Horizon Technology Finance Corp Q2 FY2024 earnings call

• Rob Pomeroy introduced the call, emphasizing the venture lending business, the experienced team, macro environment impacts, and optimism for Horizon's prospects.
• Dan Devorsetz discussed portfolio size reduction, funding activity, pipeline growth, stressed investments, and rating changes, noting the market for quality new venture loans was soft but pipeline was growing.
• Jerry Michaud spoke about the venture capital environment, VC investment activity, pipeline, and optimism for growth in the venture ecosystem.
• Dan Trolio discussed balance sheet strengthening, liquidity, operating results, net investment income, distributions, and NAV, highlighting efforts to enhance capital resources and solid operating results.

The portfolio size reduced to $647 million in the second quarter. Four debt investments totaling $11 million were funded, with one to a new portfolio company and the rest to existing ones. The onboarding yield was 13.7%, and the debt portfolio yield was 15.9%. As of June 30, warranted equity positions in 99 portfolio companies had a fair value of $29 million. The committed and approved backlog ended the quarter at $138 million. 88% of the fair value of the debt portfolio consisted of three and four rated debt investments, with 12% rated two or one.

• Expect portfolio growth to return starting in the third quarter.
• Pipeline is growing with quality new customer opportunities.
• Optimistic about the second half recovery in the venture ecosystem, with increasing market activity and a robust pipeline.

• Macro environment impacts on the recovery of certain stressed assets in the portfolio.
• Difficulty in completing rounds for some portfolio companies due to challenges in the funding environment, including delays in raising money or getting acquired.
• Limited exit opportunities affecting the VC ecosystem, which hampers VC fundraising and investment activity.

Q: This quarter, two rated loans went from one to four loans and one rated loans went from four to five. Could you talk a little bit about the reasons for some of the downgrades?

A: In the portfolio and market, it's challenging to get rounds completed. Some deals are in the process of raising money or getting acquired, but delays in commercialization, R&D, or multiple investors with different priorities can make rounds challenging. Most are a function of the macro funding environment.

Q: And you had also mentioned earlier that you guys are seeing more activity in markets. Are there any particular sectors in which you're starting to see more activity?

A: The pipeline is across sectors like technology, life science, healthcare services, sustainability. A lot of AI enabled technology and sustainability in healthcare and life science are being seen.

Q: In terms of the challenged companies in the portfolio, what has been the biggest challenge with some of these new non-accruals?

A: The lack of exit markets, lack of IPOs, and reduction in strategic M&A bleed into the willingness and capability of VC's to continue to fund across their portfolio. Exit markets drive a lot of behavior across the ecosystem.

Q: How should investors kind of, be thinking about earnings as we move forward? And if we get kind of recovery in M&A potentially less pressure on downward valuations, should we expect earnings to pick up from here, or how should we think about that?

A: The venture debt model assumes prepayments every quarter, and prepayments have been picking up. Earnings could fluctuate quarter-over-quarter based on prepayments.

Q: Maybe wanted to ask about some of the prepared remarks you made in terms of second half pickup, and trying to maybe size up what that could look like. Is it kind of, is it dependent on rate cuts, or a strengthening of the economy?

A: We've seen awards for over $160 million of total commitments, with a good portion potentially funding in Q3. If interest rates go lower in the second half, it could open up the VC ecosystem and better exits. We're optimistic about late-stage companies in our portfolio looking for exits.

Q: When we kind of think about - I mean, you all have been pretty proactive from a capital structure perspective, sitting on a bunch of cash. With those potential fundings, how should we think about the balance sheet, how will you use the cash to push it down? Will you continue to raise equity on the ATM? And/or would you draw some on the credit facilities to fund?

A: We'll use cash on the balance sheet first, then pull from debt capital, equity capital, and credit facilities as needed.

Q: On Bryce's question on leverage, what flexibility do you have to use cash to paydown the New York Life facility, or this Nuveen facility?

A: These are structured financings. There's more flexibility in the New York Life facility than in the Nuveen facility, but we have the ability to paydown and draw up again.

Q: Given you have some - all the extra cash and a lot of moving pieces, but any opportunity to buy your 2026, or 2027 notes from the market?

A: We have the opportunity, but the notes price fairly nicely, so it makes more sense to leave them out based on the spread between debt investments.

Q: Can you just tell me what percent of your companies in the portfolio, I guess, the sole lender in that company versus being a partner or lender perhaps?

A: Approximately 75% of our deals are senior in the cap table with no bank partner; there's a portion where we are partnered or sub to bank lending, primarily revolvers.