortunately HTGC has not yet published the 8-K to its website, and we are quoting from a document published on Alpha-Sense which is not readily linkable to. Once HTGC publishes the 8-K we will add the document to this article). 

DETAILS

Immune Pharmaceuticals is a portfolio company of HTGC, dating back to 2015, when an initial loan of $9.5mn was made. The current loan balance is just under $3mn. According to the 8-K, which includes an Assignment Agreement dated July 7, 2017, HTGC is essentially selling its debt position to a third party (“MEF I”) at par value. The Assignee will have the same collateral rights as HTGC previously enjoyed.

The Assignee appears to be affiliated with  Magna Management, a New York investment firm which bills itself as a direct investor. The Assignment was signed by Marc Manuel at Magna.

There is a second step to the transaction, as the 8-K describes:

Also on the Closing Date, the Company and the Investor  [Magna] entered into an Exchange Agreement (the “Exchange Agreement”) whereby the Company issued to the Investor a senior secured convertible promissory note with a principal amount of $2,974,159 (the “Exchange Note”) in exchange for the Securities.

The Exchange Note is convertible, at the option of the holder, into shares of the Company’s common stock, par value $0.001 per share, at a per share price of $2.95 (the “Fixed Conversion Price”), subject to adjustment as provided in the Exchange Note, but in no event to a conversion price lower than $1.00 per share and subject to a total beneficial ownership limitation of 4.99% of the Company’s issued and outstanding common stock. The Exchange Note has a maturity date (the “Maturity Date”) that is one year from the Closing Date. The Maturity Date may be accelerated, at the option of the holder, upon the occurrence of an Event of Default (as defined in the Exchange Note).

The Exchange Note is repayable by the Company through equal monthly amortization payments during the term of the Exchange Note, in cash or in shares of common stock at the Amortization Conversion Price (as defined in the Exchange Note) at the option of the Company. The holder has the option to accelerate each amortization payment in up to three separate payments and demand such payments in shares of the Company’s common stock. All payments in shares of common stock are subject to the Company complying with the Equity Conditions (as defined in the Exchange Note). The Company may prepay the Exchange Note at any time (upon 10 days’ notice) in cash at 115% of principal amount and accrued interest.

Additionally, so long as the Exchange Note remains outstanding or the holder holds any Conversion Shares (as defined in the Exchange Note), the Company shall not enter into any financing transaction pursuant to which the Company sells its securities at a price lower than $1.00 per share without the written consent of the holder.


ANALYSIS

Obviously there’s a whole back story here which the 8-K does not address. The bottom line, though, for HTGC is that their  current loan balance gets repaid in full.

That’s a plus from a paper gain perspective because Advantage Data records shows the debt had been discounted by (28%) at March 31, 2017. That’s a prospective Unrealized Appreciation of $830,000 likely to be booked in the IIIQ of 2017 by HTGC.


OUR VIEW

We cannot tell from the documentation here if HTGC is free and clear of Immune Pharmaceuticals following the Assignment and the conversion by the borrower of the loan into a Convertible facility.

Nonetheless, this is a very interesting instance of how flexible and creative BDCs can be in addressing portfolio concerns, and the availability of capital (here in the form of Magna) even for companies with credit issues. At a different time, an assignment like this one may not have been possible at par -or at all – but HTGC is benefiting from the buoyant investment conditions.

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