HTGC

Business Context and Reporting Period

Hercules Technology Growth Capital, Inc. (HTGC) is an internally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC). The company provides debt and equity growth capital to technology-related and life-science companies. This Form 10-Q covers the quarterly period ended March 31, 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Valuation: The total portfolio value decreased by approximately $48.5 million from December 31, 2008, primarily due to net unrealized depreciation of $5.9 million and early payoffs of $54.8 million, partially offset by new debt investments of $48.6 million.
• Debt Reduction: The company significantly deleveraged by paying off the entire $89.6 million balance of its Citigroup/Deutsche Bank Credit Facility on March 25, 2009. Total debt outstanding decreased from $216.8 million in Q1 2008 to $160.0 million in Q1 2009.
• Realized Losses: Unlike the prior year which saw net realized gains, Q1 2009 recorded a net realized loss of $1.1 million. This was driven by $1.8 million in realized losses on warrant sales, offset by $0.7 million in gains from equity sales.
• Unrealized Depreciation: Net unrealized depreciation increased significantly to $5.9 million compared to $0.9 million in the prior year, attributed to credit performance deterioration and market conditions affecting debt investments.
• Operating Expenses: Total operating expenses rose to $8.9 million from $6.6 million, driven by higher interest costs on the Wells Facility and increased legal and workout expenses.

Guidance, Outlook, and Risks

• Investment Strategy: Management continues a "slow and steady" investment strategy, focusing on established-stage and lower middle-market companies to manage credit risk in a challenging economic environment.
• Liquidity and Capital: The company maintains approximately $17.2 million in available borrowing capacity under the Wells Facility and $3.4 million under the SBA program. On May 5, 2009, the Board approved a $15 million share repurchase program.
• Dividends: A dividend of $0.32 per share was declared for Q1 2009, paid 90% in stock and 10% in cash to preserve liquidity. A subsequent cash dividend of $0.30 per share was declared on May 7, 2009.
• Risks: The filing highlights risks related to the severe economic recession, lack of liquidity in credit markets, and the potential for portfolio companies to require additional equity capital. There is also a risk of equitable subordination of loans if the company exerts control over portfolio companies.
• Covenant Amendment: The Wells Facility was amended effective April 30, 2009, to reduce the minimum tangible net worth covenant from $360 million to $250 million.

Investor Verification Checklist

• Debt Facility Status: Verify the current utilization and terms of the Wells Facility and SBA debentures following the payoff of the Citigroup facility.
• Portfolio Credit Quality: Review the investment grading distribution; 40.3% of the debt portfolio was graded 3 or lower (higher risk) as of March 31, 2009.
• Unrealized Losses: Assess the sustainability of the $5.9 million unrealized depreciation and its impact on future NAV.
• Share Repurchase Program: Monitor the execution of the newly authorized $15 million share repurchase program and its impact on share count and NAV.
• Dividend Sustainability: Confirm the company's ability to maintain dividend distributions given the shift to stock dividends and the current economic climate.