Horizon Technology Finance: Expands Revolver
NEWS
FARMINGTON, Conn., May 24, 2023 /PRNewswire/ — Horizon Technology Finance Corporation (HRZN) (“Horizon” or the “Company”), a leading specialty finance company that provides capital in the form of secured loans to venture capital backed companies in the technology, life science, healthcare information and services, and sustainability industries, today announced that Horizon Secured Loan Fund I LLC, Horizon’s wholly-owned subsidiary (“HSLF”), has amended its senior secured debt facility with a large U.S. based insurance company. Under the amended agreement, the commitment to HSLF has increased by $50 million, allowing HSLF to issue up to $250 million of secured notes, of which HSLF currently has outstanding $177 million.
The amendment to the credit facility also extends the investment period to June 2024. In addition, the amendment, among other things, changes the pricing structure for future borrowings to the three-year I-curve rate plus 3.50%. The facility is collateralized by the assets of HSLF, which consist of cash and debt investments.Horizon Technology Finance – Press Release – May 24, 2023
ANALYSIS
We thought it would be interesting to bring readers up to date on the status of HRZN’s leverage (both gross and net) and liquidity as of IQ 2023, and how this latest financing will affect its metrics going forward.
Debt To Equity
HRZN’s debt-to-equity ratio stood at 1.38:1 as of March 31, 2023.
Netting out cash, leverage was 1.24:1, slightly above the BDC’s target leverage of 1.2:1.
Liquidity
Cash on the balance sheet and available borrowing capacity on the Revolver on March 31, 2023, came to $177mn.
Given that the BDC was above its own leverage target, this was more than enough for its needs.
Cash Machine
However, capital and leverage are moving targets at the venture BDC, given its repeated use of an At The Market (ATM) program to issue new shares and raise new equity.
Last quarter the BDC raised $7mn in this fashion and $50mn in the IVQ 2022.
Above
With HRZN’s stock price currently trading at a 13% premium to its net book value per share (NAVPS), management is likely to be missing new shares at every opportunity.
After all, market conditions are very favorable to lenders and in the venture arena, the fall of SVB has opened up a great demand for new lending, even though new investment activity is low.
In the last 12 months – thanks to its capital raising – HRZN’s portfolio has increased by 39% – way above the sector average and the 4th highest of any public BDC.
Armed with the new expanded Revolver and additional ATM monies, HRZN might be able to grow substantially from its $715mn portfolio level at the end of IQ 2023.
VIEWS
Doom + Gloom
Most of the attention paid to the venture-debt industry of late has been centered around concerns about creditworthiness.
Even before SVB imploded there were worries that the great capital drought affecting both existing venture-backed companies and future ones might cause a cascade of credit losses.
As if on cue, TriplePoint Venture Growth (TPVG) did disclose that a couple of portfolio companies filed for bankruptcy recently while some other investments were performing poorly.
As we’ve discussed previously, this caused a short-term collapse in TPVG’s stock price.
Those Are The Facts
However, when the credit performance results of all 5 venture-focused BDCs in the IQ 2023 are taken into consideration (including HRZN’s), there was no obvious, broad-based, downward trend.
Furthermore, some troubled companies went to the wall without having any material impact on any BDC involved, and some others – like Core Scientific – appear ready to exit bankruptcy in relatively good shape.
As with BDC credit generally, there’s been no meaningful downward shift as yet.
Burying The Lead
Lost in all the above is the opportunity available to HRZN and its venture-debt peers to both increase market share and to have access to ever-better quality credits at very attractive pricing thanks to the SVB fallout.
This increase in HRZN’s Revolver – and the likely capital raises we shall see – will probably be replicated in similar ways by the other venture-BDCs in the months ahead.
After all, opportunities of this kind do not come along every day.
Bulk Up
As a result – even in the quiescent venture environment – we expect to see portfolios of BDCs like HRZN, Hercules Capital (HTGC); Trinity Capital (TREIN) and Runway Growth (RWAY) increase at a faster pace than the sector as a whole.
Even TPVG may be able to get in on the gold rush.