Horizon Technology Finance: Issues New Shares

May 30, 2023

NEWS

FARMINGTON, Conn., May 30, 2023 /PRNewswire/ — Horizon Technology Finance Corporation (HRZN) (the “Company” or “Horizon”) today announced that it has priced an underwritten public offering of 3,250,000 shares of its common stock at a price to the public of $12.50 per share for total gross proceeds of approximately $40,625000, before deducting underwriting commission and discounts and estimated offering expenses. The public offering is expected to close on or about June 2, 2023, subject to the customary closing conditions. In connection with the offering, the Company has granted the underwriters for the offering a 30-day option to purchase up to an additional 487,500 shares of the Company’s common stock solely to cover overallotments, if any.

The joint-lead book-running managers for the offering are Morgan Stanley & Co. LLC, UBS Investment Bank, and Wells Fargo Securities. The co-managers for the offering are Janney Montgomery Scott LLC and Maxim Group LLC.

The Company intends to use the net proceeds of this offering to repay its outstanding debt borrowed under its revolving credit facility provided by KeyBank National Association (the “Key Facility”).Press Release – Horizon Technology Finance – May 30, 2023

ANALYSIS

AUM

On a pro-forma basis – assuming a 1.25x debt to equity – HRZN’s total portfolio assets will increase by just over $90mn, to $805mn.

More

The amount of capital raised – not including the over-allotment – will increase the BDC’s net asset value by about 14%.

$322mn of HRZN’s net assets at the end of the IQ 2023 will increase to $363mn.

Share Count

The number of shares outstanding will go from 28,544,822 to 31,784,822 – up 11%.

Leverage

At the end of the IQ 223, HRZN’ debt-to-equity ratio stood at 1.4 to 1.0. Netting out cash on the balance sheet, net leverage was 1.24:1 – slightly above the BDC’s stated “target leverage of 1.2:1.

The temporary repayment of the BDC’s debt with the proceeds will bring gross leverage down to 1.1x debt to equity.

Plenty

The quarterly dividend “liability” – the payout level at the new share count – comes to $10.5mn.

That’s still well below what HRZN’s Net Investment Income came to last quarter: $13.0mn.

Earnings coverage of the pro-forma distributions is 123%, suggesting management will have no problem maintaining the recently raised $0.11 a month dividend.

Valuation

At the $12.50 price investors paid for the new shares, and with the analyst EPS consensus for 2023 pegged at $1.68, the Price To Expected Earnings (PE) ratio is 7.4x.

That’s only slightly above the BDC sector’s average PE ratio of 7.2x.

The $12.50 price at which the new shares are being sold is a 10% premium to the latest net book value per share of $11.34.

VIEWS

Good Enough

HRZN’s valuation may not be terribly exciting, but will still be accretive for the BDC.

More importantly, at a time when having plenty of liquidity and a strong balance sheet is important both offensively and defensively, this is a significant step forward.

Needs To Be Said

Given that the failure of Silicon Valley Bank (SVB) is only two months past and that many commentators are still predicting that the venture-funded eco-system of companies large and small is due for a major shake-up, the fact that HRZN could still raise equity at a premium is highly impressive.

Of course, this could yet all go wrong if the pessimists are proven right in the quarters ahead.

Everyone Wins

However – in the here and now – this capital raise appears to be a favorable development that will benefit all the stakeholders: common stock holders, Baby Bond investors as well as existing and prospective borrowers.

Changes

This is a small part of a seismic shift in the funding of venture-backed companies in the wake of SVB’s demise that is likely to result in the public and private BDC sector greatly increasing their market share.

Moving Up

More parochially: HRZN is still the smallest venture-debt by portfolio size but this capital raise will narrow the gap with its 4 peers (Hercules Capital, TriplePoint Venture Growth, Runway Growth and Trinity Capital).

We could be in a situation shortly where all the public venture-dent BDCs each have portfolios over $1bn.