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Hercules Technology Growth Capital, Inc. (NYSE:HTGC)

Q4 2008 Earnings Call Transcript

February 12, 2009 at 5:00 pm ET

Executives

Manuel Henriquez- Co-Founder, Chairman and CEO

David Lund - Chief Financial Officer

Jason Golz - Investor Relations, Counsel, FD Ashton Partners

Analysts

John Hecht - JMP Securities

Troy Ward - Stifel Nicolaus

Jon Arfstrom - RBC Capital Markets

Analyst for Robert Napoli - Piper Jaffray

Henry Coffey - Sterne, Agee & Leach

Art Spinner - Spinner Global Technology

Arthur Winston - Pilot Advisors

Operator

Good day and welcome to the Hercules Technology Growth Capital, Inc. fourth quarter 2008 conference call. Today’s call is being recorded. At this time, all participants are in listen-only mode. Later we will open the call for your questions. (Operator instructions)

I'll now turn the call over to Judy Golz of FD Ashton Partners, Investor Relations Counsel for Hercules. You may go ahead, Mr. Golz.

Jason Golz

Thank you, operator, and good afternoon, everyone. On the call today are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO; and David Lund, our CFO.

Our fourth quarter and year end 2008 financial results were released just after today's market close. They can be accessed from the Company's Web site, at hercules.com, or htgc.com. We have arranged for a tape replay of today's call, which will be available through our Web site or by using the telephone numbers and pass code provided in today's earnings release.

I would like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Today's conference call may include forward-looking statements and projections. We ask that you refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from these projections. We do not take any obligations to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit sec.gov or visit our Web site at herculestech.com.

I would now like to turn the call over to Manuel Henriquez, Hercules Co-Founder, Chairman and CEO. Manuel?

Manuel Henriquez

Thank you, Judy, and good afternoon and thank you, everybody, for joining us on the call today.

I would like to share with you Hercules’ outstanding fourth quarter performance and fiscal year end 2008. Despite an otherwise prolific and extremely challenging market. However before I start the call today I want to acknowledge that in this unprecedented economic environment which continues to persist and frankly have only gotten worse. We remain hopeful and overly optimistic that things may improve sometime in the second half of 2009. I believe that the global financial crisis we are currently experiencing will be far more reaching and deeper than anyone might have previously have expected just a short time ago. Many adjustments have been made to contain its spread have proven and continue to prove difficult and ineffective. The banking crisis continues and access to credit facilities is close to nearly impossible to secure despite efforts from the government and the TARP Program.

The banking sector continues to degenerate further as evidenced by the continuing burnings of assets that we have seen during the fourth quarter despite our government’s Herculean efforts to stabilize and stimulate our economy. Liquidity continues to be calm, or as we say, liquidity is suddenly the Holy Grail of the financial services community, followed by a heightened and continued awareness of credit concerns. Despite the government’s attempt to unlock the credit and capital markets, we have seen little to no activity in terms of gaining access to these credit facilities.

We continue to engage in discussions with various potential lenders in order for Hercules to secure additional lines of capital in the current market which is a testimony to our continued access or I should say lack of access to capital lines to continue to operate our business. Liquidity has become a critical factor in running and operating a financial services company in today’s market. Given this lack of liquidity, given the lack of credit in the market, the competitor landscape on the other hand has improved quite dramatically. There is a silver lining to this market in this opportunity as credit continues to contract, the competitor environment continues to improve quite dramatically making the investment environment for Hercules a quite an attractive environment to pursue which we expect to do later on in the quarter and certainly throughout 2009.

During today’s call we will attempt a slightly different format of the call. The call tends to be shorter in terms of the opening comments by me and discussions of the marketplace and we will be much more focused on providing quick color as to financial performance of the Company in order to allow investors a greater time for Q& A to ask more specific questions regarding the credit environment and many of our financial performances and objectives that we are trying to approach and achieve as a Company.

To that end let me give you a quick overview of the venture capital community. As many of you are aware, Hercules’ primary focus is lending activities to venture capital technology life science companies and most recently increasingly expanding its focus to private equity, low market technology and less sized companies as well. Hercules will continuously focus on existing markets however it has not been without notice on the current shifting of the venture capital market place and the capital by the venture capital community.

Back in the second quarter of 2008, Hercules made a cautious decision to begin to slow down its originations and in essence continued to build our capital reserves and liquidity reserves for the unforeseen economic downturn that we are currently in and experiencing today. This downturn became materially worse in the mid to late October period where the volatility in the broader market increased quite dramatically at which point we saw a fairly dramatic pull back on the venture capital invested activities in the marketplace.

We took advantage of this market opportunity to also scrub and monitor our portfolio more closely. We have been very diligently managing and working through many credit situations of which we look forward in our financial performance and receiving fiscal returns to the fourth quarter. I want to make sure that I do not imply nor infer that the venture capital community is suddenly falling apart or is dead. That is not the case whatsoever. The venture capital community continues to assess capital and it is simply going through a metamorphosis or new paradigms in financing technology-life sciences companies. The venture industry in terms of statistics actually invested $5.5 billion in the fourth quarter of 2008 which is gained from the prior year of the same period. For an annual basis the venture capital community in 2008 deployed $29 billion of capital which was significantly higher levels that Hercules had predicted or anticipated in the second quarter and the first quarter 2008 which we anticipated at $28 to $30 level. This is primarily driven by activities that they realized in the first and third quarter of 2008 activities. This compares to $31 billion in 2007.

Now as to our forecast or our expectations of the venture capital community for 2009. This is Hercules’ over conservative like the industry expectations as of today. Hercules expects a significant and continued downturn of venture capital activities in 2009 where we are predicting for a modeling point of view to see anywhere between 20 to 22 billion of venture capital activities and this is down from the $29 billion, as reported earlier, that they achieved in 2009. However as I said a moment ago there is a significant benefits to the contraction in the venture capital community by having less companies pursuing capital, the venture capital themselves are able to dedicate more time and attention to their more promising companies while not diluting their invested capital in spreading it into broader segments of start-up companies in their community.

What this means is at the turn, is that as less competition exists, lower valuations will occur and companies should become more frugal with their capital. As that frugality sets in, access to lower, less diluted forms of capital increases quite dramatically, meaning the demand for debt becomes in excess of demand by early stage or mid stage in more mature technology life sciences companies. However because of the contraction taking place in the venture capital marketplace it is our expectation to see where we say venture capital investing to be one of the most dangerous places to deploy capital and focusing our attention to mature companies, as we have done in the preceding 8 quarters, is we think the strategy that makes lot more sense in this current environment. I am happy to report that Hercules’ early stage technology companies represent less than 3% of our total asset and continue to decline each and every quarter thereafter.

As the venture capitalists continue this three large process of filling out their investment portfolios by focusing on more promising companies and selling off the less promising companies or shutting down the ones that do not have viable business models which was more evident today in the Wall Street Journal article, we continue to do the same process in our portfolio companies which we believe will translate into a much stable and continued historical credit performance which Hercules has continued to deliver upon. Historically, this methodology of fitting the herd, as we prefer to call it has proved to be a very timely and effective methodology by allowing the stronger companies to survive which eventually in this market will translate into higher eventual returns for those investment activities take place during a down market such as this.

Similar to the event is the lack of liquidity that exists in the venture capital market place. Clearly, many of us now realize and know that IPOs and M&A activities are all but not occurring in the market place today. It remains a very challenging environment for venture capital firms to receive or gain access to an exit through an M&A and IPO activity. We at Hercules do not expect to see many exits from our portfolio in 2009 beyond a certain handful in the coming months of 2009. However, that said, Hercules continues to do realize exits and gains in an extremely challenging environment as evidenced by the recent set of press releases that we issued to the market outlining similar life sciences exits that have taken place from M&A activity or strategic partnerships such as the announcement made today by Portola with the strategic partner in the market place today.

This continues to be indicative of Hercules ability and Hercules investment vessels to select and pick the right companies. In my 20 years as an investor, I have never seen such a dramatic and quickly deteriorating market as we are currently witnessing today. It is an unprecedented metamorphosis occurring in the financial industry which is currently underway today. Because of this, Hercules had chosen to continue its strategy on a slow and steady invested strategy that we began back in June of 2008. That strategy was meant to increase our liquidities, focus on credit and mitigate any early indications of troubles in our portfolio. We continue to remain steadfast as a partner to our portfolio companies working through difficult and challenging times with our venture capital partners and with various portfolio company' management teams in order to ensure their survivability and are able to lose capital.

By doing so, we are continuing to systematically de-leverage our portfolio by taking early repayments of capital that we receive from our loans and de-leverage our portfolio by satisfying and accelerating the pay down of our Citibank and Deutsche Bank credit facilities which David will point upon further in his discussion. In an effort to bolster our liquidity and to prove our credit situation, we have made a decision to pick our fourth quarter earnings and declare a first quarter dividend by choosing to payout our dividend in the form of stock and cash in the first quarter. This maybe something that some investors find it as not a prudent move to do. We feel very strongly that this decision is a very cautiously made decision in order to bolster up our capital position and increase our liquidity positions for the unforeseen turmoil that continues in the capital market. It will also serve as an additional buffer or insurance in order to ensure that we have sufficient amount of capital to absolutely satisfy the Citibank and Deutsche Bank obligation at the end of April.

This was a difficult decision, I can assure you but one which, we and I personally believe is the most prudent thing to do. Given the unprecedented turmoil in the capital market and in the credit markets today. It is consistent with our focus in maintaining and enhancing our balance sheet in these very challenging times. In addition, we have also adopted a policy of changing our dividend policy. We believe that investors deserve and merit a greater transparency on dividend coverage and dividend policies. Hercules has adopted a dividend policy of which we will pay out 90% to 95% of our GAAP net IRI numbers based on in the rears financial performance. This is critical because we believe this provides a greater transparency to our investors to see the dividend coverage from our earnings.

Lastly, I am extremely proud of our team's achievement. Once again, our team has delivered in a very challenging time. I am delighted to report to our shareholders another outstanding quarterly performance on all fronts including credit performance, growth of revenues, growth of many investment income and continued solid credit performance in our portfolio. We continue to defend and protect our balance sheet quite tremendously. We have adopted a very cautious approach for the first half of 2009 and we maintained a strong liquidity and credit position in our portfolio.

I will now turn the call over to David Lund who will discuss our financial results, credit performance and our current liquidity position in more detail. After that, both David and I will be happy to answer any questions you may have. Again, thank you very much. David?

David Lund

Thank you, Manuel. As Manuel mentioned, given the recent market turbulence, we are very pleased with the results we achieved for the fourth quarter and the full year. During the quarter, we were particularly focused on de-leveraging our balance sheet by collecting early loan repayments that allowed us to pay down our credit facilities with Citibank and Deutsche Bank. We also continued to work diligently to maintain the strong credit quality so that we are well positioned to continue financing companies that we believe will be future leaders in the technology and life science sectors.

With that, I will now provide more details on our summary of the fourth quarter and full year results.

Key portfolio metrics and credit facility update; total investment income for the fourth quarter which is comprised of interest and fee income was $22 million, which was an increase of 39% over the fourth quarter of 2007 investment income of $15.8 million. For the full year of 2008, total investment income was $75.8 million compared to $53.9 million in 2007, an increase of 41%. The increase in interest and fee incomes are directly attributed to higher yields, additional fees and higher average outstanding loan balances in their respective periods.

The effect of yield on our debt investment during the quarter was 14.9%. The increase from the effective yield of 13.1% for the third quarter was due to higher average yield to maturity and higher one-time fees. The weighted average yield of our portfolio at the time of loan origination increased to approximately 12.87% from 12.67% in the previous quarter.

Interest expense and loan fees on borrowings were $5.5 million for the fourth quarter of 2008 as compared to $1.8 million in the fourth quarter of 2007. The increase of approximately $3.7 million was primarily attributed to higher average loan balances outstanding and the higher average interest rates and fees on our borrowings from Citibank and Deutsche Bank.

During the fourth quarter, our average debt balance outstanding was approximately $245 million as compared to $85 million in the fourth quarter of 2007. The effective cost of debt during the quarter was approximately 9% as compared to 6.3% in the same period last year. As a reminder, our borrowings under the SBA facility are locked in for 10 years at a cost of debt of approximately 6.6%. Even with this increased cost of borrowing, we experienced this quarter our net interest margin increased to 11.3% as compared to 10.16% in the previous quarter.

Operating expenses for the quarter, excluding interest expense and loan fees were $5.4 million as compared to $4.1 million during the same period last year. The increase as compared to the fourth quarter of 2007 was primarily attributable to higher compensation expense due to higher employee headcount, higher work out related expenses and stock-based compensation expense.

I am pleased to report that net investment income for the quarter was $11 million or $0.34 per share based on 32.7 million basic shares outstanding. This is compared to $10 million or $0.31 per share in the fourth quarter of 2007 based on 32.5 million shares outstanding. Our net investment income for 2008 was $40 million, an increase of approximately $7.5 million or 23% as compared to $32.5 million in 2007.

Taxable income for the quarter was $8.6 million or $0.27 per share including approximately $2.3 million or $0.07 per share from net realized losses. The realized losses we recognized in the fourth quarter were primarily related to the $2.4 million loss on Simpler Networks and other loan and equity write offs of approximately $950,000 which was offset by realized gains of approximately $1 million primarily attributed to the sale of common stock and FFS.

I would like to point out that even with the fourth quarter realized losses for the year; we recognized $2.6 million unrealized gains for 2008. During the fourth quarter, we recognized $19.4 million of net unrealized depreciation from our loans, warrants and equity investments. This unrealized loss is comprised of depreciation of approximately $2.4 million in loan values, $7.3 million in warrant values and $9.7 million in equity values primary attributed to the valuation accounting required under FAS 157.

We continue to our high credit quality and standard and discipline of loan monitoring during the quarter. Our diligent monitoring of our portfolio companies combined with our focus on later stage venture capital and private equity bank companies have helped maintained our high credit quality. We continue to build upon the diversity and strength of our investment portfolio by adhering to our slow and steady approach and maintaining our high investment standards and seeking out leading companies in life sciences and technology.

The weighted average loan rating our portfolio was 2.39 compared to 2.25 in the prior quarter. As a reminder, most of our portfolio companies are dependent on future events of venture capital investment, and we downgrade our portfolio of companies as they approach a period in which they will need to close additional rounds of financing.

I would like to also note that the makeup of the companies in the various grading categories will change period-to-period based on operating results and funding activities. At the end of 2008, we had four companies are non-accrual with the combined carrying value of less than $1 million.

Turning to the balance sheet, at December 31, 2008 our investment portfolio balance was $581 million as compared to $530 million at December 31, 2007, representing a 10% growth in our investment year-over-year, while maintaining credit quality. We finished the quarter with a backlog of unfunded commitment of $82 million and one nonbinding term sheet for $7 million.

We also ended the quarter with approximately $17.2 million in cash, as we continued to manage our liquidity position.

During the quarter, we collected $69 million in principal repayments, including approximately $41 million an early repayments. From these proceeds, we paid down $38 million under our warehouse credit facility, resulting in the debt balance under the credit facility of $89.6 million at December 31, 2008. As noted in our earnings release, we significantly reduced credit facility debt by paying down an additional $18.7 million in January leading an outstanding balance of $70.9 million at the end of January 2009.

Turning to our liquidity, our facility with Citibank and Deutsche Bank expired under the normal terms of agreement on October 31, 2008 and will be amortizing until April 30, 2009, at which time any remaining outstanding principal and interest are due.

The borrowing rate during the amortization period is LIBOR plus 650 basis points.

The Company had approximately $216 million in debt outstanding as of December 31, 2008, representing a leverage ratio of approximately 57%, or 23% taking into account our exemptive relief for the SBA.

Currently, we have $15 million facility with Wells Fargo probably which there are no borrowing debts outstanding at December 31, 2008. In addition, the Company has $130.6 million available under the SBA program of which has grown $127.2million. These two facilities combined allowed the Company access to up to an additional $53.4 million in capital subject to certain credit and regulatory limitations.

I would like to once again remind our shareholders that borrowing done through the SBA program are available for 10 years.

Finally, our Board of Directors declared a dividend of $0.32 per share in cash and stock as Manuel discussed earlier. The dividend will be payable on March 30th, 2009 to shareholders of record as of February 23rd, 2009. This is our 14th consecutive quarterly dividend declaration since our initial public offering and will bring the total and cumulative dividend declared to $4.07 per share.

We are pleased that we are able to pay 100% of our dividend from ordinary income and spillover of prior year earnings, meaning, we do not rely on extraordinary gains to pay our dividends. In addition, the Company expects to distribute approximately $0.18 per share from the spillover earnings in 2008 to its shareholders in 2009 as additional dividend, adjusted for any realize gains or losses occurred in 2009.

I would like to reiterate that we are pleased with our financial performance this quarter and would like to acknowledge the hard work and dedication of our team here at Hercules as well as the support of our shareholders.

Operator, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of John Hecht - JMP Securities.

John Hecht - JMP Securities

A couple of questions, one is the compensation. Dave could you talk about some of the increasing compensation ready to work out this and it went from $2.5 million to $3.4 million from Q3 to Q4, is this a good base or there is some additional compensation expenses in that line item that would be more one time line digit?

David Lund

Well, I will say that during the fourth quarter, we did increase our bonus accrual because the performance of the team and third quarter was a little bit lower because we were uncertain about what was going to happen in the marketplace in the fourth quarter as it turns out, it was outstanding. So, the accrual there is a little bit higher. So, turning a little bit higher by promptly a couple of $100,000.

John Hecht - JMP Securities

And that would be a couple of $100,000 above the normal rate of compensation expense?

Manuel Henriquez

That is the best.

David Lund

That is right and in a normalized market clearly that number is probably a major astound in calendar ’09 but we do not necessarily give guidance but you can expect that number to probably drift down because of the less originations obviously occurring in ’09 if the market continues the way it is.

John Hecht - JMP Securities

Okay. Manuel, can you a little bit elaborate on the dividend policy understand the reason for paying out in stock given your goal to maintain liquidity, how should we proceed once you pay down the Citicorp facility, would we expect this to go back to a cash dividend and how would the treatment of the spillover be at potential stock and cash as well?

Manuel Henriquez

I would first make sure people understand the conscious decision and the multiple processes that we went through to make this decision with our Board and ourselves. The decision to, in essence, we called cash had been deployed, is clearly one of prudence and caution. The decision is made at this point solely for the purposes of the first quarter. It is not a policy that we are adhering to or initially believe we will continue throughout 2009. I have no expectations or beliefs at this point that we will continue that policy beyond the first quarter.

It is absolutely and certainly being done as a further insurance to insure that we have unequivocal capital needed to satisfy the remaining balloon payment at the end of April for the Citibank/Deutsche facility that is maturing. It is entirely a cautionary move for that purposes. I hope so that you will not get confused as to the merits of the dividend. Frankly, we are one of the few BDC’s truly are paying a dividend and frankly seeing a very strong $0.32 dividend. I think it is very proud of being that we did as a testimony to achieve an earning $0.34 quarterly earnings performance in the fourth quarter.

So, we have two very critical components here. The first one is the dividend policy of having a visibility and dividend coverage. This is why you see a dividend that is in essence of approximately 95% of the GAAP earnings and the fourth quarter of $0.34 translating into a $0.32 dividend.

In terms of the spillover itself, clearly once again, I am not aware of many BDCs that also spillovers but that spillover is an important that will help at the end of calendar ’09 on supplementing exact form of a fifth dividend or more commonly known the industry as the special dividend at the end of calendar ’09 that will translate into any curative remaining spillover or actually earnings required to get distributed under the RIC rules. And as a reminder the RIC rules require you to pay out at least the 8% of your earnings and then between 90% and 98% of your earnings you get off to pay an excise tax the gradual excise tax but most companies they distributed between 90% and 98% of their earnings and you are going to have the treatment of capital gains or equity derived gains during the year. Those are able to be spilled over and paid out in the following calendar year.

So, at this point we have $0.18 that was spilling over from ’08 to ’09 that unless we have any unforeseen losses should be paid out in a form of special dividends to shareholders at the end of this 2009 period.

John Hecht - JMP Securities

Okay, great color on that. And final question is your exit credit quality was somewhat consistent that there was a pickup in the Grade 4 class and I wonder if you could maybe give us a little bit color on that, was that one or two large loans or maybe more granular loan so that you can disclose on that?

Manuel Henriquez

Sure. We are having every type of services companies in this world, our challenge by the FAS 157; we went through almost an incredible amount of scrubbing because of the volatility and because of the changes of venture capital landscape. We, exercised of really going through line item-by-line item and company-by-company looking our portfolio and really looking at FAS 157 impact in essence. Depreciating the assets, we feel merit depreciation with the prevailing changes in the overall marketplace today.

Specifically to your question, the grade in the Grade 4, the increase in Grade 4 is attributable to one company and that one company without a name has a very large pharmacompany that is in process securing a very similar to that of the analysis we have made today, securing a contract in materialization with a large pharma partner because that has not been closed yet and given the size of that exposure, we felt it was prudent to downgrade that particular company until that particular contract is signed. So, it is really skewed by one company in particular.

John Hecht - JMP Securities

Okay. So, I assume that that contract is successfully signed that would fall to Grade 1or 2 category maybe?

Manuel Henriquez

Depending on the magnitude of the contract, it could be definitely catapult itself back up to the, just like a Grade 2 and depending on the debt and strategic relation for contract is negotiated could it back right to a level grade credit.

John Hecht - JMP Securities

Okay.

Manuel Henriquez

You have to remind. I need to remind. Life Science companies in particular have a fairly binary event. They either had successful Phase II Clinical Trial or a successful Phase III Clinical Trial and even though they make feel Clinical Trial it does not mean that the Company necessarily does fail. It means you can go back and resubmit data or go through different toxicology in order to resubmit data to the FDA.

Technology companies have a lot more binary outcome, and this particular Company is a Life Sciences Company that is in negotiations of a large contract.

Operator

Your next question comes from the line of Troy Ward - Stifel Nicolaus.

Troy Ward - Stifel Nicolaus

Just back to the balance sheet for a second, the $19 million depreciation number obviously was considerably more than your historical experience. Can you comment or whether or not you made any changes to your valuation technique other than just like you said a line-by-line scrubbing?

Manuel Henriquez

Look, the change is valuation technique is called volatility in the fourth quarter. You do not go for volatility index on the VIX on the historical 20% VIX index to 40% in the second quarter to 91% in the fourth quarter. When you apply a higher volatility to the Black-Sholes model that VIX by itself will create what I consider to be an artificially high valuation number or artificially low number, so because of that heightened concern on looking at the volatility that occurred just by using our standard methodologies, we decided to go through to get one more step on looking at all the credits as we normally do individually but also looking at comp group analysis and really looking at the prevailing occurrence in the venture capital marketplace and in essence impairing some of the valuation even further on specific companies that we have some awareness are either behind plan or encountering somewhat challenging revenue generating capabilities and those factors certainly play a role in depreciation further of that portfolio.

So, I guess I think we are more conservative in the third quarter than any other time ever in terms of looking at additional factors and I think that may have an impact in the portfolio.

Troy Ward - Stifel Nicolaus

Can you help us understand, maybe kind of on a percentage basis, how much of the write-down was due to the volatility in the Black-Sholes versus actually credits that are behind plan?

Manuel Henriquez

Well, that is easier Dave. It is an easier question.

David Lund

Yes. The depreciation that was taken, it is slipped in $4 million. That is really related in the kind of depreciation for performance and a loan and really the write-downs are largely attributed to just the volatility that took place in the public market when we have to do enterprise value parallels in terms of trying to determine what the value of the underlying private companies are.

Troy Ward - Stifel Nicolaus

In other words, the $4 million of that depreciation that was attributed to a loan is probably directly correlated to two particular companies, one of which is in a workout mode right now that we are working with the management teams and selling that asset as we historically done at Hercules. But again, as we have done in the past, we, Hercules will always downgrade a credit as it is approaching a trigger point of either capital raise or material event in its lifecycle. It is a cautionary move and we have done that time immemorial since we started Hercules and we will do that again and continue do that.

So, of the two loans that make up substantially all of that $4 million or so, we are actively involved in the sale of one of the triggering companies and working through a capital raise and one on the other.

Troy Ward - Stifel Nicolaus

Okay, great. That is a great color. And moving over to questions on the credit facility, looking at your subsequent event in such of $71 million as beginning of early January and then additional announcements even beyond that, it would seem to us that it is pretty well perceived that you are going to get that down to that $50 million level to allow your Wells facility to fully repay Citi. Is that the idea?

Manuel Henriquez

Actually, our confidence level is actually much higher than that. We feel pretty strongly right now, especially with the dividend cash or I would say stock payment the final bolstering of our liquidity. We feel very, very strongly that we will be able to fully pay off the credit facility with a combination of cash on the balance sheet certainly drawing portions of that outside of the Wells line. We do not, at this point, anticipate fully need to draw the whole facility on the Wells Fargo, but it is certainly an action that we are looking into as a possibility as well as using excess capital that we are accumulating inside of our SBA entity as well.

So, we have an abundance of capital that we believe come April timeframe to pay off this credit facility.

Troy Ward - Stifel Nicolaus

That is exactly, how we perceiving it coming into the quarter that is why we were a bit surprised, more than a bit surprised that you issued the dividend with stock. How can you explain the methodology of the new investments in Q4 versus issuing new equity at these levels?

Manuel Henriquez

Well, let us be clear. We do not view this as issuing equity in a direct sense because we are not paying an underwriter’s fee of 5% or 7% plus a discount around a fair value of stock itself. We felt and we strongly think that the very viable thing to do, which is even though Hercules is one of the BDCs that has ability to issue stock below NAV, we find that privilege in high, high regard that we do not want to abuse that privilege. So, we do not have any intention of simply issuing equity below NAV to issue equity below NAV and we are talking about an impact here from about $9 million or so of this whole back of the cash on our balance sheet which we think will be accretive in the long run because we are able to have that extra buffer in case some unforeseen issue occurs that we have some credit that we anticipated maturing inside the Citibank facility. If it does not occur we have that extra insurance policy that $9 million to insure that we pay the thing off.

David Lund

And also I would like to point out in the investments we have made in the fourth quarter. We have one investment. There was new one. The rest of them are more ongoing commit is do we had to existing portfolio company. So, it is not like we were making investments imprudently to the risk of the credit facility.

Manuel Henriquez

And Troy let me give a little more color on this. I think this is something is missing that may actually give you the [aha] that you are looking for. A lot of the credits or new investments that you perceived that we do oftentimes are potentially re-extending new credit facilities to our existing portfolio companies or rewriting an existing loan with one of our portfolio companies or we may have had a fixed interest rate or below market interest rate which allows us then to rewrite the credit facility at a significantly higher rate or interest and that will translate into our either higher effective yield or better yet a higher net interest margin.

So, the highly accretive event for us to continue to be very active supporters for our portfolio companies and working through our portfolio companies in both good and bad times as you maintain to build the brand of Hercules in the venture community.

Troy Ward - Stifel Nicolaus

But wouldn’t you agree that the new shares that are issued the $9 million let us call it $1.7 million, $1.8 million, however many share that turns into. I mean that is kind of have a hurdle rate in excess of 20% to be accretive to existing shareholders, Isn’t that correct?

Manuel Henriquez

Well, if you measure clearly by today’s terminology of course because we have dividend today of 22%. So, of course, the issues of share is that but if I would tell you that our new loan originations are generating current yields in the 15%, 16% range plus you add on the equity component to that you are quickly achieving our cost of capital in terms of new originations.

So, we think that is an accretive event and we can actually originally return an excess of our dividend yields today.

Troy Ward - Stifel Nicolaus

Okay. And then on the middle net worth covenant, you are totally closer than we would have thought you were going to be because of the write-downs in the quarter, how are you looking at that covenant going forward?

Manuel Henriquez

We are at 382. The minimum is 360. This was largely attributed to put to the write-down of FAS 157 for the warrant and equity or our approaching cost. So, we really do not feel like we are at significant risks here of tripping that covenant.

David Lund

And Troy, another insurance if you will on that statement that you asked is another factor of taking into account by holding back $9 million of the capital, you in essence bolster, your net worth and therefore solidify or give you a better cushion on that net worth test with the Wells Fargo facility.

So, that was also another factor taken into account on the dividend holdback for that one quarter.

Troy Ward - Stifel Nicolaus

Right, that is what we assumed. What is your appetite for leverage, let us say, towards the end of this year? Is there any thought of de-leveraging this with that completely potentially?

Manuel Henriquez

It is actually a…delivering only the context of paying back our Citibank and Deutsche Bank credit facility. There is absolute interest enough to continue to originate in a very select basis as we said in the beginning of the call and this is why we preserved the Wells Fargo credit facility until we absolutely pay off the Citibank/Deutsche Bank line once that is paid off, the Wells Fargo facility will be used to start levering the balance sheet.

We believe by that point the other lenders will in fact join the syndicate into the Wells Fargo facility and increase the balance sheet leverage further, but I will caution that I need to see some civilization in the market and improved excess in the market as we look to originate significant amounts.

Troy Ward - Stifel Nicolaus

Okay. One more then I will be done here. The SBIC, can you give us an update on what you are hearing whether or not we have heard some potentially positive things about that program building expanded? What is the appetite right now for the ability to get some of that done do you think?

Manuel Henriquez

Well, unfortunately, I have more real time data than you may actually want to know. At the beginning of this morning, we were positively supported that the legislators had at one point check, the $150 million increase in the SBIC program. As you may or may not recall, the SBIC program today is about approximately $137 million availability under the SBIC program. At one point, there was a rumor that it would increase to 225 or 250 and then it went to 185 and this morning we had heard that it was stabilized at 150, but at the beginning of this call we received an email saying that, “Oops, it got cut at the last minute.” I mean I am talking in real time here, but it may be brought back again some time between now and over the weekend but we will see.

So, we were doing with the real time, real situations. Further evidence as to why we decide to be very prudent and very cautious because were dealing variables. They are entirely out of our control and we to make sure that we are hedging we have all kinds of options available to us than a single critical path issue.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Can you just talk a little bit of how the board came up with the $0.32 it is number down the couple of pennies and I understand that but is this a level that you are going to evaluate each quarter or just a level that you think based on where you sit with your business model right now that it is a sustainable number?

Manuel Henriquez

As I said in the past we certainly do not give guidance and something that we will continue to not do given the unpredictability of the market. I think that the dividend policy is much more clearer than you may realize and that is back in December , we had issued I think the change in policy which make us one of the few BDC that I think really stand up to this issue and that is that we believe that shareholders are better served by having absolute and greater transparency of the dividend coverage based on net N&I anonymous in income so the $0.32 is arithmetic derived from $0.34 of earnings at N&I in the fourth quarter and merely multiply by it 95%.

And so the dollar expectations on going forward basis and to pay any between 95% and 99% of the quarterly earnings in the rears in the form of dividend and I want to reiterate what I said a minute a go it is not anticipated that future dividend payments will be paid in stock. It will be revert back to the cash payments that we have done historically but clearly that will be reviewed every quarter given March conditions as they turn more adverse which I hope that they do not but I think that we are preparing ourselves for a tough market here.

Jon Arfstrom - RBC Capital Markets

I understand that but just the expectation as in everybody should they expect that dividend is going to jump around from quarter to quarter?

David Lund

Well, we certainly do not expect it to jump around materially as you may believe that it will. I think that we will pay a dividend that represents 90% to 95% and with the $0.80 spill that we have, I think that there will be a potential, it could be a significant and potential fifth dividend or special dividend during the year that has made up of some portion of the $0.18 spillover and the remaining balance of the quarterly earnings that are not paid out in that particular period. So it is a combination of the 90% that we payout leaving a 10% buffer. That 10% buffer would accumulate at the end of the year and distribute it to our shareholders along with any special or any earnings spillover that cap gains that may or may not occur but yes, the dividend could move around quarter to quarter.

Jon Arfstrom - RBC Capital Markets

Okay, good. I am just changing gears here. The senior credit offers that roll that you talked about in your release; can you talk a little bit about what specifically you are using the senior credit offers are for? Is that approval one the front end? Is it monitoring? Does it work out? Can you give us some more details?

David Lund

No, Diane Earle, the credit officer I was referring to is so far an outstanding individual. She has been an incredible contributor to the organization. Most of you know that I also served as a credit officer of the Company for quite a significant period of time and Diane coming on board, I feel incredibly honored to have her here. There is a lot to take an enormous amount of credit off my plate and really hand it off to her. So, she is materially responsible for the day-to-day credit oversight operation in the organization about the technology and life sciences group as well as a lower amount of market experience. She is a highly experienced veteran in the credit community. She is a hardened asset base lender with a good 15 to 20 years of asset base lending under her belt and she comes to us with a lot of experience from her most recent institution and so she now has a very strong day-to-day credit oversight of the organization working in conjunction with two group heads of the technology and life sciences groups.

Jon Arfstrom - RBC Capital Markets

So, it is all the way through the approval monitoring and the tailwind on this as well?

David Lund

That is right. Diane is intimately involved on continuing takeover responsibility that I had held which is on work out. I would still be around to assist on all work outs, not to get cynical. I actually do not mind work outs at all. I think you learn the best in a difficult and strenuous situation. Diane is a very hard individual. I think that she can more than easily handle and she has proven it so far on work out so far being on Hercules.

Manuel Henriquez

And she is working with the deal teams on the front end of deals as well to make sure the structure looks right given the portfolio of the Company in fact. So, she has got the kind of beginning as well as end.

Jon Arfstrom - RBC Capital Markets

Last question, this may seem like a silly question but I will ask it, do you have any competitors maybe approximately a bit above this competitive environment?

Manuel Henriquez

It is less silly than you think. I do not want to slip at the value; I think it is horrible what is going on the financial community so I do not want to slip it or just missed about it. But the short answer is no, there is really no real more competition left. I mean the only competitors that we have are to some extent were venture banks and venture banks really do not do what we do. They are more early stage focus that we are an I think that the early stage venture activity that some of these banks have embarked on, sitting on a couple of billion dollars at early stage venture loans are going to go through a bit of load of herds here as the venture capital community contracts specifically in its efforts on early stage investing activities. So, this may sound completely crazy. The competitive landscape is almost entirely gone which is why we continue to preserve our own capital and we feel that as we satisfy the Citibank and Deutsche Bank credit facilities, we will be in a position to look at a beautiful landscape of investment opportunities with little to no competition at extremely attractive yields which is why we feel very strongly by withholding back $9 million of our dividend capital. We look forward to the opportunity to deploy that capital in the second and third quarter and fourth quarter of 2009 at greater than our yield spread or dividend yields today.

Operator

Your next question comes from the line of Robert Napoli - Piper Jaffray.

Analyst for Robert Napoli - Piper Jaffray

This is Jason DeLu calling in for Bob. I was wondering what amortization and early payoffs in the portfolio are you guys expecting each quarter.

David Lund

It obviously varies depending upon the activities that are happening. I think in terms of early payoffs where we are seeing fewer IPO or M&A activities in the course of 2009 that that will come down if you are in the first couple of quarters. Hopefully, we will see more of that pick up in the third and fourth quarters but I think we will possibly going to be looking probably something more in the neighborhood of maybe a million dollars of early fees and things of that nature.

Manuel Henriquez

Well, maybe a little more specific. I truly believe that the normal amortization in portfolio will continue at a run rate of probably $30 million to $40 million a quarter amortization, oh I am sorry, taking into account the de-levering. But probably more than $25 million to $35 million of amortization on a quarterly run rate basis on normal principal repayments.

David Lund

I think that Jason was asking about what fees and when it will be collected. Is that correct, Jason?

Analyst for Robert Napoli - Piper Jaffray

Well, I guess both but I will take both numbers. So, I mean I was looking for the run off that you guys are expecting each quarter.

Manuel Henriquez

Yes, that is what I thought so on a normalized basis, I think we would probably see a portfolio normalizing down and de-levering in a $25 million to $35 million normalized amortization rate and we considered Blue Bird for lack of a better word for early payoffs. I think David is right, we are probably between now and the maturity of the Citibank line. You are probably looking at $1 million to $5 million.

Analyst for Robert Napoli - Piper Jaffray

Okay and then with the expectation that VC investments can be down in 2009, can you speak to what you guys are expecting for investment within some of the industries where your portfolios are most heavily weighted? And then, how does this reduced VC investments, how can they impact your outlook for credit in terms of the great threes coming up with another need for another round of financing?

Manuel Henriquez

Well, as an answer to your question, let me take the first part of it. As we indicated right now, the venture capital industry did $28.8 billion, based on $29 billion in calendar 2008. We are probably a little more draconian in our assessment of the overall market itself. We are only expecting to see $20 billion to $22 billion of venture capital activity but as the previous caller asked, Jon Arfstrom at RBC, given the fact that we have little to no competition that is left in the market place. That is a pretty big pond to swim in at $20 billion to $22 billion of opportunities that the VCs will still invest.

A better way of looking at that from a quantitative point of view is that if you look at the venture capital dollars being deployed, let us say $20 billion and you assume that 20% of that could be debt capital complementing that, you are looking in a $4 billion market opportunity there on an annual basis. There is no way in the world that we will ever, ever fulfill the total potential demand for $4 billion. So we continue to have the opportunity to play the very large pond as one of the bigger fish there and looking at the better opportunities to invest and by looking at the better opportunities to invest in, you disproportionably pick the better players who have the stronger survivability which means you can have low to no credit losses similar to what we have had since inception of Hercules and I think that is going to continue to do well for us so the full and steady strategy of not over deploying your capital and maintaining strong liquidity on your balance sheet will build quite well for us in the second half of 2009 as we start to get back of that market.

And the VCs are still supporting their better companies which so far I think we have proven our ability to select those set of companies because our companies continue to receive additional runs of equity capital and that is happening in our portfolio as we speak.

Operator

Your next question comes from the line of Henry Coffey - Sterne, Agee & Leach.

Henry Coffey - Sterne, Agee & Leach

Just going through the subsequent event section, what is the size of the Guava Technologies loan that you expect to get paid off?

David Lund

Just right around $5 million.

Henry Coffey - Sterne, Agee & Leach

And then the final line on this Portola Pharmaceuticals, would that create a cash distribution on your way if it is successful?

David Lund

Well, first of all I think the announcement that Portola did today is absolutely fantastic.

Henry Coffey - Sterne, Agee & Leach

Right, $75 million, how much of that gets into your pocket so to speak?

David Lund

I think the Company is going to retain all of that capital at this point and continue their very successful clinical trial process going on right now. So, we were not expecting a payoff from that loan. We think it is a fantastic company, doing phenomenally very, very well and you are seeing a lot of our life sciences portfolio as you have seen in subsequent events, continue to make very strong disclosures and positive development. So we are not expecting Portola to pay us off.

Henry Coffey - Sterne, Agee & Leach

And then the cash on the balance sheet, I mean that is real cash that is accessible to you. That is not restricted or committed in any fashion, right?

David Lund

You mean at the Portola or our level?

Henry Coffey - Sterne, Agee & Leach

Your level, the $17.2 million of cash that you ended the period with.

David Lund

Right, we do have our requirement why the Citibank, Deutsche Bank line is out to maintain $10 million of cash on our balance sheet. When that obviously is paid off, that requirement goes away.

Henry Coffey - Sterne, Agee & Leach

But I mean 17 of that, that could all go to them as well?

David Lund

Correct. That is our cash to use as we see fit.

Manuel Henriquez

Henry, as we David pointed out earlier to kind of give you a little peak on the progress, the Citibank line balance is down to…

David Lund

About $71 million.

Henry Coffey - Sterne, Agee & Leach

About $70.9 million, yes.

Manuel Henriquez

Right, so we continue to accelerate and continue to pay that off and there is an interesting benefit. As we pay that credit facility off even faster, you are getting a high end interest margin being generated in the portfolio.

Henry Coffey - Sterne, Agee & Leach

Right, that is probably why I am, as well as everyone else in the phone sort of shocked at the fact that you are not paying a cash dividend in the March quarter. I understand the logic behind it. It is just when you look at the amount of cash resources that you have here, I do not know think anybody would have predicted the dividend news that would have been handed.

Manuel Henriquez

Well, hold on. I got to get you at that. I think that people need to understand and I apologize if I did not articulate this appropriately the right way. Although we have absolutely sufficient cash to satisfy the Citibank and Deutsche Bank line, we live in a world where unforeseen issues surface that we are not aware of and what I am saying to you very directly is that had we not done this particular prudent, cautious thing on holding back $9 million of cash, had we missed the payment on Citibank and Deutsche Bank line, you would have put ourselves in a higher peril because you can trigger potentially across default with the Wells Fargo facility if we don’t satisfy the Citibank Deutsche Bank line.

So, that extra $9 million in incredibly valuable to us as an insurance to ensure absolutely unequivocally that we can now satisfy obligation without risk and if investors do not like that, I am sorry but I think strongly this is a very prudent thing to do for one quarter only but we are still paying a $0.32 dividend while other BDCs are not paying dividends.

Operator

Your next question comes from the line of Sean Jackson - Avondale Partners LLC.

Sean Jackson - Avondale Partners LLC

Most of my questions had been answered but can you talk about I guess in the Wells line, $50 million I have seen you have been working on getting up to $300 million. I mean, is progress there just dead or is there any progress to talk about at all?

David Lund

It is obviously very slow. You can look around in all the national banks, the regional banks and everybody and they are all sitting on their hands at the moment. They are trying to figure out what is going on with the charter program. They are trying to figure out where to invest so conversations are continuing but the commitment at this point has not come across the threshold.

Sean Jackson - Avondale Partners LLC

Is there any catalyst event you think will loosen that up a little bit and talks will resume?

Manuel Henriquez

Well I was hoping that when the Treasury Secretary spoke, that would have done it.

Sean Jackson - Avondale Partners LLC

Alright and then lastly, is there something you are looking at, you said you intend to start it again second, third and fourth quarters. Is there one sector or something that is standing out whether it be a life sciences or I think you mentioned software in previous calls that is looking a little better. Can you just comment on that?

David Lund

I think that we rather answer the question that we are focusing more on stage of company than particular specific verticals or niches within the technology and life sciences there. I think they were seeing an ordinary amount of incredible opportunities on looking at lower middle market credits or investment opportunities that a year ago, we are looking at 5 times all in leverage, 5.5 times all in leverage and today, you gain those companies that barely all end three extra leverage on EBITDA, extremely attractive the rates in and now including the even workout risk and more companies so we think that it is prudent to look at the more mature companies as opposed to early stage once you get back-to-back Company that may require five or seven years to achieve an exit while a lower bit of market credits will achieved an exit or liquidity event in two to three years.

And so we are more about mature stage focused than necessarily sector driven.

Operator

Your next question comes from the line of Arthur Winston - Pilot Advisors.

Arthur Winston - Pilot Advisors

I realized that you directed a brilliant, how do you figure this in the $0.32 dividend and keep saying in $0.32 when the stock is going to go down to $0.32 when you pay it out? Could you just explain that?

Manuel Henriquez

I can explain that. I can not foresee what the stock will or will not do.

Arthur Winston - Pilot Advisors

What are you doing is taking for shares for everybody's worth is less.

Manuel Henriquez

Arthur, I do not think that is correct because all shareholders are relatively receiving the same treatments so no one is in essence being diluted whatsoever and as I indicated earlier, we feel that the $9 million can easily be deployed at a higher cost to capital than our yield.

Arthur Winston - Pilot Advisors

But do not give yourself; you are not saying $0.32 dividends. Could you now explain under what circumstances the dividend changes in the second quarter or does not change in the second quarter very slowly?

Manuel Henriquez

Well as I said earlier we do not provide guidance on earnings whatsoever. We never have and I think that the policy that we adopted is one that I think is very important and that is to create a greater transparency on dividend coverage. As I am sure you are fully aware of many, many BDCs and other financial…

Arthur Winston - Pilot Advisors

Since where are the BDCs?

Manuel Henriquez

They had over extended themselves on the dividend damage on earning coverage by a adopting a policy of 90% to 95% of paying out the NII earnings, you and the shareholder have a greater transparency number and you will receive that benefit at the end of the year on any remaining distributions under the RIC requirement that will be paid out as a special dividend at the end of the year making up 90% to 98% required distribution under RIC program.

Arthur Winston - Pilot Advisors

Could you explain why had suggested perhaps stated that the dividends is a one time situation for the first quarter?

Manuel Henriquez

Sure. As it is no secret as we are talking about in this call, the dividend decision on paying the 90% in stock and 10% in cash was really driven as being said the further insurance to ensure that we absolutely can unequivocally meet the requirement of the Citibank, Deutsche Bank payoff at the end of April. We have events that may occur that if we find ourselves $1 million or $3 million short, I think that shareholder value will be a lot more distressed by suddenly having default on the Citibank, Deutsche Bank line as opposed to having one quarter only where we would withhold our cash in order to ensure the satisfying of that obligation at the end of April. So I think that is a very prudent thing to do.

I am sorry that you find it not as prudent but I think that it is a greater preservation of shareholder value by doing that as opposed to placing yourself on undue risk that we are not able to satisfy the Deutsche Bank, Citibank facility at the end of April and thereby triggering the possibility of the cross default into a lost further line and lose the $50 million credit facility in the process.

Arthur Winston - Pilot Advisors

What are you suggesting is if the cash flow comes in the way it has and the way you are hoping or thinking it might?

Manuel Henriquez

I think they will return back…

Arthur Winston - Pilot Advisors

Can you let me ask the question? If the cash flow slows in the way it has been on more or less the same trajectory taking account what is going on in the world, you will be able to meet the payments on the Citi Corps situation, sometime in April or in May and therefore thereafter, there is some probability that it is possible that the dividend can be paid in the future in cash? Is that about right?

Manuel Henriquez

Well absolutely! I mean I am sorry if that is a confusing message I am delivering. I do not mean to do that, I do not see or at least foresee future dividends paying in stock. I really do not see that. If I led that impression, that is not the intent at all. Now, clearly things could deteriorate further and that will be revisited but at this juncture for what I know and what I am seeing from my cash flow, I do not anticipate that dividend in the future could be paid out of stock, no! It is a one time event in my opinion, in my view. It is there and sorry for the purpose of the insurance and for touching to our shareholders to ensure that we absolutely can pay the Citibank line and that to me is extremely valuable step to take in a very prudent step to take for one quarter, one quarter only and then we will return back to cash dividend as we historically have done.

Arthur Winston - Pilot Advisors

What is the date of the Citi Corp trends comes up?

Manuel Henriquez

April 30, 2009.

Operator

Your next question comes from the line of Art Spinner - Spinner Global Technology.

Art Spinner - Spinner Global Technology

We are new shareholders and I am still a bit confused about something. Would not it be simpler just to use the Wells Fargo line to prepay the Citibank line and then you eliminate any possibility of cross default through that means and reduce your cost to capital simultaneously?

Manuel Henriquez

The problem is that, is we spoke about this in the third quarter. It is not were absolute viable option we clearly would not have taken it. But the problem is we had to be cognizant of the remaining un-funded commitments that we have in our balance sheet so we have outstanding obligations and those outstanding obligation as we indicated earlier represents about $82 million of outstanding obligations. However, a significant portion of those un-funded commitments are specifically tied to milestone that the Company must achieve so we expect the $82 million to translate into funding over the next 2 to 3 quarters. It is probably going to around $40 million which is why we keep the Wells Fargo facility on top in case we need to fulfill those obligations.

Art Spinner - Spinner Global Technology

So you really, that is beside the match to be an offset to those obligations?

Manuel Henriquez

Absolutely. I mean and you are absolutely correct. Clearly we would have taken the opportunity to take the Wells Fargo facility and satisfy the Citibank facility but that I think would have been a greater risk because what that would have done is it will potentially was force us to use our capital rate below NAV which I frankly do not want to do and use our 20% below NAV unless it is an absolute must to do. So I think strongly as a CEO that this was the most prudent thing to do and the most cautious thing to do in order to ensure long-term value preservation for shareholders.

Art Spinner - Spinner Global Technology

And other than the covenant the gentleman was referring to earlier, are there any other covenants in Wells Fargo that you are bumping up against?

David Lund

No, that is the only one. I would say it is not even the concern but that is the only one that really is out there.

Art Spinner - Spinner Global Technology

And what recourse that your clients have if they can ask you for a drawdown and you do not have the funds to meet it?

Manuel Henriquez

Well, I do not think will find ourselves in that situation. We have, we look and track and monitor the unfunded commitment number quite extensively. That number has gone down from if I remember in Q3 or is it maybe on in $2,700 and $10 million that are moves up and I do not have that number in front of me. And we match our exposure quite diligently but I need to remind everybody, a lot of that is time delaying. It mean that that the fastest time has to occur as well as very positive and very significant milestones need to occur so we do not think that liability is a very significant size in the short term.

Art Spinner - Spinner Global Technology

I am sorry if I missed that but have you made new commitments in the fourth quarter and recently and where they have been situations where you were, there are other providers of capital that you prevailed again?

Manuel Henriquez

We have only made one new commitment in the fourth quarter.

David Lund

It is an existing portfolio company that we are very, very happy with the performance on.

Manuel Henriquez

And you may have heard or not earlier we take advantage that we have a maturing credit for an investment in one of our companies and they are performing quite well. We had an opportunity, a rare one of that in the market where you can re-originate an invest to an existing company at a significantly higher yield than you had historically underwritten it because the prevailing interest rates in the market place are such. So today, we are looking new invested transactions on a current cash basis generating 14% to 16%. You add it on to the certainties to it and then you factor in to the equity derivative in the formula one and you are far, far exceeding the 22% or 24% dividend yield that our cash was translating to cost of capital equation.

Operator

You have a follow-up question comes from the line of John Hecht of JMP Securities.

John Hecht - JMP Securities

In terms of your yield during the quarter can, you maybe breakout from the yield what might have been the OID or loan origination of prepayment, the prepayment components of it?

David Lund

Yes, let me grab that here. On a yield base or the dollar basis?

John Hecht - JMP Securities

On a yield basis and then the follow-up to that is going to be whether you are writing new loans, I know you are very prudent about writing new loans but where are you writing it now just to give me sense where yield is going?

Manuel Henriquez

The yield has gone up exponentially. You are looking at current yields today, 14% to 16% are pretty much atypical or normal, I should say. On a current cash basis you add on that depending on the stage of the company one to two points in fees then you tack it on potential equity derivatives and you are looking at returns north of 25% to 30% with some deals.

David Lund

And we have not tracked each one of the individual components to tell you what the yield was there on OID or something of that nature.

Manuel Henriquez

But John we can give you the OID number and do that. We do not calculate the impact numbers sell but we can definitely derive that for you. It is not that difficult.

John Hecht - JMP Securities

If you have the OID number, I think could derive it myself.

David Lund

For the instance, the OID number was about $2.9 million for the fourth quarter.

John Hecht - JMP Securities

Okay.

David Lund

And we had about 300,000 of what we called peak income.

John Hecht - JMP Securities

Okay great and then the prepayment, would that be in the C-line?

Manuel Henriquez

Yes.

Operator

That concluded the question and answer session today. At this time I had like to turn the call back over to Mr. Manuel Henriquez for any additional or closing remarks.

Manuel Henriquez

Thank you, operator and thank you everyone for your continued interest in Hercules Technology Growth Capital. As we have always done, we will be planning a trip to go meet with investors over the course of the next 2 to 3 weeks and if you have an interest in doing that and scheduling a face-to-face or one-one-one with management, feel free to contact David line or myself at 650-289-3060 and again thank you very much for being our shareholders and for being part of Hercules Technology story. Thank you.

Operator

This concludes today Conference. We thank you for your participation. You may now disconnect. Have a nice day.

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Source: Hercules Technology Growth Capital, Inc. Q4 2008 Earnings Call Transcript
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