Hercules Capital, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report. Hercules is an internally managed BDC and RIC providing primarily secured loans to venture- and institutionally backed technology, life sciences, and renewable-technology companies.
Financial and portfolio highlights
| Metric | FY 2023 / Dec. 31, 2023 | FY 2022 / Dec. 31, 2022 |
|---|---|---|
| Total investment income | $460.7 million | $321.7 million |
| Net investment income | $304.0 million; $2.09 per basic share before gains/losses | $188.1 million; $1.48 per basic share |
| Net realized gains (losses) | $8.4 million | $(0.9) million |
| Net change in unrealized appreciation (depreciation) | $25.0 million | $(85.1) million |
| Net increase in assets from operations | $337.5 million; $2.32 per basic share | $102.1 million; $0.80 per basic share |
| Investment portfolio, fair value | $3.248 billion | $2.964 billion |
| Net assets / NAV per share | $1.803 billion / $11.43 | $1.401 billion / $10.53 |
| Cash provided by (used in) operating activities | $68.3 million | $(424.8) million |
| Available liquidity | $743.9 million, including $98.9 million cash and available facilities | Not provided here on a comparable basis |
| Debt principal outstanding | $1.570 billion | $1.594 billion |
| Regulatory asset coverage | 228.7% excluding SBA debentures; 214.7% including them | Not stated here |
- Income growth reflected higher average loan principal and higher benchmark rates. The reported effective yield on debt investments was 15.4% for FY 2023 versus 12.7% in FY 2022; core yield was 14.1% versus 12.3%.
- Net investment income was about 66% of total investment income in 2023. Net expenses rose to $156.6 million from $133.6 million, including higher debt costs, compensation, and general and administrative expenses. Weighted-average borrowing cost increased to 4.8% from 4.2%.
- About 95.9% of debt investments were floating-rate. Debt investments were 92.0% senior secured debt by portfolio fair value. The portfolio’s weighted-average investment grade was 2.24, compared with 2.23 at year-end 2022; grade 1 is the strongest and grade 5 represents significant expected principal-loss risk.
- Non-accrual investments were 1.0% of portfolio amortized cost, up from 0.6%. The filing reports one grade-5 investment with no fair value at year-end.
- Debt and fee repayments, including early payoffs, were approximately $975.9 million. Early payoffs alone were $925.1 million, compared with $373.3 million in 2022.
Changes, distributions, and financing
- Investment income rose 43% and net investment income rose 62% year over year. Operations benefited from the reversal of the prior-year unrealized depreciation: 2023 recorded $25.0 million of net unrealized appreciation versus $85.1 million of depreciation in 2022.
- The portfolio grew about 10% in fair value. Drug Discovery & Development remained the largest sector at 38.7%; Software was 23.6%, and Consumer & Business Services was 16.2%. These three sectors comprised 78.5% of portfolio fair value.
- Hercules issued 22.7 million common shares during 2023, raising approximately $338.2 million net, versus 14.6 million shares and $229.7 million net in 2022. Share count increased to 157.8 million from 133.0 million.
- Distributions declared totaled $1.90 per share in 2023, versus $1.97 in 2022; 2023 distributions were reported as ordinary income for tax purposes. Cash distributions paid were $273.7 million. The company reported estimated undistributed taxable earnings of $0.80 per share at year-end.
- Debt principal maturities included $105 million due within one year, $689 million in one to three years, and $776 million beyond three years. The $105 million July 2024 Notes maturity is a near-term refinancing or repayment item to monitor.
Outlook, risks, and unusual items
- Management said liquidity was adequate for near-term capital requirements and that it would continue monitoring macroeconomic and market conditions. The filing provides no formal earnings, yield, or portfolio-growth guidance.
- Management cited inflation, interest-rate volatility, banking-sector disruption, geopolitical events, and recession uncertainty. It said inflation had not materially affected results in the periods presented, while cautioning that future effects are uncertain.
- Credit and valuation risks are significant: about 97% of investments in securities were Level 3, and approximately 95.1% of total assets consisted of investments valued in good faith by the company’s valuation process. The auditor identified Level 3 investment valuation as a critical audit matter; actual realizable values may differ materially.
- Income includes non-cash PIK interest and accrued exit fees. PIK income was $24.7 million in 2023, and Hercules warns that taxable income may arise before cash receipt, potentially complicating distributions and RIC compliance.
- In 2023, realized gains were partly offset by investment write-offs, including debt write-offs associated with Codiak Biosciences and Esme Learning Solutions and equity/warrant write-offs. Early repayments also boosted accelerated fee income, which may not recur at the same level.
- Leverage magnifies gains and losses. The company had $155 million outstanding on floating-rate credit facilities and $1.415 billion of other term debt, principally fixed-rate, at year-end. Debt agreements include financial and operational covenants that can constrain distributions and operations.
- Subsequent event: on February 8, 2024, the Board declared a $0.40-per-share fourth-quarter distribution and a $0.32 supplemental distribution to be paid in four quarterly installments; $0.48 per share was scheduled for payment on March 6, 2024.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of year-end. The company reported that current legal matters were not expected to materially affect results, while noting outcomes cannot be assured.
Most important facts for investors to verify
- Whether portfolio-company repayments, defaults, non-accruals, and grade migrations change materially after year-end, especially in the concentrated life sciences and software exposures.
- How Level 3 valuation assumptions and significant portfolio marks compare with subsequent funding rounds, repayments, exits, or realized losses.
- Whether the $105 million July 2024 Notes maturity was repaid, refinanced, or otherwise addressed, and the terms and availability of credit facilities.
- Whether net investment income and cash generation support declared distributions, given non-cash PIK income, early-payoff volatility, and the company’s RIC distribution requirements.
- The dilution and per-share effects of equity issuance: shares outstanding rose substantially in 2023, and authorization for below-NAV issuance runs through July 20, 2024, subject to conditions.
- Whether the announced 2024 supplemental distribution and other subsequent distributions are covered by sustainable taxable income and cash flow.