Horizon Know-how Finance (HRZN) Q2 2022 Earnings Name Transcript

Horizon Know-how Finance (HRZN -0.52%)
Q2 2022 Earnings Name
Aug 03, 2022, 9:00 a.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Operator

Greetings, and welcome to the Horizon Know-how Finance Company second quarter 2022 earnings name. [Operator instructions] As a reminder, this convention is being recorded. It’s now my pleasure to introduce your host, Megan Bacon, director of IR and advertising. Please proceed.

Megan Bacon — Director of Investor Relations and Advertising

Thanks, and welcome to Horizon Know-how Finance Company second quarter 2022 convention name. Representing the corporate right now are Rob Pomeroy, chairman and chief govt officer, Jerry Michaud, president, and Dan Trolio, chief monetary officer. I want to level out that the Q2 earnings press launch and Kind 10-Q can be found on the corporate’s web site at horizontechfinance.com. Earlier than we start our formal remarks, I have to remind everybody that in this convention name, the corporate will make sure forward-looking statements, together with statements with regard to the long run efficiency of the corporate.

Phrases similar to believes, expects, anticipates, intends or related expressions are used to establish forward-looking statements. These forward-looking statements are topic to the inherent uncertainties in predicting future outcomes and circumstances. Sure elements may trigger precise outcomes to vary on a cloth foundation from these projected in these forward-looking statements. And a few of these elements are detailed within the danger issue dialogue within the firm’s filings with the Securities and Alternate Fee, together with the corporate’s Kind 10-Okay for the 12 months ended December 31, 2021.

The corporate undertakes no obligation to replace or revise any forward-looking statements, whether or not on account of new info, future occasions or in any other case. Right now, I want to flip the decision over to Rob Pomeroy.

Rob Pomeroy — Chairman and Chief Govt Officer

Welcome, everybody, and thanks to your curiosity in Horizon. As we at all times do on our quarterly calls, I’ll replace you on our efficiency and our present total working setting. Jerry will then focus on our enterprise improvement efforts, our portfolio occasions and our markets. And Dan will element our working efficiency and monetary situation.

We’ll then take some questions. At present, we’re reporting the outcomes of our robust efficiency within the second quarter regardless of a difficult macroeconomic setting. We hit on all cylinders within the second quarter, validating the facility of the lending platform of our advisor, Horizon Know-how Finance Administration. Our earnings exceeded our distributions for the quarter and first half of 2022, whereas we considerably grew our portfolio, maintained our credit score high quality and additional strengthened our steadiness sheet with a purpose to present ample capability to fund our development.

We’re retaining a watchful eye on the impacts of inflation, rising rates of interest and unstable markets on our portfolio, however we’re happy with our execution and leads to these difficult occasions. For the quarter, we generated internet funding earnings of $0.35 per share, above our distributions of $0.30 per share. Based mostly on our outcomes and outlook, we declared month-to-month distributions of $0.10 per share by the top of the 12 months, which is able to mark six straight years of month-to-month distributions at this degree. We maintained undistributed spillover earnings of $0.53 per share as of June.

We grew the portfolio by $62 million, one other quarterly file for HRZN, which resulted in a portfolio worth at quarter finish of $577 million. The Horizon model has gained important traction within the enterprise debt group and our advisor continues to achieve success in sourcing and successful high-quality enterprise debt investments. We completed the quarter with a file dedicated and accredited backlog of $221 million and a pipeline of alternatives of over $1 billion. This momentum out there gives us with the potential to be selective and disciplined as we glance to additional develop our portfolio.

We strengthened our steadiness sheet by issuing over $57 million of 2027 notes at 6 1/4%, additional growing our funding capability and reflecting our capability to boost capital in a difficult setting. As well as, throughout the quarter, we raised roughly $10 million of fairness capital at a premium to NAV by our at-the-market program. Because of this, we ended the quarter with over $120 million of liquidity. We achieved a portfolio yield on our debt investments of 14.2% for the quarter.

We ended the quarter with NAV of $11.69 per share, up $0.01 from March 31, 2022, and up $0.49 from the top of Q2 2021. And at last, we maintained a steady credit score profile with 96% of our portfolio rated three or increased as of June 30. As at all times, we’re persistently and actively managing our portfolio of investments to keep up its credit score high quality. Trying ahead, there continues to be very robust demand for enterprise debt inside our focused industries as evidenced by our dedicated backlog and pipeline.

We’re keenly conscious of the present setting and are prudent with respect to structuring and originating new high-quality investments. For the quarter, the advisor’s platform funded a file $192 million in new enterprise debt investments unfold all through our focused industries, together with a file $137 million funded by the general public firm. We imagine our advisor continues to construct us a portfolio with the chance for enhanced yields, using our advisor’s predictive pricing technique. This technique predicts our debtors’ early exits from refinancings and liquidity occasions and the extra earnings and accelerated earnings that we obtained from such occasions.

We’re happy with the staff efforts of our advisor, not simply over the primary half of the 12 months, however for all it has achieved over the previous few years to efficiently develop and handle its platform and our portfolio. Staff is stronger than ever, ready to handle the altering macro setting, and we imagine, effectively positioned to navigate by this setting and proceed producing sustainable development and profitability. With that, I’ll now flip the decision over to Jerry and Dan to provide you extra particulars and shade on our efficiency. Jerry?

Jerry Michaud — President

Thanks, Rob, and good morning to everybody. It was one other traditionally robust quarter of development for Horizon even within the face of more and more difficult macro setting. We grew our portfolio by $62 million within the quarter, a second consecutive quarterly file, and completed the quarter with a portfolio of $577 million. We funded 15 transactions totaling a file $137 million, together with $63 million in debt investments to seven new portfolio corporations consisting of 4 new life science investments, two new know-how investments and one new healthcare tech funding, offering additional diversification to our portfolio.

We additionally funded $74 million to eight of our present portfolio corporations. Our onboarding yield of 11.6% throughout the quarter mirrored the continued self-discipline in pricing transactions that we count on to supply robust internet funding earnings. We skilled three mortgage prepayments throughout the quarter totaling $57 million, which included a portfolio mortgage that we refinanced. The reimbursement charges and accelerated earnings from such prepayments contributed to a robust debt portfolio yield of 14.2%, as soon as once more among the many high of the BDC business.

Given the present macro setting, we anticipate prepayments for the rest of the 12 months could also be lighter than we’ve sometimes seen within the second half of prior years. As of June 30, we held warrant and fairness positions in 90 portfolio corporations with a good worth of $26 million. As we’ve persistently famous, structuring investments with warrants and fairness rights is a key facet of our enterprise debt technique and a further worth generator. Within the second quarter, we closed $203 million in new mortgage commitments and approvals and ended the quarter with a file dedicated and accredited backlog of $221 million in comparison with $151 million on the finish of the primary quarter.

Whereas there is no such thing as a assure we’ll fund all these transactions and our dedicated or awarded backlogs, we’re clearly effectively positioned to additional develop our funding portfolio within the second half of the 12 months. Our portfolio’s credit score high quality remained strong because the honest worth of 96% of our debt portfolio consisted of three and four-rated loans as of June 30, in line with our prior quarter finish. In the course of the quarter, one funding was downgraded to a two ranking and one funding was downgraded to a one ranking. On the finish of the quarter, we had a complete of 5 credit with a one or two ranking with the remaining 50 portfolio credit rated three or higher.

Because the quarter finish, one among our one rated credit, MacuLogix, offered its belongings and we obtained an preliminary money fee and fairness within the buying firm, in addition to potential future worth from the gathering of AR and royalty funds on future gross sales. Turning now to the enterprise capital setting. As anticipated, we noticed a discount in VC funding exercise in comparison with the record-setting complete prior 12 months. In response to PitchBook, roughly $62 billion was invested in VC-backed corporations within the second quarter of 2022, lower than the primary quarter however nonetheless a wholesome circulate.

VC fundraising momentum continued within the second quarter as $48 billion was raised, making it doubtless that final 12 months’s full 12 months fundraising file might be surpassed within the third quarter. Bigger VC funds continued to drive the majority of the fundraising. In the meantime, VC-backed exit exercise was markedly decrease given the present setting and the close to shutting of the IPO window. Whole exit worth for the quarter was $13 billion, the bottom quarter whole since 2016.

Whereas the financial setting and investor sentiment have clearly shifted within the first half of 2022, we once more notice that VC companies proceed to keep up file ranges of dry powder that will present liquidity for brand spanking new funding alternatives and assist for present portfolio of corporations. As is obvious in our current efficiency, the extreme tightening of the IPO market and important discount in SPAC exits is partially driving elevated demand for enterprise debt, a key supply of extra liquidity for development stage corporations. Whereas we count on demand for enterprise debt to stay robust within the second half of 2022, we additionally anticipate that VC companies will take part alongside most new debt investments with follow-on fairness fundings with a purpose to present extra liquidity and runway to achieve higher fairness and M&A markets. The VC group and enterprise debt group might want to work collaboratively to supply the required and acceptable funding to their portfolio corporations with a purpose to efficiently navigate by the present setting.

Based mostly on Horizon’s data and expertise and its long-standing and favorable place within the enterprise capital ecosystem, we count on to work carefully with the VC group to assist our portfolio corporations, in addition to fund new portfolio corporations. With our advisor’s robust and lively lending platform and the strong funding capability of Horizon, we imagine we’re effectively located to proceed competing and successful within the present setting. Subsequent to the top of the second quarter, we continued our development momentum funding 4 transactions totaling $38.5 million in July. Our dedicated, accredited and awarded backlog as of right now stands at $364 million, which incorporates new awards throughout July.

Our advisor’s pipeline of recent alternatives right now remains to be roughly $1 billion, amongst traditionally excessive ranges of alternatives to additional develop our enterprise portfolio over the approaching quarters. Trying forward, with an abundance of demand from enticing high quality corporations for enterprise debt options for which to develop our dedicated backlog and our advisor’s pipeline, we stay very conscious of the present setting and are happy to be able the place we will afford to be selective in making new investments. We additionally proceed to carry an lively and common dialogue with every of our portfolio corporations and their buyers with a purpose to handle our credit score high quality and establish adjustments within the VC ecosystem. Accordingly, due to such efforts, we imagine we stay effectively positioned to proceed to ship extra long-term shareholder worth.

With that, I’ll now flip the decision over to Dan.

Dan Trolio — Chief Monetary Officer

Thanks, Jerry, and good morning, everybody. In the course of the second quarter, we constructed on our efforts from the start of the 12 months and additional enhanced our capital sources. First, we elevated our lending capability by the issuance of $57.5 million of 2027 notes at 6 1/4%, which incorporates $7.5 million issued in early July from the train of the over-allotment. Second, by our ATM program, we efficiently and accretively offered 868,000 shares of inventory, opportunistically elevating over $10 million.

These actions present us with additional capability to develop the portfolio. Turning to our working outcomes. As of June 30, we had $123 million in accessible liquidity, consisting of $76 million in money and $47 million in funds accessible to be drawn below our present credit score amenities. As of June 30, there was $75 million excellent below our $125 million KeyBank credit score facility and $137 million excellent on our $200 million New York Life credit score facility, leaving us with ample capability to develop the portfolio.

Debt-to-equity ratio stood at 1.27 to 1 as of June 30, which was barely increased than our goal leverage of 1.2 to 1. However netting out our leverage with money on the steadiness sheet, our internet debt-to-equity ratio was one to at least one. Based mostly on our money place and our borrowing capability on our credit score amenities, our potential new funding capability at June 30 was $190 million. For the second quarter, we earned whole funding earnings of $18.6 million, a rise of 38% in comparison with the prior 12 months interval.

Curiosity earnings on investments elevated primarily on account of the next common incomes debt funding portfolio for the quarter. Our debt funding portfolio on a internet price foundation stood at $563 million as of June 30, a 13% improve from March 31, 2022. For the second quarter of 2022, we achieved onboarding yields of 11.6% in comparison with 11.4% achieved within the first quarter. Our mortgage portfolio yield was 14.2% for the second quarter in comparison with 14.7% for final 12 months’s second quarter.

Whole bills for the quarter had been $9.9 million in comparison with $7.3 million within the second quarter of 2021. Our performance-based incentive payment elevated to $2.1 million from $1.5 million for final 12 months’s second quarter. Our curiosity expense elevated to $4.2 million from $3 million in final 12 months’s second quarter resulting from a rise in common borrowings. Our base administration payment was $2.5 million, up from $1.8 million in final 12 months’s second quarter resulting from a rise within the common dimension of our portfolio.

Web funding earnings for the second quarter of 2022 was $0.35 per share in comparison with $0.26 per share within the first quarter of 2022 and $0.31 per share for the second quarter of 2021. The corporate’s undistributed spillover earnings as of June 30 was $0.53 per share. We anticipate that our bigger portfolio with our predictive pricing technique will allow us over time to generate NII that covers distributions. As we now have stated prior to now, we’ll expertise prepayments all year long, however the timing is tough to foretell.

To summarize our portfolio actions for the second quarter, internet new originations totaled $137 million, which had been partially offset by $5 million in scheduled principal funds and $65 million in principal prepayments and principal paydowns. We ended the quarter with a complete funding portfolio of $577 million. Given the macro setting, we’d count on portfolio development to normalize from the primary half of 2022 ranges. The portfolio consisted of debt investments in 55 corporations with an combination honest worth of $552 million and a portfolio of warrant and fairness and different investments in 91 corporations with an combination honest worth of $26 million.

Based mostly upon our outlook for 2022, our board declared month-to-month distributions of $0.10 per share for October, November, and December 2022. We’ve now declared month-to-month distributions of $0.10 per share for six consecutive years. We stay dedicated to offering our shareholders with distributions which might be coated by our internet funding earnings over time. Our NAV as of June 30 was $11.69 per share in comparison with $11.68 as of March 31, 2022, and $11.20 as of June 30, 2021.

The $0.01 improve in NAV on a quarterly foundation was primarily resulting from our internet funding earnings, partially offset by paid distributions and changes to honest worth. As we’ve persistently famous, 100% of the excellent principal quantity of our debt investments bear curiosity at floating charges with coupons which might be structured to extend as rates of interest rise with rate of interest flooring. As of June 30, over 90% of our portfolio will profit from extra will increase within the prime charge. This concludes our opening remarks.

We’ll be glad to take questions you’ll have at the moment.

Questions & Solutions:

Operator

[Operator instructions] Our first query comes from Paul Johnson with KBW. Please proceed.

Paul Johnson — KBW — Analyst

Yeah. Good morning, guys. Thanks for taking my questions. I’ve a number of for you this morning.

The primary is simply principally round development expectations sort of searching over the following 12 months or so. I do know you stated first half doubtless to not be as sturdy possibly as the primary half of this 12 months. However I imply, on a internet foundation, are we speaking about roughly sort of flat to no development for the BDC is what we may count on? Or do you assume there’s somewhat little bit of capability to proceed to develop the portfolio by the top of the 12 months?

Jerry Michaud — President

Paul, that is Jerry. Sure, I nonetheless assume there may be room for development. In case you take a look at our numbers on our dedicated backlog and what’s been awarded only recently, we definitely assume that the demand is there to proceed to develop the enterprise. However in fact, what we — what’s somewhat bit tougher to foretell is prepayments over the second half.

We do assume that they may sluggish. I believe we’ve been just about indicating that now for a few quarters, given the slowdown within the fairness markets and the choppiness of the setting on the whole. So I do assume there might be room for development, possibly not as sturdy because it was within the first half. We do have some potential prepayments right here within the second half.

We’ve a few corporations which might be effectively alongside within the SPAC course of, which if these transactions occur, we’d most likely get prepayments. After which, there’s a few others that had been additionally — there appears to be some indication that we is likely to be pay as you go over the second half. So there might be some prepayments. I do assume even with that, although, given our robust backlog, given robust demand from what we’re listening to within the market, we do assume there might be some degree — some alternative to proceed to develop the portfolio, however most likely not on the degree we did within the first half.

Paul Johnson — KBW — Analyst

Obtained it. And so far as just like the exercise that you just’re seeing, the demand for enterprise capital, how a lot of it might you say right here not too long ago within the second quarter and right now on the whole quarter thus far? I imply is that pushed by corporations basically seeking to sort of keep away from down rounds or decrease valuation fairness raises, which might be good corporations simply basically sort of in search of an extended runway versus sort of increased tax burn, doubtlessly earlier-stage corporations which might be simply, fairly frankly, simply in want of capital and already financing these sorts of corporations right now.

Jerry Michaud — President

Sure. In order that’s the fitting query, I believe. Most of what we’re seeing right now are — and I had talked about this and I needed to get a few of this into my feedback as a result of I believe it’s actually necessary based mostly on some articles that I’ve simply seen not too long ago, too. Enterprise debt in this type of setting doesn’t substitute fairness.

That’s not the thought. Now, to your level, and it’s a superb one, if it’s a high-quality firm with actually robust buyers and so they’ve demonstrated continued assist, that’s definitely one thing we’re excited about taking a look at and funding. A big quantity of what we’re seeing right now is we’re offering debt together with fairness. So sure, valuations are down.

VCs don’t wish to should put extra money than they should into a few of their portfolio corporations to get to a greater M&A market. However they’re nonetheless excellent corporations, and the VCs are going to proceed to assist them. And in reality, they’ve the power to do this due to the fundraising that the VC group has skilled over the past couple of years truly. So most of what we’re seeing is basically high quality corporations coming to the marketplace for each debt and fairness.

And people are the sorts of transactions that we’re — we clearly have a excessive degree of curiosity in, and that’s most of what we’re seeing. To your — to the second a part of that, corporations that want to boost capital, there’s been undoubtedly — VCs have undoubtedly put stress on their portfolio corporations to scale back prices, scale back burn and we’re seeing lots of that. For probably the most half, these will not be transactions that we most likely are ready to step as much as put debt in, in substitute of what ought to be some extra fairness. We’re not likely seeing that a lot of them both although, in equity.

So most of it’s a fairly robust market. It’s opportunistic, however the demand is so excessive. As we had talked about, we truly could be pretty selective and nonetheless meet what we hope to be our development numbers for the rest of the 12 months. However it’s a uneven market and we’re paying very shut consideration to what the VC group on the whole is doing.

We’re paying very shut consideration to particularly what enterprise capitalists are doing relative to our portfolio corporations and that’s guiding us relative to taking a look at new alternatives. And the very last thing I’d simply add is one — one other space we’re most likely staying away from is we’re not likely excited about refinancing debt that corporations have already got as a result of they most likely — on the time they bought the leverage, it was most likely OK. However given valuations have come down, we predict a few of these corporations are most likely over-leveraged at this level.

Paul Johnson — KBW — Analyst

Proper. Sure. Is sensible and recognize all the colour on that. My subsequent query is basically for having Jerry or Dan, both approach, simply has to sort of do with simply the marks on ebook this quarter.

Curious as to 1 / 4 the place we sort of count on to have NAV headwinds of mid-single digits, most likely not at increased finish for VCs with extra public fairness publicity. I perceive your fairness investments aren’t fairly as massive as a number of the different enterprise BDCs on the market. However are you able to simply sort of stroll us by sort of the way you guys take a look at the mark for this quarter for the belongings. And I’m additionally simply so far as the fairness investments go, seems like they had been marked increased this quarter.

Was there something specific in there that drove that?

Dan Trolio — Chief Monetary Officer

Sure, Paul, that is Dan. What we stated each quarter is for a enterprise debt portfolio, we take a look at the honest worth of every funding each quarter. There actually is nobody particular index that may permit us to take a good worth adjustment throughout the board for our asset class that basically wouldn’t be honest worth. And so, we undergo every funding on a quarterly foundation and based mostly on the data we now have on the time that we — up till the day we file, we regulate and make our honest worth adjustments.

And that’s mirrored within the Q. There have been our regular migration between two and one-rated and three and four-rated credit. So on the debt aspect, that has been mirrored within the honest worth. After which, sure, on the warrant piece, we don’t maintain a good portion of warrants in public fairness.

However you’re proper, the warrants portion of our honest worth did improve and that’s particular to handful of our offers. Our portfolio corporations had been in a position to increase fairness on this setting at a fairly important up spherical and that drove the rise within the honest worth that you just’re taking a look at.

Paul Johnson — KBW — Analyst

Obtained it. Recognize it. That solutions my query. I suppose final query I had, I apologize for therefore many questions.

I’ll get again within the queue after this. However it’s simply across the unfunded commitments, I imply we touched on this earlier the quarter. However how a lot visibility do you guys have across the unfunded commitments that’s constructing over the previous couple of quarters. I think about with all the brand new funding exercise that you just’ve had, sure, simply interested by how a lot visibility that you’ve got round any of that getting drawn down from quarter to quarter.

Jerry Michaud — President

Sure. So we even have some visibility as a result of an incredible portion of our dedicated backlog is predicated on corporations assembly sure milestones. And we all know based mostly on projections they’ve given us after they count on to fulfill these milestones. So we do have good visibility by way of when there can be a chance for the corporate to attract it down.

Now, whether or not they meet these milestones on this market, in fact, is definitely one thing that isn’t as most likely clear as it might be in a greater setting. So that can actually be the query is our firm is ready to meet their milestone necessities with a purpose to truly draw the capital. Now, we had a fairly lively second quarter in phrases should you take a look at the portfolio — present portfolio corporations that we funded. A few of these had been a results of corporations assembly milestones.

One firm, we truly refinanced the debt bundle. They raised a really important fairness spherical and we refinanced their debt bundle, which prolonged the runway for the corporate, together with the numerous fairness they’ve raised, and we had been additionally in a position to get our last fee pulled ahead. So it was truly an earnings occasion from that transaction as effectively. So it’s a little bit tougher to find out if milestones might be met, however we definitely have fairly good visibility when the expectation is that they’ll meet these milestones.

That’s not essentially a complete lot completely different than — even in a greater market, however in a greater market, we most likely have somewhat bit extra confidence that milestones can be met.

Paul Johnson — KBW — Analyst

Thanks for that. And thanks for taking my questions.

Operator

[Operator instructions] There are not any additional questions in queue at the moment. I want to flip the ground again over to Mr. Rob Pomeroy for closing feedback.

Rob Pomeroy — Chairman and Chief Govt Officer

Thanks all for becoming a member of us this morning. We recognize your continued curiosity and assist in Horizon. We hope you and your households proceed to stay protected and wholesome, and we sit up for talking with you once more quickly. It will conclude our convention name this morning.

Operator

[Operator signoff]

Length: 0 minutes

Name individuals:

Megan Bacon — Director of Investor Relations and Advertising

Rob Pomeroy — Chairman and Chief Govt Officer

Jerry Michaud — President

Dan Trolio — Chief Monetary Officer

Paul Johnson — KBW — Analyst

Extra HRZN evaluation

All earnings name transcripts