Horizon Technology Finance Corporation
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good morning, and welcome to Horizon Technology Finance’s First Quarter 2013 Conference Call. Today’s call is being recorded. All lines have been placed on mute. We will conduct a question-and-answer session after the opening remarks, instructions will follow at that time. I would now like to turn the call over to Michael Cimini of The IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

[Michael Cimini:]

Thank you, and welcome to the Horizon Technology Finance first quarter 2013 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Chris Mathieu, Chief Financial Officer. Before we begin, I would like to point out that Q1 press release is available on the company’s website at www.horizontechnologyfinancecorp.com. Now, I’ll read the following Safe Harbor statement. During this conference call, Horizon Technology Finance will make certain forward-looking statements including statements with regard to the future performance of the company. Words such as believe, expect, anticipate, intend, or similar expressions are used to identify forward-looking statements. These statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on material basis from those projected in these forward-looking statements, and some of those factors are detailed in the risk factor discussion in the company’s filings with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2012. The company undertakes no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. At this time, I would like to turn the call over to Rob Pomeroy.

[Rob Pomeroy:]

Good morning, and thank you all for joining us. Today, I would like to cover the following areas that impact both the quarterly and the long term performance of Horizon. I will speak to loan origination, portfolio growth, credit quality, components of net investment income and dividend coverage. Our goal continues to be to provide detail and transparency about our results to our investors. In April, we provided our quarterly portfolio update and added detail about the prepayments and normal amortization that incurred in the first quarter. We will continue to provide this detailed information on a quarterly basis. Horizon is a direct originator of loans and we are proud of our ability to find, propose, win and close high quality investments that meet our strict underwriting requirements. In the first quarter, we funded $28.5 million in new loans to seven borrowers. This is strong execution especially considering the traditional slowness of the first quarter and the record level of new loans that we closed in the fourth quarter and the record level of new loans that we closed in the fourth quarter. There were no refinanced balances included in the $28.5 million and we received no early payoffs during the quarter. After deducting $10 million in normal loan amortization, our loan portfolio grew by $19 million to a record $239 million at March 31. A high portion of the new loans were funded late in the quarter and the positive impact of these new loans on net investment income will be realized in the coming quarters. Early payoffs are a normal part of the Horizon lending model and a source of pre-payment fees, increased interest income from accelerated recognition of commitment themes and end of term payments and return of capital for future reinvestment. The Horizon Venture lending model has a higher incidence payoffs than many other BDC due to the dynamic nature of development stage portfolio companies. During 2012, Horizon refinanced or received prepayments more than $87 million in loan balances on an average portfolio of $188 million. We expect that our portfolio will experience a significant number of prepayments during any 12-month period. The timing and level of these prepayments are not within our control. In the first quarter, we had no really prepayments although three companies had notified us that they might prepay in the quarter. Two of those prepayments have already occurred in the current quarter, generating approximately $230,000 in prepayment fees. The return capital will be deployed in the second quarter. I would like to now turn our attention to credit quality. Horizon has had an excellent credit history with accumulative realized loss percentage of less than 1% on over $500 million in loans originated over the five-year life of the company, which equates to less than 0.2% in annualized losses. Since inception, we have recorded more than $7 million in realized warrant games resulting in net realized gains of approximately $2 million. No new loans on non-accrual during the first quarter. In the aggregate, the carrying value of the existing loans on non-accrual remained relatively unchanged from year-in. The most significant loan on non-accrual is to Satcon Technologies which has been written down to zero. The Satcon loss is included in the loss experience I just mentioned. In the first quarter, we received scheduled payments of approximately $560,000 on one of the loans on non-accrual. The other loan on non-accrual is in an orderly liquidation process with an ultimate disposition expected by year-end. In the normal course of our portfolio management, we rate our loans on a 4-point scale. At any point in time, we will either upgrade our loans for strong performance to a four rating from the standard three or downgrade them to a two for underperformance. These adjustments are made at the end of each quarter based upon management’s extensive experience and venture lending and on information known at the time of the review. These are young dynamic companies and their circumstances often change quarter-to-quarter, month to month. During the first quarter of 2013, we changed three accounts to a two rating. At the quarter end, each of these accounts needed to raise additional capital. We are pleased to report that all three of these companies have raised capital during April and we believe their prospects are improving. Horizon has traditionally had between 2% and 14% of our loan portfolio at fair value rated as one or two credits. Loans that are downgraded to two are not expected to incur loss of principal. Loans that are downgraded to a one rating have a higher risk of loss of principal and their carrying values reflect that risk. As of March 31st, 90% of the loan portfolio was performing at or better than our expectation and are rated either a three or a four. I would now like to speak to the key drivers behind our net investment income. The primary driver is topline interest income. Interest income is comprised of the loan coupon, commitment fees and end of term of payments or ETPs. We measure the profitability of each new loan based upon these combined components, not just the coupon. The yield of our new loans is a key driver which impacts the overall portfolio yield. The weighted average yield of the new loans made in the first quarter was 12.9%, consisting of an average coupon of 11.4% augmented by commitment fees that add 0.4% in yield and ETPs that are expected to add an additional 1.1%. We plan to provide information on the make-up of our yield on a quarterly basis going forward. Our stated portfolio yield on a quarter-to-quarter basis consist of loan coupon, commitment fees, ETPs, plus prepayment fees divided by the weighted average loan portfolio outstanding for the quarter. In the first quarter, our portfolio yield of 12.8% was comprised entirely of interest income, commitment fees and ETPs as we had no prepayment fee income. Another key driver of our profitability is the positive impact from leverage. By the end of the first quarter, our leverage was 0.8 to 1. With leverage, we can take advantage of the positive spread between the high yield of our portfolio and interest expense to achieve higher net investment income. Although the impact to this increased leverage was not significantly reflected in our first quarter results because many of our loans funded late in the first quarter, the impact of increased leverage should be found in the second quarter and future quarters. Finally, I would like to speak to dividend coverage. In November 2012, we changed our dividend policy to one where the dividend will be covered by net investment income over time. In the fourth quarter, we earned $0.36 per share and declared monthly dividends totaling $0.34 per share payable during the first quarter. In the first quarter, we earned $0.29 per share and declared monthly dividends totaling $0.345 per share, payable during the second quarter. We expect that the expanded portfolio and increased leveraged obtained in the first quarter, together with the additional income or the prepayments already earned during the second quarter. An additional prepayment anticipated in future quarters will produce net investment income that more than covers our dividends over time. Accordingly, on May 3rd, we declared monthly dividends $0.345 per share payable during the third quarter. In summary, the first quarter was a good quarter in which we were focused on the key drivers in our business with an eye toward long term success. Gerry and Chris will now provide more detail on the market and our financial performance. Gerry?

[Gerry Michaud:]

Thanks, Rob, and good morning everyone. Our marketing activity for the first quarter underscores the ongoing demand for our venture debt product with particular strength in the technology and medical device sectors. In highlighting our performance for the first quarter, we grew our portfolio by 8.4% from $229 million at the end of the fourth quarter to $248 million. We funded seven companies, totaling $28.5 million. We added five new companies to our portfolio which increased the total number of companies in which we owe warrants to 66, an increase of 37% as compared to March of 2012. Of note, one of our portfolios like Science Company has filed for an IPO, and last week, set the price range of their offering. Importantly, the five new company transactions we funded in Q4, which represented $21 million of the $28.5 million funded, had an average onboarding yields of 13.2% compared to 12.6% for the seven new companies transactions added in fourth quarter. Onboarding yields consist of interest rate on the transaction, commitment fees and ETPs but it does not include expected gains from warrants, prepayment fees or acceleration income from ETPs. We also increased the amount of our investment in warrant positions in two of our existing portfolio companies. In the first quarter, we made five new loan commitments totaling $25.5 million. Our approval and committed backlog stood at $15.6 million to 10 companies. Although there can be no assurance the transactions early in evaluation will result in commitments, our pipeline remain strong with more than $200 million of new opportunities being evaluated. Subsequent to our investment portfolio update press release issued on April 3rd, we have been awarded five new transactions totaling $31 million and funded three transactions totaling $6.5 million from our committed backlog. Today, our approved and committed backlog totals $35.2 million to 11 companies. Including prepayments of $10.3 million already received in the second quarter, we expected net portfolio growth for the second quarter may be in the range of $5 million to $10 million. Turning to our core market sectors, we continue to see attractive lending opportunities to well sponsored technology companies, especially in the markets, have media and ad technology platforms, cloud computing, mobile device and specialty Internet businesses. We are also seeing attractive financing opportunities in medical device, as well as increased opportunities in healthcare and information service companies. Our active pipeline in these markets has contributed to our success in maintaining our pricing discipline in a very competitive marketplace as demonstrated by the attractive pricing we obtained on the five new investments we funded in the first quarter. Since going public in 2010, our transaction pipeline has been consistently robust, which has been a major factor in our ability to select the best investment opportunities available in the market each quarter. In the drug discovery market, we continue to see strong competition, which had led to downward pressure on interest rate and logic transaction sizes. As a result, we are focused on prior earning with other lenders to mitigate concentration risks and we have remained disciplined in pricing and structuring opportunities in the life science market based on our 20 years of experience in financing life science companies. We remain cautious in our approach to investing in the clean tech sector. For the balance of 2013, we will continue to evaluate the progress achieved in our existing clean tech investments, as well as monitor new investments by VC firms before taking a more proactive role in this sector. We continue to see an increase in investment activity within the healthcare information and services sector. During the first quarter, we funded one transaction for $7 million in this market as more companies seek to capitalize on the significant opportunities to increase overall efficiencies in delivering healthcare and to improve patient outcomes. We believe this market is poised for further growth during the remainder of 2013 and into 2014. As it relates to VC investment activity in the quarter, we continue to see a decline of VC investment by venture capital firms in the first quarter. Total VC investment in the first quarter was down 11% to approximately $6.4 billion from $7.2 billion during the fourth quarter, reflecting a continuing decline which started in Q1 of 2012. You see the primary cause of declining investment by VCs as twofold. First, VCs need to reserve more of their capital for follow-on investment in the existing portfolio companies as a result of the less-than-robust or predictable M&A and IPO markets. And second, we have seen a significant reduction of VC firms coming out of the 2008, 2009 economic downturn. So there were a fewer, albeit stronger VCs trying to process increasing demand by entrepreneurs for capital. The effect of declining VC investment is less capital available for startups and early stage companies, as VC remained focus on moving existing portfolio companies to an exit. Until there is a changeable improvement in M&A or IPO activity, we believe that there will continue to be muted investment and early-stage companies by VCs, especially in those companies that require significant amounts of capital to develop their technology. On a positive note, VC fundraising seems to have stabilized based on first quarter fundraising activity of approximately $4.2 billion, which is consistent with the annualized fundraising amounts for approximately $20 billion for 2011 and 2012. Lower investment levels by venture capital firms translate into more demand and more opportunities for venture debt financing, which we believe provides for a favorable outlook for venture loan demand during 2013. As a result, we expect demand for venture loans to continue to be very strong during 2013, especially for later stage companies. While we believe this bodes well for Horizon for the balance of 2013, we will carefully watch loan-to-value and loan-to-equity ratios to ensure that we are maintaining a high quality loan portfolio for our stockholders. In Q1 of 2013, there were only eight IPOs of VC-backed companies which raised $672 million. This is a 52% decline from the fourth quarter of 2012 and a 60% decline from the first quarter of 2012, as reported by the National Venture Capital Association. News is not all bad on the IPO front, however, as seven of the eight IPOs completed in the first quarter have traded up since going public. We agree with the National Venture Capital Association forward that IPO activity should begin to increase significantly during the balance of 2013 for three reasons. First, we believe investors would act favorably to the price performance of the companies that went public in the first quarter. Second, with the stock market reaching record highs, investors are going to start to look for opportunities and new offerings, where they believe there may be considerable stock price appreciation, especially for growth-oriented companies. Third, in order for there to be great demand for new IPOs, there has to be a significant spike of growth-oriented companies positioned to fill the demand. And we see within our own pipeline and portfolio many companies that have demonstrated strong growth over the last three years and are well-positioned for a public offering. According to PwC, 41 companies entered the IPO registration process in the first quarter of 2013, a 41% increase from the 29 companies that entered the pipeline in the fourth quarter of 2012. In addition, there was a dramatic increase in the number of companies that completed IPOs under the JOBS Act from the first quarter. Since many of these companies are growth-oriented technology companies, we believe the pipeline for IPOs during 2013 may be understated as these IPO filings do not need to be made public until just before they reach the market. M&A activity was also down in the first quarter of 2013, with acquisitions of $4.3 billion, representing a 44% decrease in M&A activity compared to the fourth quarter of 2012. Again, we believe the news here is not all bad as well. Many corporate buyers have been sitting on the sidelines waiting for M&A prices to bottom out over the last two years. However, we believe there’s more venture capital backed companies filed for IPOs, and those IPOs successfully trade up in the public market. Corporate buyers of technology companies will no longer have the luxury of sitting on the sidelines and will begin to aggressively pursue M&A activity during 2013. We witnessed a similar scenario play out within our own portfolio in 2011 when corporate buyers of medical device companies felt compelled to complete a number of M&A transactions as a defense against a favorable IPO market for medical device companies. Turning to competition. A number of our competitors raised significant amounts of equity and debt during 2012, and we are seeing a significant supply of capital in the marketplace today, which is putting more pressure on pricing and structures. As we consider how to continue to successfully complete in a very competitive marketplace in 2013, we believe our strong pipeline of opportunity withstands at over $200 million today and our anticipated funding requirements during 2013 put us in a strong position to carefully select venture loan opportunities that meet our pricing, structuring, and underwriting criteria. We expect to originate approximately $20 million to $35 million in new venture loans each quarter in 2013. Given our very strong brand name, long-term relationships with market leaders and our core tech targeted markets, and experienced managing directors, we expect to continue to have a significant market advantage in 2013. Our market advantage will continue to allow us to compete favorably and meet our expected funding goals, while maintaining both the quality of our portfolio and attractive pricing. With that update, I will now turn the call over to Chris.

[Chris Mathieu:]

Thanks, Gerry, and good morning, everybody. I’d like to turn your attention now to Horizon’s first quarter financial performance. Our consolidated financial results for the three months ended March 31st, 2013 have been presented in our earnings release distributed after the market closed yesterday, and we also filed our Form 10-Q with the SEC last night. Our total investment income for the first quarter of 2013 was $7.4 million compared to $6.6 million for the first quarter of 2012. This increase of 11.2% was primarily due to the increased average size of our loan portfolio, partially offset by lower fee income as they were no longer prepayments during the first quarter of 2014. Substantially, all of the $7.4 million in investment income for this quarter was earned from interest income, which included $1.2 million from the amortization of origination fees and end-of-term payments from our loan portfolio. Total investment income of $6.6 million for the first quarter of 2012 consisted of $5.9 million in interest income, which included $1.1 million from the amortization of origination fees and end-of-term payments, as well as fee income of $700,000 from prepayment fees on loans with four portfolio companies. We continue to believe that loan prepayments are unpredictable and are therefore best measured over a 12-month period to better assess their impact on NII and dividend coverage over time. Our weighted average portfolio yield was 12.8% for the first quarter compared to 5.4% for the first quarter of 2012. The portfolio yield for the first quarter of 2013 reflected a lower than usual level of loan prepayment activity, while the first quarter of 2012 reflected a higher than usual level of prepayment activity recorded during that period. The company’s total expenses were $4.6 million for the first quarter of 2013 as compared to $3.3 million for the first quarter of 2012. Total expenses for each period consisted of interest expense, management incentive and administrative fees, and, to a lesser extent, professional fees and G&A expenses. Interest expense increased quarter-over-quarter primarily due to the increase in the average borrowings outstanding, as well as an increase in borrowing cost associated with our Fortress facility and our senior notes. The effective rate for the debt outstanding as of March 31st, 2013 is 5.9%. In addition to the interest rate on our borrowings, we have debt issue costs that continue to be amortized over the term of our borrowings. Including the impact of these issue costs and ongoing facility non-used fees, the combined effective rate is 6.8%. The combined earned net investment income of $2.8 million or $0.29 per share for the first quarter of 2013. It compares to $3.4 million or $0.44 per share for the first quarter of 2012. Although we did not receive any realized warrant gains in the first quarter, we believe our expanding investment portfolio, which now includes warrant positions in 66 portfolio companies at March 31st, provides a potential to realize significant gains in the future. For the first quarter of 2013, the net unrealized appreciation on investments was $400,000 compared to net unrealized depreciation on investment for the first quarter of 2012 of $800,000. For both periods these amounts reflect the net change in fair value of both our debt and warrant investments. For the first quarter of 2013 and 2012, we increased net assets from operations by $3 million or $0.31 per share and $2.5 million or $0.33 per share, respectively. Our net asset value at March 31st, 2013 was $15.12 per share or a decrease of $0.03 per share compared to December 31st. This change in NAV is due to declaring total dividends in the quarter of $0.345 per share compared to the net increase in net assets resulting from our operations in the quarter of $0.31 per share. Overall, the asset quality remains good, with approximately 90% of the total fair value of the loan portfolio at the end of the quarter performing at or better than expectation. At the end of the first quarter of 2013, the loan portfolio had a weighted average credit rating of 3.1 compared to an average credit rating of 3.2 at the end of the first quarter of 2012. Our investment portfolio at March 31st included 49 secured loans with an aggregate fair value of $239 million, and warrant positions in 66 portfolio companies with a aggregate fair value of $6 million. Horizon entered the first quarter with approximately $34 million in available liquidity, including cash and short-term investments totaling $4.6 million, as well as $29.4 million in funds available under existing credit facility commitments. As of March 31st, our Wells facility with a current commitment of $75 million had a total of $67 million outstanding as we continue to utilize this facility to provide leverage for both new and existing investments. Our delayed draw term loan credit facility of $75 million with Fortress Credit had a total of $10 million outstanding as of March 31st. This facility, which provides for a two-to-one advance rate on eligible loans, increases our ability to fund more second-lien transactions and further diversify our portfolio. We are currently exploring opportunities to drive down our overall debt costs on our existing credit facilities and identifying other sources of credit in the market for the benefit of our stockholders. We will provide updates on our progress during the rest of 2013. As of March 31st, our leverage was 0.8 to 1, in line with our target leverage. We are now beginning to enjoy the benefits of our higher leverage with favorable contributions to NII and improved returns on equity. With a venture loan portfolio, we have the advantage of a significant level of normal, contractual, monthly loan principal payments, which create a natural de-leveraging of our portfolio. This de-leveraging allows us to frequently evaluate our total leverage as we manage the overall size and make-up of the portfolio. We continue to monitor both the equity and debt markets and expect to opportunistically and subject certainly to market conditions raise additional capital as needed to support the company’s future growth and enhance long-term shareholder value. Now, I’d like to turn the call back to Rob.

[Rob Pomeroy:]

Thank you, Chris. We’re pleased by our start to 2013. Our focus remains on executing our investment strategy that has enabled Horizon to generate attractive risk-adjusted returns since inception. With a high-quality portfolio of venture loans yielding between 11% and 14%, combined with the opportunity to benefit from further upside via warrants, we are well positioned to strengthen Horizon’s leading industry reputation and drive long-term shareholder value. Before we open the floor for questions, I would like to note that we plan to hold our next conference call to report second quarter results during the week of August 5th, 2013. We’ll have happy to take questions you may have at this time.

[Operator:]

Thank you sir. (Operator instructions) All right, and our first question will come from the line of Robert Dodd with Raymond James. Please go ahead. Your line is now open.

[Robert Dodd:]

Hi, guys. A couple of questions about the stressed part of the portfolio. If we look at the non-accruals, can you give us any color you have on when you expect those issues to be resolved? I think you mentioned, so I’m guessing, I think ACT should be done by the end of the year. But any color on Satcon and/or solar plus [ph]?

[Rob Pomeroy:]

So Satcon is in Chapter 7 bankruptcy liquidation. The reports are not a lot of progress, honestly, Robert, during the first quarter. We’re at the whim of the bankruptcy court, but would expect that it would play out in the next quarter or two.

[Robert Dodd:]

Great, perfect. Just looking at kind of the risk category to the next step-up assets, I mean, those are substantial increase there from Q4 where you had Tengion, seen one of the new ones as before, and that group is Celsion. Can you give us any color – obviously in the Tengion last quarter, you said you thought it was very low risk that it would go to non-accrual. Celsion to me looks like it’s pretty low risk as well, it’s got issues. Any color on the other two about what you think the probably of that $18 million fair value or some portion of that actually making it down on to the non-accrual list?

[Rob Pomeroy:]

Actually, Celsion is not one of the two.

[Robert Dodd:]

Okay.

[Rob Pomeroy:]

The other two rated companies needed to raise capital, as I said in the text of the conference call. At the time that we rated them at the end of the quarter, all three of the companies actually did raise capital during April, which is a positive sign. Certainly not out of the woods yet. We will continue to monitor them. Yes, it’s higher than in 12/31, but I tried to emphasize that it’s well within the range that we’ve operated before. Our companies have traditionally over time been downgraded to twos because of how they’re performing and plan or they need to raise cash quite often, upgraded back to three or find a way to repay us. And so, sticking to our netting and normal procedures, we felt the need to rate these as twos at the end of March and we will continue to rate these as we evaluate them at the end of each quarter.

[Robert Dodd:]

Okay, great. That’s helpful. Last one if I can, on the campus sort of Wells versus Fortress, when you put the Fortress facility in place, as you mentioned on the call, it gives you more flexibility on some of the second-lien buckets, et cetera. It doesn’t seem – obviously, I mean, you haven’t used that much of the facility. So is that indicative that you’ve gone much more away from – I don’t want to call them lower quality assets – but the type of assets you expected to be using, or I mean, originating when you put the Fortress facility in place? Give us any color there. Because it seems, frankly, for a relatively pricey facility getting underutilized at this point.

[Chris Mathieu:]

Right. Yes, so that’s a good question. Essentially, the fundings that we had, to the extent that they are available to be funded under the Wells facility, we will use that facility as it is a cheaper overall cost of capital even with the non-used fees of the Fortress facility in place. So we’ve always aligned the use of our leverage commitments to always fund under the lowest cost of capital. And we’ve had funding timings where our first-lien type transactions have funded sooner. We certainly have some of our second-lien business in the second quarter have funded, but we’ve been able to enjoy the fundings under the Wells today.

[Robert Dodd:]

Okay, thank you.

[Operator:]

Thank you, sir. Our next question will come from the line of Troy Ward with KBW. Please go ahead. Your line is open.

[Troy Ward:]

Thank you and good morning.

[Rob Pomeroy:]

Good morning.

[Troy Ward:]

Guys, just real quick. Can you talk about – you spoke about the public, the IPO market and how the IPOs have gone public, have done well, and your hope maybe that you can see some increased activity there. As I look at your portfolio, by my count, you have 10 companies right now that are public. But if you look at kind of your total exposure to those companies in the $35 million, a couple of your non-accruals fall in there. So your actual public fair value is marked about $0.83 on the dollar. How do you view – I guess how should shareholders view the public exit as the right channel and how do you view it going forward? Is it just an anomaly that your public companies right now haven’t performed as well? Do you still think that’s the right and most likely exit channel?

[Gerry Michaud:]

Yes, it’s actually a pretty interesting observation. There are two kinds of IPOs that get done in our market. One essentially is just another vehicle for financing the company. In other words, it’s not really an exit for either investors or, necessarily, lenders. However, what we’re seeing today is, for the first time in a long time, and actually for the first time in a very long time, forward-looking pretty bullish on both M&A and IPO activity in our market. This is something that I think has been a drag on the overall market for quite a while now. So as you look at the companies that had gone public in the past, most of those in fact were – with the exception of Pharmasset, which we had a very solid exit on – most of those in fact were just essentially financings. Now, I think it’s really important to point out that Satcon is obviously in that group and Satcon was a company we actually financed, I believe, after it had gone public, and the market cap from that company actually grew significantly from the time we did the financing right through the end of 2011, before the solar panel market kind of disintegrated on us. So that one, I think, if you take that out of the equation, it changes those numbers quite a bit. But what I’m talking about is I talked about the IPO market going forward and M&A is a really positive market and a really uptick in valuations, and that’s something we haven’t seen in quite awhile. So for the first time in quite awhile, we’re pretty optimistic about that and we actually think that there’ll be some good results certainly during the second half of 2013, maybe even this quarter, but maybe certainly in the second half of 2013. We’re actually looking to some very positive results in the marketplace.

[Troy Ward:]

Great, that’s good color. Thanks. And, yes, clearly, there’s selection bias here because maybe some of the positive public entities that you’re involved with, you could already have exited at a gain. So one last question. On the guidance, kind of the expectation for quarterly originations, could you repeat that? Did you say $20 million to $35 million or $20 million to $25 million.

[Gerry Michaud:]

I think I said $20 million to $35 million.

[Troy Ward:]

Okay, that’s what I had. And then can you just provide kind of what assumptions kind of go behind that? From a funding perspective, how do you view your ability to raise additional capital funding? And, I guess, what are the options if that funding is not available? How do you intend to run the company if you aren’t going to be able to fund your portfolio?

[Rob Pomeroy:]

What we really think about is net portfolio growth, and since the beginning of the year, we’ve really thought about net portfolio growth at a clip of about $10 million per quarter for 2013. And that seems like a good baseline for us. Certainly for the first quarter, we were a little bit higher than that since we had no prepayments. So we had estimated $10 million of net growth. We ended up at $19 million net growth. And so a large part of that variability will be the timing and the extent of prepayments. So Gerry’s estimates of $20 million to $35 million on top side largely play into a normal amortization in the order of $10 million to $15 million of contractual principal payments coming back each quarter, and then layering in some level, although sometimes unknown, some level of prepayments to get to kind of a $10 million net portfolio growth. And we think that that is a number that’s manageable given our prepayments that happen on an annual basis and the normal amortization to build the portfolio up to a little bit higher on the leverage through the end of the year. Certainly, we’ll continue to look at the equity and the debt markets to do efficient financings to grow the company, but also importantly to contribute more favorably to NII, as I described earlier. We’re looking to lower the debt cost, the overall expense by getting some relief there. And that’s ongoing.

[Troy Ward:]

Great, thanks, guys.

[Operator:]

Thank you, sir. Our next question will come from the line of Jonathan Bock with Wells Fargo Securities. Please go ahead. Your line is now open.

[Jonathan Bock:]

Apologize if I missed it, Chris, but can you give us available liquidity to date on both the facilities as well as the current cash balances, maybe what’s that fungible number? I thought it was $34 million. Is that right or is that significantly higher?

[Chris Mathieu:]

That’s correct. So as of the end of the quarter, we have $34 million of liquidity broken down between about $5 million of cash and the rest coming from availability on both the Wells line and the Fortress line. We certainly have more availability right now on the commitment from Fortress than we can actually given the overall one-to-one regulatory limitation as a BDC.

[Jonathan Bock:]

Yes. And the total amount of unfunded commitments to date of $15 million, so I would assume that that liquidity you do need to keep some amount available in order to fund those unfunded commitments, correct?

[Chris Mathieu:]

Yes. So some of that committed backlog has already funded, some of that will fund over the next few quarters.

[Jonathan Bock:]

And this is just a question I’m sure a lot of investors will have. If we’re trying to get to $10 million net portfolio growth a quarter, would that mean that we have less than two quarters worth of portfolio growth actually available and through liquidity?

[Rob Pomeroy:]

Yes, that’s the math, Jonathan. Remember though that there’s $10 million to $15 million of amortization and we’ve already got $10 million of prepays in the first quarter.

[Jonathan Bock:]

So maybe give or take a quarter, walk us through, now that we’re at leverage capacity, we do give BDCs credit for using their leverage, which is good to see here, but what’s the next step related to equity capital given that you do have an ability to raise, though, I believe, below NAV?

[Rob Pomeroy:]

So we will continue to monitor both the equity and debt markets and expect opportunistically, seek to raise additional capital based on market conditions, status of our pipeline, all in support of growth that we believe is accretive to NII.

[Jonathan Bock:]

Is it possible to make a below-book offering today with the cost of capital at 9.5% at your current debt rates accretive?

[Chris Mathieu:]

It’s possible.

[Rob Pomeroy:]

It’s possible.

[Jonathan Bock:]

Okay. That’s really what we’re looking for. I think at the end of the day, we’re happy to see leverage utilization. I just think the question is, while it’s possible, is that something that you believe in light of what happened on the last below-book offering, something you’d be considering at this moment in time as maybe your door number one? Or would you prefer rather to just wait and let the markets trade you above NAV before you would consider an issuance?

[Chris Mathieu:]

I think what’s important is to focus on both equity and debt. And so, as I was describing, we are very actively focusing today on improving our debt costs. And that will go immediately to improving the overall contribution to NII, and that will be pretty clear.

[Jonathan Bock:]

Generally, we see debt costs oftentimes get lowered as a result often following the raising of equity capital. Would you consider that one must happen first before you would consider the other?

[Chris Mathieu:]

It’s very possible that the debt would happen before equity.

[Jonathan Bock:]

Okay.

[Chris Mathieu:]

But there’s nothing that we can report on today.

[Jonathan Bock:]

No, of course. All right, guys, thank you so much.

[Chris Mathieu:]

Okay.

[Operator:]

Thank you, sir. And our next question will come from Casey Alexander with Gilford Securities. Please go ahead. Your line is open.

[Casey Alexander:]

You said that one of your life science companies filed for an IPO. Can you share which company it was and when it was filed?

[Gerry Michaud:]

Yes, it was Ambit. I actually don’t remember when the initial filing took place, but they did just announce last week that –

[Rob Pomeroy:]

Their range, right?

[Gerry Michaud:]

Yes, they announced the range last week.

[Casey Alexander:]

Okay. So does the current fair value of the Ambit warrant position take that into account or is there potentially going to be a markup in the coming quarter?

[Chris Mathieu:]

Yes. They have not priced that offering. So we have used our normal Black Scholes valuation modeling as of March. The update about the filing and the range only happened last week. So we would not have reflected that in the March numbers. I would suspect, much like Gerry described, that this is a financing for the company, not an exit for us in the near term.

[Casey Alexander:]

Okay, great. Thank you.

[Operator:]

Thank you, sir. And presenters, at this time, I’m showing no additional phone line questions. I’d like to turn the call back over to Rob Pomeroy for any additional or closing remarks.

[Rob Pomeroy:]

I’d like to thank everyone again for joining us on today’s call and for your continued interest in the Horizon story. We look forward to sharing our progress with you in the future.

[Operator:]

Thank you, sir. Ladies and gentlemen, this concludes Horizon Technology Finance Corporation’s conference call. Thank you and have a great day.