Horizon Technology Finance (NASDAQ:HRZN) Q3 2018 Results Conference Call October 31, 2018 9:00 AM ET
Megan Bacon - Marketing Support Manager
Rob Pomeroy - Chairman, Chief Executive Officer
Gerry Michaud - President
Dan Trolio - Chief Financial Officer
Ryan Lynch - KBW
Robert Dodd - Raymond James
Casey Alexander - Compass Point
Christopher Testa - National Securities
Good morning and welcome to Horizon Technology Finance’s Third Quarter 2018 Conference Call. Today’s call is being recorded. All lines have been placed on mute. We will conduct a question and answer session after the opening remarks. Instructions will follow at that time.
I would now like to turn the conference over to Megan Bacon of Horizon for introductions and a reading of the Safe Harbor statements. Please go ahead.
Thank you. And welcome to the Horizon Technology Finance Third Quarter 2018 Conference Call. Representing the Company today are, Rob Pomeroy, Chairman, Chief Executive Officer; Gerry Michaud, President; and Dan Trolio, Chief Financial Officer.
Before we begin, I would like to point out that the Q3 earnings press release and Form 10-Q are available on the Company’s Web site horizontechfinance.com.
Now, I will 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 believes, expects, anticipates, intends, or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.
Certain factors could cause actual results to differ on a 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 31, 2017. The Company undertakes no obligation 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.
Good morning and thank you all for joining us. Building on the positive momentum we established in the first half of 2018, we generated strong results for the third quarter, implementing our strategies established earlier in the year, we made notable progress in a number of important areas. Specifically, we grew our portfolio and committed backlog for the second consecutive quarter, highlighting the strong demand for Horizon’s ventured debt products. We posted our third consecutive quarter of net investment income growth, earning net investment income of $0.30 per share that cover our distribution for the quarter. We’ve had only one new non-accrual since the beginning of 2017, finished the quarter with no loans on non-accrual and grew our NAV by $0.06 per share.
Finally, yesterday our shareholders approved the proposal to implement the increased leverage made possible by the Small Business Credit Availability Act passed earlier this year. These steps should strengthen our liquidity and growth potential, as well as ensure our interest remains strongly align with shareholders. Today, we will discuss this progress in more detail.
The growth of our loan portfolio by over $23 million during the past two quarters has contributed to higher investment income. We continue to maintain one of the highest yielding floating rate loan portfolios in the BDC industry. For the third quarter, our debt portfolio yield was 14.8% and 14.4% for the past four quarters, which takes into consideration regularly scheduled interest and fee income, as well as income from liquidity events.
As we have discussed on previous calls, the pace of prepayments has normalized in 2018 relative to 2017's higher levels. Prepayment will continue to present opportunities for accelerated income from liquidity events and a more stable portfolio in terms of size and earnings power. We funded seven new loans in the third quarter of 2018, totaling more than $24 million, which enable us to increase our portfolio by over $13 million. We also closed $50 million in new approvals and commitments that increased our committed and approved backlog to $47 million, which we believe highlights the strong demand for our growth capital.
We continue to make progress during the quarter on the portfolios' to credit quality. Again, since the first quarter of 2017, we have had only one new non-accrual loan and no loans on not-accrual at the end of the third quarter. We are continuing to see some activity in the technology market for M&A that has improved the prospects for our portfolio companies. Three portfolio companies entered into a definitive agreement to be acquired during the third quarter.
As I mentioned earlier, we had an increase in our NAV. This can be attributed to stability in the fair value of the loan portfolio and an increase in the fair value of the warrants we hold in private portfolio companies. Based upon the growth in our NII over the past three quarters and our outlook, our board declared monthly distributions of $0.10 per share for January, February and March 2019. We have now declared distributions at this $0.30 per share level for nine consecutive quarters.
We remain committed to providing our shareholders with distributions that are covered by our net investment income over time and maintain an undistributed spillover $0.05 per share in support of future distributions.
We are pleased that our shareholders voted to approve the early implementation of the reduced asset coverage test, which was approved by our Board of Directors in June. We believe the additional leverage at Horizon will complement the joint venture that we established in the second quarter with Arena Investors and leveraged with New York Life to expand our venture lending brand and market position.
Specifically and effective immediately, Horizon's asset coverage requirements for senior securities have been reduced to 150% equivalent to the 2:1 debt to equity ratio from 200% equivalent to a 1; 1 debt to equity ratio. It is important to note that Horizon will continue to be prudent in its utilization of leverage and will not alter its investment strategy. Rather, we intend to continue to provide senior secured loans to well sponsored development stage companies in the life science and technology markets.
As we mentioned last quarter, taking into consideration the yields that we are able to achieve in the current market, the increased leverage, even at moderately higher levels, can produce improved return on equity and increase net investment income for our shareholders.
Now, that the modified asset coverage requirements are in effect, we expect to seek opportunities to increase our target leverage into a range from 0.8: 1 to 1.2:1. We will execute this strategy judiciously over the coming quarters in a disciplined manner from the previous target of 0.75:1, which will provide us increased flexibility to grow and diversify our assets and investment portfolio.
In addition to the approved asset coverage proposal, a new agreement with our advisor was approved and ensures we continue to align the interests of our advisor and shareholders as we access increased leverage. The advisor has reduced the base management fee percentage to 1.6% on the amount by which gross assets was cash and cash equivalent exceeds $250 million. The new investment advisory agreement continues to provide our shareholders with protection through the Fee Cap and Deferral Mechanism implemented in 2014. The advisor has further agreed to waive the recoupment of previously deferred incentive fees during 2018 and that waiver includes $400,000 waive during the third quarter. Total amounts waived now total $700,000.
To conclude, Horizon's third quarter performance was strong as we achieved substantial success on a number of fronts. We grew the portfolio, earned solid NII, covering the dividend and continue to strengthen credit quality, while making further progress to enhance our liquidity and growth potential. At the same time, we continue to see strong origination activity and have expanded our backlog.
I will now turn the call over to Jerry who will update on our business development efforts and market environment, and then to Dan, who will detail our operating performance and financial conditions.
Thanks, Rob. Good morning, everyone. During the third quarter, we continued to execute on our strategy of sustained managed growth based on adding high quality venture debt loans with attractive yields to our portfolio. We added seven new floating rate transaction store portfolio, totaling $24 million. When combined with the portfolio growth we achieved in 2017 and year-to-date date in 2018, our portfolio has now grown 23% over the last seven quarters, while we have maintained a strong focus on product quality and consistently achieved strong on-boarding yields.
During the quarter, our on-boarding yields of 13.3% reflected the economic benefits of our strategy to provide senior secured debt solutions to growing technology and life science companies, as well as the reality of a rising rate environment. We have two portfolio exits during the quarter, totaling $6.6 million, including the successful exit of SavingStar, which was a two rated of credit in our portfolio in Q1 of 2018.
The prepayment and accelerated income from these events resulted in the loan portfolio yield for the quarter of 14.8%. While prepayment activity was lower than prior quarters, when it was combined with our growing portfolio of high yielding loans, we continued to maintain one of the highest yielding debt portfolios in the BDC industry with a more predictable income stream, all while adding new investments with higher ETPs and prepayment opportunities going forward.
In addition to our funding activity during the quarter, we also closed $50 million in new loan commitments and approvals and ended the quarter with a committed backlog of $47 million compared to a backlog of $29 million at the end of Q2. At the end of the quarter, we held warrant and equity positions in 78 portfolio companies with a fair value of $12.5 million. In addition to existing two of the loan investments during the quarter, we also had three of our warrant portfolio companies eAsic, Spring CM, and Ekahau, announced M&A transactions, which had an impact of approximately $1 million of increased warrant value in Q3 and $1.2 million of warrant proceeds received in Q3 and early Q4.
Subsequent to our quarter end, we have been awarded two new transactions totaling $28.5 million and approved one new transaction totaling $12 million. Our committed approved and awarded backlog as of today is $75.5 million to 10 companies and a pipeline of new opportunities of over $445 million. In addition, we have exited two portfolio companies already in the fourth quarter, resulting in accelerated and prepayment income of $1.2 million. We’re also aware of one additional exit that could take place in the fourth quarter as well.
With our solid committed backlog coming into the quarter and anticipated exit activity, we expect Q4 to be a very active quarter. Our ultimate goal for the quarter will be to continue to achieve modest portfolio growth while enhancing NII with prepayment and accelerated income combined with a growing more predictable income stream from our growing high yield portfolio.
Turning now to the venture capital environment, VC investment strengthened to new highs during Q3. Investments to VC back companies were up 17% for the third quarter over Q2 with $28 Billion invested across 1,229 transactions according to Moneytree. During the first nine months of 2018, $84 billion was invested in VC back companies, which already reflects a decade high in terms of annual deal value. Despite a slight reduction during the third quarter in deal value across early angel and seed stages, 2018 remains on pace to meet or exceed 2017 levels, which we continue to view as a positive indication for new company formation and potential debt prospects in future quarters.
In terms of VC fund raising, we have already seen over $30 billion raised in 2018, reflecting the fifth consecutive year that milestone has been achieved. 2018 remains on pace to exceed 2017 totals and fund-raising shows no indication of a significant slowdown. VC backed exit activity in Q3 is encouraging as the number of exists in 2018 should now meet or exceed 2017 totals. Total capital exited is expected to easily surpass 2017 by the year-end due in part to a greater percentage of companies being exited at larger valuations according to PitchBook. A healthier IPO market continues to provide much needed returns to LPs and capital for reinvestment. In the third quarter, we saw 23 venture backed IPOs, including 17 in life science sector, which bodes well for Horizon. Given favorable public market conditions for IPOs, we expect IPOs in biotech especially to continue their strong run. One of our science portfolio companies has recently filed to go public under the Jobs Act.
Turning now to our core markets. In the third quarter, the life science market remained robust with solid demand for equity and debt. Horizon continues to see an active market related to medical device companies. During the quarter, we closed $15 million venture loan facility to CSA Medical, a developer of novel protected cryotherapy medical devices. Additionally, the healthcare technology market for debt and equity continues to grow. We added MacuLogix, a pioneer in the detection of age related molecular degeneration and in curable eye disease to our healthcare portfolio in the third quarter.
The broader technology sector remains very active with funding available for new and growth oriented companies. AI Technology, Autonomous Vehicles, FinTech and Internet Companies continue to dominate the VC investment landscape, and we are beginning to see positive signs for our healthy tech IPO window. As mentioned earlier, in our own portfolio we had two during the third quarter and one already in Q4.
Regarding the general venture debt competitive landscape, the environment in the third quarter was consistent with what we have experienced in prior recent quarters. While we continue to see overall strong demand for our debt products, during the past three quarters, we also have seen an increase in larger debt transaction requests by borrowers and relax terms and milestones structure provided by other lenders, which raises a cautionary note to an otherwise positive venture debt market.
Covenant light debt transactions have been afflicting middle market lending for the past 24 months, and we are now beginning to see some of that same pressure being applied to the venture lending market. We recognize this potential risk to our market and have taken a more strategic defensive market position over the past three quarters related to these issues.
On the positive side, the trends of larger loan sizes and lighter covenants are often driven by a combination of significant revenue growth and larger equity rounds. Despite competition from many different funding sources, Horizon’s 15 year market presence in reputation makes us well positioned to provide growth capital to innovate companies in our core markets. And we continue to identify and win attractive investment opportunities.
Additionally, with sustained strength in the IPO market, particularly for life science companies and their record levels of VC investment in the third quarter and proceeding quarters, we expect continued opportunities to both exit investments and provide debt financing to VC backed companies. Based on these trends and the robust investment pipeline, we believe Horizon with its focus on credit quality will continue to deliver long-term disciplined portfolio growth.
With that update, I'll now turn the call over to Dan.
Thanks, Gerry, and good morning, everyone. I will now briefly discuss our financial results for the third quarter of 2018. Horizon earned total investment income of $7.8 million for the third quarter of '18 as compared to $6.8 million for the third quarter of '17. The increase was due to higher interest income on investments given the larger average size of our loan portfolio.
For the third quarter, we achieved on-boarding loan yields of 13.3% compared to 11.9% in the second quarter. Our loan portfolio yield was 14.8% for the third quarter of 2018 compared to 15.3% in the second quarter and 16.5% for the last year's third quarter.
As mentioned in the past, the primary changes period-to-period to our portfolio yields are driven by the timing of new loan originations and the timing and extent of loan prepayments and the related fee income from those prepayments, including prepayment fees and acceleration of previously unamortized end of turn payments.
Turning to our expenses, total net expenses for the third quarter were $4.4 million compared to $3 million in the third quarter of '17. Interest expense increased year-over-year to $1.7 million, compared with $1.1 million in the prior year period. This change was primarily due to an increase in the average borrowing. Base management fee increase year-over-year to $1.2 million compared with $0.9 million in the prior year period. This change was primarily due to growth in the average size of our investment portfolio.
In addition, we recorded $850,000 of incentive fee expense in the third quarter of 2018. As previously mentioned, in March of 2018, the Advisor irrevocably waived the receipt of incentive fees related to the amount previously deferred that it may be entitled to receive under the investment management agreement for the 2018 year. During the third quarter of '18, the Advisor waived performance based incentive fee expenses of $400,000, which the advisor would have otherwise then take.
Net investment income was $0.30 per share for the third quarter compared with $0.33 per share in the third quarter of '17 and $0.29 per share for the second quarter of this year. As we cover our distribution with net investment income for the third quarter, the Company's undistributed spillover income as of September 30th remains at $0.05 per share. Our NAV as of September 30th was $11.66 per share as compared to $11.60 in the prior quarter. The increase was primarily due to successful portfolio company events, which increased the fair value of our warrants.
To summarize our portfolio activities for the third quarter, new originations totaled $24 million, which were offset by $6 million in scheduled principal payments and $7 million in principal prepayments. We ended the third quarter of 2018 with investment portfolio of $240 million, which includes debt investments in 33 companies with an aggregate fair value of $215 million, a portfolio warrant and equity position in 78 companies with an aggregate fair value of $13 million, other investments in four companies with an aggregate fair value of $8 million and equity interest in our JV with an aggregate fair value of $4 million.
As we’ve highlighted in the past, nearly 100% of the outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase as interest rates rise. As such, we believe Horizon remains well positioned to benefit from a rising rate environment and experienced both increasing income and expanding net interest margin.
Looking at our liquidity, Horizon ended the quarter with $20 million in available liquidity. This includes $6 million in cash and $14 million in funds available under our existing credit facility. As of September 30th, we had $76 million outstanding under our credit facility with KeyBanc. As Rob mentioned, our shareholders recently approved the proposal to lower our asset coverage requirements. And as a result, we intend to seek opportunities to increase our target leverage range to 0.8:1 to 1.2: 1 from the previous part of 0.75: 1.
In addition, as we discussed on the prior call, we established a joint venture in the second quarter owned on an equal basis by Horizon and Arena Investors. We continue to expect to calculate the JV over the next several quarters and expect to reach certain investment thresholds during this year’s fourth quarter or the beginning of 2019, which will enable us to access leverage from New York Life. Lastly, I'd like to note that we plan to hold our next conference call to report fourth quarter 2018 results in early March.
This concludes our opening remarks. We’ll be happy to take questions you may have at this time.
Thank you [Operator Instructions]. And our first question comes from Ryan Lynch from KBW. Your line is now open.
First question I had, you guys actually had good portfolio growth net portfolio growth in this quarter. I was just curious, can you walk -- but I guess you guys didn’t have any growth in Horizon senior loan fund. So can you maybe just walk me through what is this termination between what loans actually get placed on Horizon's balance sheet versus which loans go into the Horizon's loan fund or what loans could actually be on balance sheet and senior loan fund?
So as we mentioned the strategy in the senior loan it's similar to the strategy at Horizon. It’s early in the process with the JV and we closed it in the end of Q2. So we’re in three to four months and we’re working through the JV process with the Arena in our investor. So Horizon manages its investment portfolio as an opportunity as we normally do and then the JV is another platform. And we discussed those opportunities with arena and we side those what goes in there through that process.
So could the loans that you guys placed on the balance sheet today also be split and put some on the balance sheet as well as some within the fund. And if that’s the case with those loans, essentially it was -- so you guys put it on your balance sheet, so you guys obviously like the loans was Arena this quarter. Were they the ones you who didn’t want to actually put those loans in the fund. Just trying to understanding of why none of those loans were actually placed into the fund this quarter, when you guys made some loans last quarter?
I think about it -- Ryan this is Rob, more of a timing thing. It's our intention to split deals with the -- between on balance sheet and the joint venture. So as Dan said, we'll work through the process to make that work effectively. And so I would expect to see some of the loans that we have already funded and up in the JV and going forward for those two loans -- new loans to be placed some on the JV and some on the balance sheet.
And then regarding the fee waiver, you guys have made the decision to waive the deferred portion of the incentive fee through the remainder of 2018, that’s not an immaterial or now. So, I’m just wondering what is -- as we look to 2019. What is the thought process for potentially continuing that waiver?
We made the decision in March to do that. For 2018, we’ll take a look at the outlook in next year and make a decision at that time.
Thank you. And our next question comes from Robert Dodd from Raymond James. Your line is now open.
Congrats on covering the dividend in the quarter, a couple of questions on the spread. I mean, if I got it right, the on-boarding yields this quarter 13 to -- they were 11.9 last quarter. And if I just look at overall yields as well, 14.8 in the last four quarters have been 14.4. Obviously, base rates have gone up over that period. But if I just look versus prior quarter, I mean LIBOR was stable versus the second quarter prepay, and regular amortization fees seemed pretty stable Q2 and Q3, if anything they tick down a tiny part in Q3 on the amortization side, but the yield was up. And then to Joe’s point, the market is pretty competitive. So, can you maybe reconcile those two things for us a little bit higher on-boarding and higher average yields in a competitive market when fee income seems to be stable, I mean it sounds like spreads are going up and that’s pretty rare in a highly competitive markets. So can you reconcile those issues for us?
So I wouldn’t take one quarter as an indication. There was a particular trend going on here. It could be related to one or two transactions that we just were able to -- maybe have the insight track on relative to the transaction and the relationship we had with the borrower, the investors, which could have impacted deal. So I wouldn’t take this necessarily one quarter but we are absolutely focused on where rates are today, where they are going. And you’re absolutely right both relative to interest rate as well as other structure points in the transaction it is a very competitive market. And we are finding ways to compete relative to all those things. But again it was actually a relatively overall the $24 million I think in fundings -- third quarter is always relatively like compared to the other quarters. So, I would give it a couple of more quarters before we draw any conclusions on that.
And then on the liability structure, obviously, they have shareholder approval to go over one-to-one debt to equity. Do the covenants and obviously the key facility, which looks very like it's just a net worth covenant and a borrowing base. And then also on your baby bond, which I presume is just a 40x, covenant or does -- do either of those things need to be adjusted before you can take advantage of the shareholder approval or are you just ready to go right now?
There's nothing in either of those documents that will prohibit us to take advantage of it as they are today.
And then if I can, one more on the fee. Obviously, you've announced that you will lower the incremental fee to 1.6, if it seems right. I mean, you've done that for me now I want more. I mean, why 1.6? It's -- why not 1.5, why not 1.75? I mean, what was the process that the board went through to come up with that 1.6 on the incremental? And is it related to a desire that that's what needs -- it needs to be above an asset base in order to cover the dividend in '19 or was that a separate consideration?
I appreciate your preamble, Robert, because no good deed goes on unpunished. But the thought was that we took a hard look at our peers and where they are. There's a lot of people at 1.75, we thought we would in essence average down to 1.7 and on the margin, the 1.6 also helps with the argument about leverage that said, this was all about the managers not all -- not to managers, it's about ROE and increased NII. And so we decided on 1.6. And going forward, I think you should note that we did it on assets not on as just those loans -- were above 1:1 leverage. So, if we're able at some point to grow, both debt and equity on the margin, the fee will continue to average down.
Thank you. And our next question comes from Casey Alexander from Compass Point. Your line is now open.
Can you explain the technicalities of the vote for the increased leverage? And the only reason that I asked that is looking at the filing from last night it appears that only 45% or so of your shares outstanding actually voted for the leverage, not 50%. So, I'm just curious what the technicalities are of achieving a positive vote when less than 50% of the shareholders voted for the new proposal?
So the technicalities -- I'm not a lawyer Casey but as I understand it, there are two hurdles you have to raise to me. One is you have to have a quorum of shareholders to vote. In the case for the shareholder or for the leverage vote, that quorum was more than 50% of the stock shares held on the register date, which I think was early in September. And then of those voters, you needed to achieve for the leverage vote more than 50% voting for. So we had close to 90% of the people who voted, voted in favor of the proposal and we had about 53% of our total shares voted.
Okay, that explains it for me thank you. And believe me I appreciate how difficult it is to get retail BDC shareholders to vote for a special provision. It's not a simple task. Gerry, this is for you. I’m curious about your cautionary note about cove light and structures entering the venture debt base. And the Company has as big a backlog, as I can remember. And yet in your comment you said you’re taking a defensive market position. Could you explain to me what that means in regards to a defensive market position?
So we absolutely over the last three quarters, Casey and see those on the form, we have seen a significant increase in the request from borrowers for larger debt transactions. As I also mentioned, generally speaking, they're being accompanied by larger equity ramps, as well as either if it’s a revenue company, actually attractive revenue growth from the companies as well. So what we’re trying to do is not be enamored with the growth or the equity round that they’ve done but looking forward relative to, if we make our investment today, are they going to be able to continue to do that.
And the way we go about structuring the transaction, it’s all about that. It’s all not about the fact that they may have just done $25 million equity round and they grew revenues 40% in the prior year. It’s about will they be able to continue with that trajectory and if they can’t, what does that mean to us and what do we need to do to protect ourselves in case they can’t continue on that thing. So we will continue to use things like milestones relative to trenching our deals and making, maybe a larger debt commitment. But access to that money based on them continuing to perform the way they historically have performed over the recent year, and so that’s the first thing.
And then the second thing is we will look at the same thing relative to covenants. So we are still trying to put in covenants that we believe that down the road we may protect ourselves, so that’s one thing we are doing. And yes, there is pressure on that from a competitive standpoint but we are continuing to do that, we have plenty of pipeline. So, if we can’t win all the transactions and we have lost some pretty attractive transactions, because we couldn’t get the right structure, so that’s one thing.
Second thing is we’re looking at where we are in the cap structure, more senior we are in the cap structure, the better feel we have for the Company, because we have a pretty good database of transactions since we started 2003 and we know being senior in a transaction can have a material impact when things don’t go out on a comparative basis to being further down the cap structure. So, we’re basically incorporating all of that in our thinking as we evaluate these transactions. And not trying to be enamored, because the market is very, very strong relative to equity investment now, relative to some actually good growth in revenues. But we look out over the next two years and I don’t know -- I know you probably go to some conferences, certainly, I’ve gone -- on a regular basis, go to conferences and whether I’m on the panel or I’m sitting in the audience, someone is going to suggest that we’re about to hit a downturn in the credit cycle. They’re not going to give us a timeframe on that but everyone sees it coming. And so we recognize that we're cognizant of it and trying to structure transactions that won’t be in appropriate or I should say just a really strong environment that we’re in today.
Well, the prevalent comment I’ve heard is in the fourth year of the credit cycle. So I’m not sure in terms of evaluating companies by looking forward and what you think they were going to do over the next couple of years and whether that’s sustainable versus the loan that you’re making is anything different than what you might have already done. Let me ask you different question. You mentioned that the deal sizes -- that the equity raises and the deal sizes that are being asked are larger. Can you protect yourself a little more by clubbing out a portion of the deal or syndicating out a portion of the deal and thereby keeping your whole sizes smaller and your portfolio more diversified?
That’s something across that we’ve always done, actually it’s always been part of our strategy. And so yes, certainly that hasn’t changed relative to how we think about whole sizes in our portfolio. I mean, I think right now our committed backlog is about 70 -- committed in awarded backlog is about $75 million, that’s 10 deals that’s $7.5 million whole size that’s the place where we’re comfortable.
Thank you. And our last question comes from Christopher Testa from National Securities. Your line is now open.
Just touching a little bit on what Casey was getting at regarding the cov light and deterioration in terms of what you guys are seeing. Are there any instances where you might find it good to do a loan that might be cove light or might have some loser terms if it's with a VC that you guys have repeatedly done business and what you feel comfortable with, or is this something that’s just gets passed on immediately if the proper protections are in the place?
I think that’s a great question actually, but there is no perfect answer to it. We went through 2007 to 2010, which was a horrible time overall globally. Our portfolio in many ways came through that portably than most asset classes and in part the reason for that was in fact that we did work very closely with the VC investors in the portfolio companies. And to the extent that the company themselves were doing what they were suppose to do relative to developing their product or whatever, but the markets weren’t allowing them to raise capital, because things were so bad. We work very closely with the VC investors and that did allow us to get a lot of companies in our portfolio and their portfolio through that period.
So who the investors are absolutely do matter as we’re looking at transactions. That said, I think that you can find yourself on the wrong side of that ledger if you are just facing your decision on the fact that you have good investors, because no matter how good a VC firm might be, they have a portfolio just like we do. And they rank their portfolio companies just like we do. And when things get difficult, the bottom part of that portfolio is going to be exposed, because they probably aren’t going to be putting more capital at work there.
So we have to do our own very solid underwriting and structuring relative to the transaction. But it is helped by the fact of who the VCs are, what relationships we have with them, how we've worked with them in the past, not just on good results, but on difficult situations as well.
That's definitely a good explanation already. Thank you. And sticking with that theme, has a lot of the deterioration in terms come from later stage companies or is that also affected the more early stage and the mid stage companies that you guys will look at?
Well, there has been, I would say what I would call, a trickledown effect. I would say most of it is in fact later stage that's true with larger transaction sizes have come in. But there was also which is not unusual in our markets by the way where there is a trend toward a certain technology, maybe it's AI technology or whatever where the VCs are putting a lot of money to work. Sometimes the debt requests that come from pretty early stage companies that are in very specific technologies markets that are training positive, it can absolutely trickle down to earlier stage companies and we have seen some of that.
And you guys have a slight increase in the investments that were rated to on your internal system this quarter. I am assuming by the dollar amount, it was probably just one investment. Could you just give some color on what moved there and why?
This is a normal part of the way we manage our credit portfolio. And if a company needs to raise money or is materially behind plan and we feel that that is putting stress on the Company, we'll move it into the two categories, Chris. I think our history of moving those in and out including the deal that Gerry mentioned on the tax was SavingStar, it was a two-rated credit earlier this year was similar to the deal that we moved this quarter. It was able to be sold -- the company was actually sold and we were able to get a full repayment and full recoupment. So, it's a deal that we're watching and managing very aggressively. But we expect as we do for all of the twos that we will come through the other side with a full recovery.
And just switching gears and looking at the financing side of the equation. You guys don't do -- have some move on the credit facility, but obviously as you pick up more leverage, it seems that that capacity could get utilized almost in full, going forward. So I'm just curious. Are you more prone to upsize the facility? You guys have also done a securitization in the past and it seems that that market is opening back up from BDCs. Or is potentially another unsecured note in the mix? I guess, given where spreads are and what you guys are seeing in your backlog, what do you think actually makes the most sense for Horizon?
Chris, that's a great question and you're correct on all three of those options. And as you said, there's a lot of activity in the baby bond market and securitization has opened up with a couple of deals that just finished. And so we are analyzing those currently and we are in discussions with KeyBanc and our current facility. So there's -- we're analyzing those and there's good opportunity for us in all three of those, and as we get closer to that obviously. But we'll announce that when we get there, but we're still in the process of analyzing it.
And just last one for me. I might have missed this. You guys had alluded to a certain amount of prepayment related income received, I believe, in the fourth quarter thus far. What was the number on that?
And is that all prepayment fees or does that include any acceleration of [OID]?
Thank you. There are no further questions. I would now like to turn the call back to Rob Pomeroy, Chairman and CEO for closing comments.
Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon, and we look forward to speaking with you again in March. This will conclude our call. Thanks.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.