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Executives

Colin Hoover – Investor Relations

Manuel A. Henriquez – Chairman, President and Chief Executive Officer

Jessica T. Baron – Chief Financial Officer, Vice President-Finance Corporate Controller

Analysts

Jasper Burch – Macquarie Research

Aaron James Deer – Sandler O'Neill & Partners L.P.

Robert Bordett – Raymond James

Vernon Plack – BB&T Capital Markets

Douglas Harter – Credit Suisse

Jason Arnold – RBC Capital Markets

John Hecht – Stephens, Inc.

Hercules Technology Growth Capital, Inc. (HTGC) Q2 2012 Earnings Call August 2, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Hercules Technology Growth Capital’s Q2 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Mr. Colin Hoover, Investor Relations of Hercules Technology. Mr. Hoover, you may begin your conference.

Colin Hoover

Thank you, operator and good afternoon everyone. On the call today are Manuel Henriquez, Hercules’ Co-founder, Chairman and CEO; and Jessica Baron, Chief Financial Officer. Hercules’ second quarter 2012 financial results were released just after the market closed today. They can be accessed from the company’s website at www.htgc.com. We’ve arranged for a replay of the call at Hercules’ webpage or by using the telephone number and pass code provided in today’s earnings release.

I’d also like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and the confirmation and final audit results.

In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements including, without limitation, the risks, and uncertainties, including the uncertainties surrounding the current market turbulence, and other factors we identify from time-to-time in our filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can provide to be inaccurate. and as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of our latest SEC filings, please visit sec.gov or visit the website www.htgc.com.

I’d now like to turn the call over to Manuel Henriquez, Hercules’ Co-founder, Chairman and CEO. Manuel?

Manuel A. Henriquez

Well, thank you Colin, and good afternoon and thank you everyone for joining us today. We have much to share with our investors this quarter, an another outstanding quarter and strong growth and performance by our team. I’d briefly give you some of the agenda, I plan on speaking briefly on our operating performance and results for Q2.

I will share with you my observations and discussion points on the current environment and go to venture capital marketplace, and in pending legislation in Congress, as well as our view and perspective of what will come in the second half of 2012. And then lastly, turn the call over to Jessica Baron, our CFO.

Now, turning my attention to the second quarter results, I am pleased to announce the progress and continued building of our portfolio and continued asset growth in our portfolio and earnings growth in our portfolio.

We delivered a record high total quarterly investment income of $23.9 million, representing approximately 15% increase year-over-year. We also achieved an 80% increase year-over-year in growth of NII income at $12.3 million or $0.25 of share.

DNOI not to be left behind also showed impressive growth at 19.5% year-over-year growth to $13.5 million or $0.28 of share in DNOI. All of this translates to strong coverage of earnings growth and more importantly strong coverage of dividend coverage of our earnings with our performance.

Also showing strong growth in a portfolio was our asset growth in a portfolio. We grew the asset in our portfolio by 52% to approximately $723 million of investment assets at the end of the quarter, again representing a 52% increase year-over-year on the performance of the portfolio itself.

Consistent with the first quarter of this year, we continued or controlled slow and steady growth approach to building assets. We were continuing that approach in the coming quarters especially in lieu of the current economic conditions in Europe and a looming U.S. election.

In terms specific on our balance sheet, we had interest earning assets of approximately $650 million at the end of the quarter representing the 57% growth that I mentioned earlier. New commitments during the quarter were equally strong. We’ve finished the quarter with $139 million of new commitments during the quarter, bringing the first half of 2012 to $240 million of new commitments during the year, well on track, towards the guidance we shared earlier of the $500 million to $700 million.

However, given our controlled look for the second half of this year, we believe that new portfolio commitment will range more in line of the $500 million to $600 million level as opposed to $700 million level I had shared earlier.

I want to caution that we reserve the right to increase that depending on continued market conditions improving, if such improvements continue to occur as we expected to see happening.

On a funding level, we experienced a $112 million of funding during the quarter. Also as indicated earlier, we expected to see early payoffs during the quarter, and in fact we had early payoffs of approximately $46 million during the quarter that occurred, coupled with another $18 million of normal amortization that occurred during the quarter.

It’s important as we look to portfolio growth; we also turn our attention to expectations of portfolio growth in Q3. In Q3, we expect to see portfolio growth in the neighborhood of $20 million to $30 million of new asset growth during the quarter on a cost basis.

Turning my attention to credit quality. overall, credit quality remains strong with an overall risk rating of 2.08 or basically flat to the same quarter in Q1 of last, that’s reported. However, given the uncertainty facing Europe, we completed an internal review of our entire portfolio to make a determination, what exposure if any do we have to Europe and our portfolio companies had to Europe. I'm happy to say that in a direct base, we have little to no exposure to Europe and indirectly a handful of portfolio companies, specifically in the life sciences areas do have exposure in Europe whether it’s in the form of conducting clinical trials or actually having sales of their clinical compounds or devices in this European market.

We do not believe however, that this exposure represents an undue risk than normal in our portfolio and we will continue to monitor the progress and exposure to our European investments, and European exposure we have through our portfolio companies today.

As we turn our attention to second half of this year, we remain steadfast and focused on credit quality, and we refuse to give up credit quality and reaching down the capital structure for yield preservation. We will be more than happy to forego 20 to 40 basis points in yield, but maintain a senior secured first lien positions on the assets, and not compromise our position on the balance sheet simply to preserve yield.

I remain consistent with my unwillingness not to sacrifice credit quality simply to achieve earnings growth, and will be happily miss the earnings if credit quality is not there.

As I turn my attention specific to yield, as I stated at the beginning of this year, we expect you to see 50 to 100 basis points yield depression in fiscal 2012. In the second quarter of 2012, we experienced an additional 40 basis points yield compression during the quarter. However, as most of you will see that our affected GAAP yield that we disclosed is approximately 15%. Unlike most BDCs Hercules gets one step further to provide clarity and transparency to our shareholders, and we actually breakout one-time events that actually impact or inflates the effective yield of portfolio. Our adjusted effective yield of portfolio when taken into account one-time event is actually 13.3%, a 40% decline from the prior quarter, a decline which I had to give perspective, it doesn’t concern me, because it is in line with what we expect and consistent with our credit policies are maintaining discipline.

We are also seeing a slowing down of the compression of yield, meaning the velocity of yield compression is now diminishing. We do not expect to see continued significant yield compression in the coming quarters, and I personally believe at this point that we’re probably seeing another 10 to 20 basis points that may occur in Q3, and then we start bouncing off and going up again on the yield basis, as we start originating new assets in the portfolio itself.

Now turning my attention to the balance sheet. We continue to actively diversify and expand our source of liquidity. We’re focused on strengthening our balance sheet, improving our financial flexibility and ensuring that we have a balance sheet that will accommodate and address our future growth needs.

During the quarter, we ended up with approximately $208 million of liquidity, and we also increased liquidity during the quarter with an additional capital raised from our B bonds of approximately $42 million that occurred in the April of the second quarter.

We recently announced this morning that we expanded and amended our existing credit faculties with Wells Fargo. This amendment to the credit facility was something that’s quite important to us, and we were successfully able to add additional year, two term plus a tail which allow us to amortize a credit facility for additional one-year period of time, obsessively setting the maturity by another two years. This would not have been possible without our continued strong partner with Wells Fargo, and as self-evident with Wells Fargo’s willingness to continue to work with us, Hercules to amend that credit facility.

Under the new credit facility, we expect to start drawing upon that facility in the coming quarters and start further leveraging our balance sheet, which is our preference as we continue to grow our asset base.

In June, we also received final approval from the SBA to be able to re-borrow an additional $24.3 million of SBA debentures. You may recall that we recently retired at beginning of this year our $25 million of SBA debentures, and we are once again now re-borrowing or will be re-borrowing those new debentures in the coming months.

We also expect during the third quarter to retire an additional $25 million of SBA debentures that have a cost of capital in the neighborhood of 6% or greater. This will cause $0.01 to $0.015 an impact in earnings as acceleration of unmet amortized fees attribute to the SBA that will occur in the third quarter. This is no different than what occurred in the first quarter of 2012 and occurred also last year in 2011.

We remain actively and continuously retire more expensive SBA debentures in coming quarters and take advantage of the low tenure Treasury rates that exists, and locking in new SBA debentures that are extremely attractively priced representing a 200 to 400 basis point savings to our current SBA debentures we have outstanding today.

Furthermore, we recently completed in July an additional top off of another $42 million of baby bond seven year senior unsecured debt offerings we recently did. On a year to date basis, I’m happy to report that Hercules has successfully issued approximately $85 million of seven year unsecured bond offerings in the market place. This now increase our liquidity further as I said earlier in the call.

However, I want to caution that because of the increase in capital raise that we did attribute to the baby bond and until that capital is deployed in the market place, we will carry a negative spread or impact to earnings of approximately $0.02 to $0.03 in Q3 as we convert that additional liquidity into earning assets in the coming quarters.

Turning my attention to liquidity, despite what is an otherwise unpredictable IPO liquidity window, I have to say that I was quite impressed with our achievement as an organization. Hercules achieved the robust liquidity environment in the first half of 2012 with approximately 8 exit events that took place so far this year, six of which were completed IPO offerings and two completed M&A offerings. Because of that success, our shareholders benefited from approximately $8.3 million in realized gains during the quarter.

We continue to have a position in over 115 different venture stage companies where we have warrants or equity positions in. We currently have three additional companies incurring IPO registration today. Glori Energy, iWatt and one company of ours who has chosen to file confidentially under the Job’s act. We also saw one company withdraw their IPO offering during the quarter as well.

as I said a minute ago, we finished the quarter with very strong warrant position. We had some very attractive positions in various technology and life sciences companies that in itself warrant to those companies, completed IPO offering given our unrealized position, and continue the expectations of unrealized appreciation could more easily make up our entire realized loss in the portfolio today. We have 115 different warrant positions representing a very, very attractive exit opportunity.

However, as we do in every call, we do not expect all 115 companies to go public or achieve liquidity events. those liquidity events are also highly subjective and depending on market conditions both on the M&A and IPO environment that exists.

as I do in every call, no call is complete in Hercules without outlining and highlighting the venture capital marketplace and venture capital activity. I am happy to report that we saw a very solid and continued vibrant venture capital investment activities. The venture capitals invested $8.1 billion in the second quarter of 2012 to approximately 860 companies representing only a 9% decline on a year-over-year basis.

On the first half of the year total, we’ve seen $15.3 billion invested, representing simply a 7% decline in year-over-year basis. By sector, IT or information technology remains the most robust with approximately $2.4 billion invested to 286 companies. Software remains and continue to be the strongest subcategory within the IT or Information Technology area receiving approximately $1.6 billion of that capital. Healthcare and life sciences combined received $1.5 billion of capital, representing a 33% decline on a year-over-year basis, and consistent with our outlook in the life sciences community, and you’ve seen our own portfolio also adjust in size accordingly as well.

Healthcare information systems however was the bright spot within the healthcare area. Healthcare IT saw a dramatic increase of approximately 33% investment activity to $268 million of capital, deployed to 29 companies. That said, we continue to see headwinds in renewable and energy sector, which saw a continued contraction of investment activities. These activities are only made further by the lack and clarity and ambiguity regarding U.S owned energy policy, the potential change administration, and also struggling to stay and federal government willingness to do tax incentives, loan guarantees and other forms of government assistance into that sector. Overall, capital in this sector declined 66% to approximately $293 million on a year-over-year basis.

As I turn my attention to stage, early stage continue to see strong growth with approximately 23% of capital invested into early-stage companies. Second round deals saw approximately 70% of the capital, and the balance into later stage companies representing 59% of the capital invested.

Venture capital exits, a very important indication of our ability to select and pick the right companies. In Q2, we saw 11 completed IPO's during the quarter. I'm proud to say two of those IPO’s were Hercules companies during the second quarter, raising approximately $7.7 billion. Although Q2 experienced nine fewer IPO’s than Q1, it still showed an indication of willingness by investors to purchase IPO shares.

M&A remains extremely robust and strong. We saw 110 exits completed by US venture backed companies getting acquired representing an uptick from that same period in Q1. We currently have approximately 44 companies in IPO registration that are venture backed, three of which are Hercules companies today.

Lastly, in completing the eco-system of the venture capital community, venture capitals fund raising, which is a leading indicator of the confidence in the venture industry, also saw a very strong period of growth. 82 venture fund successfully raised over $13 billion of commitments so far in the first half of 2012, representing a 21% increase over the same period last year.

A strong indication of the continuous support by the living partnered community and the confidence in the top tier venture to continue realize excess in the portfolio. Now bringing this to a close, as I turn my attention to Q3 in the second of this year, as I said earlier, we will continue to look optimistically for the second half of this year, but as we done at these period of time, we look to that environment in a very cautious and controlled growth environment and manner.

We expect to see net portfolio growth on a cost base of approximately $20 million to $30 million, up in Q3. We continue to look towards credit quality in our underwriting and less towards yield in that underwriting process.

We continue to see an ongoing phenomena that’s becoming a much more consistent pattern of deals close as late in the quarter and longer to bring on the books, which means that as those assets get on boarded later in the quarter, their contribution to earnings in that quarter is lessened.

That said, we turn our attention to Q3 with a very strong pipeline of approximately $1.2 billion, and I’m happy to report with approximately $130 million of signed terms lease going into Q3 as of today. In addition to that, we have approximately $90 million of unfunded commitments that will translate to earning assets in the coming quarter, as well to fuel additional asset growth.

Lastly, a lot has been made and lot has been written about the continued regulatory environment and potential looming changes in the regulatory environment that would be accretive or beneficial to the BDCs, especially BDCs as this Hercules that also have an SBIC. For example, House Bill 5929 or H.R. 5929 as is more commonly referred to is a bill in front of the house today, that would increase BDC leverage for a 1:1 regulatory base to a 2:1 ratio, that will be significant unlocking value for shareholders, and allowing BDCs to leverage the balance sheet further and be able to turn the sources of growth capital as we’ve done in the form of bond offering as we completed both a convertible bond offering and a payee bond offering we recently completed.

Not being left behind, the Senate Bill 2136 is specifically earmarked towards increases of leverage of SBICs, these are small business investment companies, which Hercules is one. Currently today, the regulatory limit imposed by Congress is $225 million. Under Senate Bill 2136 that, limit would be increased to $350 million. We ask our shareholders and our constituents to please write letters to yours Congressmen and encourage the passage of these two bills for the benefit of the BDC and the SBA industry. They will both help to increase American innovation as well as help bring down the unemployment. It’s important the Congress act and move on these Bills and help increase the American innovative environment that we invest in.

In closing, we pierced a very strong and solid second quarter performance thanks to no part for the continued dedication and hard work of our team in identifying the right perspective companies. We also like to thank both our venture capital partners and our CEOs and managements of our portfolio companies for their continued support and belief in Hercules and continue to work with Hercules as they continue to develop their respective business models. Although we are concerned about the U.S. economy and the global economy coupled with U.S. election we continue to make investments in this environment but we are going to take our time and control investments.

We do not believe it’s a – is a sprint to put out for the book but to continue to focus on credit quality as we’ve done and continue the focus on managing our balance sheet in difficult times. I remain very optimistic and very encouraged to what I’m seeing and I’ll share with you briefly one little anecdote. Yesterday, I had a conversation with one of our portfolio companies. They start off Q2 with a dismal outlook in Europe, they recently came back from Europe and they shared one piece of information with me, which is they saw dramatic shift in European willingness after the Greek election that they are now beginning to increase their outlook for 2012 on European exposure.

Now I caution that is only one sound bike but I was a bit surprised on how bullish they came back from the European trip and I’m encouraged by that little information.

With that said, I'll turn the call over to Jessica Baron, our CFO.

Jessica T. Baron

Thank you, Manuel, and thank you everyone for listening today. I’ll briefly go over our results for the quarter. We filed our 10-Q as well as our earnings press release after the market close today and here is a recap. We delivered $23.9 million in total investment income or revenues, a quarterly record, and an increase of 14.9% when compared to the second quarter of 2011. This year-over-year growth was driven by higher average outstanding balances of yielding assets during the quarter and accelerated fees related to almost $50 million of early payoffs during the quarter.

The fair value of our yielding debt investment portfolio at quarter end was $647.1 million, an increase as Manuel mentioned of 57% from the same period a year ago. The effective yields on our debt investments during the second quarter was up to 15.2% from 14.6% in the first quarter of 2012. Excluding the income acceleration impact primarily past the one-time event, the effective yields for the quarter was 13.3%, down approximately 40 basis points sequentially and 70 basis points year-to-date. I’d like to reiterate that we expected to see the 100 basis point decline in our debt portfolios effective yield during 2012.

Excluding early payoffs, the normal run rate on our portfolio historically has been between 12.5% to 15.5%. I’d also like to note that our peak income has historically has been the case is immaterial to our financial statements. Once again take which is non-cash revenue, which must be paid out to our shareholders in the form of dividend continues to represent a small component or less than 1.1% of our total investment income for the second quarter.

Our cost of debt increased to $5.2 million in Q2 of 2012 compared to $3.8 million in the second quarter of 2011. The increase was primarily attributed to approximately $668,000 of interest and fee expenses related to the $43 million of senior unsecured notes due 2019 issued during the second quarter, and approximately $250,000 of interest expense on a higher SBA debenture balance outstanding during the period.

Our weighted average cost of debt was 6.7% in Q2 of ‘12 as compared to 6.6% in Q2 of 2011. Operating expenses for the quarter totaled $6.3 million as compared to $6.6 million in the second quarter of 2011. The decrease was primarily due to non-recurring executive severance costs incurred in the second quarter of 2011.

Q2 total investment income was $12.3 million compared to $10.4 million in the second quarter of 2011 representing an increase of approximately 18.3%. Net investment income per share was $0.25 for Q2 of ‘12 based on 48.6 million shares outstanding compared to $0.24 based on 43 million shares outstanding in the second quarter of 2011.

Our net unrealized depreciation from our loans, warrants and equity investments during the second quarter was $20 million, of which $12.2 million was due to mark-to-market fair value adjustments, only $600,000 was attributable to credit impairments of our debt portfolio and $7.2 million of this unrealized depreciation was related to the reversal of net unrealized appreciation to realized gains on warrants and equity.

Our net realized gains for the second quarter was approximately $8.3 million. We recognized a gain of $2.4 million and $800,000 from the sale warrants in Annie's which went public in March and Bullhorn, Inc. respectively, and $5.3 million from the sale of warrants and equity in NEXX Systems. These gains were partially offset by realized losses of approximately $200,000 due to the write off of warrants in two portfolio companies.

Now moving on to our balance sheet, I’d first like to provide a summary of the investment portfolio. We’ve seen significant growth in our portfolio over the last year, as growth results of our debt investment origination activities. As of June 30, 2012, total investments assets were $722.8 million, an increase of $247.6 million or 52% since June 30, 2011.

During the quarter, we’ve closed debt and equity commitment of approximately $139 million and funded a $112 million to new and existing portfolio companies. As Manuel mentioned, we continue to see yields closing dates in the quarter. We experienced $64.1 million and principal repayments for the quarter, including $46 million in early principal repayments. The majority once again which occurred in April an $18.1 million in schedule principal repayments.

Regarding the composition of our portfolio quarter-end over 94.9% of our loans at floating rates are floating rates before and over 99% of our loan investments are senior debt investments. Remain pleased with our loan portfolio credit quality, the weighted average loan rating of our portfolio was 2.08, consistent with the prior quarter.

We had only one debt investment on non-accrual at the end of the quarter that had a cost basis at $7.1 million and a carrying value of approximately a $169,000. Note that this is the one position, we took the incremental $600,000 of unrealized depreciation for collateral impairment purposes during the second quarter. Subsequent to quarter end, we received a payment of $2 million for this position, with respect to record a realized offset $5.7 million and a reversal of previously recorded unrealized depreciation of $6.9 million in the third quarter related to the company.

At June 30, 2012, our owned and equity investments combined at fair value represent approximately 11% of our total portfolio versus about 11.5% at the end of the prior quarter. Our equity investments at fair value as of June 30 total approximately $47.6 million. Our warrant positions in 115 portfolio companies to provide us with the option to potentially invest $74.6 million of additional capital. We harvested 19 from several warrant in equity positions earlier this year, and believe that this pool of assets can provide capital returns for the company in the future.

Now describing our liquidity at June 30 of ‘12, we had approximately $207.3 million of availability comprised of $56.1 million of cash, $24.3 million of FDA borrowing capacity and $126.9 million in borrowing capacity under our credit facilities.

In mid-April we closed our first baby bond offering raising $43 million of 7% unsecured notes due 2019, and subsequent to quarter end we reopened the offering raising an additional $41.5 million, bringing the total amount to $84.5 million of issuances in 2012. As a result of adding these additional leverage, we anticipate to increase our interest and fee expense by approximately $900,000 per quarter or 2% to 3% in earnings and until this capital is fully deployed.

Further on our purchase of capital, we enhanced and amended our existing Wells Fargo credit facility, which includes $75 million of initial credit capacity under $300 million accordion credit facility. Effective August 1, these extended the maturity date by one year to August of 2015, lower the interest rate floor by the 75 basis points and added an amortization period of 12 months from the maturity date to pay down the principle balance.

In June of 2012, we received approval from the SBA to borrow the $24.3 million of debentures under our second SBIC license. Should we borrow the debenture in the third quarter, during the September pooling, our pricing will be set. Based on pricing of the debentures at the March 2012 pooling, which had less than a 3% cost or pricing, we expect we could reduce our cost of debt on these borrowings by approximately 2.5% to 3% over the long-term. We ended the quarter with $200.8 million of SBA debentures outstanding.

Finally, as Manuel mentioned, we expect to repay an additional $25 million of SBA debentures during the third quarter, which will impact our earnings by $0.01 due to the accelerations of unamortized fees associated with those higher cost debentures. Our net asset value at June 30 was $474.8 million or $9.54 per share less than 49.7 million shares outstanding, as compared to $485.4 million or $9.76 based on 49.7 million shares outstanding at the end of the first quarter.

The sequential decline in NAV during the quarter is primarily attributed from mark-to-market, unrealized depreciation on our investment portfolios. Finally, moving out to our dividends, we declared a definitive, a $0.24 per share payable on August 24, to shareholders of record on August 17.

In closing, the second quarter was another solid quarter. Our diversified sources of funding (inaudible) puts us this addition to grow our investment portfolio and deliver strong earnings and dividends for our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from Jasper Burch from Macquarie. Your line is open.

Jasper Burch – Macquarie Research

Hi, good afternoon, everyone. We said down last month and chatted, we talked about, how you would kept first baby bond issuance, you still had large, when you get the small because you really want to sort of match your liabilities with upcoming fundings that you expected in the upcoming investment opportunities. I was just wondering, I mean coming out with the second baby bond issuance, and potential further issuance, I mean does that point to sort of a more bullish outlook on portfolio growth? And so that where are you expecting for portfolio growth in the last portion of the year?

Manuel A. Henriquez

So it showing us to learn my voice outlook for the portfolio? This is why we took advantage of the window that existed to be able to a secondary bond offering or top off of the existing bond and really enhance, and strengthen our balance sheet to take advantage of that growing market opportunity. Further evidence of that is our current active hiring. We’re in the market right now looking to hire three to five, it just on the investment professionals in both our technology and life sciences grew, and I historically have held back from doing that until I believe that we are facing the right environment.

So you will see us start looking to deploy more capital probably sometime in the fourth quarter last year election, because the election outlook will have an impact and how we’re making investment activity as I described in previous calls as well as in propaganda democrat, they will change the landscape of investment activities.

But you are absolutely correct. The signaling of my bullishness and outlook is in fact with the increase of baby bond offering that we expect to deploy in a quarter or two. However, because of the timing issues, we took those [candidates] money, when you actually needed. So in this case we’re probably end of having the $0.02 to $0.03 in earnings as we convert that new liquidity in divested assets, which we have in the past and we'll do it again this quarter.

Jasper Burch – Macquarie Research

Okay, thanks for that color. And then, in terms of the depreciation on the portfolio, there was about $12 million that was driven by market yield adjustments. And then also I think in the opening remarks you mentioned that you expect the yield to actually climb a little bit in the fourth quarter. I was just wondering if you could give us a little bit more color, on what sort of the new investment yields that you're seeing are, and where those are relative to what's already on the portfolio.

Manuel A. Henriquez

So, we are going to be careful heard that, your initial comment is correct but the underlying premise is not. Some part of the yield that you see on unrealized depreciation is directly attributed to mark-to-market on the portfolio itself and not new asset generation. So the difference is that you got to – you have to discriminate, wherein you look backwards on your current portfolio and you looking forward to what you originate. Certain assets that may be higher yielding in the past, they are marked up are now being marked down to reflect mark to market adjustments.

So you got to look at, I somewhat ignore the depreciation and portfolio related to yield. I look at it more on a GAAP basis and you asked whether they are on boarding. And so what we saw occur in the second quarter was, we saw an uptick on the interest rate itself., so we saw that are the 20 basis point increase in the underlying interest rate, but we continue to see a little bit of compression going on with items related to OID facilities and other commitment fees that we have that accretive over the life alone, that’s you see most of the depression that came from. Jessi, you want to add to that?

Jessica T. Baron

I think it’s is a representation (inaudible).

Jasper Burch – Macquarie Research

Okay, so you are seeing interest rates up and some of the fees down, so I guess I mean I guess, I just sort of assume that, if you saw the – like the comps go down the portfolio comps that mean yields on portfolio comps going up, that was what your portfolio down now it’s not the right way to look at it.

Manuel A. Henriquez

And that necessarily is what have is, is we do mark-to-market the formula we exist, and we have is these are level three assets, so the so-called mark-to-market is looking backwards on your what originally last six months as your so-called market activity during versus the new deals you are doing. So we had deals that we’ve done in the past that could have had for example a effective rate of 13% when you create the OID and now you are doing deals at say 12.5%, we take that impact over the portfolio you adjust – you’ll see a slight impression related to OID and other components.

As I said in Q1, we’re reducing to give up on our collateral position, a senior secured position, we rather played off yield for that collateral position. So we are seeing a bit of compression attributed to fees. An OID accretion as we take, as we decide to take slight lower warrant coverages that we calculate OID that would have a – growing impact on the calculation of yield. I’d probably just compute the heck of it, I apologize.

Jasper Burch – Macquarie Research

I’ll just revisit the chance get [now figured] out. And then in terms of the fee income, it rebounded a lot last couple of quarters, it taking sort of a dip play last year. Is that just due to, I mean the portfolio turn over and the portfolio or what’s the driver of that I mean sort of what is the level that we should look at going forward.

Jessica T. Baron

Yeah I mean, that’s correct. If you look at the difference between our effective yields with and without impact of early path of 15.2%versus 13.3% the average drivers. As we said almost $50 million of investment paid as office current quarter and depending upon, which assets that maybe you have win part of the acceleration of the unamortized fees.

Jasper Burch – Macquarie Research

Okay, great. Thank you, that’s all very helpful, I’ll hop off.

Operator

Okay, thank you. Our next question comes from Aaron Deer with Sandler O'Neill. Your line is open.

Aaron James Deer – Sandler O'Neill & Partners L.P.

Hi, good afternoon everyone.

Manuel A. Henriquez

Hi, Aaron.

Aaron James Deer – Sandler O'Neill & Partners L.P.

I’m going to actually follow-up on Jeff’s question with respect to the yield adjustment. I just want to be clear, so the $8.3 million in the loan category that was entirely due to yield adjustments and there was no credit or other related impact there?

Jessica T. Baron

Right, I mean we really wanted to accurately to pick what happened this quarter with respect to our valuation adjustment. There was only one collateral based impairment in the portfolio, which referred $1,600. The rest of these adjustments are all supplying the current market fair value approach, which we have. There is actually some pretty good disclosures in our 10-Q about the process we apply here.

But when we’re calling the field adjustments, it is what Manuel described where we are looking at rate today versus the historical rates embedded in our portfolio. And when you compare those on all-in basis, we see that the rates in most historical deals are little bit lower and when you do that comparison, you render this adjustment. Bear in mind of course that when these investments pass off and when as you’ve seen historically in our portfolio, our past are generally at par. Those unrealized depreciation adjustments that you see today will be reversed.

Manuel A. Henriquez

Yeah, I want to again add to this point. I think we’re one of only a few if not the only BDC that really decides to breakout yields and breakout the GAAP yield to the consistent yield. So, if I compare ourselves (inaudible) seize out that we had a 50.3% yield and we can just leave it at that. We don’t think it’s the right thing to do. We think the critical thing to do is to breakout and actually show that and this is our first attempt, and also on putting a new table in a release is help to drive, providing even more clarity on these discussions. So if we need to improve those tables further, we’re happy to do that as well. We’re just trying to create much more transparency for our shareholders as well and hope for the...

Aaron James Deer – Sandler O'Neill & Partners L.P.

I appreciate the disclosure. I’m just trying to understand, if the average rates since decline then shouldn’t a value raise?

Jessica T. Baron

So, think of it this way Aaron, the average rate is represented of the entire portfolio, whether that be an investment made that’s still on go through 2009, one which was done at the end of Q2 of 2012. if you look a snapshot in time, we are seeing trends of improvements in current, today raise. But you sort of kept comparing the snapshot in time versus the history that’s embedded in our portfolio.

So when you’re seeing a decline in all-in rates, you could perhaps look at that as being that the weighted-average based upon what come in the portfolio have slightly declined we’re talking about 40 basis points here whereas if you were to compare the deals, let’s renew let’s say the last quarter versus the deals that renew this quarter, you’re seeing an improvement in rate.

Manuel A. Henriquez

So, let me think you’re satisfied as well to help out. The loans that we’re talking about, our loans are at fiscal 2010 and 2011, when the markets are bit dislocated, we had a higher proportion of warrants attributed to those deals, because of that you have an increase in OID and to say those loans have a 14% mark-to-market yields at the time.

Today, you’re looking at loans originating to 13% level, 13.3% level, which means you’ll about 100 basis points differential. And on a weighted basis that equates about a 40 basis point differential we do on the weighted basis of the portfolio. So, yes, you are correct, when you look at old legacy loans, there maybe at 40% level or so versus the new loans at 13%. When you apply mark-to-market, you’ll see a depreciation of those legacy loans to equalize what is seem to be the current market around 13%.

Aaron James Deer – Sandler O'Neill & Partners L.P.

And then on the – just getting some additional color on the (inaudible), I think Jessica, you’ve mentioned what the scheduled payments were for the quarter, and then I’d say you had the $2 million pay down on the non-accrual Maxvision loan. Any other pay down that you’ve had quarter-to-date and expectations for the quarter overall?

Jessica T. Baron

This really in the quarter there hasn’t been any activity of note in that category.

Manuel A. Henriquez

As of today, we're not aware of any of our portfolio companies give us an indication that they plan on paying off early in Q3 thus far.

Aaron James Deer – Sandler O'Neill & Partners L.P.

Okay, great. Thanks for taking my question.

Operator

Thank you. Our next question comes from Robert Bordett from Raymond James. Your line is now open.

Robert Bordett – Raymond James

If I can go back to a question you’ve already covered, that the deployment expectations for the rest of the year, you talked about relative to the elections, et cetera there’s lot of uncertainty there, but if we look at the commitments you’ve had year-to-date 240, target now maybe 500 to 600. So you’re kind of half way there already, but it seems your expectations for Q3 this commitments versus funding. So your expectations for Q3 seem pretty moderate given the uncertainty in Q4 and how the elections going to turn out, which is everybody's guess at this point. How comfortable do you feel, because this sound like that the indications were pretty elevated deployment funding number in Q4 and how comfortable do you feel with that given the uncertainties there?

Manuel A. Henriquez

Well, it’s actually little more comforting than that. Let me kind of break it down for you. So we finished the first half of this year with about $214 million of commitments that we disclosed on this call. We also and further disclosed approximately $130 million of in-house signed term sheets already. So if you add this two together alone, you already have $370 million as of August 2. So I’m actually much better offered than I must have failed to clarify. So again, $240 million signed already and closed in the first half of this year, I have $130 million of signed term sheets in-house right now assuming all of that closes now put me at $370 million in August 2, turning my attention to remaining four months or so of the year.

Historically, if you look at Hercules’ pattern, the fourth quarter can be anywhere due to $100 million to $240 million of commitments that are closed. And that’s the variability that can easily top over to $600 million to $700 million level, but it’s all going to be contingent upon factor leading into the fourth quarter, which I do not have good visibility on right now.

Robert Bordett – Raymond James

Okay, got it. I think that makes sense. Looking at the you obviously (inaudible) in the context of the 20 to 30 expecting on cost basis, new assets in Q3, I mean I guess that’s the delta of some of the term sheets signed, you don’t expect in the satellite fund June in Q3?

Manuel A. Henriquez

Bingo, that’s exactly the case.

Robert Bordett – Raymond James

Okay, got it, got it. Okay.

Manuel A. Henriquez

I think this from the pipeline point of view, I feel very, very good what we’re adding, how we are trending, it’s just like I said on the call, things are taking – well, things are taking longer to close that we’re also taking longer to close purposely, we do want to make sure these underlying companies are not – their trailing performance is not tapering off, as we lead into a new closing of an investment.

Robert Bordett – Raymond James

Okay, got it. Second question, obviously the key thing you have gotten, I’d say you gotten rid of your non-accrual. I mean anything on the credit side any other portfolio companies that are raising concerns, is that could turn into non-accruals or do you feel very comfortable, obviously your overall average credit rating has remained very stable. But we can have a wide discussion within an average rate?

Unidentified Company Representative

Well, I would say, what I’d say at all times to our investors, and the entire majority of our portfolio is contingent upon securing additional equity rounds on the venture capital community. At this point, as we say in every call, we disclosed the investor capital community performance and investments. At this juncture, I don’t anticipate any dramatic curtailment of equity dollars being invested by the venture industry per se, which means that my outlook or my confidence in our portfolio company is securing future rounds of equity remain stable. I'm not at this point turned to a negative outlook on having our portfolio come and secure additional rounds of financing. That said, as I said on previous calls, I will repeat on this call many of our life sciences companies are conditioned upon securing new rounds of financing, by specifically achieving and accomplishing FDA milestones on progressing from a Phase I clinical trial to Phase II clinical trial or a Phase III clinical trial. Some of those trials are completely, entirely out of the company's control because they have to do a science and their bodies ability to digest or symbolize these compounds and seek benefits out of them. But, my outlook on credit has not changed dramatically at all.

Robert Bordett – Raymond James

I appreciate it. Thanks.

Operator

Thank you. Our next question comes from Vernon Plack from BB&T Capital. Your line is now open.

Vernon Plack – BB&T Capital Markets

Yeah, thanks very much, couple of questions. Can you tell me the warrants, the game multiple on the warrant sales both Annie's and Bullhorn?

Unidentified Company Representative

I believe that – why you forget the other one next. Next, I could tell you that one, because that one sits out. It was a 10.17 of multiple. And next, and I believe Annie’s was a 4.2 multiple on Annie’s that we’re going to confirm for you right now. Annie’s was a – sorry, 8.3 plus and we’re showing 8.3 on Annie’s. I am sorry, 8.3 on Annie’s and Bullhorn, don’t have that in front of me. I can get you that information, Bullhorn in front of me.

Vernon Plack – BB&T Capital Markets

Okay, looking at the portfolio from a diversification standpoint, it seems like the one category that went down a lot and I haven’t look at it too closely, but looks like software went from actually went up from 6% of the 12%. Is that just the – it’s obviously the result of no minimum portfolio but can you help me understand that in terms of.

Unidentified Company Representative

Yeah, as I said at the call, the software category within the venture industry space received a pretty strong venture capital investment activity. It received $1.6 billion venture capital activity of the total $2.4 billion of all information technology investing. As I said in the past we are under invested in the software and we're actively looking increase our exposure of software. You will see that number continue to increase in the coming quarters, as we also bring down, ever since slightly our Cleantech, and our Life Sciences exposure in balance with the software growth.

Vernon Plack – BB&T Capital Markets

Okay, and…

Unidentified Company Representative

And this is the part of the things that we do for risk litigation. We will dial in sectors and stages.

Vernon Plack – BB&T Capital Markets

Right, just in terms of the – if you look at the impact that the early payoffs had on investment income and coming out with the number of around $3 million or $0.06 a share, is that the ballpark?

Jessica T. Baron

That’s good math.

Vernon Plack – BB&T Capital Markets

So I got good enough.

Jessica T. Baron

That’s good math, yeah.

Vernon Plack – BB&T Capital Markets

Okay. And if I look at that if you consider that norm occurring although you have a certain amount of that every quarter, and if I look at the return of SBA debt which could be $0.01, $0.105 if I look at the baby bond and a short-term impact of $0.02 to $0.03 I’m coming up with probably a net interest income number in the third quarter somewhere in the high-teens, does that seem reasonable, not to cheer on the business forecasting but it’s my logic thing.

Manuel A. Henriquez

We don’t give guidance that tightly anyways, but I think that you are logic. I would say that your logic of extrapolation is within reason, but the delta of that is – as you continue to deploy the assets and again we said we expect $20 million, $30 million up in the quarter albeit late in the quarter and that would dampen a little bit of that impact that you just referred to.

Vernon Plack – BB&T Capital Markets

Sure, sure, okay. That's helpful. Thanks.

Operator

Thank you. Our next question comes from Douglas Harter with Credit Suisse. Your line is now open.

Douglas Harter – Credit Suisse

I was hoping you could talk a little bit, obviously you’ve got the Wells facility which seems like a nice facility. Was there further availability to get structures like that? Do you have an appetite to do further facilities like that?

Manuel A. Henriquez

You know, Doug, I’m encouraged by the discourse that we had with Wells. I think that there is some evidence that banks are beginning to – but that’s consider relending again. Wells have been with us long time. So they understand our credit and our credit history. So they are quite comfortable with how we have performed, and what we’ve done. I can’t tell you with 100% certainly that others are there, where well did, but we are encouraged with some of the dialog going on that probably in the first part of 2013. We will look to add additional lenders to our syndicate. But as of today, I don’t know if anybody in horizon then if I tell you that, they’ll fall in place that quickly.

Douglas Harter – Credit Suisse

Okay. And I guess, I think we’ve talked about this in the past, but the 12 month amortization, is that something that would give you greater comfort in using those credit facilities to a greater extent?

Manuel A. Henriquez

Absolutely, that is probably by far even more so they’re removing the floor, but less (inaudible) floor, I should say LIBOR floor is by far the more important issue, and the reason is this. As we proved in 2009, 2010 with our Deutsche Bank and Citibank line, the ability to have a tail, an amortization period is vital to be able to have the control, liquidation of the portfolio and that fine result having to inherently just did liquidate the portfolio and causing further impact.

For those who may recall during that period of time, we saw dramatic earnings increase, as you were liquidating and paying back the Citibank and Deutsche Bank $130 million exposure we had, and having a tail allow us to do that control ability.

Now to bringing all together, we are also experienced normal course of business between $18 and $20 of amortization on a quarterly basis. So having a one year tail and having a $75 million exposure more than adequately allow us to repay that loan under no amortization periods.

Douglas Harter – Credit Suisse

Great, thanks. And then just wondering if you could just update us on your Facebook holdings, I’d say that you still under as of June 30 and obviously it’s been weak quarter today?

Manuel A. Henriquez

Well, you are certainly being polite on being weak. It’s been a pretty horrific performance. That said the fundamentals of why we made that investment and our belief in that company remains very strong, very solid. They have some challenges ahead of themselves on monetizing the mobile users. I will not shoot them in a context, I think they will figure it out and they will crack that nut. They have a challenge ahead of them. But just to remind everybody, our cost basis on those holdings are $31 and I believe $0.8 a share. So on a cost basis, we’re somewhere around $3.3 million down on that investment and I believe that they will crack that nut. This morning, I think the afternoon LinkedIn reported good earnings and they are in that similar – monetizing mobile users. So I’ll remain hopeful that Facebook will crack that nut.

Douglas Harter – Credit Suisse

Great, thank you.

Operator

Thank you. Our next question comes from the line of Jason Arnold with RBC Capital Markets. Your line is now open.

Jason Arnold – RBC Capital Markets

Hi. I’m just curious if you could give us an update on the competitive environment amongst lenders in your space right now?

Manuel A. Henriquez

Believe it or not, Jason nothing – there is no dramatic change whatsoever. We are not seeing any more increased competition than we saw Q1, and frankly, not much has changed. So we are not losing sleep on the competitive environment out there, it’s just been steady as it goes.

Jason Arnold –RBC Capital Market

Okay, great. Thank you for the color.

Operator

Thank you. And our next question comes from John Hecht with Stephens. Your line is now open.

John Hecht – Stephens, Inc.

Good afternoon, guys. Thanks for taking my questions. First of all, just to unclear the – after you resolved the non-accruals subsequent to the other quarter, do you guys have no non-accruals as a percent of fair value right now?

Jessica T. Baron

After the end of the quarter, that’s correct.

John Hecht – Stephens, Inc.

Okay. And then just maybe this is what the favorable clarification, Manuel, what are you saying in the market that do you think you’re yields will raise an average, it’s sound like into the lateral part of the year, maybe end of the fourth quarter. Is that a function of maturing ARMs with your yields or is that a function of you’re seeing better pricing up there in your new bits, and so that you be might just see some up list in the overall portfolio and new loans going forward?

Manuel A. Henriquez

When you see the Q, you will figure this out quite rapidly. We have financial loans that are sub scanner deals that we have on our books. There are very good quality loans that we did, when we had in bundles of cash on our balance sheet, in order to help mitigate the negative spread, then maintaining cash at 10 basis points, I rather do a loan at 7% or 9% yields if you will. As we start utilizing the remaining cash, we have the liability to vacate those loans at a lower yield, and by the removal or payoff of those loans that is out to start giving raise to our overall portfolio yield.

John Hecht – Stephens, Inc.

Okay, I gotcha. And then Jessica, it sounds like you have $50 million of SBA debt you can re-price over the next, I think is it September re-pricing? If the tenure stays around, what is today? Do you have a sense with the interest savings on an annual basis?

Jessica T. Baron

And for the SBA debentures, obviously we’ll be cutting the 300 basis points to 400 basis points loans have specific borrowing. But the impact on our total rate of average cost to that or maybe 0.5% once we complete the full cycle of all the pay-off.

John Hecht – Stephens, Inc.

Great, thanks very much guys.

Manuel A. Henriquez

Thanks John.

Operator

I’m showing no further questions at this time, and I’d like to turn the call back over to Mr. Manuel Henriquez, your line is now open.

Manuel A. Henriquez

Thank you operator and thank you everyone for your continued interest and support of Hercules Technology Growth Capital. If you like to raise a meaning or have additional questions, feel free to contact our Investor Relations department. We’re also be participating at the JMP Financial Services and Real Estate Conference, in New York City on September 13, and presenting. At that conference, if you like to schedule one on one meetings, please contact JMP or Investor Relations department. Again, thank you very much and for being our shareholders and for being part of Hercules Technology Growth Capital story. Thank you operator.

Operator

Thank you, ladies and gentlemen for participating in today’s conference. This does conclude the program. And you all may disconnect. Everyone have a great day.

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