Horizon Technology Finance Corporation
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Good morning, and welcome to Horizon Technology Finance Second 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 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 second 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 the Q2 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 believes, expects, anticipates, intends, 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 a material basis from those projected in these forward-looking statements, and some of these 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?

[Robert D. Pomeroy Jr.:]

Good morning, and thank you all for joining us. We are pleased to report two important accomplishments during the second quarter. First, that we earned net investment income of $0.38 per share, and earned a portfolio yield of 14.5%. Our second quarter NII more than covered our dividends of $0.345 per share paid in the second quarter, and we maintained a portfolio of quality, high yielding assets, delivering solid financial results for shareholders. Second, we also strategically enhanced Horizon's future earnings potential. Specifically, in May we reduced the interest rate on our revolving credit facility, and in June we issued $90 million of asset-backed notes at a fixed interest rate of 3%. At June 30, we have over 90% of our borrowings locked in with a fixed interest rate. Today I would like to speak to the Horizon venture lending strategy, the earnings power of our high-quality portfolio, and the value proposition of owning shares in Horizon. Horizon is a leading provider of secured loans to venture capital backed, development stage companies. We target four broad technology markets, including information technology, life science, healthcare information and services, and clean-tech. Venture lending is a smart way to play in the technology and venture capital market. Our investments are secured loans with strong current pay yields, and we receive warrants on our transactions. These warrants allow us to participate in the upside when these young companies succeed. Conversely the secured nature of our loans, which are made at low loan-to-value protect us if the borrower runs into difficulties. As a result, the Horizon track record is characterized by low loan losses and warrant gains that exceed these losses over time. The capital that Horizon provides to these technology companies is used to further clinical research, launch new products, ramp revenue, and reach the next technological or valuation milestone. Because our capital comes in the form of a loan rather than equity, the companies are able to advance with much less dilution to the existing owners and management teams. As such, venture debt has become a standard tool in the venture capitalist tool box. But it is important to remember that the development curve for these young companies is not a straight line. Plans are made, altered and difficulties encountered. As a result, the venture capital investors want to be sure that they are working with the lender that understands the unique aspects of venture capital backed companies, and will work with them through sometimes difficult transitions. Horizon has proven to be such a partner for over 10 years, and the Horizon management team has executed this strategy together for over 20 years through multiple business cycles. Why is this reputation important? It is important to the existing investors and management of Horizon’s portfolio companies because they can be confident that they will have a lender that will act rationally when plans change. It is important to Horizon because it provides a seat at the table for the most interesting new opportunities that are referred to us by the venture capital community, and it should be important to investors in Horizon that look to invest in a team that has the necessary market access and market knowledge to successfully execute the venture lending strategy. How is the Horizon strategy different from most middle market BDCs? First, we focus only on our core technology markets, where we have participated for many years and understand the unique dynamics. Horizon has a team of very experienced managing directors with deep in market expertise and strong reputations in their core markets. Second, we keep our loans small relative to the enterprise value that secures our debt, and the amounts invested by the venture capitalists are low loan-to-value and the amortizing repayment structures provide a great cushion against decreases in value. Our typical loan-to-value is less than 30% compared to many middle market loans that approach 75% loan-to-value. As a result, Horizon has cumulative realized loan losses of less than 1% and cumulative loan impairments of less than 2.5% based on the over $500 million in new loans funded. Over 90% of our current portfolio is performing at or better than expected at the time of underwriting, consistent with past experience. Horizon’s high-quality portfolio has significant earnings power. Our loans are originated directly and are not syndicated loans. The loans carry double-digit current pay coupons. Most loans also include upfront fees, prepayment fees and end of term payments. The unlevered yield to maturity of these loans has averaged over 12.5%. This yield does not include any gains from warrants. But the real earnings power of this portfolio comes from the dynamic nature of our borrowers. There is a high incidence of early prepayments in the venture lending strategy. When a loan prepays in the middle of its term, the remaining portion of the upfront fees and the prepayment fee boost the yield. For those loans with end of term payments, the yield is further enhanced because the full end of term payment becomes due at the time of prepayment. The combination of these income enhancements produces transaction yields in the mid-to-high teens, again without any benefit from the warrants. It is this earnings power that drives the portfolio yields that have averaged over 14% since we went public. Speaking of warrants, one of the true future values of the Horizon portfolio lies in the warrants we hold in 72 development stage technology companies. These warrants have long lives that often survive the repayment of the underlying loan. Generally, they are based upon the low valuations of these companies that exist at the time of our loan, with the hope that they will achieve higher valuations at the time of exit. Although many of the warrants will not monetize, the warrants in the successful companies have the potential to provide substantial future value to the shareholders of Horizon. Horizon has had 20 exits since going public with warrant gain multiples ranging from no gain to 10 times the warrant strike price. They total over 7 million in realized gains. So why hasn’t every middle market lender jumped into this attractive pool? Well, this place does attract new entrants from time to time. But wanting to be in the venture lending business and being successful at it can be two very different things. The venture lending business requires discipline. Lending to markets that are overheated or not supported by solid venture lending attributes can cause great peril. Using traditional lending attitudes about dealing with problem loans will quickly alienate the venture capital owners. Even hiring a team of veteran venture lenders is no guarantee that the venture lending strategy will fit into a broader lending institution. And the venture capital investors want to work with venture lenders they can rely on. So what is the volume proposition of owning shares in HRZN? Horizon is different from middle market BDCs, because of our focused lending strategy. Our market requires an experienced team that has both market knowledge and market access. Our underlying investments are well protected, secured loans with low loan-to-value. The Horizon credit track record bears out the benefit of a disciplined underwriting approach. Loans carry an attractive yield to maturity that is enhanced by the dynamic nature of our borrowers. Prepayments, a normal part of the Horizon venture lending model, produce increased returns and provide capital for redeployment to new borrowers, which means more warrants. The warrants that Horizon receives have a long life that survive the repayment of the loans in most cases. Our mid teens yield converts into good earnings power for the company, which in turn provides a strong monthly dividend for shareholders. Since going public in October 2010, we have now declared cumulative dividends of approximately $4.58 per share and we retained the potential for upside from Horizon’s warrant portfolio, adding to the value proposition. Chris will provide details of our financial performance and portfolio in a minute, but first Jerry will give a detailed overview of the venture capital and venture lending market.

[Gerald A. Michaud:]

Thank you Rob, and good morning everyone. Our marketing activity in the second quarter reflects management’s disciplined approach to meeting the strong demand for Horizon’s value-added products by selectively investing in only those transactions that meet our time-tested, underwriting and return criteria and offer the potential for upside returns from warrants gains. In highlighting our performance for the quarter, we funded 10 companies, totaling $29 million. We added seven new companies to our portfolio, which increased the total number of companies in which we owe warrants to 72, an increase of 31% as compared to June of 2012. Importantly, the seven new company transactions we funded in Q2, which represents $24 million of the $29 million had an average onboarding yield of 12.4%. As a reminder, onboarding yields for our venture loan transaction consists of the coupon rate, commitment fees, and end of term payments, but does not include expected gains from warrants, prepayment fees or acceleration income from end of term payments, all of which historically have also been a part of our overall venture debt portfolio returns. We increased the amount of our investment positions in three of our existing portfolio companies. In the second quarter, we closed seven new loan commitments totaling $33.5 million compared to five new loan commitments totaling $25.5 million in Q1. Our approved and committed backlog increased from $15.6 million to 10 companies at the end of Q1 to $19 million to 10 companies at the end of Q2. Although there can be no assurance that transactions in our pipeline will be funded, our pipeline remained robust in the second quarter with more than $100 million of new opportunities, enabling Horizon to continue to select the highest quality investments available in the market. Subsequent to our investment portfolio update press release issued on July 9, we have been awarded one new transactions totaling $2.5 million and funded three transactions totaling $6 million. Today, our approved and committed backlog totals $18 million to 9 companies. For the third quarter, after the impact of amortization and loan prepayments on new originations, we expect the net portfolio change to be flat to minus $10 million. Turning to our core market sectors in the second quarter, we saw an increase in opportunities in our life science sector, with medical device and early-stage drug development companies leading the way. We also experienced continued demand for late stage technology companies looking for growth capital to meet the growing revenue traction these companies are currently experiencing. We expect to see the pipeline activity of quality opportunities in all of our core market sectors to slow during the third quarter, resulting from a traditional seasonal pause and due to the significant impact in the biotech IPO market in the second quarter. We are cautious in our approach to investing in the clean-tech sector, and will continue to watch for new VC investing before taking a more active role in that sector. With respect to the healthcare information services market, we continue to believe this will be a growth market for Horizon during the balance of 2013 and 2014 as emerging companies seek to capitalize on the significant opportunity to reduce the cost of healthcare delivery and improve patient care. That said, quality venture lending opportunities in this market space have been slow to emerge in the first half of 2013. In reviewing recent VC investments, we now see a four quarter trend reflecting a relatively consistent VC investment pattern overall. In the last four quarters, VC investment has ranged from a low of 7.5 billion in Q2 2013, to a high of 7.8 billion in Q3 2012 and the number of investments have also stayed within a relatively tight range of between 800 investments in Q2 2013, and 880 investments in Q3 2012, representing about a 10% range in both dollars invested and number of investments. Overall the last four quarters represents a historical decline from previous investment periods of 2011 and pre-2008. However those periods reflected far more volatile quarterly swings in investment activity resulting in a less predictable marketplace. Furthermore, the $29 billion run rate that VC investment is on for 2013 is only slightly lower than the previous five-year annual VC investment average of $30 billion. As we review our own portfolio of venture backed capital backed companies, we have seen a rational pattern of follow on investment in our portfolio companies over the last four quarters. As it relates to VC investment for the balance of 2013, we expect to see some momentum in life science investment as a result of significant increase of IPO activity in the second quarter. While there are significantly fewer private VC backed life science companies compared to technology companies in our market, they tend to take up a disproportionate amount of VC investment capital as a result of the higher investment required to bring drugs to the regulatory process with the FDA. VC fundraising declined in Q2 2013 as 44 funds raised $2.9 billion in the second quarter compared to the first quarter of 2013, when 44 funds raised $4.3 billion. A strong US-based VC funds receives a disproportionate amount of the funds raised in Q2 as evidenced by the top five venture capital funds receiving 55% of the total capital. On the IPO front, activity increased significantly in the second quarter with 22 IPOs of VC backed companies raising more than $2 billion, compared to only 8 IPOs raising $717 million in Q1 of 2013. The significant increase in IPO activity in Q2 was led by life science IPOs in the quarter, including our own biotech portfolio and with bioscience. This represents the highest number of IPOs in the last five quarters, and importantly, the number of life science IPOs increased from only four in the first quarter of 2013 to 11 IPOs in the second quarter. Our expectation for the balance of 2013 is that VC backed IPOs will level off in the third quarter, as the market digests a significant increase in the second quarter combined with the traditional slowdown in Q3 IPO activity. However, the increased demand for Biotech IPOs will led to increased M&A activity in the sector during the balance of the year. We also expect Biotechs to see improved pricing on M&As as they are able to leverage IPO demand to negotiate better M&A terms. We have one portfolio company in registration for an IPO, while another in the biosciences priced their IPO during the second quarter. As a reminder, in many cases an IPO is a financing event for our portfolio companies that may not result in a loan prepayment or an immediate exercise of our warrant position. Looking at our market sectors, M&A activity remained sluggish in Q2, which is partially due to the more robust IPO market. Based on the returns generated from recent IPOs many emerging growth companies that would normally be attractive candidates for larger acquiring companies have opted to forego any merger and remain independent and look to a possible IPO to grow and increased shareholder value. Again we believe this will change for the balance of 2013 as corporate buyers of VC backed companies become more aggressive in pricing M&A transactions in light of a competitive IPO market. This is particularly and uniquely true in today’s market as a result of the JOBS Act, which allows VC backed companies to file to go public confidentially. So M&A buyers do not have the advantage of knowing a potential M&A candidate’s filing status. M&A buyers like EMC have experienced success from their acquired venture capital backed companies, including VMware and (inaudible), which I would note was a former Horizon portfolio company. EMC along with other historical buyers of venture backed companies such as Cisco, Microsoft and Google may look to add innovative VC backed technology companies to their portfolios as they have in the past. During the second quarter, there were 84 venture capital backed M&A transactions completed, with 15 of those transactions representing a disclosed value of $3 billion. This was a sharp decline from the second quarter of 2012 when 122 venture backed M&A transactions were completed with 34 of those transactions disclosing a combined value of $6.3 billion. We believe that as long as the IPO market continues to perform as it has ailing companies to file confidentially under the JOBS Act, in generating compelling returns for venture capital investors, corporate buyers, flush with capital will become more inclined to aggressively pursue acquisitions in order to create a greater balance between these two offsetting markets. In turn, we are confident that the more robust IPO market and corporate M&A market for the balance of 2013 we lead to a stronger more optimistic investment environment for VC investment. Innovative technology companies particularly in our storage technology and semiconductor sectors, and our life science sector will benefit from VCs for capital being returned from portfolio exits. We expect VC investment in the clean-tech sector to be more measured as VCs monitor existing investments before aggressively looking for new investment opportunities. Turning to competition, we continue to see active participation in the market from a number of competitors. Our ability to compete effectively reflects our ability to benefit from our advisers long-standing relationships in the VC community and see a continuous flow of pipeline activity from those referral sources. We were able to maintain a disciplined pricing strategy related to our onboarding yields on new investments in the second quarter in spite of continued strong competition in all of our market sectors. Our expectation for the balance of 2013 is that competition will remain very strong and we may even see additional entrance into the venture lending market given the attractive yields in our market compared to middle market lending. We believe however, we are well positioned to continue to selectively source high-quality investment opportunities based on our leading industry brand-name recognition and long-standing track record of supporting VC backed companies in our targeted markets. With that update, I will now turn the call over to Chris.

[Christopher M. Mathieu:]

Thanks Jerry, and good morning everybody. Our consolidated financial results for the three months ended June 30, 2013 have been presented in our earnings release distributed after the market closed yesterday. We also filed our Form 10-Q with the SEC last night. For the three months ended June 30, total investment income increased 60% to a record $8.8 million compared to $5.5 million for the second quarter of 2012. This increase was primarily due to the increased average size of our loan portfolio, while we maintained onboarding yields on our new transactions. Total investment income for the quarter included $8.4 million from interest income on investments, as well as approximately $400,000 of fee income associated with loan prepayments totaling $19.3 million from four of our portfolio companies. Loan prepayments serve to enhance Horizon’s overall returns to shareholders. For the six months ended June 30, total investment income increased 33% to $16.2 million compared to $12.1 million for the first six months of 2012. Total investment income in the first six months of 2013 consisted of $15.8 million in interest income on investments, with the remainder consisting of fee income due to the loan prepayments in the second quarter. For the second quarter, our portfolio yield was 14.5% compared to 12.9% for the second quarter of 2012. The portfolio yield for the six months ended June 30, 2013 and 2012 was 13.7% and 14.1% respectively. Onboarding yields have remained consistent with those of the existing portfolio. The primary changes from quarter-to-quarter to portfolio yields are driven by the timing of new loan fundings and timing and extent of loan prepayments within the portfolio. The company’s total expenses were $5.1 million for the second quarter as compared to $3.2 million for the second 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, as well as higher borrowing costs associated with our Fortress facility. The effective interest rate for debt outstanding as of June 30, 2013 was 6.5% compared to 7.2% at June 30, 2012. We want to remind you that interest expense is a combination of the current pay coupon, plus debt issue cost already paid in connection with securing commitments, plus non-used fees on our credit facilities. Net investment income increased to $0.38 per share or $3.6 million for the second quarter of 2013 as compared to $0.30 per share or $2.3 million for the second quarter of 2012. For the six months period ended June 30, 2013 net investment income was $6.4 million as compared to $5.6 million in the prior year period. Our expanding warrant portfolio, which included warrant positions in 72 portfolio companies at June 30th provides the potential to realize significant gains in the future. For the second quarter of 2013, the net unrealized depreciation on investments was $2.4 million or $0.25 per share, primarily due to the fair value adjustments of $2.3 million on one investment currently on non-accrual. No new loans were placed on non-accrual during the second quarter. Overall the asset quality remained stable with approximately 91% of the total fair value of the loan portfolio at the end of the quarter performing at or better than expected. At the end of the second quarter, the loan portfolio had a weighted average internal credit rating of 3.1, with 4 being the highest credit quality and 3 being the rating for a standard level of risk. The rating of a 2 or a 1 represents a deteriorating credit quality and increased risk. Our net asset value at June 30 was $14.89 per share, a decline of $0.23 per share compared to March 31st. While we have more than covered the dividend just declared by current NII, we experienced a reduction in NAV primarily from the recording of an unrealized depreciation on one debt investment on non-accrual. Our investment portfolio at June 30 included 52 secured loans with an aggregate fair value of approximately $238 million and warrant positions in 72 portfolio companies with an aggregate fair value of approximately $6 million. We maintained the level of our investment portfolio throughout the quarter at approximately $247 million with the successful booking of approximately $29 million in venture loans into 10 portfolio companies. The growth of earning assets was offset by $8.7 million in normal contractual loan payments and $19.3 million in loan prepayments. Subject to the level of actual loan prepayments we expect that the net portfolio change for the third quarter may be slightly down in the range of minus $10 million to flat. To date, in the third quarter we have already experienced one loan prepayment and we are aware of the potential for the prepayment of one additional loan before the end of the quarter, which may or may not happen or may slip into the fourth quarter. Investment capacity is similar to that of the first quarter as Horizon ended the second quarter with approximately $35 million in available liquidity, including cash and equivalents totally approximately $25 million, as well as approximately $10 million in funds available under existing credit facilities. We reported on our first-quarter earnings call in May that we are exploring opportunities to drive down our overall debt costs on our existing credit facilities, and identifying other sources of leverage in the market to reduce our exposure to rising interest rates all for the benefit of our shareholders. We will continue to seek improved pricing and structure within our borrowing options to provide long-term benefits. We are pleased to report progress since our last update. In May, we announced that Horizon reduced the pricing on our revolving credit facility with Wells Fargo by 75 basis points. Effective May 1, the stated interest rate under the credit facility was reduced to one month LIBOR plus 3.25. All of the terms of the credit facility remain unchanged. Complementing our success with Wells Fargo, we completed an asset backed securitization in June. We issued $90 million of notes rated A2 by Moody’s and backed by $189 million of secured loans originated by Horizon. The notes bear interest at a fixed rate of 3% per annum and have a stated maturity date of May 2018. The weighted average life of the notes is approximately a year and a half. The securitization expanded our capital resources, enhances our ability to leverage new and existing investments at favorable rates, and moves a substantial portion of our floating-rate borrowings to a fixed rate to match term financing. This securitization has fixed the stated interest rate on $90 million or 68% of the Horizon borrowings as of June 30 at 3%. With the issuing of these notes, 92% of our total borrowings are now at fixed rates. Following the completion of our securitization, we had no borrowings outstanding on our Wells facility as of June 30 and our credit facility with Fortress credit had a total of $10 million outstanding as of June 30. Each of the credit facilities continue to provide a commitment of $75 million to Horizon. As of June 30, our asset coverage ratio was 207% or a GAAP debt-to-equity ratio of 93% at a net leverage ratio of 76%, after taking into consideration cash on our books at $25 million. Our shareholders are now enjoying the benefits of a leveraged portfolio. Although this leverage provides favorable contributions to NII, we remind you that a matured venture loan portfolio deleverages itself quickly, in a largely predictable pattern due to the underlying contractual amortization schedules. This predictable payment stream from our loan portfolio along with the capital return through prepayments provides a view to our total investment capacity over the next 2 to 4 quarters. It is from this investment capacity that we are encouraged by the quality and the level of investment opportunities available to us in the current market. Now I would like to turn this call back to Rob.

[Robert D. Pomeroy Jr.:]

Thank you, Chris. Again we are pleased by our performance for the second quarter and first half of 2013 as we continue to execute according to plan. With our high quality assets with yields between 11% and 14% combined with the opportunity to benefit from additional upside through our expanding warrant portfolio, we remain well positioned to generate compelling risk-adjusted returns and drive long-term value for our shareholders. Before we open the floor for questions I would like to note that we plan to hold our next conference call to report third-quarter results during the week of November 4, 2013. We will be happy to take questions you may have at this time.

[Operator:]

Thank you. (Operator instructions) The first question is from Greg Mason of KBW. Your line is open.

[Greg Mason:]

Great. Good morning gentlemen. You mentioned your new investments have a 12.4% total yield, could you talk about what trends you are seeing in the yield environment for the venture capital markets relative to, you know, a couple of quarters ago, as well as the pipeline that you are looking at today going forward?

[Gerald A. Michaud:]

Yes, sure. This is Jerry. We are actually, you know, I can even go back further than that but over a quite a period of time now, we have actually seen pretty stable rates as it relates to competitive pressures on rates. I think we have been pretty consistently seeing deals from in the kind of 11.5% to 13%, and again you have to remember we do both second lien and first lien deals. So, probably get a little bit higher yields on our second lien deals than our first lien deals, but very consistent along that path. We are really still looking for value, and I think that that is going to continue now, especially with the more active M&A and IPO market, where companies can actually kind of see the future or at least predict some of the future relative to the potential for an exit. And so really what we are looking for now is the value proposition in the loan to get them to that exit. So the difference between, unlike other markets where, you know, every point of interest rate matters, in our markets what they are really looking for is, you know, how much more value can we help them create before that exit. So they are not really particularly care out 25 basis points of rate. They are more interested in the overall value of the loan. We’re still seeing that and I think we are seeing it even a little bit more today because there seems to be a little bit more optimism especially in the VC community relative to exits. They have had some especially in the second quarter, some of the biotech IPOs have really been better than what we have seen in a long time. Not just that they were able to get out but they were able to get out within the price range in many cases, and also some of those deals were upsized. So as that capital started to come back now, the VCs, you know, they are looking at their other later stage portfolio companies and potential exits, plus they have more money to invest. So we’re still seeing pretty stable rates. I’m not going to say it is not a competitive environment, it is a competitive environment but I still think that brand name in this market matters greatly, and, you know, investors look to those lenders that have historically been able to provide good products with good value, and people that they know that they can work with as these companies, you know, manage their way through their growth curve. So I still like the kind of returns we are seeing in the marketplace today, the supply of opportunity is still -- the demand for loans is still very good and the spreads are still very attractive and I expect to see that through the rest of the year.

[Greg Mason:]

I appreciate those comments, and then you talked about competition I will be curious to see what you are seeing in terms of new entrants and how they are behaving, I know yesterday we saw (inaudible) starting up a venture capital lending, Aries has entered this space, I’m sure there are some private players as well, so what are you seeing from a competitive front there, as well as could you also talk about the competitive actions of the technology banks like Silicon Valley bank and Comerica?

[Robert D. Pomeroy Jr.:]

Sure. So, I mean, you know, new entrants into the market is nothing new for us. I think the reason we’re probably seeing that is, you know. we do get attractive yields in our marketplace. I think our market has expanded relative to the amount of demand given the longer time for exits, you know, all kinds of financing opportunities are now being considered for the private companies, where before they had I think a predictable exit in the late 90s. And it is becoming a more mature market, so it is a very attractive market from the outside looking in. What we have historically found though for new entrants, especially those that are not solely focused as a venture lending strategy is that it is really -- it is one thing to look from the outside and come in, it is another thing to actually get in this market and understand how to work with these companies over the long term to create value for their investors. And, you know, I would also say that that one of the benefits that you have in doing this is that as we work with these companies, we are actually after when you get past onboard yields and things like that during the course of the loan we actually have opportunities in these companies to add more value for our shareholders as they work through their development stage and ask us to help them further. So, you know, we just really like the space, but we also know how difficult a space it is to work in and the knowledge-base that you need and the experience that you need, not just from, you know, the marketing people, we have I think the best in the business, but also from our portfolio managers and things like that. You know, building that kind of infrastructure takes a long time and getting the confidence of the market place takes even longer. So we are -- we always watch what is going on relative to the competitive standpoint, but we’re real comfortable where we are today from that standpoint. You know, as it relates to the banks, you know they are still regulated and they still have their niche where they play. We still, you know, work pretty closely with many of them relative to being able to find finance the growth stretch capital part of what the market needs versus the more asset-based side of the business and so, you know, we still feel pretty comfortable about where their niche is and where ours is, and we work pretty collaboratively with them.

[Greg Mason:]

Great. I appreciate the comment.

[Operator:]

Thank you, and the next question is from Robert Dodd of Raymond James. Your line is open.

[Robert Dodd:]

Hi guys, a couple of quick questions, on the securitization, about 2.1 million increase upfront to the structure, what is the amortization to it?

[Robert D. Pomeroy Jr.:]

We basically will take the amortization relatively over the term of the financing.

[Robert Dodd:]

And then on kind of the indications you gave flat to down 10 in portfolio, can you give us any more color on, because you talked about one prepayment already made, maybe another one, are really expecting refinancing activity in the quarter, particularly if some of these new guys come in and maybe get aggressive on pricing essentially, or is the -- or you are expecting a relatively low amount of those funding in the third quarter, typically pretty slow?

[Robert D. Pomeroy Jr.:]

It is more of the latter Robert.

[Robert Dodd:]

Okay, got it. Then, just finally, capital plans, I mean you have 93% debt-to-equity asset coverage ratio where it is, that is high, and well above your target range, and I know obviously you can’t say much about it, but can you give us any color on whether you have changed that target range for debt-to-equity to the company, or broad color on what your plans are in that area?

[Robert D. Pomeroy Jr.:]

So, we -- I think Chris addressed this in the body of his part of the presentation. I mean it is high Robert, especially was on the last day of the year, or quarter given that is the day we did the securitization. The portfolio does amortize really rapidly, and so as you look forward the actual asset coverage ratio improves the debt when it comes down just from normal amortization. So, we haven’t really changed our target. We believe 0.8 (ph) is the right place to operate, but you know, even absent a capital raise we will work down from where we are today to a slightly more comfortable level.

[Robert Dodd:]

Got it. Thanks.

[Operator:]

Thank you. The next question is from Casey Alexander of Gilford Securities. Your line is open.

[Casey Alexander:]

I was just wondering, there was a lot of churn in the portfolio, so what is the portfolio ending balance of first lien versus second lien?

[Robert D. Pomeroy Jr.:]

I don’t think we have that exact number in my fingertips Casey, but I don’t think it is actually changed very much.

[Christopher M. Mathieu:]

Yes, I can tell you for the first half of the year, we did more first lien deals than second lien deals in dollars, about the same actually in the number of transactions in dollars, but it is not significant. So the portfolio didn’t -- the make-up of the portfolio wouldn’t have changed much in that regard.

[Casey Alexander:]

Okay, I think as of the last reading it was 55 first lien, 45 second lien, so you would say it is pretty close to that?

[Christopher M. Mathieu:]

I’m using your numbers, so I would say that --

[Robert D. Pomeroy Jr.:]

We don’t have a firm number, but I find that reasonable as a general guideline.

[Casey Alexander:]

When you quote the average yield on the portfolio on a quarter-by-quarter basis, it is awfully variable as a result of portfolio activity, what is sort of the -- you know, the average yield just on loans so that we know how to, you know, sort of accrue net income or investment income?

[Robert D. Pomeroy Jr.:]

So, I guess the best way to look at that Casey would be look at the quarters in which we have no prepayments. It was 12.9 I think in the first quarter this year, or I think it was the quarter last year, where we had no prepayments. So those are pretty pure numbers.

[Casey Alexander:]

And since you say that the sort of deal yields are staying pretty consistent, that number is okay or is it trending in any one direction or another?

[Robert D. Pomeroy Jr.:]

It is not moving materially.

[Casey Alexander:]

Okay, great. Thank you.

[Operator:]

Thank you. The next question is from (inaudible) from Wells Fargo Security. Your line is open.

[Unidentified Analyst:]

Good morning and thank you for taking my questions. With your recent securitization and the cost of debt on this, I was wondering if there was any potential for reducing your unused facility fee on the Fortress facility, or even call of this facility, and if you can remind us is there a call period on this facility?

[Robert D. Pomeroy Jr.:]

Okay. That is a fair question, the Fortress facility has non-use fee of 1% of the amount not used. It does have a prepayment provision that we can prepay, but there is a penalty for it, so right now it is not advantageous to prepay that. It is available to us. We are looking at all our options as far as lowering the non-use cost of our facilities as well as the ongoing actual coupons and such, but nothing to report today regarding the Fortress facility. It remains in place. We continue to have full access to it. Regarding the securitization, I think Robert asked a question on the amortization of cost. We think of the all in cost of that facility right around 4.5%, although the coupon is about 3%, or is 3% with the debt issue costs, we are looking at that as being more effective cost of 4.5%.

[Unidentified Analyst:]

Thanks for that color, and if you could talk about the repayments that are expected in 3Q, kind of a ballpark, what the accelerated OID (ph) would be and exit fees just for modeling?

[Christopher M. Mathieu:]

Yes, we have not -- we are not prepared to…

[Robert D. Pomeroy Jr.:]

Quantify.

[Christopher M. Mathieu:]

Quantify that from a level of detail both on the loan side just because the uncertainty of the amounts and then also the GAAP accounting part of it.

[Unidentified Analyst:]

All right. Thanks for taking my questions.

[Operator:]

Thank you. (Operator instructions) The next question is from Greg Mason of KBW. Your line is open.

[Greg Mason:]

Great thanks, one last follow-up question on the new securitization, what is the expected life for that securitization based on what you think the repayments will be, and remind me there is no reinvestment period, correct?

[Robert D. Pomeroy Jr.:]

Yes. To both your points, during the kind of the prepared statements I mentioned that the weighted average life is a year and a half, and the -- there is no reinvestment period. It is a static pool with a borrowing base approach. So as the underlying (inaudible) pay us back, we stay in formula and pay down the notes.

[Greg Mason:]

Great. Thank you.

[Robert D. Pomeroy Jr.:]

The actual term is more like four years but the weighted average is about a year and a half.

[Greg Mason:]

Got it. Thank you.

[Robert D. Pomeroy Jr.:]

You are welcome.

[Operator:]

Thank you. There are no further questions in the queue at this time. I like to turn the call back over for closing remarks.

[Robert D. Pomeroy Jr.:]

Thank you, operator. I would like to thank everyone again for joining us on today’s call and for following the Horizon story. We look forward to sharing our progress with you in the future. Operator?

[Operator:]

This concludes Horizon Technology Finance Corporation’s conference call. Thank you and have a great day.