Finance

Horizon Expertise Finance (HRZN) Q2 2022 Earnings Name Transcript

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Horizon Expertise Finance (HRZN 3.60%)
Q2 2022 Earnings Name
Aug 03, 2022, 9:00 a.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Members

Ready Remarks:

Operator

Greetings, and welcome to the Horizon Expertise 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 BaconDirector of Investor Relations and Advertising

Thanks, and welcome to Horizon Expertise Finance Company second quarter 2022 convention name. Representing the corporate right now are Rob Pomeroy, chairman and chief government officer, Jerry Michaud, president, and Dan Trolio, chief monetary officer. I wish to level out that the Q2 earnings press launch and Type 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 longer term efficiency of the corporate.

Phrases similar to believes, expects, anticipates, intends or comparable expressions are used to establish forward-looking statements. These forward-looking statements are topic to the inherent uncertainties in predicting future outcomes and situations. Sure components might trigger precise outcomes to vary on a fabric foundation from these projected in these forward-looking statements. And a few of these components are detailed within the threat issue dialogue within the firm’s filings with the Securities and Trade Fee, together with the corporate’s Type 10-Ok for the yr ended December 31, 2021.

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

Rob PomeroyChairman and Chief Government Officer

Welcome, everybody, and thanks on your curiosity in Horizon. As we all the time do on our quarterly calls, I’ll replace you on our efficiency and our present total working surroundings. Jerry will then talk about our enterprise growth efforts, our portfolio occasions and our markets. And Dan will element our working efficiency and monetary situation.

We are going to then take some questions. Right this moment, we’re reporting the outcomes of our robust efficiency within the second quarter regardless of a difficult macroeconomic surroundings. We hit on all cylinders within the second quarter, validating the facility of the lending platform of our advisor, Horizon Expertise 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 so as to present ample capability to fund our development.

We’re conserving a watchful eye on the impacts of inflation, rising rates of interest and risky markets on our portfolio, however we’re pleased with our execution and ends in these difficult instances. For the quarter, we generated internet funding revenue of $0.35 per share, above our distributions of $0.30 per share. Primarily based on our outcomes and outlook, we declared month-to-month distributions of $0.10 per share via the top of the yr, which can mark six straight years of month-to-month distributions at this stage. We maintained undistributed spillover revenue of $0.53 per share as of June.

We grew the portfolio by $62 million, one other quarterly document 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 document dedicated and authorised backlog of $221 million and a pipeline of alternatives of over $1 billion. This momentum out there offers us with the aptitude 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 rising our funding capability and reflecting our skill to boost capital in a difficult surroundings. As well as, through the quarter, we raised roughly $10 million of fairness capital at a premium to NAV via 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 secure credit score profile with 96% of our portfolio rated three or increased as of June 30. As all the time, we’re persistently and actively managing our portfolio of investments to keep up its credit score high quality. Wanting 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 surroundings and are prudent with respect to structuring and originating new high-quality investments. For the quarter, the advisor’s platform funded a document $192 million in new enterprise debt investments unfold all through our focused industries, together with a document $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 revenue and accelerated revenue that we obtained from such occasions.

We’re pleased with the workforce efforts of our advisor, not simply over the primary half of the yr, however for all it has completed over the previous few years to efficiently develop and handle its platform and our portfolio. Staff is stronger than ever, ready to deal with the altering macro surroundings, and we imagine, effectively positioned to navigate via this surroundings 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 MichaudPresident

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 surroundings. We grew our portfolio by $62 million within the quarter, a second consecutive quarterly document, and completed the quarter with a portfolio of $577 million. We funded 15 transactions totaling a document $137 million, together with $63 million in debt investments to seven new portfolio firms 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 current portfolio firms. Our onboarding yield of 11.6% through the quarter mirrored the continued self-discipline in pricing transactions that we anticipate to supply robust internet funding revenue. We skilled three mortgage prepayments through the quarter totaling $57 million, which included a portfolio mortgage that we refinanced. The compensation charges and accelerated revenue from such prepayments contributed to a powerful debt portfolio yield of 14.2%, as soon as once more among the many high of the BDC business.

Given the present macro surroundings, we anticipate prepayments for the rest of the yr could also be lighter than we have usually seen within the second half of prior years. As of June 30, we held warrant and fairness positions in 90 portfolio firms with a good worth of $26 million. As we have persistently famous, structuring investments with warrants and fairness rights is a key side 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 document dedicated and authorised 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 are going to 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 yr. Our portfolio’s credit score high quality remained stable 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. Through 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.

For the reason that quarter finish, one in every of our one rated credit, MacuLogix, offered its property 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 surroundings. As anticipated, we noticed a discount in VC funding exercise in comparison with the record-setting complete prior yr. In response to PitchBook, roughly $62 billion was invested in VC-backed firms 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 seemingly that final yr’s full yr fundraising document 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 surroundings and the close to shutting of the IPO window. Whole exit worth for the quarter was $13 billion, the bottom quarter complete since 2016.

Whereas the financial surroundings and investor sentiment have clearly shifted within the first half of 2022, we once more observe that VC corporations proceed to keep up document ranges of dry powder which will present liquidity for brand new funding alternatives and help for current portfolio of firms. As is clear 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 firms. Whereas we anticipate demand for enterprise debt to stay robust within the second half of 2022, we additionally anticipate that VC corporations will take part alongside most new debt investments with follow-on fairness fundings so as to present extra liquidity and runway to succeed in higher fairness and M&A markets. The VC group and enterprise debt group might want to work collaboratively to supply the mandatory and acceptable funding to their portfolio firms so as to efficiently navigate via the present surroundings.

Primarily based on Horizon’s information and expertise and its long-standing and favorable place within the enterprise capital ecosystem, we anticipate to work intently with the VC group to help our portfolio firms, in addition to fund new portfolio firms. With our advisor’s robust and lively lending platform and the stable funding capability of Horizon, we imagine we’re effectively located to proceed competing and successful within the present surroundings. Subsequent to the top of the second quarter, we continued our development momentum funding 4 transactions totaling $38.5 million in July. Our dedicated, authorised 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. Wanting forward, with an abundance of demand from enticing high quality firms for enterprise debt options for which to develop our dedicated backlog and our advisor’s pipeline, we stay very aware of the present surroundings and are happy to be able the place we are able to afford to be selective in making new investments. We additionally proceed to carry an lively and common dialogue with every of our portfolio firms and their traders so as 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 TrolioChief Monetary Officer

Thanks, Jerry, and good morning, everybody. Through the second quarter, we constructed on our efforts from the start of the yr and additional enhanced our capital assets. First, we elevated our lending capability via 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, via 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 out there liquidity, consisting of $76 million in money and $47 million in funds out there to be drawn below our current 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. Primarily based 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 complete funding revenue of $18.6 million, a rise of 38% in comparison with the prior yr interval.

Curiosity revenue on investments elevated primarily on account of the next common incomes debt funding portfolio for the quarter. Our debt funding portfolio on a internet value 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 yr’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 price elevated to $2.1 million from $1.5 million for final yr’s second quarter. Our curiosity expense elevated to $4.2 million from $3 million in final yr’s second quarter because of a rise in common borrowings. Our base administration price was $2.5 million, up from $1.8 million in final yr’s second quarter because of a rise within the common dimension of our portfolio.

Internet funding revenue 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 revenue 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’ve mentioned up to now, we are going to expertise prepayments all year long, however the timing is troublesome 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 surroundings, we’d anticipate portfolio development to normalize from the primary half of 2022 ranges. The portfolio consisted of debt investments in 55 firms with an mixture honest worth of $552 million and a portfolio of warrant and fairness and different investments in 91 firms with an mixture honest worth of $26 million.

Primarily based 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 got 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 can be coated by our internet funding revenue 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 because of our internet funding revenue, partially offset by paid distributions and changes to honest worth. As we have persistently famous, 100% of the excellent principal quantity of our debt investments bear curiosity at floating charges with coupons which can 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 fee. This concludes our opening remarks.

We’ll be pleased to take questions you will have presently.

Questions & Solutions:

Operator

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

Paul JohnsonKBW — Analyst

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

The primary is simply mainly round development expectations form of searching over the subsequent yr or so. I do know you mentioned first half seemingly to not be as strong possibly as the primary half of this yr. However I imply, on a internet foundation, are we speaking about roughly form of flat to no development for the BDC is what we might anticipate? Or do you suppose there’s a bit of little bit of skill to proceed to develop the portfolio via the top of the yr?

Jerry MichaudPresident

Paul, that is Jerry. Sure, I nonetheless suppose there’s room for development. In the event you have a look at our numbers on our dedicated backlog and what’s been awarded only in the near past, we definitely suppose that the demand is there to proceed to develop the enterprise. However after all, what we — what’s a bit of bit harder to foretell is prepayments over the second half.

We do suppose that they’ll gradual. I believe we have been just about indicating that now for a few quarters, given the slowdown within the fairness markets and the choppiness of the surroundings basically. So I do suppose there might be room for development, possibly not as strong because it was within the first half. We do have some potential prepayments right here within the second half.

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

Paul JohnsonKBW — Analyst

Obtained it. And so far as just like the exercise that you simply’re seeing, the demand for enterprise capital, how a lot of it will you say right here just lately within the second quarter and right now basically quarter to this point? I imply is that pushed by firms basically seeking to form of keep away from down rounds or decrease valuation fairness raises, which can be good firms simply basically form of searching for an extended runway versus form of increased tax burn, probably earlier-stage firms which can be simply, fairly frankly, simply in want of capital and already financing these varieties of firms right now.

Jerry MichaudPresident

Sure. In order that’s the correct query, I believe. Most of what we’re seeing right now are — and I had talked about this and I wished to get a few of this into my feedback as a result of I believe it’s actually vital based mostly on some articles that I’ve simply seen just lately, too. Enterprise debt in this type of surroundings would not change fairness.

That is not the thought. Now, to your level, and it is a good one, if it is a high-quality firm with actually robust traders they usually’ve demonstrated continued help, that is definitely one thing we’re taken with 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 do not need to should put extra money than they should into a few of their portfolio firms to get to a greater M&A market. However they’re nonetheless excellent firms, and the VCs are going to proceed to help them. And actually, they’ve the power to try 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 absolutely high quality firms coming to the marketplace for each debt and fairness.

And people are the sorts of transactions that we’re — we clearly have a excessive stage of curiosity in, and that’s most of what we’re seeing. To your — to the second a part of that, firms that want to boost capital, there’s been undoubtedly — VCs have undoubtedly put strain on their portfolio firms to cut back prices, scale back burn and we’re seeing numerous that. For essentially the most half, these will not be transactions that we in all probability are ready to step as much as put debt in, in change of what must 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 is opportunistic, however the demand is so excessive. As we had talked about, we truly will be pretty selective and nonetheless meet what we hope to be our development numbers for the rest of the yr. However it’s a uneven market and we’re paying very shut consideration to what the VC group basically is doing.

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

Paul JohnsonKBW — Analyst

Proper. Sure. Is sensible and respect all the colour on that. My subsequent query is absolutely for having Jerry or Dan, both manner, simply has to form of do with simply the marks on e book this quarter.

Curious as to 1 / 4 the place we form of anticipate to have NAV headwinds of mid-single digits, in all probability not at increased finish for VCs with extra public fairness publicity. I perceive your fairness investments aren’t fairly as massive as a few of the different enterprise BDCs on the market. However are you able to simply form of stroll us via form of the way you guys have a look at the mark for this quarter for the property. And I am additionally simply so far as the fairness investments go, appears to be like like they had been marked increased this quarter.

Was there something specific in there that drove that?

Dan TrolioChief Monetary Officer

Sure, Paul, that is Dan. What we mentioned each quarter is for a enterprise debt portfolio, we have 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 actually would not be honest worth. And so, we undergo every funding on a quarterly foundation and based mostly on the data we’ve on the time that we — up till the day we file, we modify 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 do not maintain a good portion of warrants in public fairness.

However you are proper, the warrants portion of our honest worth did improve and that’s particular to handful of our offers. Our portfolio firms had been capable of elevate fairness on this surroundings at a reasonably important up spherical and that drove the rise within the honest worth that you are looking at.

Paul JohnsonKBW — Analyst

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

I will get again within the queue after this. Nevertheless 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 is constructing over the previous couple of quarters. I think about with all the brand new funding exercise that you have had, sure, simply inquisitive about how a lot visibility that you’ve round any of that getting drawn down from quarter to quarter.

Jerry MichaudPresident

Sure. So we even have some visibility as a result of a fantastic portion of our dedicated backlog relies on firms assembly sure milestones. And we all know based mostly on projections they’ve given us once they anticipate to fulfill these milestones. So we do have good visibility by way of when there can be a possibility for the corporate to attract it down.

Now, whether or not they meet these milestones on this market, after all, is definitely one thing that’s not as in all probability clear as it will be in a greater surroundings. So that may actually be the query is our firm is ready to meet their milestone necessities so as to truly draw the capital. Now, we had a reasonably lively second quarter in phrases in the event you have a look at the portfolio — current portfolio firms that we funded. A few of these had been a results of firms 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 capable of get our remaining fee pulled ahead. So it was truly an revenue occasion from that transaction as effectively. So it’s a little bit harder to find out if milestones might be met, however we definitely have fairly good visibility when the expectation is that they’re going to meet these milestones.

That is not essentially a complete lot totally different than — even in a greater market, however in a greater market, we in all probability have a bit of bit extra confidence that milestones can be met.

Paul JohnsonKBW — Analyst

Thanks for that. And thanks for taking my questions.

Operator

[Operator instructions] There aren’t any additional questions in queue presently. I wish to flip the ground again over to Mr. Rob Pomeroy for closing feedback.

Rob PomeroyChairman and Chief Government Officer

Thanks all for becoming a member of us this morning. We respect your continued curiosity and help 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]

Period: 0 minutes

Name contributors:

Megan BaconDirector of Investor Relations and Advertising

Rob PomeroyChairman and Chief Government Officer

Jerry MichaudPresident

Dan TrolioChief Monetary Officer

Paul JohnsonKBW — Analyst

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