Business Context and Reporting Period
Hercules Capital, Inc. (HTGC) is an internally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company focuses on providing senior secured loans to high-growth, venture capital-backed companies in technology, life sciences, and sustainable/renewable technology sectors. This summary covers the quarterly period ended September 30, 2019.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | Dec 31, 2018 (Balance Sheet) |
|---|---|---|---|
| Total Assets | $2,316.9 million | $2,316.9 million | $1,945.2 million |
| Total Investments (at value) | $2,247.2 million | $2,247.2 million | $1,880.4 million |
| Net Investment Income | $38.9 million | $103.2 million | N/A |
| Net Realized Gain (Loss) | $4.8 million | $13.6 million | N/A |
| Net Unrealized Appreciation (Depreciation) | $(24.4) million | $12.2 million | N/A |
| Net Increase in Net Assets from Operations | $19.3 million | $129.0 million | N/A |
| Net Assets | $1,085.7 million | $1,085.7 million | $955.4 million |
| Net Asset Value (NAV) per Share | $10.38 | $10.38 | $9.90 |
| Total Debt Outstanding (Principal) | $1,210.6 million | $1,210.6 million | $980.5 million |
| Cash and Cash Equivalents | $21.0 million | $21.0 million | $34.2 million |
Material Changes vs. Prior Period
- Portfolio Growth: Total investment portfolio value increased by approximately $367 million (19.5%) from December 31, 2018, driven by new fundings of $784.9 million and accretion, partially offset by principal repayments and early payoffs totaling $424.5 million.
- Income Growth: Net investment income for the nine months ended September 30, 2019, increased to $103.2 million from $78.1 million in the prior year period, primarily due to a larger weighted average principal outstanding.
- Expense Increase: Operating expenses rose to $94.1 million for the nine months ended September 30, 2019, compared to $72.7 million in the prior year. This increase was driven by higher interest expense on new borrowings (2027 and 2028 Asset-Backed Notes) and increased general and administrative expenses, specifically legal fees related to SEC cooperation and a settlement with the former Chairman and CEO.
- Unrealized Volatility: The quarter ended September 30, 2019, saw a net unrealized depreciation of $24.4 million, contrasting with a net unrealized appreciation of $2.9 million in the same quarter of 2018. However, the nine-month period showed a net unrealized appreciation of $12.2 million.
- Debt Structure: The company issued $105 million in July 2024 Notes and $250 million in 2028 Asset-Backed Notes during the period, while fully repaying the 2024 Notes ($83.5 million) in early 2019.
Guidance, Outlook, and Risks
- Outlook: Management continues to focus on originating new investments and maintaining a core yield on debt investments. The effective yield on debt investments was 13.4% for the quarter ended September 30, 2019.
- Liquidity: As of September 30, 2019, the company had $284.4 million in available liquidity, including $21.0 million in cash and $263.4 million in available borrowing capacity under credit facilities (Wells and Union Bank), subject to borrowing base requirements.
- Regulatory Compliance: The company maintains an asset coverage ratio of 202.1% (excluding SBA debentures) and 189.5% (including SBA debentures), well above the 150% minimum required under the 1940 Act.
- Risks:
- Valuation Risk: Approximately 97% of the portfolio is valued using Level 3 inputs (unobservable), determined in good faith by the Board. This introduces subjectivity and potential volatility in reported NAV.
- Interest Rate Risk: 97.6% of the loan portfolio has floating rates. While rising rates increase income, they also increase the cost of funds and may impact portfolio company repayment ability.
- Concentration Risk: Six portfolio companies represented greater than 5% of net assets each, with the top six comprising approximately 36.5% of net assets.
- Legal Proceedings: The company is cooperating with the SEC regarding document requests received in March 2019, which has contributed to increased legal expenses.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the tax attributes of distributions. For the nine months ended September 30, 2019, distributions were $0.98 per share, while net investment income per share was $1.03. Management stated that year-to-date distributions were 100% from earnings and profits, but final tax characterization is determined annually.
- Non-Accrual Assets: Confirm the status of the three debt investments on non-accrual status as of September 30, 2019, which had a cumulative cost of $9.2 million and a fair value of $2.2 million.
- Unfunded Commitments: Note the $167.5 million in unfunded contractual commitments available at the request of portfolio companies, which represent future cash outflows.
- Equity Offerings: Verify the impact of the June 2019 equity offering ($70.5 million net proceeds) and ATM sales on share count dilution versus capital deployment.
- Legal Settlements: Review the specific financial impact of the settlement with the former Chairman and CEO on future compensation and legal expense trends.