Horizon Technology Finance Corporation
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good morning and welcome to Horizon Technology Finances’ Third Quarter 2013 Conference Call. (Operator Instructions). I would now like to turn the call over Michael Cimini of the IGB Group for introductions of the readings of the Safe Harbor statement. Please go ahead sir.

[Michael Cimini:]

Thank you, and welcome to the Horizon Technology Finance third 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 Q3 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 and 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 these factors are detailed in the Risk Factor discussion in the Company's filings with the SEC including 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. Rob? At this time, I would like to turn the call over to Rob Pomeroy.

[Rob Pomeroy:]

Thank you Mike. Good morning and thank you all for joining us. During the third quarter Horizon delivered strong financial results for shareholders generating high current pay interest income and earning attractive fees. We’re pleased to once again capitalize on the inherent earnings power of our dynamic venture loan portfolio. For the third quarter we earned net investment income of $3.5 million or $0.36 per share which exceeded our previously declared monthly dividends. Since implementing our current dividend strategy one year ago our NII has exceeded our dividend in three out of four quarters and in the aggregate fully covered our dividends. We remain focused on taking advantage of the inherent earnings power within our existing investment portfolio and utilizing our disciplined approach to capitalize on select new opportunities. I would like to spend a few months to discuss in more detail some of the main business drivers that contributed to our success in the quarter. First is the return that we generated on our investments, Horizon has consistently earned high yields on it's loan investments between 11% and 15% which take into account the coupon interest, amendment fees, end-of-term payments or ETPs and prepayment fees. As a reminder loan prepayments are regular feature of the venture lending model providing capital that can be redeployed into high yielding assets. For the third quarter all of these factors combined for a solid weighted average yield of 14.6%. Next is the effective use of leverage. During the third quarter we benefited from the use of cost effective leverage to increase earnings. By recently completing our first investment grade term securitization and reducing the interest rate on our revolving credit facility we have enhanced our ability to leverage new and existing investments at more favorable rates. As we take proactive measures to enhance future performance management remains dedicated to reducing risk. By locking the 92% of our total borrowings at fixed rates we have moved to substantial portion of our floating rate borrowings to fixed rate, match term financing. In addition as our portfolio amortizes we expect to naturally delever our balance sheet and return to our previously stated target leverage of approximately 0.8 to 1 over the next 6 to 12 months. As we announced yesterday evening we have amended and extended our revolving credit facility. Chris will provide more color on the major aspects of this news shortly. As we reduce our leverage we remain committed to acting in a manner that best serves the long term interest of our shareholders and we have no intention of raising equity capital at current levels. With the increase in our NAV combined with the potential for additional NAV upside we will continue to be patient while actively managing our existing portfolio of quality high yielding assets. Regarding credit, our overall asset quality remains relatively stable. As of September 30th our loan portfolio had a weighted average credit rating of 3.1 were 3 is a standard credit on a 4.0 scale with over 90% of the portfolio performing at or above expectations. During the third quarter we put the Satcon bankruptcy from over a year ago behind us as we took to realize loss. Because we had previously written a loan down to zero and place it on non-accrual there was no impact from this realized loss on either NII or NAV in the third quarter. During the quarter we placed one new loan on non-accrual. It is early in our efforts to work out this problem account and assess the amount and likelihood for recovery. Workouts and problem accounts are to be expected in the venture lending business and aggressive management of these accounts is a core competency of the Horizon’s management team. To that end after an auction process one of our other portfolio companies who have loaned us on non-accrual entered into a Memorandum of Understanding to sell it's assets. This dramatically improved our prospects for recovery during the third quarter. If closed as anticipated the sale proceeds and future contingent payments have the potential for a full recovery of our investment. We increased the fair value of this asset to reflect the improved prospects tempered [ph] for that fact that the acquisition is not yet closed. Although we did not realize any warrant gains in the third quarter we’re encouraged by the double digit increase in the fair value of our warrant portfolio. Included in our 71 company warrant portfolio at September 30th, where warrant and equity positions in 11 public companies with a combined fair value of 1.8 million. We continue to closely monitor a number of opportunities to monetize our warrant positions and we will provide an update as appropriate upon realizing a material gain on an investment. During the third quarter we experienced liquidity events that consisted of loan prepayments from three portfolio companies increasing the total number of liquidity events from prepayments to seven for the nine months ended September 30th. Few portfolio companies were acquired during the quarter resulting in the full prepayment of their venture loans with Horizon. One of these companies was a Two Rated credit enabling Horizon to reverse it's previously reported unrealized depreciation for this investment. And other portfolio company prepaid it's loan in the quarter after raising additional capital in a private financing. We continue to hold warrants however which typically survived the underlying loan repayment. These three liquidity events generated an internal rate of return ranging between from 13% and 24% and we have the ability in two of these cases to further enhance returns via warrants. Horizon has now experienced liquidity events in 10 of the past 12 quarters since going public in October 2010. Again we have the opportunity in most of these cases to increase our returns through our warrant positions. It is important to note that these liquidity events are a normal course of business for our company and we now intend to provide shareholders with information regarding these frequent occurrences on a quarterly basis just as we did in yesterday’s earnings release. Our focus remains on producing net investment income that more than covers our dividends. As we announced yesterday we declared monthly dividends totaling $0.3450 per share payable during the first quarter of 2014 representing an annualized yield of 9.2% based on our NAV of $14.95 per share. Since our IPO we have now declared cumulative dividends of $4.925 per share. We intend to continue to provide our shareholders with consistent execution and strong performance by focusing on the underlying fundamentals of our unique venture lending model which includes the following. Directly originating loans with strong current pay yields, utilizing a proven underwriting approach to quality, VC backed companies across our target markets. Maintaining significant downside protection through secured loans, the low loan to value and rapid amortization. Aggressively managing problem accounts to maximize recovery. Augmenting results from the effective use of debt leverage and preserving the ability to participate in the future success of young, innovation companies based on the warrants we receive as part of each transaction. We have built a leading venture lending franchise by adhering to those core principles. Positioning the company well to continue to generate attractive risk adjusted returns. Chris will provide details of our financial performance and portfolio but first Jerry will give an overview of the market.

[Jerry Michaud:]

Thank you Rob and good morning everyone. As we anticipated our marketing activity in the third quarter was soft compared to the first half of 2013. However there were a number of events that took place during the quarter that further impacted Q3 marketing results. First two transactions which we expected to fund in Q3 slipped into the fourth quarter and were funded in October. Second most of the funding’s in the third quarter were tranche funding’s as part of a larger commitment so actual fund transaction size the smaller for the quarter. But the third quarter’s historically is a slow quarter; July and August were particularly quite resulting in a significant decline in our pipeline during that period. Last we experienced significant competition in our life science market for late stage drug development companies that resulted in irrational pricing and transaction structures characterized by single digit yields, low warrant coverage, high valuations and covenant life time’s [ph]. We now believe that market opportunity for late stage life science opportunities is overheated due to competition from royalty funds, strategic capital and they continue to robust IPO market. We have seen a silver lining in the life science market over the last few quarters however as VCs are returning to investing an earlier stage life science companies again providing attractive lending opportunities in this segment of the life science market. Horizon has taken advantage of opportunities in this market segment over the past few quarters as reflected in the number of high quality life science companies we’ve added to our portfolio such as Microline, Inotek, (indiscernible) pharmaceutical and Tryton Medical. We expect to focus on this segment of life science market going forward as it represents opportunities to close quality transactions at attractive pricing. We will continue to monitor the late stage life science market but do not expect many quality opportunities with rational pricing and till such time as the IPO market for these company subsides and royalty funds more fully deployed recently raised capital. Our other targeted market segments including technology, healthcare information and services include tech for comparatively quite during the third quarter and much of what we did see did not reflect the quality you needed to meet our underwriting criteria, at our underwriting standards. Our pipeline decreased significantly late in the third quarter with only 60 million of opportunities in the pipeline representing a historical low. That said we’ve seen a significant increase in pipeline activity early in the fourth quarter raising our pipeline to over 100 million once in [ph]. But there can be no assurance the transactions in our pipeline will be funded both the quantity and the quality of the opportunities we are seeing here in Q4 makes us cautiously optimistic that we will be able to meet funding levels over the next two quarters that are consistent with our funding goals during that period and based on our expected funding capacity. Subsequent to our investment portfolio update press release issued on October 2nd, we have funded three transactions totaling $4 million. Today our approved and committed backlog totals 10 million to seven companies. Turning back to our core market sectors other than our life science market we have experienced increased activity in the fourth quarter from the following market segments. In our technology market we’re seeing quality opportunities, a cloud based device management companies, cloud based cyber security companies and specialized chip development companies. And we characterize all these opportunities this companies that are experiencing rapid customer and revenue growth are well sponsored and present the opportunity for Horizon to bring the value added financing solution and return for attractive pricing. In our healthcare information and services sector we are seeing the emergence of companies who are developing technologies and solutions and address the need for healthcare providers to provide services and allow patients to have more control over the healthcare management by reducing cost to the healthcare system. We’re evaluating a number of opportunities in this market segment. Obviously with the well published issues related to the roll out of the Affordable Care Act there are both additional risks as well as opportunities to address this market going forward. We are still taking a cautionary approach to the clean tech market and we will only consider opportunities in this market segment that meet a significantly high credit quality bar including substantial market and revenue traction, well-sponsored companies with low loan to value and low loan to invested capital which also provide an opportunity for premium pricing reflective of the proceeds clean tech market risk. Turning to venture capital activities during the third quarter, overall venture capital investment in the quarter remained relatively stable with 8.1 billion invested in 806 deals, keeping in line with the previous eight quarters according to Dow Jones venture source. As well VC fund raising remained consistent in the third quarter compared with the previous eight quarters. In 2013 the number of funds slightly increased quarter-to-quarter indicating smaller fund sizes as VCs look to invest in less capital intensive sectors or are relying on alternative sources of capital such as strategic or collaboration arrangements, royalty financing, public markets and venture debt. We’re encouraged by the level of VC activity which are reflective of the optimism by VCs based on increasing number of VC exits particularly within the IPO market. For the third quarter venture backed IPO activity continued it's strong momentum with 26 deals raising $2.7 billion. This presents an increase of 13% from the last quarter in terms field flow and 11% increase in dollars raised, more importantly IPO activity for Q3 and Q2, 2013 marks the first time there were 20 or more VC backed IPOs in two consecutive quarters since 2004. Life science companies continue to lead the way as they represented over 60% of the IPOs in Q3. Currently Horizon as a total of 11 portfolio companies that have completed their IPOs and trade under New York stock exchange or NASDAQ of which five continue to have outstanding loans with Horizon. We also have one portfolio company in registration for an IPO filing confidentially under the JOBS Act. As a reminder in many cases an IPO is financing event for our portfolio companies that may not result in a loan prepayment or immediate exercise of our warrant position. In terms of M&A during the third quarter there were 107 venture capital backed M&A transactions completed with 31 of those transactions representing a disclosed value of $4.9 billion compared to 92 venture capital backed M&A transactions completed with 17 of those transactions representing a disclosed value of 3.4 billion in Q2. We continue to believe the strategic and financial buyers with access to capital will become more aggressive in pricing M&A transactions as a result of the current IPO market, eventually creating a greater balance between the two as well as a strong overall VC investment environment as we VCs redeploy return capital from liquidity events and aggressively raise capital on the yields of successful portfolio exists. Turning to competition as I mentioned the market for the late stage life science company is overheated as a result of competition from royalty funds or robust IPO market and life science focus venture lenders are all competing for quality late stage life opportunities. In addition, it's been well publicized that a number of BDCs would not historically had a venture lending strategy as indicated they will be entering the market. We expect that these nuances would downward pressure on yields in the venture lending market as they try to gain foothold in our market. While we have been able to maintain strong and attractive onboarding yields to-date we’re very cognizant to increased competition could impact pricing down the road. All of that said experience also demonstrates that the historic relationship the VC community has with experienced venture debt lenders that have demonstrated that experience and track record of providing financing too and working with development stage companies over a long period of time is valued in the market by the venture capital community and will continue to play a very important role and how a venture debt transactions are sourced and won [ph] in the market. In that regard we believe Horizon will continue to play a leading role of providing value added financing solutions that are attractive to experience VCs in the portfolio companies and receive value added attractive returns, high yields in return. With that update I will now turn the call over to Chris.

[Chris Mathieu:]

Thanks Jerry and good morning everybody. Our consolidated financial results for the three months ended September 30, 2013 has been presented in our earnings release distributed after the market closed yesterday. We also filed our Form 10Q with the SEC last night. For the three months ended September 30, total investment income increased 31% to $8.7 million compared to 6.6 million for the third quarter of 2012. This increase was primarily due to the increased average size of our loan portfolio. The new portfolio companies funded in the third quarter had an average onboarding yield of 12.3%. Total investment income for the quarter included $8.2 million from interest income on investments as well as approximately $500,000 of fee income associated with loan prepayments totaling $7.5 million from three of our portfolio companies. For the nine months ended September 30, total investment income increased 33%, it's $24.9 million compared to 18.7 million for the first nine months of 2012. Total investment income for the first nine months of 2013 consisted of 24 million an interest income on investments with the remainder consisting of fee income, future loan prepayments in the second and third quarter. For the third quarter our portfolio yield was 14.6% compared to 13.6% for the third quarter of 2012. The portfolio yield for the nine months period ended September 30, 2013 and 2012 was 14.1% and 13.9% respectively. The primary changes from quarter-to-quarter to portfolio yields are driven by the timing of new loan funding’s and timing and extend of loan prepayments within the portfolio. The company’s total expenses were 5.1 million for the third quarter of 2013 as compared to 3.7 million for the third 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 year-over-year primarily due to the increased average borrowings following the issuance of our fixed rate asset backed notes in the principal amount of $90 million. The effective interest rate for the debt outstanding as of September 30, 2013 was 6.5% and 8.1% a year earlier. I want to remind you that interest expense is the current pay coupon plus debt issue cost or repaid in connection with securing commitments plus non-use [ph] fees on our credit facility. Management fee expense for the third quarter increased year-over-year by approximately 200,000 to 1.3 million as a result of an increase in the average gross assets. This was partially offset by a onetime waiver of the management fee on cash totaling approximately a $140,000 during the quarter as we held a higher than normal cash balance due to the net proceeds generated from our asset backed securitization. NII increased to $0.36 per share or $3.5 million for the third quarter of 2013 as compared to $0.33 per share or $3 million for the third quarter of 2012. For the nine months period ended September 30, NII was $9.9 million as compared to 8.6 million in the prior year period. Our warrant procedure which increased year-over-year by 22% to warrant positions in 71 portfolio companies at September 30 creates the opportunity to realize significant gains in the future. For the third quarter we reported a net realized loss on investment for $5.6 million primarily due to the determination that our debt and warrant investment in Satcon were not recoverable which resulted in a realized loss totaling $5.3 million on that account. Horizon had previously reported unrealized depreciation of $5.3 million related to this account and as a result the net realized loss had no impact on the net changing assets from operations during the quarter NNI or NAV. There was one new account in the life science sector placed on non-accrual during the third quarter with the cost basis of approximately $5 million. As a result there were three investments on non-accrual as of September 30, 2013. The impact on NNI from the new account on non-accrual in the third quarter was less than a penny per share, for the fourth quarter we expect the impact on NNI to be approximately a penny per share. For the third quarter of 2013 the net unrealized appreciation on investments were $6 million. This was primarily due to the reversal of the previously reported unrealized depreciation on our debt and warrant investments in Satcon as well as the favorable change in fair values of our investment portfolio during the quarter. The net increase in net assets resulted from operations was $3.9 million or $0.41 per share for the third quarter. Our net asset value or NAV as of September 30, 2013 was $14.95 per share an increase of $0.06 per share compared to June 30, 2013, due to covering the dividend just declared by current NNI a recovery in the fair value of one of our loans and an increase in the fair value of our warrant portfolio. As of September 30, 2013 we had approximately $6.2 million or $0.64 per share in undistributed or spillover income for future payment consideration. At September 30, our investment portfolio consisted of warrant positions and 71 portfolio companies with an aggregate fair value of 6.6 million and 50 secured loans with an aggregate fair value of $232 million. As expected we have a reduction in the size of our portfolio and ended the quarter with an investment portfolio of $241 million with new bookings of 11.5 million in venture loans into six portfolio companies. This portfolio performance was offset by $10 million in regularly scheduled loan payments and $7.5 million in principle prepayments. Subject to the level of actual loan prepayments combined with the impact of normal amortization we expect a net portfolio change for the fourth quarter maybe down by approximately $5 million to $15 million. In the fourth quarter we’re aware of at least two potential liquid event in excess of $15 million in total as two portfolio companies have already notified that the intent to prepay their loans by the end of December. In fact $7.5 million prepayment came in last night with a $225,000 prepayment fee which will go to support NNI in the fourth quarter. Investment capacity has improved since Q2, as Horizon ended the third quarter with approximately $37 million in available liquidity including cash and equivalents totaling approximately $27 million as well as approximately $10 million in funds available under existing credit facility commitments. As of September 30, we had no borrowings outstanding under our revolving credit facility and our term loan credit facility had a total of $10 million outstanding. Following our securitization completed in June of this year we turned our balance sheet focus in the third quarter to our revolving credit facility in order to both improve it's terms and ensure we have the ability to either renew it at the end of the revolving term next July or place it with another facility. In this process we were able to quickly achieve both objectives in a cost efficient manner by partnering with key equipment finance a major market participant in the BDC space. As we announced last night we amended and renewed facility as a major accomplishment for the company and provides the following important benefits. First we lowered the cost of our anticipated borrowings for 2014 by reducing the LIBOR floor under the facility to 75 basis points as compared to the previous floor of 100 basis points. Based on our current LIBOR rates this effectively reduces the current interest rate on the borrowings for the quarter to 4%. Second we extend the remaining revolving period during which we could increase borrowings by more than 2 years from July 2014 to November of 2016. Third, in light of the securitization and current leverage we right sized Horizon’s existing commitment levels by securing an initial commitment of $50 million versus the previous commitment of 75 million. We did this while retaining the right to increase the commitment with key and other lenders to a $150 million. Based on the demand we saw from banks during the process we believe we will be able to increase the size of our revolver when we deem it in our best interest to do so, by right sizing our current commitment we will effectively reduce the impact of non-use fees for this facility as our asset backed notes amortize. Fourth, the facility as amended now always the ride [ph] to more fully leverage all of the loans in the investment portfolio. We intend to use the facility as our primary source of leverage for new loan, not just for the first-lien loans as we did until the securitization but also for second-lien loans as we’re now permitted to have a much higher concentration of second-lien loans in the facility. As a result any second-lien transaction that we place on the facility will now be leveraged at an advance rate of 50% for the current borrowing cost of only 4% as opposed to the 7% borrowing cost they would bear on our term loan facility. We expect to first draw on the facility in Q1 and more fully in the second half of 2014. The success we achieved over the past five months in substantially improving our overall borrowing capacity including the new commitment from Key as well as the $90 million turned securitization completed in Q2 enhances our ability to grow future earnings. Currently approximately 68% of total borrowings outstanding are fixed at a favorable interest rate of 3% lowering our overall debt cost and enhancing our future earnings potential in addition with 92% of total borrowings now at fixed rates we have reduced our exposure to a rising interest rate environment. As of September 30, our asset coverage ratio was 208% or a GAAP debt to equity ratio of 93% and a net leverage ratio of 74% after taking into account cash of approximately $27 million. While we continue to benefit from the use of cost effective leverage, our high quality portfolio deleverages itself quickly due to the rapid amortization schedules. This predictable cash flow generated from our venture loans combined with the capital returns through normal liquidity events to provide sufficient capital to take advantage of market opportunities as we continue to effectively manage our existing portfolio of returning [ph] assets. Now I would like to turn the call back to Rob.

[Rob Pomeroy:]

Thank you Chris. We’re pleased by our performance for the third quarter which demonstrates the earnings power of our dynamic venture loan portfolio. I want to emphasize that management remains focused on optimizing the capital that we have available to us by deploying that capital to grow efficiently and profitably into a diverse mix of quality, high yielding assets. We have no intention of raising equity capital in current levels, we will remain patient as we endeavor to reduce our leverage, maintain an appropriate level of investments and extract profits from our portfolio. Profits will come from double digit coupons, fees, ETPs and ultimately from monetizing our warrant position as opportunities present themselves. We will also continue to enhance our profitability by improving the cost and efficiency of our debt capital as evidenced by our new partnership with Key Equipment Finance. In doing so we intend to strengthen Horizon’s leading industry brand 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 fourth quarter results during the week of March 10, 2014. We will be happy to take questions you may have at this time.

[Operator:]

(Operator Instructions). Our first question comes from (indiscernible) of KBW. Your line is open.

[Unidentified Analyst:]

With the amendment of your Wells facility should we expect those existing fees associated with that facility to be expense [ph] in the fourth quarter as hard that amendment or would those new fees, would those existing fees rollover to the new facility?

[Rob Pomeroy:]

So the structure of the transaction was an amendment and modification where KeyBank came in and took the place of Wells rather than closing down the old facility and creating a new one. So essentially it's a replacement, there is a slight accounting impact where it's about a nickel impact in the fourth quarter for the transition from one lender to the other.

[Unidentified Analyst:]

Okay so now you would expect basically the same kind of those amortization of origination fees the experience in 2013 or the key facility.

[Rob Pomeroy:]

Correct.

[Unidentified Analyst:]

Okay. And then Chris I don’t know if I heard you long but did you say you guys expected $10 million to $15 million of negative net portfolio growth in the fourth quarter?

[Rob Pomeroy:]

That’s correct.

[Chris Mathieu:]

It's 5 to-

[Rob Pomeroy:]

5 to 15.

[Unidentified Analyst:]

5 million to 15 million, okay.

[Rob Pomeroy:]

On a net basis.

[Unidentified Analyst:]

Yeah and then you guys take (indiscernible) on non-accruals you guys had about a $2 million write-down in this market about a $3 million. Looks like they filed for Chapter 7 bankruptcy on Monday and I saw their only assets were really primarily intellectual property. So was this liquidation you know of the company you know factored into your second quarter evaluation or could this be further downside to your third quarter mark?

[Chris Mathieu:]

When we fair value of the assets we use a scenario approach which included in our expectation that they would file Chapter 7.

[Operator:]

Our next question comes from Fin O'Shea of Raymond James. Your line is open.

[Fin O'Shea:]

I just had a question on the credit quality of the portfolio. We saw there has been an uptick in level of lien [ph] loans by about 4.5 million and you know more than offset by floor [ph] loans going at about 14 million, you could just get us some detail on those.

[Rob Pomeroy:]

Yes so the primary movements there were the increase in value for one non-accrual loans ACT which I spoke to in the body of my script, and so as a result of it's increase in value fair value the percentage wise, those are primary difference.

[Operator:]

Our next question comes from (inaudible) of Wells Fargo. Your line is open.

[Unidentified Analyst:]

I really appreciate the market color guys and as we have seen then you referenced IPO is accelerating in 3Q and quarter-to-date, how does this impact the demand for your debt and also the prospects for your loan monetization’s?

[Jerry Michaud:]

So actually it's you know we have gone through these cycles you know over a very long period of time and so we, they all tend to at the end of the day kind of look the same after when you get chance to look back at it and then what we’re beginning to see is you know later stage companies that were waiting for either better public markets or better M&A environment are now having that opportunity to get some liquidity and what the result of that has historically being, we’re beginning to see it now as well as we see this become far more optimistic and capable by the way of raising additional capital and deploying that in earlier stage asset so while the later stage deals that we may have had an opportunity to finance had the IPO market or M&A market then less attractive, those deals start to get out and go away but on the other side of that we start seeing lots of really good opportunities in earlier stage companies across you know the various market sectors and that is exactly what we’re seeing now. I would particularly point out the life science market where we’re seeing really high quality life science fields that are relatively you know in earlier stages that are getting funded and that’s something that market has had trouble raising capital over the last couple of years because most of the money was in fact going into late stage companies. So we’re pretty optimistic that where we’re losing deals on the top we’re going to gain you know we will be gaining deals on the bottom side. So where it could impact is the size of the transactions because obviously earlier stage deals A, don’t need as much capital and don’t qualify for much capital so the transaction sizes might be on average a little bit smaller but generally speaking I think overall the dollar opportunity for investment we’re seeing actually starting to get stronger from both the lower end of the market right up through you know the middle part of the market. So we’re pretty optimistic going into 2014 especially what I’ve just seen here on the fourth quarter is there will be ample opportunity and market capacity for us to meet our funding goals.

[Unidentified Analyst:]

And on the earlier stage deals would it fair to assume that the typical structure on these would be U.S. the sole lender given the smaller size or would you be perhaps (indiscernible) or someone else?

[Rob Pomeroy:]

Yeah you raised a very interesting question. You know if you look at what we were able to accomplish in the first three quarters of last year after we completed our bond offering and then sequentially be follow on equity offering. We were able to deploy all of that capital extremely efficient within the transactions where we you know we were able to source the deals and essentially fund most of that on our own nickel. We knew coming into this year that liquidity was going to be a challenge for us. We even though we got approval to do an equity offering below NAV we had pretty early on decided to you know try to manage the capital we have and efficiently deploy that and so started that strategy you know we have been partnering on a lot of transaction this year that has allowed us to stay in the market, price the deals appropriately and get high quality yields on transaction. So we’re doing that a lot more this year and that has effectively allowed us to be very aggressive and very active in the marketplace.

[Operator:]

Our next question comes from Merrill Ross of Wunderlich Securities. Your line is open.

[Merrill Ross:]

I was wondering if there was any commonality in the non-accruals and similarities or differences in what you expect them to you know workout particularly of the new one that came on this quarter.

[Rob Pomeroy:]

No each one is unique, they have been in different markets and got to the position of non-accrual for very different reasons but once that are can be anticipated in the venture lending space so these are not unusual but they happen but there is no commonality.

[Merrill Ross:]

So a follow-up, and switching to a more positive topic. How would you define your franchise now in getting new investments or new commitments? Is it more a function of your following up with VC partners that you know have previously sent deals to you or is this more partnering up you know with other lenders who are you know more active in the business now than they were then?

[Rob Pomeroy:]

Yes so it's the latter, we are still seeing a significant in-flow of referrals from the venture capital community that we have, have been working with for you know over 20 years now as a management team. Most of the partnering we’re doing, we’re bringing partners into our transaction. It's almost exclusive but they have maybe you know one or two, it's (indiscernible) but for the most part we’re the ones we’re generating the opportunities and bringing in partners as we see a need to do that.

[Operator:]

Our next question comes from Matthew Howlett of UBS. Your line is open.

[Matthew Howlett:]

Just to follow-up on the comments you know maybe it to be raise capital. I know a lot has changed as the Special Stockholder Meeting and can we just sort of kind of look at it like the improved liquidity position of the company since then, the new facilities in place the improved outlook on the portfolio and the warrant but does the explain the more of the comments as it relates to capital?

[Rob Pomeroy:]

We have as Chris mentioned we have adequate capital to deploy based on available cash and to the return of capital from prepayments and normal amortization. So we’re very comfortable trying to optimize the existing portfolio and try to stay as fully investors as we can. We’re also trying to reduce the leverage by deploying the cash that we raised from securitization but trying to get back down to you know our target leverage of 0.8 to 1 now.

[Matthew Howlett:]

Right, can one presume that with the stock still well below NAV and you know this stability in the portfolio last year I mean that you wouldn’t look to raise capital at meaningful discount the book I mean is that something that at this point is off the table?

[Rob Pomeroy:]

Our goal is to not issue shares below NAV as we’ve stated we have no intension to selling shares at the current levels.

[Matthew Howlett:]

And then with the, you know with the real improvement with the facilities and you know the securitization could you revisit the SVIC [ph] at some point again, I mean do you look at it as a natural progression with a company given you know your larger peer which is trading well above book seems to be really utilizing those facilities?

[Rob Pomeroy:]

Yeah as we have stated before we really have no intention of reapplying for the SVI [ph] license at this time.

[Operator:]

Our next question comes from Casey Alexander of Gilford Securities. Your line is open.

[Casey Alexander:]

The Key facility, am I correct is the commitment strong by 25 million from what it was under Wells?

[Rob Pomeroy:]

That’s correct it's-

[Casey Alexander:]

And is that intended to reduce the non-use fee?

[Rob Pomeroy:]

That is one of the bio-products of it, yes.

[Casey Alexander:]

Okay and is the advance rate any different than what you had under Wells?

[Rob Pomeroy:]

The advance rate is almost identical; it's 50% on eligible assets. The big difference is that we have a shift in the breakdown between first and second lien eligible asset. So it's now substantially improved that we can have more second lien business that previously had to be targeted for either securitization or the Fortress facility and with this improved eligibility for second lien to assets we now see a much better path to put that on the Key facility.

[Casey Alexander:]

And just to make sure I hate to ask this I think this is the third time you’ve to answer this but projected 5 million to 15 million of net negative portfolio growth for Q4 is that correct?

[Rob Pomeroy:]

Net portfolio decrease, yes the 5 to 15.

[Chris Mathieu:]

We have also mentioned those, we anticipated as much and that includes the anticipation of some prepays in the fourth quarter.

[Casey Alexander:]

My last question is that the few income associated with the prepays in this quarter was you know reasonably quite a bit higher than it was in the second quarter although the absolute level of prepays was pretty reasonably lower than it was in the second quarter. Was it something unusual about the fee structures and the deals that came this quarter or last quarter that account for that difference?

[Rob Pomeroy:]

Yes. So prepayments are almost always structured in declining value so our early prepayments in the life of a loan tend to be in the 4% or 5% range of the principal outstanding at that time and so the prepayments that occurred were earlier in the life cycle. If you had a loan that would say for a year, three or a four year loan it might only be 1% or 2% prepayment penalty in this case for these deals.

[Casey Alexander:]

All right that makes sense and lastly the discussion about the later stage life science being overheated I mean is that your expectation that you’re going to get refi-ed out of a number of your later stage life science deals that you’re holding now?

[Rob Pomeroy:]

I wouldn’t say it's our expectation that happens because if the company’s decide through an IPO that that wouldn’t necessarily result us on being prepaid. So I wouldn’t say that that’s something that we expect you know we did see a couple of transactions in that market though we were prepaid this year. But I wouldn’t say that this is you know kind of run on the bank as it relates to that. First of all if you look at all that science portfolio it is a pretty strong blend of not just late stage but you know early and middle stage companies as well. So I’m not overly concerned about that going into 2014.

[Operator:]

I’m showing no further questions. At this time I would like to turn the call back over to Rob Pomeroy for any further remarks.

[Rob Pomeroy:]

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

[Operator:]

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