Hercules Tech Can't Muster Estimates

 |  About: Hercules Technology Growth Capital (HTGC)
by: Zacks Investment Research

Hercules Technology Growth Capital Inc.’s (NYSE:HTGC) fourth-quarter change in net assets of 23 cents per share came in short of the Zacks Consensus Estimate of 26 cents (see conference call transcript here). However, this compares favorably with the negative change in net assets of 34 cents in the year-ago quarter.

The improvement in results over the prior-year quarter was due primarily to lower operating expenses and an increase in unrealized appreciation on investments. However, lower investment income and higher net realized loss on investments were the downside.

Pre-tax net investment income for the reported quarter came in at $9.4 million, down 14.9% from $11.0 million in the prior-year quarter. On a per share basis, net investment income (before investment gains and losses) was 26 cents, compared to 34 cents in the year-ago quarter.

The decrease in investment income was due primarily to a significant drop in total invested assets. The investment portfolio decreased $210.0 million from the year-ago-quarter as Hercules continued to manage its balance sheet and increase liquidity.

For full year 2009, pre-tax net investment income increased 7.8% year-over-year to $43.1 million.

Total revenues for the reported quarter were $16.7 million, compared to $22.0 million in the year-ago period. Net interest margin was 12.82% for the reported quarter, up from 11.38% for the year-ago quarter.

Total operating expenses were down 33.4% year-over-year to $7.3 million. This decrease was primarily attributable to lower interest, loan fees and compensation expenses, offset partially by higher legal expenses, work-out related expenses and consulting fees.

Net realized losses of $11.3 million recognized during the reported quarter were primarily attributable to net losses on loans, equities and warrants in two portfolio companies. Hercules realized gains of approximately $1.6 million from the sale of equity holdings and the exercise of certain warrants in publicly held securities, helping to offset a portion of realized losses.

Hercules’ funding of debt and equity in the quarter totaled approximately $17 million and approximately $800,000, respectively. The effective yield on Hercules’ debt portfolio investments was 13.3%, lower than 14.9% in the year-ago-quarter and was primarily attributable to the decrease in interest income.

Dividend and Share Repurchase Update

Concurrent with the earnings release, the Board of Directors of Hercules declared a cash dividend of 20 cents per share for the first quarter of 2010. The dividend will be paid on March 19, 2010, to shareholders of record as of February 19, 2010.

The dividend declared for the first quarter of 2010 represents a 33.3% decrease from 30 cents per share paid in the reported quarter. This is Hercules’ eighteenth consecutive quarterly dividend since its initial public offering.

The Board of Hercules has also approved a $35 million open market share repurchase program. The new program replaces a $15 million repurchase program that expired in November 2009. The company also closed a new credit facility for $20 million with Union Bank.

Hercules is currently a small participant in a market with huge growth prospects. Though the ongoing market turmoil has contributed to the current contraction within the venture capital community and volatility in the broader markets, we are encouraged by the company’s concentrated focus on its credit performance.