Horizon Technology Finance Corp Q4 FY2024 earnings call

Key Points

• 2024 ended with the portfolio growing for the second consecutive quarter, expected to continue in 2025. Net investment income in 2024 covered monthly distributions, but net asset value was lower due to stressed investments affected by ongoing issues in the venture capital ecosystem.
• Full year 2024 results: net investment income $1.32 per share, portfolio yield on debt investments nearly 16%, committed and approved backlog $207 million, net asset value $8.43 per share. Strengthened balance sheet with a $100 million senior secured credit facility with Nuveen, $20 million convertible debt offering, and over $66 million raised via ATM program.
• Board declared regular monthly distributions of $0.11 per share payable through June 2025. Advisor agreed to waive portion of quarterly income incentive fees if net investment income is less than distributions declared.
• Dan Devorsetz: Fourth quarter portfolio grew to $698 million, funded seven debt investments totaling $59 million and one equity investment of $2 million, with $55 million new debt to four new portfolio companies. Expect portfolio growth in Q1 2025.
• Jerry Michaud: VC investment environment in Q4 2024 was $75 billion, total for 2024 $209 billion, but exit markets need improvement. Life science exit markets active, M&A market more attractive. Horizon has $1.4 billion pipeline of opportunities.
• Dan Trolio: 2024 portfolio at $698 million, strengthened balance sheet with credit facility and convertible notes, raised over $66 million via ATM. Fourth quarter net investment income $0.27 per share, full year $1.32 per share. NAV $8.43 per share at year-end.

At the end of 2024, the portfolio stood at $698 million, up 2% from $684 million as of September 30, 2024. For the full year 2024, the company generated net investment income of $1.32 per share, covering regular monthly distributions. The portfolio yield on debt investments was nearly 16% for the full year, remaining near the top of the BDC industry. The committed and approved backlog ended the year at $207 million. The net asset value was $8.43 per share at year-end, with 91% of the fair value of the debt portfolio consisting of three and four rated debt investments, and 9% being 2 or 1 rated.

Forward-looking Statements

• Expect portfolio to continue growing in 2025.
• NAV expected to increase as macro environment improves and venture ecosystem recovers.
• Distributions expected to be covered by net investment income over time.

Risks Identified

• Ongoing stress in the venture capital ecosystem, tightened capital availability, muted IPO and M&A market, and continued pressure on portfolio company valuations.
• Uncertainty regarding the outcome of fundraising and exit for some portfolio companies, leading to fair value markdowns.
• Impact of federal government policies on life science companies, including uncertainty around drug pricing and regulatory approval.

Q: What are the key drivers to get from the $0.27 NII back above the $0.33 dividend rate?

A: When looking at NII projection, prepayments fluctuate each quarter. Fourth quarter was light on prepayments and associated fee income. Key drivers are harvesting prepayments and growing the balance sheet as done in past two quarters.

Q: What primarily drove the portfolio marks this quarter?

A: Primarily on debt investments due to continued fundraising and exit market challenges for some companies in the portfolio, with several in positions where markdowns were appropriate.

Q: What happened with Evelo Biosciences and income recorded in Q4?

A: Evelo was moved to another asset bucket. Any recovery is based on sale or contractual transactions, and there are expectations of further recovery in coming quarters.

Q: What was the outcome with Swift Health Systems?

A: It's not resolved, still in an extended fundraising process with ongoing capital raising efforts.

Q: How did Fed easings in Q4 affect yields?

A: The third quarter rate cut had a bigger impact in Q4. A little over 100 basis points move down last year, 43% of the portfolio is at or above prime rate, so further rate movement down will have smaller impact.

Q: How much did share repurchases add to Q4 NAV per share?

A: About $0.02. Remaining spillover was $1.06.