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 September 30, 2008.
Key Financial Metrics
| Metric | Amount (in thousands) |
|---|---|
| Total Assets | $675,003 |
| Total Investments (at value) | $636,747 |
| Net Assets | $402,690 |
| Net Asset Value (NAV) per Share | $12.25 |
| Cash and Cash Equivalents | $20,489 |
| Total Liabilities | $272,313 |
| Short-term Credit Facility | $127,900 |
| Long-term SBA Debentures | $127,200 |
| Net Investment Income (9 months) | $28,964 |
| Net Increase in Net Assets from Operations (9 months) | $31,933 |
| Net Income per Share (9 months, diluted) | $0.98 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investment portfolio value increased to $636.7 million from $530.0 million at December 31, 2007. This growth was driven by $291.6 million in funded debt investments during the nine-month period.
- Leverage Increase: Total borrowings increased significantly to $265.1 million from $134.3 million at year-end 2007. This includes a new $10 million draw on the Wells Facility and increased utilization of the SBA debentures ($127.2 million outstanding vs. $55.1 million).
- Operating Expenses: Operating expenses for the nine months ended September 30, 2008, rose to $24.9 million from $15.6 million in the prior year period. This 60% increase was primarily due to higher interest expense ($8.7 million vs. $3.0 million) resulting from increased debt balances and higher borrowing costs.
- Unrealized Gains/Losses: The company recorded a net unrealized depreciation of $2.0 million for the nine-month period, compared to a depreciation of $0.7 million in the prior year period. This was partially offset by net realized gains of $5.0 million.
- Credit Facility Expiration: The primary Credit Facility with Citigroup and Deutsche Bank expired on October 31, 2008, and entered an amortization period.
Guidance, Outlook, and Risks
- Market Conditions: Management notes that the U.S. capital markets are experiencing extreme volatility and disruption due to the financial crisis, leading to tightened credit and reduced liquidity. The company anticipates these conditions may persist.
- Liquidity Strategy: HTGC has determined to de-leverage its balance sheet in the short term to support liquidity. It plans to fund future activities through a combination of debt and equity capital, though access to capital markets remains uncertain.
- Dividend Outlook: The company estimates it will distribute approximately $1.32 per share in dividends for 2008. A dividend of $0.34 per share was declared for the quarter ended September 30, payable in December 2008.
- Key Risks:
- Financing Risk: The expiration of the Credit Facility without an extension significantly reduces borrowing capacity. The company must rely on the Wells Facility and SBA debentures, which may have higher costs or restrictive terms.
- Portfolio Performance: Deteriorating economic conditions could impair the ability of portfolio companies to repay loans, potentially leading to increased non-performing assets and realized losses.
- Valuation Uncertainty: Over 99% of the portfolio is valued at fair value by the Board of Directors due to the lack of active markets, introducing subjectivity into asset valuations.
Investor Verification Checklist
- Debt Maturity Wall: Verify the status of the Credit Facility extension and the company's ability to refinance the $127.9 million principal due by April 30, 2009.
- Asset Coverage Ratio: Confirm the asset coverage ratio remains above the 200% regulatory requirement (reported as 484% excluding SBA leverage) given the high leverage levels.
- Portfolio Downgrades: Review the increase in portfolio companies graded 3, 4, or 5 (25 companies total) and the specific performance of the one portfolio company on non-accrual status.
- Dividend Sustainability: Assess whether the estimated $1.32 annual dividend is sustainable given the rise in interest expenses and potential for future realized losses in a recessionary environment.
- Unfunded Commitments: Note the $141.8 million in unfunded commitments to portfolio companies and the company's liquidity position to meet these obligations.