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Hercules Capital: Arranges New Revolver

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PALO ALTO, Calif.–(BUSINESS WIRE)– Hercules Capital, Inc. (HTGC) (NYSE: HTGC) (“Hercules” or the “Company”), the largest and leading specialty financing provider to innovative venture, growth and established stage companies backed by some of the leading and top-tier venture capital and select private equity firms, today announced that effective November 9, 2021, it has entered into a new $100.0 million multi-currency credit facility with Sumitomo Mitsui Banking Corporation (“SMBC”).

SMBC has committed a total of $100.0 million in credit capacity subject to borrowing base, leverage and other restrictions. The new credit facility also includes an uncommitted accordion feature expandable up to $150.0 million. The interest rate applicable to borrowings under the new credit facility is LIBOR plus 1.875% and the advance rate under the new credit facility is a maximum of 75% against eligible loans. The new credit facility matures in November 2026, including a 12-month amortization period.

“With the announcement of our recent 5-year 2.625% investment grade bond offering totaling $325.0 million and our new credit facility with SMBC, we continue to reduce our cost of capital while improving operational flexibility,” said Seth Meyer, chief financial officer of Hercules. “This new credit facility is multi-currency, with improved pricing and flexibility and longer maturity. We thank SMBC for their support of our industry-leading franchise.”

Another Brick In The Wall

In the above press release, HTGC added one more string to its financing bow, already replete with 15 other different facilities, including SBA debentures, unsecured notes of varying maturities, “asset-backed notes” and two other revolvers.

The total $100mn commitment only adds 5% to the $2.0bn in debt available to the growing BDC.

Important

We found this development interesting principally because of the pricing and advance rates involved. Historically, senior lenders have charged HTGC a substantially higher interest rate than other “normal” BDCs of a similar size, presumably representing the perceived heightened risk involved.

This latest facility is – far and away – the most inexpensive on HTGC’s books based on our review of the latest 190-Q. The Wells Fargo secured facility – which has been around since 2015 – is priced at LIBOR +3.00%. Moreover, the advance rate on qualified assets is 55%. By comparison, this new facility – as shown above – is priced at LIBOR + 1.875% and the advance rate is 75%. (A more recent Union Bank secured revolver is priced at LIBOR + 2.50%).

Untapped ?

As always with HTGC, there’s some doubt as to whether this revolver will get much use as the BDC tends to use the facilities as a back-up. (At September 30, 2021 $472mn in commitments from Wells and Union Bank were completely undrawn). It’s unlikely – given the size of the facility and it’s likely lack of use – this news will have much impact on the BDC’s cost of debt capital. More telling is that the BDC seems to be as well regarded – from a risk standpoint – as its other large cap peers by yet another institutional lender – in this case Sumitomo Mitsui.

Inexpensive

This is also reflected in the low yields HTGC has attracted when placing 5 year unsecured monies. The most recent issuance in September 2021 was at a yield of 2.625%. That’s not the cheapest out there but compares favorably against well known names like Apollo Investment (AINV), which paid 4.50% and Barings BDC (BBDC), which paid 3.41%.

This augurs well for HTGC – and the venture debt category generally – where cost of capital is concerned going forward. Both able to generate double digit yields by lending, and paying very low rates for borrowing, venture-debt spreads are the highest in the sector by far, outstripping what large cap BDCs focused on the mainstream lending to private equity sponsor buy-outs can achieve. Everybody in the leveraged lending business is seeing pressure on spreads but HTGC, and its two other venture-debt peers – have more room for maneuver.

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