Horizon Technology Finance Corporation 2023 Form 10-K Summary
Business context and reporting period
Horizon Technology Finance Corporation is an externally managed, non-diversified business development company and regulated investment company that provides secured venture loans to development-stage companies in technology, life science, healthcare information and services, and sustainability industries. The filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a standalone fourth-quarter filing.
At year-end, the company held 56 debt investments with a fair value of $670.2 million, including $578.7 million, or 86.3%, in senior term loans. Total portfolio investments were $709.1 million, net assets were $324.0 million, and NAV per share was $9.71.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total investment income | $113.5 million | $79.2 million | Up 43.3% |
| Total expenses | $50.5 million | $42.3 million | Up 19.5% |
| Net investment income before excise tax | $62.9 million | $36.9 million | Up 70.5% |
| Net investment income | $61.4 million | $36.2 million | Up 69.8% |
| Net realized loss | $29.9 million | $9.5 million | Loss increased |
| Net unrealized depreciation | $48.8 million | $5.6 million | Depreciation increased |
| Net decrease in net assets from operations | $17.2 million | Net increase of $21.2 million | Turned negative |
| Net investment income per share | $1.98 | $1.46 | Up 35.6% |
| Distributions declared per share | $1.37 | $1.28 | Up 7.0% |
Investment income consisted primarily of $110.1 million of interest income, including $8.4 million of payment-in-kind interest and $15.9 million from origination-fee and end-of-term-payment accretion. The dollar-weighted annualized yield was 16.6% on average debt investments and 15.7% on all investments. Net investment income represented approximately 54% of total investment income before excise tax.
Cash, cash equivalents and restricted cash totaled $75.7 million at year-end, including $73.1 million of unrestricted cash and money market funds and $2.6 million of restricted money market funds. Operating activities used $5.3 million of cash, while financing activities provided $50.5 million.
Gross borrowings were $466.0 million, or $462.2 million net of debt issuance costs, compared with $439.3 million gross borrowings at December 31, 2022. Reported asset coverage was 170%, above the 150% BDC minimum. Average borrowing cost was 6.77% at year-end. Debt included $251.0 million under the Key and NYL facilities, $100.0 million of 2022 asset-backed notes, $57.5 million of 2026 notes, and $57.5 million of 2027 notes.
Material changes versus the prior comparable period
- Investment income increased substantially due to a larger average debt portfolio and higher Prime-based rates, but interest expense also rose 50.9% to $29.0 million as average borrowings and borrowing costs increased.
- Portfolio fair value declined to $709.1 million from $720.0 million despite $218.7 million of net new debt and equity investments, reflecting $29.7 million of net investment losses, $48.8 million of unrealized depreciation, repayments, prepayments and sales.
- NAV per share fell to $9.71 from $11.47, primarily because of realized losses, unrealized depreciation and distributions. The common stock closed at $13.17 at December 31, 2023, a premium to NAV.
- Credit quality weakened at the lower end of the portfolio. Four investments were rated 1, with fair value of $27.6 million, compared with three such investments with fair value of $8.3 million at year-end 2022. The weighted-average internal credit rating remained 3.1.
- The company realized net losses primarily from the settlement of four debt investments after portfolio companies ceased operations or could not raise additional capital. Four debt investments were on non-accrual status at year-end, with cost of $72.5 million and fair value of $27.6 million.
- The company repaid the $42.6 million outstanding balance of the 2019 asset-backed notes in November 2023 and amended both the Key Facility and NYL Facility to increase or extend borrowing capacity and maturities.
- Equity funding increased net assets. The company raised $26.2 million through ATM sales and $38.9 million through a June 2023 follow-on offering. It issued 5.5 million shares in total, including shares issued under the dividend reinvestment plan.
- The Advisor was acquired by an affiliate of Monroe Capital on June 30, 2023. The new investment management agreement retained substantially the same economic terms, and a significant portion of the acquisition consideration is contingent on performance in 2023 through 2025.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or portfolio-growth guidance. Management stated that existing cash, operating cash generation and available credit-facility capacity were expected to be sufficient for working-capital and capital-commitment needs for at least the next 12 months. The company intends to continue monthly distributions, but distributions remain subject to Board approval, taxable income, asset-coverage requirements and borrowing restrictions.
- Credit and valuation risk: Most investments are privately held, below investment grade and valued using Level 3 models. Level 3 investments totaled $706.9 million, making NAV sensitive to credit ratings, discount rates, expected cash flows and portfolio-company performance.
- Portfolio-company funding risk: Many borrowers require additional equity or debt capital. Failed fundraises, bankruptcies, restructurings or collateral-value declines could cause additional realized losses.
- Leverage and refinancing risk: The Key Facility's revolving period ends June 22, 2024 and its maturity is June 22, 2026. The NYL Facility's investment period ends in June 2024 and its maturity is June 2029. The 2026 Notes mature in March 2026, and the 2027 Notes mature in June 2027.
- Unfunded commitments: The company had $180.5 million of unfunded commitments, including $138.0 million due within one year. These commitments may not be drawn, but could create liquidity needs.
- Non-cash income: PIK interest represented 7.4% of investment income, and 7.0% of interest and fee income was not received in cash. Such income can support taxable income and incentive fees without providing equivalent liquidity.
- Incentive-fee deferral: The fee cap and deferral mechanism reduced 2023 incentive-fee expense by $9.8 million. Deferred incentive fees subject to potential future recoupment totaled $10.8 million at year-end.
- Interest-rate sensitivity: Approximately 94% of debt-investment principal was floating rate. Based on the filing's sensitivity analysis, a 100-basis-point increase in rates would increase annual net assets from operations by approximately $5.3 million before the impact of incentive fees; a 100-basis-point decrease would reduce them by approximately $3.9 million.
- Subsequent events: Through February 2024, the company funded additional investments in Better Place Forests, Nexii and Ceribell. Nexii entered Canadian creditor-protection proceedings in January 2024, and HIMV sold BioVaxys-related intellectual property in February 2024 for $750,000 in cash, $250,000 of purchaser shares and potential earn-out payments.
Most important facts for investors to verify
- Reconcile the decline in NAV per share from $11.47 to $9.71 with the $1.37 per-share distribution and the realized and unrealized portfolio losses.
- Review the four non-accrual investments, particularly the gap between their $72.5 million cost and $27.6 million fair value, and assess potential additional losses.
- Evaluate the timing and refinancing plans for the Key Facility, 2026 Notes and other debt maturities, including the June 2024 end of the revolving or investment periods.
- Assess whether $75.7 million of cash and restricted cash, available credit capacity and expected collections are adequate against $180.5 million of unfunded commitments and scheduled debt obligations.
- Review the assumptions supporting the $706.9 million of Level 3 valuations, including hypothetical market yields, probability weightings and portfolio-company cash-flow forecasts.
- Determine how much of future distributions is supported by recurring cash interest versus PIK interest, fee accretion, prepayments or taxable-income spillover.
- Monitor the effect of the Monroe Capital ownership change on Advisor personnel, investment origination, fee arrangements, conflicts and allocation of co-investment opportunities.
- Verify post-year-end developments at Nexii, Ceribell, Better Place Forests and other stressed or non-accrual borrowers.