Horizon Technology Finance (HRZN) is one of three BDCs focused on the so-called venture debt market, alongside Hercules Technology (HTGC) and Triple Point Venture Growth (TPVG). HRZN went public back in 2010, but had a hard time getting going for a number of years. Early on, the BDC was rejected for an SBIC license and has had to fund itself in the more expensive private debt markets ever since. At the end of 2017 total assets had not moved much – if at all – from the level of seven years before. Nor has the dividend fared well, cut from a $1.80 annual pace to $1.20 currently, a third down. Realized Losses of one kind or another have eroded equity capital raised by 25%. Net Asset Value was at $11.64 at year end 2018, down from $16.75 at the close of 2010. The stock price, which traded as high as $17.00 in the early days has dropped as low as $9.04. However, the BDC has been on a rebound for some time now; weeding out or writing off bad loans made; growing the portfolio size and increasing earnings to exceed the current dividend. A joint venture formed in mid-2018 with Arena Sunset SPV promises to add one more pocket in which loans can be dropped, along with the higher leverage allowed under the Small Business Credit Availability Act will allow balance sheet assets to grow a little further, on what is already a highly leveraged business. Outside of the JV, debt to equity is already close to 1:1. The market has taken note of late, allowing HRZN to raise fresh equity capital in March 2019 at $12.14 a share. Now the BDC’s challenge is to maintain this recent asset growth without absorbing material debt or equity losses. In fact, HRZN has to show that the many investments in equity and warrants in these technology and life sciences companies can generate some meaningful capital gains over time and offset loans that go bad. In this regard, HRZN’s track record has not been so great. Is the problem just the nature of the market for this type of asset that doesn’t allow for material net gains, or is it management’s fault – choosing the wrong horses to ride ? This could work out well for HRZN and its shareholders if all goes well. After all, the yields on these venture debt loans are the highest in the BDC sector. That might help to maintain or even increase the regular distribution down the road. On the other hand when you’re talking investment yields in the mid-teens above average risk – sooner or later – will follow. The BDC is highly leveraged and is going higher, so watch out below if the Indian Summer of HRZN should come to an end for any reason. Some investors will say “once bitten, twice shy”, others will be willing to give management the benefit of the doubt.
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- Net investment income of $5.0 million, or $0.37 per share. Total investment portfolio of $274.8 million as of June 30, 2019. Net asset value of $157.1 million, or $11.60 per share, as of June 30, 2019. Held portfolio of warrant and equity positions in 74 companies as of June 30, 2019. Subsequent to quarter end, declared monthly distributions of $0.10 per share.