Hercules Capital: This 5.25% Baby Bond Has Begun Trading On The NYSE
Summary
- Overview of Hercules Capital's new baby bond, HCXZ.
- Quick review of the company's outstanding issues.
- Comparison with the sector.
- Comparison with all other baby bonds that pay a fixed rate and have less than 10 years to maturity.
- Comparison with the other securities issued by BDCs.
Introduction
In this article, we want to present a new baby bond issued by Hercules Capital (NYSE:HTGC). Our goal is purely to inform you about the product while refraining from an investment recommendation ourselves. Even though the product might not be of interest to us and our financial objectives, it's definitely worth taking a look at.
The New Issue
Before we get into our brief analysis, here is a link to the company's 497 filing.
For a total of 3M notes issued, the total gross proceeds to the company are $75M. You can find some relevant information about the new baby bond in the table below:
Source: Author's spreadsheet
Hercules Capital 5.25% notes due 2025 (NYSE: HCXZ) pay a fixed interest at a rate of 5.25%. The new issue has no Standard & Poor's rating, is callable as of April 30, 2021, and is maturing on April 30, 2025. HCXZ is currently trading at a price of $24.40 and has a 6.22% yield-to-call and 5.72% yield-to-maturity. The interest paid by this baby bond is not eligible for the preferential 15% to 20% tax rate. This results in the "qualified equivalent" YTC and YTM are around 5.19% and 4.77%, respectively.
Here is the product's yield-to-call curve:
Source: Author's spreadsheet
The Company
As per the company profile:
Hercules Capital, Inc., incorporated on Dec. 18, 2003, is a specialty finance company. The Company is an internally managed, non-diversified, closed-end investment company. The Company focuses on providing senior secured venture growth loans to venture capital-backed companies in a range of technology, life sciences, and sustainable and renewable technology industries. The Company's investment objective is to maximize its portfolio total return by generating current income from its debt investments and capital appreciation from its warrant and equity-related investments. Its primary business objectives are to increase its net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related industries with attractive current yields and the potential for equity appreciation and realized gains.
The Company focuses its investments in companies active in the technology industry sub-sectors characterized by products or services that require technologies, including computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information technology infrastructure or services, Internet consumer and business services, telecommunications, telecommunications equipment, renewable or alternative energy, media and life sciences. Within the life sciences sub-sector, it focuses on medical devices, bio-pharmaceutical, drug discovery, drug delivery, healthcare services and information systems companies. Within the sustainable and renewable technology sub-sector, it focuses on sustainable and renewable energy technologies and energy efficiency, and monitoring technologies. It invests primarily in structured debt with warrants and in senior debt and equity investments. It invests primarily in private companies but also have investments in public companies. It also makes investments in qualifying small businesses through its small business investment companies (SBICs). Its SBIC subsidiaries include Hercules Technology II, L.P. (HT II) and Hercules Technology III, L.P. (HT III).
Below you can see a price chart of the common stock, HTGC:
Source: Tradingview.com
While the text above provides us with a stepping stone in terms of information about the fund, it means nothing without looking at some numbers:
Source: Cefdata.com
The Hercules Capital Family
HTGC has one more outstanding baby bond: Hercules Capital 6.25% Notes due July 30, 2024 (NYSE:HTGX):
Source: Author's spreadsheet
The company intends to use the proceeds from the newly issued baby bond to redeem the outstanding aggregate principal amount of the 2024 Notes (HTGX).
Furthermore, there are three corporate bonds issued by the company:
Source: FINRA
All three of them have a maturity date in 2022, which is three years earlier than the maturity date of the newly issued baby bond. Although, I'll choose the closest to HCXZ one, HTGC4555108, which is yielding at a rate of 4.19%. This should be compared to the 5.72%, which results in a yield spread of 1.5% between the two securities. This can be justified by the closer maturity date of the corporate bond.
Some more information about the bond could be found in the table below.
Source: FINRA
Sector Comparison
Except for HTGX, there are two more baby bonds from the Mortgage Investment sector (according to Finviz) that pay a fixed interest rate.
Source: Author's database
Here is what the bubble charts look like:
By Years-to-Maturity and Yield-to-Maturity
Source: Author's database
By Yield-to-Call and Yield-to-Maturity
Source: Author's database
As the two trade a lot lower than their par value, they are not suitable for a meaningful comparison.
Fixed-Rated Baby Bonds
The next chart contains all baby bonds that trade on the national exchanges, pay fixed interest and have less than 10 years to maturity with a positive YTC.
By Years-to-Maturity and Yield-to-Maturity
Source: Author's database
By Yield-to-Call and Yield-to-Maturity
Source: Author's database
Take a closer look at the main group:
Source: Author's database
Business Development Companies
The chart below contains all baby bonds and preferred stocks issued by BDCs by their YTC and YTM:
Source: Author's database
With a positive yield-to-call only:
Source: Author's database
Asset Coverage Ratio
As per the 497 filing:
We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150%, subject to certain approval and disclosure requirements) after such borrowings. See "Supplementary Risk Factors-Risks Related to our Business Structure-Recently passed legislation may allow us to incur additional leverage", in this prospectus supplement.
Conclusion
This is an informational article about the new baby bond HCXZ. With these articles, we want to pay attention to all new preferred stocks and baby bonds. They are a good guide to what to expect from your income portfolio.
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This article was written by
Day trader whose strategy is based on arbitrages in preferred stocks and closed-end funds. I have been trading the markets since I started my education in Finance. My professional trading career started right before the big financial crisis of 2008-2009 and I clearly understand what are the risks the average investor faces. Being a very competitive trader I have always worked hard on improving my research and knowledge. All my bets are heavily leveraged(up to 25 times) so there is very little room for mistakes. Through the years my approach has been constantly changing. I started as a pure day trader. Later I added pair trades. At the moment most of my profits come from leveraging my fixed income picks. I find myself somewhere in between a trader and an investor. I am always invested in the markets but constantly replace my normally valued constituents with undervalued ones. This approach is similar to rebalancing your portfolio and I just do this any time there is some better value in the markets. I separate my trading results from my trading/investment results. I target 40% ROE on my investment account and since inception in 2015, I am very close to this target.
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