HTFC - NYSE

Ladies and gentlemen, greetings, and welcome to the Horizon Technology Finance Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Megan Bacon. Please go ahead.

Thank you, and welcome to Horizon Technology Finance Corporation's Third Quarter 2025 Conference Call. Representing the company today are Mike Balkin, Chief Executive Officer; Paul Seitz, Chief Investment Officer; and Dan Trolio, Chief Financial Officer. I would like to point out that the Q3 earnings press release and Form 10-Q are available on the company's website at horizontechfinance.com. Before we begin our formal remarks, I need to remind everyone that during this conference call, the company 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, 2024. 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 Mike Balkin.

Thanks, Megan, and welcome, everyone, and thank you for your interest in Horizon. Today, we will update you on our quarterly performance in the current operating environment. Paul Seitz will take us through recent business and portfolio developments as well as the current status of the venture lending market, and Dan Trolio will detail our operating performance and financial condition. We will then take questions. Well, it has been a very active several months since I assumed the CEO role in June. I spent countless hours with our team together thinking about the next chapter of Horizon and how best to expand the Horizon platform moving forward. The first part of that strategy came to fruition when we announced in August, that MRCC and HR

Thanks, Mike, and good morning to everyone. I'm happy to join today's call and look forward to speaking to you all in the quarters to come. It's an exciting time here at Horizon. While we continue to work closely with all of our current portfolio companies to optimize returns and create further opportunities for additional value creation, we are very enthusiastic about our future. As Mike mentioned, we believe the combined company will provide us with the size and scale needed to originate larger venture loans to growing public and private small companies. At the end of the quarter, our current portfolio stood at $603 million as the loans we originated and acquired during the quarter were offset by prepayments and amortization in our existing portfolio. In the third quarter, we funded 3 debt investments totaling $15 million. Positively, we are making strong progress on building up our pipeline with larger venture loan opportunities in our target sectors, and we are positioning ourselves well to return to growing our portfolio. Looking ahead to Q4, we expect to grow our portfolio in the quarter driven by our pipeline. Thus far in October, we have already funded a $10 million venture loan transaction and have been awarded 3 new venture loan transactions representing $50 million in total commitments, with much of that total to potentially fund in Q4. That said, we will always be disciplined in our approach to originating loans. During the third quarter, we experienced 6 loan prepayments totaling $50 million in prepaid principal and also collected over $3 million in equity and warrant proceeds. We currently expect more limited prepayment activity in Q4. Our onboarding debt investment yield of 12.2% during the third quarter remained consistent with our historic levels. We expect to continue to generate strong onboarding yields with our current pipeline of opportunities, which we believe will generate strong net investment income over time. Our debt portfolio yield of 18.6% for the quarter was, once again, one of the highest yielding debt portfolios in the BDC industry. Our ability to generate these industry-leading yields continues to be a testament to our venture lending strategy and our execution of such strategy across various market cycles and interest rate environments. As of September 30, we held more equity positions in 95 portfolio companies with a fair value of $40 million. Structuring investments with warrants and equity rights is a key component of our venture debt strategy and a potential generator of shareholder value. We ended the third quarter with a committed and approved backlog of $119 million compared to $149 million at the end of the second quarter. We believe our pipeline, combined with our committed backlog, with most of our funding commitments subject to companies achieving certain key milestones; provides a solid base to prudently grow our portfolio over time. As of quarter end, 87% of the fair value of our debt portfolio consisted of 3 and 4 rated debt investments, while 13% of the fair value of our portfolio was rated 2 or 1. While we continue to collaborate with all of our portfolio companies to optimize returns, we are pleased in the quarter to achieve two strong outcomes on stress investments, namely Soli and Hound Labs. These had a positive impact on both NII and NAV. This is a demonstration of our proven ability to utilize a variety of strategies to seek to optimize returns and create opportunities for potential future value. Turning to the venture capital environment, according to PitchBook, the market is warming up with approximately $81 billion invested in VC-backed companies in the third quarter, driven in significant part by continued large investments in AI. On the positive side, we saw exit markets further open in the third quarter with approximately $75 billion of exit value, driven primarily by tech IPOs. Along with acquisitions by VC-backed companies, the IPO market is once again opened and investors clearly are eager to put their money to work. In life sciences, while there is optimism, there remain valuation disconnects and compression, which is keeping a relative lid on potential IPOs in that sector. Meanwhile, on the tech side, there is considerable optimism and we are being very thoughtful about taking a deeper dive into the various subsectors, particularly in AI and defense technology, to determine the best path for future investments. Looking ahead, venture debt remains a significant option for companies to access capital as they continue to grow and prepare for exits. This provides opportunity for Horizon to seek high-quality, well-sponsored tech and life science companies to add to its portfolio. To sum up, as we close out 2025, we are increasingly excited for our long-term future as we prepare to merge with MRCC. Our alignment with Monroe is increasing, and we are truly beginning to tap into Monroe as an incredible resource, which should significantly benefit us as we target larger venture loan opportunities for both public and private companies. Additionally, we will continue to work diligently on optimizing outcomes with respect to our current portfolio. We are confident that we are taking the right steps to continue to be a leader in the venture lending space. These steps will enable us to originate larger venture loans to high-quality, fast-growing public and private companies and expand our portfolio over the longer term. This should lead to increased NII over time and ultimately, additional value for shareholders. With that, I will now turn the call over to our Chief Financial Officer, Dan Trolio.

Thanks, Paul, and good morning, everyone, Along with the hard work being accomplished to get the merger across the finish line as well as build up our originations pipeline, we further strengthened our balance sheet during the quarter. As Mike mentioned, we successfully raised $40 million through the issuance of our 5.5% convertible notes due 2030 and used the proceeds to retire our Horizon funding trust, asset-backed notes, which had an interest rate of just over 7.5%. Additionally, we continue to utilize our ATM program to successfully and accretively sell over 1.5 million shares in the quarter, raising an additional $10 million of equity. These actions demonstrate our continued ability to opportunistically access the debt and equity markets. In addition, we continue to diligently work with all of our portfolio companies to optimize outcomes for our investments and improve our credit quality. As such, we believe we remain well positioned to grow our portfolio in the coming quarters and create additional value for our shareholders moving forward. As of September 30, we had $151 million in available liquidity, consisting of $130 million in cash and $21 million in funds available to be drawn under our existing credit facilities. We currently have no borrowings outstanding under our $150 million KeyBanc credit facility, $181 million outstanding on our $250 million New York Life credit facility and $90 million outstanding on our $200 million Nuveen credit facility, leaving us with ample capacity to grow our portfolio of debt investments. Our net equity ratio stood at 1.36:1 as of September 30. And and netting out cash on our balance sheet, our net leverage was 0.94:1, below our target leverage. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity as of September 30 was $460 million. Turning to our operating results. For the third quarter, we earned investment income of $26 million compared to $25 million in the prior-year period, primarily due to higher interest income and fee income on our debt investment portfolio. Our net investment portfolio on a net cost basis stood at $585 million as of September 30 compared to $636 million as of June 30, 2025. For the third quarter of 2025, we achieved onboarding yields of 12.2% compared to 12% achieved in the second quarter of 2025. Our loan portfolio yield was 18.6% for the third quarter compared to 15.9% for last year's third quarter. Total expenses for the quarter were $12 million, compared to $12.4 million in the third quarter of '24. Our interest expense of $7.9 million was comparable to last year's third quarter, while our base management fee was $2.7 million, $0.2 million lower than our prior-year period due to a smaller portfolio. We received no performance-based incentive fees in the third quarter as we continue to experience the deferral of incentive fees otherwise earned by our adviser under our incentive fee cap and deferral mechanism. While we expect that the adviser will return to earning incentive fees, as we previously mentioned, the adviser has agreed to waive a portion of any incentive fee in a quarter where we do not earn our distributions in 2025. Net investment income for the third quarter of '25 was $0.32 per share compared to $0.28 per share in the second quarter of '25 and $0.32 per share for the third quarter of 24%. The company's undistributed spillover income as of September 30 was $0.93 per share. Based upon our outlook and undistributed spillover income, our Board declared monthly distributions of $0.11 per share for January, February and March 2026. To summarize our portfolio activities for the quarter, new originations totaled $15 million, and we also purchased for $23 million additional investments via the acquisition of the venture debt portfolio of a former co-lender. These were offset by $14 million in scheduled principal payments and $61 million in principal prepayments and partial paydowns. We ended the quarter with a total investment portfolio of $603 million. As of September 30, the portfolio consisted of debt investments and 39 companies with a negative fair value of $560 million in a portfolio of warrant, equity and other investments in 102 companies with an aggregate fair value of $43 million. Our NAV as of September 30 was $7.12 per share compared to $6.75 as of June 30, 2025 and $9.06 as of September 30, 2024. The $0.37 increase in NAV on a quarterly basis was primarily due to net investment income and positive adjustments to fair value, partially offset by our paid distributions. As we've consistently noted, nearly 100% of our outstanding principal amount of our debt investments bear interest at floating rates. Of those investments, almost 60% are already at their interest rate floors, which should mitigate the impact of decreasing interest rates. This concludes our opening remarks. We'll be happy to take questions you may have at this time.

[Operator Instructions] The first question comes from Douglas Harter with UBS.

This is Cory Johnson on for Doug Harter. So it sounds like the VC market is heating up and there are more exits out there in the market. And early payoffs have been strong for the last 2 quarters, but I believe you mentioned that for 4Q, that those payoffs might be a little bit more limited. I guess, what do you expect that trend to be going forward maybe into 2026? And is it related to the government shutdown where we think that perhaps the 4Q payouts might be a little bit more limited?

Yes, this is Paul Seitz. I don't think that the government shutdown necessarily is going to impact any payoffs or prepayments or anything like that. I would say that it was a little bit higher this quarter, but we expect probably our payoffs and early prepayments to revert to any sort of historical standard. The exit markets are heating up, which is a good thing. But I think it's, right now, in just sort of a little bit of a wait-and-see period.

Got it. And during the quarter, the net leverage -- your net leverage came down. Curious, are you seeing -- I know you mentioned that you think your portfolio will grow next quarter, and you're starting to see more deals come across your table. But I was just sort of curious in terms of like now that you are seeing more deals, what is sort of the credit quality behind them? Are there names that you like? Or are you just more name that you seem to be -- you're looking to pass on? And then obviously, it's a little bit difficult to exactly figure out the trajectory of your -- where the leverage will go. But how long do you think it might be before you perhaps reach your target leverage again?

Yes. So as we say every quarter, our target leverage is around 1.2 to 1.3x net of cash. This quarter, it did come down a bit, where we're at 0.94:1. So as we talked where -- in our prepared remarks that the pipeline is growing in originations, we expect originations to exceed prepayments going forward. And so I think when we look at the leverage, we should be getting back to that 1.2, 1.3x over the next quarter or 2.

[Operator Instructions] Our next question comes from Paul Johnson with KBW.

Just on the portfolio yield or just the portfolio yield in general, it sounds like you're pretty confident about the onboarding yields coming in. But obviously, the income has been running higher, some onetime items just running higher with prepayments. I mean the 18.9% yield, I mean, how should we be thinking about that? Is that sustainable going forward? Or what's kind of like the longer-term sort of target, I guess, based on the same pipeline?

Yes. So I would point you to our historical portfolio yield, which we've averaged around 14.5% to 15%. That's a more normalized yield. And then I'll just point out, that is a portfolio yield after prepayments and onetime events. And as we mentioned, the onboarding yield has been about 12%, 12.5% for the past few quarters and probably most likely be around that going forward.

Got it. Okay. That's helpful. And then maybe you could just take us through the debt portfolio that you acquired during the quarter, kind of what transpired there? It looks like you were able to buy at a potentially a discount to where, I guess, had previously been marked. But anything -- any color on that would be helpful to hear.

Yes, correct. We were able to acquire a venture debt portfolio from one of our co-lenders that we had created a [ sidecar ] fund, SMA back in 2021 with a $300 million total commitment. We were able to invest that completely. And so it was in runoff. And then over the past year or so when there are fewer names remaining, we were working with that co-lender, names that, obviously, we've already invested in and negotiated a price. They were co-lender in venture debt, was their only venture debt portfolio and they were looking just to exit the market. And obviously, we're the natural buyer.

Got it. Okay. Interesting. And then maybe just it would be helpful here kind of what is -- as we get into next year and get beyond the fee waivers, like what is kind of the idea with spillover? It still looks like there's a decent amount of $0.93. But I mean, would you like to just continue to work that down potentially further before evaluating the distribution? Or is that something you'd like to kind of maintain?

Yes. So I'll just remind you, every quarter, we discussed the distribution and take into account the current income level and the future level of the Horizon platform and look at the spillover, and we'll determine the amount of distribution on a quarterly basis.

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Assuming the deal with MRCC closes, is the focus going to be on larger credits going forward? And what does that do to the yield?

That will be one of the benefits with a larger balance sheet. You can hold larger position and stay diversified as we focus on our top 1, top 5, top 10 diversification. But there will still be venture debt deals in the market that we have played in, we'll just be able to hold larger pieces of it. And so we don't expect the yields to change dramatically.

Great. Given the stock price is trading below book now, what's the plan on using the common stock ATM going forward?

Same plan as usual. We look at our originations pipeline, we look at our liquidity and our capacity and look to pull as many levers as possible to originate and grow the portfolio where we can. Obviously, we're trading below book. We won't be able to utilize the ATM.

Okay. And then given -- assuming the Monroe deal closes, you are going to have a much larger balance sheet, any consideration in terms of revisiting the base management fee? I know it is 2% for the first $250 million in assets. And then there's a breakpoint to 160 bps above $250 million. And even at 160 bps, you're sort of at the high end of the range for BDCs in general stay. Any comment on that?

Yes. So we have our normal 15-C process that we do on an annual basis, and we review all of our competitors. And when everybody calculates it different, has different hurdles and different percentages on a blended effective cost percentage; we are within the average of our peers. We look at it every year through that 15-C process, and we'll continue to do that going forward and make sure we're within market.

Great. And then any target ROE for the new assets coming on from Monroe?

We don't have any targeted new assets right now that are coming on. The Monroe platform will help us get access to larger assets and potentially some additional assets, but nothing specific today.

Yes. No, actually, I phrased it poorly. For the new capital coming in from the Monroe deal, what is the target ROE or return hurdle that you're looking for to get from that new capital?

It's basically stick to what we do, the venture debt model that has a high-yielding portfolio, and that will drive the ROE. We don't have a specific targeted ROE on that capital.

Thank you. Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Mike Balkin for the 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 soon. This will conclude our call.