Horizon Technology Finance's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Horizon Technology (HRZN)

Horizon Technology Finance Corporation (NASDAQ:HRZN)

Q3 2012 Earnings Call

November 7, 2012 9:00 am ET

Executives

Nick Rust - IR Representative, IGB GROUP

Rob Pomeroy - Chairman & CEO

Jerry Michaud - President

Chris Mathieu - CFO

Analysts

Troy Ward - Stifel Nicolaus

Casey Alexander - Gilford Securities

Robert Dodd - Raymond James

Boris Pialloux - National Securities

Jonathan Bock - Wells Fargo Securities

Operator

Good morning, and welcome to the Horizon Technology Finance's Third Quarter 2012 Conference Call. Today's call is being recorded. All lines have been place on mute. We will conduct a question-and-answer session after the opening remarks.

I would now like to turn the call over to Nick Rust of The IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead sir.

Nick Rust

Thank you, and welcome to Horizon Technology Finance third quarter 2012 conference call. Representing the Company today are Rob Pomeroy, Chairman and Chief Executive Officer, Jerry Michaud, President, and Chris Mathieu, Chief Financial Officer.

Before we begin, I would like to point out Q3 press release is available on the company's website at www.horizontechnologyfinancecorp.com.

Now, I'll read the following Safe Harbor statement. During this conference call, Horizon Technology Finance will make certain forward-looking statements including statements with regard to the future performance of the Company. Words such as believe, expect, anticipate, intend, or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties and predicting future results and conditions. Current factors could cause actual results to differ on material basis from those projected in these forward-looking statements, and some of these factors are detailed in the "Risk Factor" discussion in the company's filings with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31st, 2011.

The company undertakes no obligations to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

At this time, I would like to turn the call over to Rob Pomeroy.

Rob Pomeroy

Good morning, and thank you all for joining us. Before beginning my formal comments today, I want to acknowledge the tremendous destruction and dislocation caused by super storm Sandy to those in the hard hit areas of New Jersey, New York, and the rest of the East Coast. We know how hard this can be on families and businesses with a loss of life and property. And our thoughts in first go out to all of you as you recover from this tragedy.

I would also like to recognize the power of democracy as we see the results of the elections held yesterday. Whether or not your candidates won, the high level of participation is encouraging. Now the newly elected or reelected officials must takeup the hard work of actually governing. We wish them well and challenge them to move the country forward.

During today's call I will discuss our third quarter and year-to-date progress. Jerry will then provide a market overview. After that Chris will review our financial results as well as our investment portfolio. Chris, Jerry, and I will then be happy to take your questions.

Horizon's business is sound, profitable, and growing. On last quarter's earnings call, I spoke of the important drivers, which are fundamental for all BDC's, deploying capital by directly originating new loans, maintaining strong credit discipline and quality, earning a good yield on investment, using leverage to improve return to shareholders, prudently raising new debt and equity capital to support the business, and paying dividend.

By consistently focusing on these drivers, we've built a solid specialty finance business. Our focus on these drivers is reflected in the -- our third quarter results. We funded gross new loans of $48.5 million and grew our portfolio by $25 million. We maintained a credit rating of 3.2, with 93% of our loans performing at or above our expectations.

We earned a portfolio yield of 13.6% for the quarter, and 13.9% year-to-date. We increased our leverage capacity with a new $75 million credit facility, and increased our overall debt to equity ratio to 0.5 to 1. We sold 1.9 million common shares with net proceeds of $29.5 million in July, and we declared a dividend of $0.45 per share, which is our eighth dividend overall totaling $3.20 per share since going public.

Last quarter, I also spoke about the issues that impacted our quarterly results, as we execute on these main drivers. The timing of new loan fundings impacts that quarter's earnings. New loan fundings typically occur late in a quarter, as it did again this quarter. Accordingly, when we are growing our portfolio, models that use simple averages for our outstanding portfolio balance, will overestimate our income for such quarters.

In addition, the number, dollar, and timing of prepayments in any quarter are neither predictable nor consistent, but are a fundamental part of the venture lending business and can have a material impact on net investment income.

In the first quarter, when we earned $0.44 per share, we had a high level of prepayments. In our third quarter, where we had nominal prepayments, we earned NII of $0.33 per share. Looking at NII and prepayments over several quarters may provide a better basis for the impact of prepayments on NII, which one might expect on an annual basis. For the first three quarters of 2012, we earned NII of $1.06 per share, for an average of $0.35 per share for the quarter.

While we are pleased with our third quarter results, and the progress we made during the quarter, there remains much hard work to do going forward. We are cautious about the future, and in particular, we are paying close attention to the following.

In October, one of our portfolio companies Satcon Technology filed for protection under Chapter 11 of the bankruptcy code. Our secured loan to Satcon, which was originated in June of 2010, has a remaining principal balance of approximately $5.3 million. While, it is early in the bankruptcy process, we believe that there are assets supporting our loan that will mitigate any potential loss. As we continue to monitor developments, we have placed this loan on non-accrual status, as of the fourth quarter. We currently estimate that the impact of the non-accrual on our net investment income in the fourth quarter is approximately $0.025 per share.

More broadly, the clean-tech industry is experiencing challenges as a result of several issues, including global reduction in government subsidies for renewable energy, creditory practices by Chinese manufactures, the bankruptcy of high profile companies backed by the U.S. federal government, and the uncertain future support of government and the private sector for clean-tech. We've turned very cautious on new investments in clean-tech, as to have some of the venture capitalists that were leaders in clean-tech investing.

We are also concerned by the uncertainty of the U.S. and European economies as we look towards 2013. Changes as a result of yesterday's election, the fiscal clip, continued EU concerns, and changing taxation profiles, will all have an impact on the macroeconomic environment we operate in.

We are experiencing strong interest on our venture loan solutions. But we are finding that each new opportunity is competitive with borrowers negotiating hard for the best terms available. We have seen a shift to lower coupons on some of our new loans, offset by more frequent and higher final payments. Yields on new transactions have been consistent over the past six quarters. Our portfolio yield however is being negatively impacted by the runoff and prepayment of 2009 and 2010 transactions that were written at higher yields during the financial crisis.

Before turning the call over to Jerry, I would like to speak briefly to our dividend strategy. In the second quarter of 2011, we earned over $5 million in realized warrant gains equating to $0.91 per share. We made the decision in August 2011 to distribute that gain to our shareholders overtime by augmenting our core quarterly dividend.

Our core dividend strategy remains to payout dividends that are covered by our net investment income, to be augmented with actual net realized gains as appropriate. After payment of the current dividend on November 30th, we will have $0.23 per share remaining in undistributed net income.

So I'll conclude as I began, our business is sound, profitable, and growing. We look forward to 2013 and beyond, facing opportunities and challenges with an experienced and successful team. Jerry.

Jerry Michaud

Thanks Rob, and good morning everyone. Our third quarter investment activity showed the demand for our venture loan products remained relatively strong in what is traditionally our slowest seasonal quarter each year. We funded $48.5 million in new loans in the third quarter of 2012, compared to $7 million in the third quarter of 2011.

We were also pleased with the continued diversity of our funded transactions in the third quarter. We funded four transactions totaling $16.5 million in the technology market, five transactions totaling $9 million in the life science market, one transaction totaling $7 million in the clean-tech market, and two transactions totaling $16 million in the healthcare information and services market.

Our portfolio of diversification has been a hallmark of the Horizon's portfolio since our inception, an important risk mitigants, which is reflected in our favorable loan loss track record.

In addition to the favorable diversification of our quarterly funding by markets, I would also point out the following marketing activity achievements for the quarter. We funded a total of $48.5 million in 12 transactions during the third quarter, which represented our fourth consecutive quarter of increased gross fundings.

We added four new companies to our portfolio, which increased the total number of companies in which we hold warrants to 58. We increased the amount of our investment and warrant positions in 8 of our 15 portfolio companies.

In the third quarter, we made six new loan commitments in the amount of $41.3 million. We grew our portfolio by 12.9% in the third quarter from $197 million at the end of the second quarter, to $221 million at the end of the third quarter.

As of September 30th, 2012, our approvals and committed backlog stood at $32.8 million to 10 companies. Approvals there could be no assurance at transactions early in evaluation will result in commitments. Our pipeline remains robust with over $240 million of new opportunities being evaluated. The primary contributors to the increase in our pipeline activity include the addition of two people to the team of experience and productive managing directors and the increase in number and average size of deal opportunities from our core markets of technology and life science.

Additionally, subsequent to our investment portfolio update press release provided on October 1st, we've been awarded 13 new transactions totaling $97.6 million. We've approved three new transactions totaling $20.5 million, and funded two transactions totaled $11.1 million from our committed backlog. After considering the fourth quarter activity, today our approvals and committed backlog totals $42.2 million to 12 companies.

As mentioned in our past investor calls, there is no guarantee that all of the new transactions will eventually fund, as many are subject to credit approval and/or our structured transactions subject to borrowers meeting specific milestones. However, we are pleased with the continued demand for our venture loan products during the fourth quarter.

With respect to our view of the state of our markets, we noticed the significant softness of investment activity across all markets during the third quarter. Total venture capital investment of approximately $7 billion during the third quarter was down 19% from $8.3 billion of investment during the second quarter, and down 42% from more than $10 billion of investment in the third quarter of 2011. Even though at the same time, U.S. venture capital fund raising is on track to have its best year in the last three years and top $20 billion in 2012.

We believe that VC funds were looking at the same data sets we were looking at in the third quarter and were concerned about near-term macro issues such as the U.S. and European economies, the uncertainty of the U.S. elections, and upcoming fiscal cliff negotiations, as well as the micro issues related to the clean-tech sector.

In addition, the life science industry needs more favorable at the, a clinical trial guidance to shorten time-to-market issues. We believe all of these factors have resulted in VC's taking a cautious and pragmatic approach to individual investment opportunities. Notwithstanding these issues and concerns, we believe that it is more capital flows into VC funds, VC investment will be relative strong in 2013, as some of the macro issues begin to clarify and venture capital has looked to invest capital from their newly raised funds.

The total value of M&A transactions was relatively flat in the third quarter at $12.1 billion, compared to $12.6 billion in the second quarter, and was down about 10% in the third quarter a year ago. M&A valuations in the third quarter continued at a slight upward trend averaging $132 million per transaction, which was up from approximately $120 million in the second quarter of 2012, and $103 million in the third quarter of 2011.

Typically IPO activity in the third calendar quarter is generally slow, which was again shown in 2012, as only 10 IPOs were completed in the third quarter with a total of $807 million raised. The total amount raised however as compared favorably to the same period in 2011, when 11 IPOs raised only $505 million.

On the competitive market front, we continue to see active participation in the market from a number of competitors, who like Horizon, have been able to raise capital in 2012, and are seeking to deploy their capital.

Overall, pricing is held up fairly well with some pressure on interest rate coupons being offset by increasing end-of-term payments. Although we remain cautiously optimistic about our ability to continue to generate solid investment opportunities, by providing value added loan products at attractive pricing, we will be watching the market carefully in the fourth quarter, as signs of downward pressure on pricing or overly aggressive loan structuring due to competitors striving to meet their annual funding goals.

We believe, we already have a solid backlog of awarded and committed transactions with favorable pricing and structuring characteristics, which will allow us to be selective as we continue our marketing activities in the fourth quarter.

With that I turn the call over to Chris Mathieu, our Chief Financial Officer.

Chris Mathieu

Thanks Jerry. I'd like to turn your attention now to the Horizon financial performance for the quarter. Our consolidated financial results for the three and nine months ended September 30th, have been presented in our earnings release distributed after the market closed yesterday, and we also filed our Form 10-Q with the SEC last night.

Total investment income for the third quarter of 2012 was $6.6 million compared to $6.4 million for the third quarter of last year. This increase was primarily due to the increased average size of our loan portfolio. Substantially all of the $6.6 million in investment income for the quarter was earned from interest income, from our loan portfolio. The total investment income also included approximately $200,000 of fees associated with prepayment fees from one of our portfolio company and other loan amendment fees.

For the nine months ended September 30th, total investment income increased 4.8% to $18.7 million, as compared to $17.9 million in the prior year period. Total investment income for the first nine months of 2012 of $18.7 million consisted of $17.8 million in interest income from investments, and also $900,000 primarily from prepayment fees from one portfolio company in the third quarter and four portfolio companies during the first quarter of the year. We believe loan prepayments were natural and healthy part of our portfolio life cycle.

Our weighted average yield was 13.6% for the third quarter, compared to 12.9% for the second quarter, and 14.2% for the third quarter of last year. Our weighted average portfolio yield for the nine month period ended September 30th of 2012 was 13.9% and 14.6% for last year.

The company's total expenses were $3.7 million for the third quarter, compared to $3.4 million for the third quarter of last year. Total expenses for each period consisted of interest expense, management fees, incentive and administrative fees, and to a lesser extent professional fees and G&A expenses.

Interest expense increased quarter-over-quarter due to increased usage of the company's credit facility with Wells Fargo, the closing of a new loan facility with Fortress Credit, and the issuance of senior unsecured notes, partially offset by continued use of our WestLB facility that is still being paid down.

On a going forward basis, we estimate our average interest rate at 6.25%, which takes into account our credit facilities with Wells Fargo, Fortress, and our publicly traded senior unsecured notes. Although, actual usage will vary, we project that the credit facilities can be used equally over their remaining terms. In addition to the interest rate on our borrowings we also have the effect of debt issue cost that continue to be amortized over the term of the credit facility.

Performance based incentive fee is also increased year-over-year primarily due to the reversal of an accrual for the incentive fee related to realized gains that we earned in the third quarter of 2011. There was no such reversal recorded in Q3 of 2012.

The company earned net investment income of $3 million or $0.33 per share for the quarter, as compared to $3 million or $0.39 per share in the prior year quarter.

During the third quarter of 2012, we completed a public offering of 1.9 million shares of common stock, which raised gross proceeds of about $31 million, and also increased the average number of shares outstanding for the quarter. For the nine months ended September 30th, net investment income was $8.6 million or $1.06 per share, as compared to $7.2 million or $0.95 per share in the prior year period.

We did not realize any warrant gains in the third quarter of 2012, but we continue to believe that there is a growth in the investment portfolio, which includes warrant positions in 58 companies as of September 30th, and that these provide potential for realizing meaningful gains in the future.

In this third quarter, the net unrealized depreciation on investments was $700,000, compared to unrealized depreciation of approximately $200,000 for the three months ended September 30, 2011. For both periods these amounts are the result of changes in the net fair value of our debt in warrant investments.

Our overall asset quality of the portfolio remained strong, our three and four rated credits represented approximately 93% of the total fair value of the loan portfolio at the end of the quarter, while our two rated credits increased slightly to 7% at September 30th.

As of September 30th, 2012, our net asset value was $16.41 per share or $156.9 million. For the three months ended September 30th, we increased net assets from operations by $3.6 million or $0.40 per share. For the nine month period ended September 30th, we increased net asset from operations by $8.4 million or $1.03 per share.

We began the quarter with investment portfolio balance of $196 million. Our third quarter new loan volume totaled $49 million, with $12 million of that coming from refinanced balances with an existing portfolio company. We also recorded $11 million in normal contractual loan payment and $1.5 million in loan prepayment, leading to an ending investment balance of $221 million as of September 30th.

Our investment portfolio as of September 30th, included 44 secured loans with an aggregate fair value of $212 million and 58 warrant positions with an aggregate fair value of $5.8 million. Horizon ended the third quarter with approximately $86 million in available liquidity, including cash of approximately $6 million, and $80 million in funds available under existing credit facility commitments.

Our low level of cash reflects our focus on maintaining a low level of non-earning assets, which we achieved in third quarter by utilizing the proceeds from a July equity offering to repay most of the then outstanding debts under our Wells facility, and then re-borrowing under the facility as needed to fund new investments in the quarter. As of September 30th, our Wells facility with a current commitment of $75 million had $23.7 million outstanding and our WestLB facility had $9.6 million outstanding.

In August, we completed a new credit facility of $75 million with Fortress Credit. This facility, which complements our existing facilities, has up to a five-year term, includes a drop period of up to four years, the amounts borrowed bear interest at LIBOR plus 6% with a LIBOR floor of 1%. This facility is unique in that it provides a 2 to 1 advanced rate on eligible loans as of September 30th. The facility had a outstanding balance of $10 million.

As of September 30th, we were leveraged 25 to 1, sufficiently below our current target ratio of 0.8 to 1. By continuing to execute on our leverage strategy, we have further enhanced our liquidity position and our ability to grow the portfolio and expand future earnings.

I would like to turn back to Rob.

Rob Pomeroy

Thank you, Chris. Again we are pleased by our performance for the third quarter. We remain focused on leveraging our increased liquidity to continue to execute our investment strategy, as we have consistently done in the past.

By further expanding our high quality portfolio of secured loans with attractive yields, while maintaining the opportunity for enhanced returns via warrants, we expect to further strengthen Horizon's leading franchise in the venture lending industry and drive shareholder value.

Before we open the floor for questions I would like to note that we plan to hold our next conference call to report year-end results during the week of March 11, 2013.

We'll be happy to take questions you may have at this time.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Troy Word with Stifel Nicolaus. Please go ahead with your question.

Troy Ward - Stifel Nicolaus

Hey Jerry, can you walk through the -- can you repeat the committed backlog and pipeline information for today. I didn't -- I wasn't able to jot that down quite fast enough?

Jerry Michaud

Yeah, sure can. Let's see. So where would you like me to start?

Troy Ward - Stifel Nicolaus

Well I think I heard $42.2 million in 12 companies in the committed backlog, that's of today?

Jerry Michaud

That's of today. That's correct.

Troy Ward - Stifel Nicolaus

Okay. So did you -- could I back, with the numbers you gave, could we back into what you've or did you just perhaps say, what you've done since quarter end?

Jerry Michaud

Yeah. I did. We funded two transactions for $11.1 million from our committed backlog. And so after those fundings our backlog stood at $42.2 million in 12 companies.

Troy Ward - Stifel Nicolaus

Okay, that's what I guessed. Okay and I heard a pipeline of $242 million. But that's the much bigger funnel obviously?

Jerry Michaud

That's correct.

Troy Ward - Stifel Nicolaus

Okay. And then moving onto a couple specific questions on Satcon. First was in the third quarter did it -- did the full amount of the interest accrue to earnings in the third quarter?

Jerry Michaud

Yes it did.

Troy Ward - Stifel Nicolaus

Okay. And then what is your, I mean obviously it's a file, it's a public document, where does your $5.2 million loan stand in the capital structure at Satcon?

Jerry Michaud

Yes. So we're behind a senior credit facility held by Silicon Valley Bank.

Troy Ward - Stifel Nicolaus

And how much is that?

Jerry Michaud

I think this is in the document; it's around $13 million.

Troy Ward - Stifel Nicolaus

And when they filed their, kind of their assets and liabilities, I'm sure it was a negative enterprise value. Do you remember what those numbers were?

Jerry Michaud

I don't have those numbers Troy.

Troy Ward - Stifel Nicolaus

Okay. And then could you give us an update on that. I mean earlier this was, the only other company that I recalled was on non-accrual and you restructured that into a royalty agreement the fair value looks to have been steady, but it's still marked covered 40 kind of percent of your original cost. Is there something -- what's going on there, is there something that gives you confidence that you'll be able to recover that that unrealized loss in fact?

Rob Pomeroy

Yeah. So it's early but they have we've already received two quarterly royalty payments pretty much on the plan that we were operating on that we -- when we valued the loan initially still early, but so far so good.

Troy Ward - Stifel Nicolaus

Okay. And so is that coming through as income or is that coming as a reduction?

Rob Pomeroy

No, it reduces the carrying value.

Chris Mathieu

Yes, reducing the cost basis.

Troy Ward - Stifel Nicolaus

Okay, great. And then on the Fortress facility, can you just give us some color obviously from the outside looking in, LIBOR plus 6% with a 1% floor, isn't all that cost competitive for a secured facility with what you've been able and others have been able to get from an unsecured line of credit. Can you just talk about kind of the thought process behind the Fortress facility?

Chris Mathieu

The strategy was to unleash some of the available leverage that we had within the capital structure. So the Fortress facility is more flexible in it's concentration, in it's structuring to allows to do what we've done for a longtime, which is partner with others like the technology banks, where we have a -- allow our accounts receivable facility to come into the transaction along with our venture loan. So that's one of the unique aspects of the transaction.

The other is that it does have 2 to 1 leverage filled into it. I think everybody else's facilities right now are 1 to 1. So I'm looking for potential changes in legislation down the road. This would allow us to immediately access a higher leverage vehicle.

Troy Ward - Stifel Nicolaus

But as of today, I mean your other sources of leverage, were they too restrictive that didn't allow you to reach acceptable level of leverage?

Chris Mathieu

That's correct and that's true for everybody that does financing with comparable lenders that we have.

Troy Ward - Stifel Nicolaus

Right. I guess we will talk about that online I'm not sure I get that.

Chris Mathieu

So far, I'll be more specific. So other lenders like our other facilities don't allow significant levels or any meaningful levels of participation where I could say the technology bank is senior to us.

Troy Ward - Stifel Nicolaus

What about the term that you issued the unsecured?

Chris Mathieu

Well that's right, that's a different capital source. The diversifying capital source as well not relying on the public markets.

Troy Ward - Stifel Nicolaus

So was that -- did you think you had fully tapped that channel?

Chris Mathieu

Yeah.

Troy Ward - Stifel Nicolaus

Okay. Does Fortress have any, well, first of all what were the upfront fees that were paid on the Fortress facility, so we can amortize those across the cost?

Chris Mathieu

You see the debt issued cost, would be like we're paying a total of like 1.5% and over a five-year deal.

Troy Ward - Stifel Nicolaus

And but that's on the 1.5% from the $75 million?

Chris Mathieu

Yes. Yeah.

Troy Ward - Stifel Nicolaus

And then…

Chris Mathieu

It's pretty customary. I mean, if you know, if you look at anybody you pay on commitments whether it's Wells Fargo or any of the other facilities I'm not sure.

Troy Ward - Stifel Nicolaus

Well, the difference is they're not 7% money. If you add 1.5% over five years to the cost of the Fortress facility and then layer on a 2% management fee and 20% carry of what's the margin into and you're doing cash coupons most recently you've been in the 10.5% and then with fees call it, 13%, 13.5%?

Chris Mathieu

I understand. I understand you. Is there a question?

Troy Ward - Stifel Nicolaus

What is the margin left for shareholders after you used it?

Chris Mathieu

Well our deals are 13% to 14%, our deals excluding warrant so that, so you can do the math on that.

Troy Ward - Stifel Nicolaus

I don't see that there is any margin left excluding unless once actually hit, I don't see where the shareholder is going to benefit from using this facility?

Chris Mathieu

Is there another question?

Operator

Our next question comes from Casey Alexander with Gilford Securities. Please go ahead.

Casey Alexander - Gilford Securities

I'm sorry. I, somebody walked in on me. Did you give a level of where you think you're going to value the Satcon loan going forward?

Rob Pomeroy

We did not. We did speak that our fair value right now at the end of the third quarter cost is par is fair value. We also noted that we placed the loan on non-accrual in the fourth quarter and had no negative impact on the third quarter. It's too early to tell where we will fall out on fourth quarter fair valuing. But right now it's still at par and we're watching those -- the proceedings closely.

Casey Alexander - Gilford Securities

Well, it is fair to say that there's going to be some material mark on that loan?

Rob Pomeroy

It's not fair to say right now. We are a secured lender. We think whether it's substantial, collateral, and it's too early to tell in the process.

Casey Alexander - Gilford Securities

Okay. There was -- you made a comment about the policy. I mean, it was sort of a jumbled comment about the policy is that the dividend is covered by NII you have $0.23 remaining of undistributed capital gains. Is -- does that mean that when the undistributed capital gains are run out that is your intention to start matching the dividend to NII at that point in time?

Rob Pomeroy

Well just to reiterate I mean the idea of paying more than NII when we made that decision in August last year was to return what we had actually realized in gain. So we do not attempt to provide return of capital. So our core dividend strategy is to have the core dividend be based on and covered by NII, to be augmented by actual realized gains.

Casey Alexander - Gilford Securities

Okay. And then I mean can I ask you a question, why not just when you have undistributed capital gains, just put them out, at the end of the year in a special dividend and run the dividend off of core NII?

Rob Pomeroy

We made the decision a year -- well over a year ago to try to spread that out overtime.

Casey Alexander - Gilford Securities

Okay. Secondly I'm not quite sure that I understood your statement about current loan structure, so lower coupons with more frequent and the higher final payments. Can you give me a little more color on what that actually means?

Jerry Michaud

Sure in the venture loan market today essentially most structures in addition to including a coupon rate for the customer includes a final payment, which is a yield enhancement payment, it's not a principal payment. So in today's world you might find a transaction where the interest rate is somewhere in the 11.5% range. And then there would be a final payment may be in the 3% or 4% range, which gets your yield somewhere into that, high 12% to 14%. And that structure has been holding steady, but it's been what we've seen a slight increase to both a little bit lower coupon and a little bit higher final payment to reach that overall yield.

Casey Alexander - Gilford Securities

Okay. Have you -- what level of loan amortization do you expect in Q4 and also have you seen any prepayment thus far in Q4?

Chris Mathieu

So the normal portfolio amortization last quarter was about $12 million. And so we'll be working off a slightly larger portfolio net. So we're still in that relative range. So far this quarter we've had one prepayment I believe -- actually I'm sorry, we have had three prepayments.

Casey Alexander - Gilford Securities

So far in Q4?

Chris Mathieu

Yeah.

Casey Alexander - Gilford Securities

How much were they?

Chris Mathieu

Relatively one -- let me back up. Two of those are actual prepayments of existing loans. One of the balances was refinanced with a new loan. Included in that $11 million that we said was funded. So, the net portfolio growth is so far in the quarter pretty flat.

Casey Alexander - Gilford Securities

Flat, okay. Great. And just kind of a decision. Are there any portfolio companies is it you have, that have filed S1's or registration statements?

Rob Pomeroy

Yeah, we have a company called Singulex that's a portfolio company that's in the IPO process as we speak.

Operator

Our next question comes from Robert Dodd of Raymond James. Please go ahead with your question.

Robert Dodd - Raymond James

Quickly, first on the IPO process, you say you got one. Do you have any companies in discussions or in M&A discussions right now?

Rob Pomeroy

None that we can discuss.

Robert Dodd - Raymond James

Okay. And just looking at the credit quality obviously end of Q3 looked very stable obviously Satcon was the supplier. So, is there any -- when I look at fair value mark except for certainly to access credit quality, are there any other early indicators in the portfolio that you can point to as a company that might be stressed all significantly outperforming this, not currently showing up in those fair value marks?

Rob Pomeroy

No. We're very pleased with the fair level of our quality of credit. I mean it's a heavy burden to carry that you had no loan losses and that we carry very low non-accruals. But, so every one of these that impacts us. But it would be normal for our business to have some level of distress. I think the level of distress we have right now in our portfolio even considering the Satcon situation is very, very acceptable to us.

Robert Dodd - Raymond James

Okay great. And then last one for me. I mean, what are the motivations for the Fortress well seem to me to push towards more second lien, which I would have expected all other things being equal, whichever season they grow to push up cash coupons. But the color you gave and it seems to indicate you're expecting cash coupons to expand. Is that a like-for-like metric you're giving and then the mix towards, ship towards more second lien will be on top of that or can you give us a little bit more color about how the mix in having a more flexible capital source could affect those coupons?

Jerry Michaud

That's a good question. So I'll make a couple of comments on that. First of all we only put the Fortress line in place, here in the quarter. So we wouldn't expect to see a significant increase in our second lien transactions based on just the timing of when that line was put in place. And in addition to that again we've two new managing directors on board but they also came on board in the third quarter. So we do expect to see increased activity from both of those sources i.e. the ability as Chris had mentioned. This gives us much greater flexibility relative to what I call not second lien but kind of two new liens to AR lines, which is traditional on our business. It gives us much greater flexibility in doing those transactions and the expectation would be that those transactions would have a higher coupon.

Operator

Our next question comes from Boris Pialloux with National Securities. Please go ahead with your question.

Boris Pialloux - National Securities

Hi, thanks for taking my question. Just have a general question, it's mostly a -- what impact of the aftermath of Facebook on social media, do you see more demand coming from companies, which actually kind of get new round of equity funding?

Rob Pomeroy

Interesting question, and I'll take that. We have taken half well historically not just recently taken a very conservative view on social media opportunities in the marketplace. And I think we've done a total of one transaction, which is already prepaid and was not a problem at all. But we have a little bit of trouble finding true enterprise value in those companies, sure everybody knows Facebook but there is a lot of companies that have followed them that, the subscription models that they have that doesn't give us a great comfort level relative to kind of the stickiness of those revenues. And so in our portfolio we have very, very little exposure literally none, other than companies that might service social media companies, in other words the technology company that helps social media company with relative new things they can do on their platform because of the technology. But even they're not a great deal of exposure.

So that's not been an area where we've focused on, and so it has not been a problem for us either relative to our portfolio or relative to looking at new opportunities because again when I look at our pipeline that has not been a focus for us. So we've been -- we're real comfortable with the level of activity outside of social media and feel very confident in the activity in those other sectors in life science and true technology companies and healthcare information and services especially.

Operator

Our next question comes from Jonathan Bock from Wells Fargo Securities. Please go ahead with your question.

Jonathan Bock - Wells Fargo Securities

Good morning and thank you for taking my question. First Jerry, just a broader kind of industry question, as I was listening to your comments, venture debt demand does remain relatively robust. But as you said and what we heard from other sources that there may be some slight deterioration in deal structure, particularly as we move into this quarter and may be, could you talk to us about some of the ways that you are mitigating potential credit risks and the structures that you were providing venture portfolio companies in this environment?

Jerry Michaud

Yeah, sure. It's really easy for us. I mean, it has everything to do with honestly, 20 years experience in the management team and almost a same level of experience relative to what managing directors and our credit people. We've been through all kinds of good markets and bad markets over that period of time, both macro and micro within the specific market sectors that we service and we don't diverge from that, we don't.

When the markets are hot and everything is going well and coupons are up, we don't get overheated in any specific sector of our market. We stay balanced in our portfolio and we've continued to do those things and will continue to do those things. And so, when I look at our pipeline, both in terms of our committed backlog and the transactions we've been awarded as well as the deals we're evaluating, we're not diverging from our strict underwriting criteria, which has lead to obviously I think probably one of the better loan loss track records in the BDC industry not just the venture lending industry.

And so, we continue to look at transactions on that basis. We're very pragmatic on every opportunity. We understand where the market is at the time we're underwriting it. We take those considerations into effect. We also look for opportunities during times like this, where we see opportunities where the people are kind of walking away from the market, and so we can may be get better stronger structures as a result of that, and we take off -- we take advantage of those opportunities. And we did that in 2009, when the market softened and a lot of venture lenders kind of backed off the market, we selectively picked a number of transactions at that time, kept busy in the market, and as a result ended up with some higher yielding deals that were well structured. We continue to use that same kind of strategy.

Jonathan Bock - Wells Fargo Securities

Well that's a great color. Thank you. Now Rob, given that you do have a meaningful amount of investment capacity on your credit facility, would it be fair to say that you are interested in growing the equity account any time prior to year-end?

Jerry Michaud

The availability our capital raised, equity capital raising strategy is two folds. Really one is to always be sure that we do it one; it's accretive to do so for our shareholders and two, it's market driven. So it requires that there would be an opportunity to do it. We do have debt facilities that could benefit from additional equity, in other words we're about $33 million short of equity to fully utilize the credit facilities we have. But right now it's we have capacity for the investment pipeline but we also have good momentum in the market.

Jonathan Bock - Wells Fargo Securities

Okay. So just a technical question. So that $86 million you could borrow that free and clear today or would that be unavailable until new equity is raised?

Chris Mathieu

That's free and clear today. There would be another approximately $30 million of credit availability if we were to raise additional equity.

Jonathan Bock - Wells Fargo Securities

Okay, great thanks Chris. Now, based on the potential earnings pressure that could come from the loss of Satcon and what we never want to forecast for realized loss because you obviously have a great track record let's just say if something like that can happen walkthrough us the reasoning of keeping the dividend where it is, relative to your core earnings power in light of the fact that the market right now really isn't giving you any additional credit for that dividend if we look at the stock's valuation?

Rob Pomeroy

Well I guess I would say that, we over back to what I've said if I repeat myself it's intentional that the core dividend strategy has always been to cover the dividend with NII. When we have the big realized gain last year, there was an expectation that we would have subsequent realized gains, and so we thought that this would be a method by which we could reward our shareholders. As those gains came we did I think meaningful million dollar gain in the fourth quarter last year. We've not had one since. So the answer is that I think as we look at what's left in undistributed income at the end of the third quarter it's still appropriate to pay the dividend.

Jonathan Bock - Wells Fargo Securities

Okay, great Rob thanks. Now as you talk about growing NII to cover the dividend I'm trying to go back and just looking at a little math here in that the all in calculated interest cost of the Fortress facility is about 7.5% that's the L plus 6% plus the higher bid floor and I'd say 50 basis points or so. On average, your cost as a percent of assets is 470 basis points and that can go down as you grow, but by and large when you put that at comp 7.5%, your total cost is an excess of 12 and Chris you mentioned that you're originating in excess of 13, but imagine investors would wonder how is that dividend covered with only 30 or 50 basis points of additional earnings accretion, half of the only facility that you can borrow from?

Chris Mathieu

Well, first of all that the cost of the debt is only implies to half of the loan. So, we have the other half is earns only less. So we have to use the leverage. That's the advantage of having this facility.

Jonathan Bock - Wells Fargo Securities

Okay. Well we're going to, I guess so when you saw half the loan, so I would assume that you would be covering it from equity capital, but if we judge by the cost of equity that you're raising by looking at the dividend that was in excess of 11. So at what point do investors say, I mean, I really like the model and I like the way things are going, but I just don't see how earnings gets there and is that perhaps why the stock is trading at where it is? And if that's the case why throw good money after bad when you don't really need too?

Rob Pomeroy

Well the overall strategy is that it allows us to fully utilize the Wells Fargo like facility as well. So because our tradition as Jerry had said traditionally we've done a balance of first and second lien transactions. And so to maintain that sort of balance and get the opportunities we need, growing the portfolio, growing the number of warrants this was the real motivation for taking what is may be in the expensive debt facility.

Jonathan Bock - Wells Fargo Securities

Yeah, totally agree and we totally agree that there are other low cost facilities there that you're borrowing on and I know shareholders would appreciate to borrow on that as well. Outside of that we appreciate what you guys are doing. Thank you so much.

Operator

Our next question comes from Troy Ward with Stifel Nicolaus. Please go ahead.

Troy Ward - Stifel Nicolaus

Hey guys, sorry, I got cut off earlier. I just had a couple of follow-ups on the Fortress facility. On the -- can you repay that facility, you talked about raising equity in one of the benefits is that you're able to repay facility obviously so you don't have to just sit on cash. Can you repay the Fortress facility back down to zero without incurring any fees?

Rob Pomeroy

The structure is that it's a not a revolving line. It's a delayed drop term loan. So the quick answer is no. The design of the structure is to borrow in kind of step fashion and for the first three years of the facility there would be a declining prepayment charge, three to one as it goes down and then after that we can prepay at our discretion.

Troy Ward - Stifel Nicolaus

Okay. And then I think I saw the non-usage fee is 1%. Is that correct?

Rob Pomeroy

Yes.

Troy Ward - Stifel Nicolaus

So currently if you have $10 million drawn and 7.5% let's say is the basic cost, but then you're paying another 1% on the $65 million. Is that the way the math works?

Rob Pomeroy

Now you don't pay, either have you pay the interest at 7.5% or you don't pay that and you pay the 1% is not so.

Troy Ward - Stifel Nicolaus

Well you're paying the interest on the $10 million and then the 1% on the other $65 million?

Rob Pomeroy

That's correct.

Chris Mathieu

That's right, yeah.

Troy Ward - Stifel Nicolaus

Okay, all right. So right now the cost of the $10 million you've drawn because you're paying again for the stuff you're not using is in excess of 13%. So I'm just saying that not for short value but for much more as, you really have to draw this down totally?

Rob Pomeroy

That's why that's clearly for short value because it's a portfolio. It's not just the $10 million loan. It's a $220 million asset base with a strategy to deploy capital. Like Jerry said, we only got it 60 days to go. We have the month of -- the quarter of, the third quarter, waived on non-used fees. So the strategy is to use it. And just like all other facilities, you do pay a non-used fee and it's part of an overall leverage and liquidity strategy. Not just about that one credit facility when in fact we've three facilities that we're managing our liquidity all the time.

Troy Ward - Stifel Nicolaus

Right that's what I was trying to get to. I mean we should be modeling that this is going to be used, fully used. I mean that's that way it's going to make the most sense. Is that fair to say?

Rob Pomeroy

Yes. You listened to what Jerry talked about as far as momentum in the market post September 30th, and you can go back to the script -- the transcript I guess to get more clarity on those numbers. But utilization will generally not be an issue.

Operator

I'm not showing any other questions in the queue. I would like to turn it back over to Rob Pomeroy, CEO for closing comments.

Rob Pomeroy

Thank you very much for participating and your continued interest in the Horizon story.

Operator

Sorry sir.

Rob Pomeroy

All right. That will conclude our call. Thank you.

Operator

Thank you. I would like to thank everyone again for joining on today's conference call and following the Horizon story. This concludes Horizon Technology Finance Corporation conference call. Thank you and have a nice day.

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