Hercules Capital Reports Record Fourth Quarter and Full-Year 2018 Financial Results

Company Achieves Multiple Records for Total New Debt and Equity
Commitments, Total Gross Fundings, Total Investment Income, Net
Investment Income, Total Investment Assets and Total Debt Investments

Record FY2018 New Debt and Equity Commitments of $1.21 Billion, up
37.6% Year-over-Year

Record Net Portfolio Growth of $312.9 Million, leading to Record
Total Debt Investments of $1.75 billion, at cost, an increase of 21.7%
year-over-year

Received Stockholder Approval to Reduce Its Asset Coverage
Requirement from 200% to 150%

Net Investment Income of $0.32 per Share provides 103% Coverage of
Regular Dividend Distribution Payout

Record Undistributed Earnings Spillover of ~$30.7 million, or $0.32
Earnings per Share
(1)

Q4 2018 Financial Achievements and Highlights

  • Net Investment Income “NII” of $30.6 million, or $0.32 per share,
    an increase of 24.8% year-over-year

    • Total Investment Income of $56.9 million, an increase of 13.3%
      year-over-year
  • Distributable Net Operating Income(2)
    “DNOI,” a non-GAAP measure, of $33.9 million, or $0.35 per share
  • New debt and equity commitments of $249.4 million

    • Total gross fundings of $254.7 million
  • Unscheduled early principal repayments or “early loan repayments”
    of $63.9 million
  • 13.6% Return on Average Equity “ROAE” (NII/Average Equity)
  • 6.8% Return on Average Assets “ROAA” (NII/Average Assets)
  • Regulatory leverage of 87.0% and net regulatory leverage, a
    non-GAAP measure, of 83.4%
    (3)
  • 13.5% GAAP Effective Yields and 12.9% Core Yields(4),
    a non-GAAP measure

Full-year ending December 31, 2018 Financial Highlights

  • Record Total Assets of $1.94 billion, an increase of 17.6%, as
    compared to $1.65 billion for the 12 months ending December 31, 2017
  • Record Total Debt Investments of $1.73 billion, at fair value, an
    increase of 22.4%, as compared to $1.42 billion for the 12 months
    ended December 31, 2017
  • Record total new debt and equity commitments of $1.21 billion, an
    increase of 37.6%, as compared to $881.9 million for the 12 months
    ending December 31, 2017

    • Record Total Gross Fundings of $960.8 million, an increase of
      25.6%, as compared to $764.8 million for the 12 months ending
      December 31, 2017
  • Record NII of $108.7 million, or $1.19 per share, an increase of
    12.7%, as compared to $96.4 million for the 12 months ending December
    31, 2017

    • Record Total Investment Income of $207.8 million, an increase
      of 8.8%, as compared to $190.9 million for the 12 months ending
      December 31, 2017
  • Unscheduled early principal repayments of $486.6 million

Footnotes:

(1) Per Share calculation based on weighted shares of common
stock outstanding of 96.4 million, subject to final tax filings in 2018

(2) Distributable Net Operating Income, “DNOI” represents net
investment income as determined in accordance with U.S. generally
accepted accounting principles, or GAAP, adjusted for amortization of
employee restricted stock awards and stock options.

(3) Net regulatory leverage is defined as regulatory leverage
less cash balance at period end

(4) Core Yield excludes Early Loan Repayments and One-Time
Fees, and includes income and fees from expired commitments

PALO ALTO, Calif.–(BUSINESS WIRE)–Hercules
Capital, Inc.
(NYSE: HTGC) (“Hercules” or the “Company”), the
largest and leading specialty financing provider to innovative venture
growth stage companies backed by leading venture capital and select
private equity firms, today announced its financial results for the
fourth quarter and full-year ended December 31, 2018.

The Company announced that its Board of Directors has declared a fourth
quarter cash distribution of $0.31 per share, respectively, that will be
payable on March 11, 2019, to shareholders of record as of March 4, 2019.

“We capped off a record year with a strong finish in Q4 2018, setting
multiple records for Total New Debt and Equity Commitments, Total
Investment Income, Net Investment Income, Total Investment Assets and
Total Debt Investments for the year, delivering record portfolio growth,
and generating NII in excess of our dividend distribution payout while
increasing our earnings spill-over for future potential dividend
increases or supplemental dividend distributions,” stated Manuel A.
Henriquez, chairman and chief executive officer of Hercules. “2018 truly
showed the benefits of our scale and platform capabilities as we
continue to leverage our industry-leading venture debt platform and
market leadership position, which resulted in total debt and equity
commitments of $249.4 million and total gross fundings $254.7 million in
Q4, and ending the year with a record debt investment portfolio balance
of $1.75 billion. Our healthy ecosystem continues to fuel our investment
pipeline as venture capital fundraising and investment remained at
record levels, while the IPO market exhibits ever-increasing signs of
renewed optimism with many notable companies preparing for their IPO
debuts in 1H2019. This includes two of our own portfolio companies that
completed IPOs in February 2019, and five more that have filed for their
respective IPO debuts. We remain very optimistic as we head into 2019,
subject to existing market conditions remaining favorable.”

Henriquez continued, “Our balance sheet remains highly liquid and asset
sensitive which positions Hercules to benefit from the recent increases
in PRIME. Our debt investment portfolio continues to deliver strong core
and effective yields while also benefiting from reduced early loan
repayments in the quarter, allowing our debt investment portfolio to
grow. We finished Q4 2018 with a strong liquidity position of $156.2
million, and our access to the capital markets keeps us well positioned
to fund our expected loan portfolio growth throughout the year in 2019.
We remain very active in the capital markets, having recently completed
our fourth securitization raising an additional $250.0 million of
capital to continue to fund our investment portfolio growth. This
transaction caps off a remarkable year for Hercules in which we raised
approximately $708.0 million of new debt and equity capital, expanding
and diversifying our sources of capital and providing long-dated
maturities to help support our growth and deliver increased earnings in
2019 and beyond.”

Henriquez concluded, “Finally, I am very pleased to welcome Seth Meyer,
who will join our executive team as the new Chief Financial Officer on
March 4, 2019. As we continue to set a path for organic growth and
potential future expansion of our product offerings to our innovative
companies, Seth will be in integral part of our senior management team,
as we focus on the growth opportunities before us and look to achieve
our long-term growth objectives.”

Q4 2018 Review and Operating Results

Debt Investment Portfolio

Hercules achieved another strong quarter of new commitments, totaling
$249.4 million, and gross fundings of $254.7 million.

During the quarter, Hercules realized early loan repayments of $63.9
million, which along with normal scheduled amortization of $23.2
million, resulted in total debt repayments of $87.1 million.

The strong new debt investment origination and funding activities lead
to net debt investment portfolio growth of $144.9 million during the
fourth quarter, on a cost basis.

The Company’s total investment portfolio, (at cost and fair value) by
category, quarter-over-quarter and year-over-year are highlighted below:

Total Investment Portfolio: Q3 2018 to
Q4 2018

                 
(in millions) Debt Equity Warrants Total Portfolio
Balances at Cost at 9/30/18 $ 1,608.0   $ 168.6   $ 36.5   $ 1,813.1  
New fundings(a) 230.1 23.4 1.1 254.6
Warrants not related to Q4 2018 fundings
Early payoffs(b) (63.9 ) (63.9 )
Principal payments received on investments (23.2 ) (23.2 )
Net changes attributed to conversions, liquidations, and fees   1.9     (0.1 )   (1.9 )   (0.1 )
Net activity during Q4 2018   144.9     23.3     (0.8 )   167.4  
Balances at Cost at 12/31/18 $ 1,752.9   $ 191.9   $ 35.7   $ 1,980.5  
 
       
Balances at Value at 9/30/18 $ 1,603.3   $ 127.4   $ 29.8   $ 1,760.5  
Net activity during Q4 2018 144.9 23.3 (0.8 ) 167.4
Net change in unrealized appreciation (depreciation)   (14.7 )   (30.5 )   (2.3 )   (47.5 )
Total net activity during Q4 2018   130.2     (7.2 )   (3.1 )   119.9  
Balances at Value at 12/31/18 $ 1,733.5   $ 120.2   $ 26.7   $ 1,880.4  
 
(a)New fundings amount does not include revolver loans
during Q4 2018.
(b)Unscheduled paydowns include $1M paydown on revolvers
during Q4 2018.

Debt Investment Portfolio Balances by Quarter

(in millions)       Q4 2018     Q3 2018     Q2 2018     Q1 2018     Q4 2017
                 
Ending Balance at Cost $ 1,752.9 $ 1,608.0 $ 1,554.2 $ 1,368.6 $ 1,440.0
 
Weighted Average Balance $ 1,685.0 $ 1,555.0 $ 1,470.0 $ 1,364.0 $ 1,413.0

As of December 31, 2018, 85.3% of the Company’s debt investments were in
a senior secured first lien position.

Effective Portfolio Yield and Growing Core Portfolio Yield (“Core
Yield”)

Effective yields on Hercules’ debt investment portfolio were 13.5%
during Q4 2018, the same level as Q3 2018. The Company realized $63.9
million of early loan repayments in Q4 2018 compared to $64.9 million in
Q3 2018, or a decrease of 1.5%. Effective portfolio yields generally
include the effects of fees and income accelerations attributed to early
loan repayments, and other one-time events. Effective yields are
materially impacted by elevated levels of early loan repayments and
derived by dividing total investment income by the weighted average
earning investment portfolio assets outstanding during the quarter,
which excludes non-interest earning assets such as warrants and equity
investments.

Core yields, a non-GAAP measure, were 12.9% during Q4 2018, exceeding
the upper end of the Company’s 2018 expected range of 11.5% to 12.5%,
and above the 12.7% level achieved in Q3 2018. Hercules defines core
yield as yields that generally exclude any benefit from income related
to early repayments attributed to the acceleration of unamortized income
and prepayment fees and includes income from expired commitments.

Income Statement

Total investment income increased to $56.9 million for Q4 2018, compared
to $50.2 million in Q4 2017, an increase of 13.3% year-over-year. The
increase is primarily attributable to a higher average debt investment
balance between periods along with an increase in the core yield from
12.5% in Q4 2017 to 12.9% in Q4 2018.

Non-interest and fee expenses increased to $14.4 million in Q4 2018
versus $12.6 million for Q4 2017. The increase was primarily due to an
increase in G&A and stock-based compensation expenses, offset by lower
variable compensation expenses.

Interest expense and fees were $11.9 million in Q4 2018, compared to
$13.0 million in Q4 2017. The decrease was due to a lower weighted
average cost of borrowings comprised of interest and fees, of 5.3% in Q4
2018, a decrease from 6.4% in Q4 2017. The lower weighted average cost
of borrowings resulted from the issuance of the 5.25% Notes due 2025 in
April 2018, 6.25% Notes due 2033 in October 2018, and 4.605% fixed rate
asset-backed notes due 2027 (the “2027 Asset-Backed Notes”) in November
2018, as well as increased average borrowing under our credit facilities.

NII – Net Investment Income

NII for Q4 2018 was $30.6 million, or $0.32 per share, based on 96.4
million basic weighted average shares outstanding, compared to $24.5
million, or $0.29 per share, based on 83.8 million basic weighted
average shares outstanding in Q4 2017, an increase of 24.9%
year-over-year. The increase is primarily attributable to a higher
average debt investment balance between periods along with an increase
in the core yield from 12.5% in Q4 2017 to 12.9% in Q4 2018.

DNOI – Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q4 2018 was $33.9 million, or $0.35 per
share, compared to $26.1 million, or $0.31 per share, in Q4 2017.

DNOI is a non-GAAP financial measure. The Company believes that DNOI
provides useful information to investors and management because it
measures Hercules’ operating performance, exclusive of employee stock
compensation, which represents expense to the Company, but does not
require settlement in cash. DNOI includes income from payment-in-kind,
or “PIK”, and back-end fees that are generally not payable in cash on a
regular basis, but rather at investment maturity. Hercules believes
disclosing DNOI and the related per share measures are useful and
appropriate supplements and not alternatives to GAAP measures for net
operating income, net income, earnings per share and cash flows from
operating activities.

Continued Credit Discipline and Strong Credit Performance

Hercules’ net cumulative realized gain/(loss) position, since its first
origination activities in October 2004 through December 31, 2018,
(including net loan, warrant and equity activity) on investments,
totaled ($40.1) million, on a GAAP basis, spanning 15 years of
investment activities.

When compared to total new debt investment commitments during the same
period of over $8.5 billion, the total realized gain/(loss) since
inception of ($40.1) million represents approximately 47 basis points
“bps,” or 0.47%, of cumulative debt commitments, or an effective
annualized loss rate of 3 bps, or 0.03%.

Realized Gains/(Losses)

During Q4 2018, Hercules had gross realized gains/(losses) of $(0.6)
million primarily from gross realized gains of $1.4 million, offset by
the liquidation, write-off or expiration of warrant and equity
investments in seven (7) portfolio companies and a debt investment in
one (1) portfolio company, of ($2.0) million.

Unrealized Appreciation/(Depreciation)

During Q4 2018, Hercules recorded $47.1 million of net unrealized
depreciation primarily related to mark-to-market changes which were
mainly driven by the volatility in the public markets in Q4 2018 which
adversely impacted our public equity and warrant investments, as well as
our private investments. The allocation was:

  • ($33.9) million of unrealized depreciation which was attributable to
    our mark-to-market adjustments based on comparable public peer group
    performance

    • ($17.7) million of unrealized depreciation which was attributable
      to our private securities mark-to-market adjustments based on
      comparable public peer group performance; and
    • ($16.2) million of unrealized depreciation was directly attributed
      to our public securities mark-to-market performance adjustments;
  • ($9.1) million of unrealized depreciation due to collateral-based
    impairments;
  • ($6.6) million was related to mark-to-market yields adjustments; and
  • $2.5 million was related to the reversal of unrealized depreciation
    from actual realizations

Portfolio Asset Quality

As of December 31, 2018, the weighted average grade of the debt
investment portfolio remained level at 2.18, on a cost basis, compared
to 2.23 as of September 30, 2018, based on a scale of 1 to 5, with 1
being the highest quality. Hercules’ policy is to generally adjust the
credit grading down on its portfolio companies as they approach their
expected need for additional growth equity capital to fund their
respective operations for the next 9-14 months.

Additionally, Hercules may selectively downgrade portfolio companies,
from time to time, if they are not meeting the Company’s financing
criteria, underperforming relative to their respective business plans,
or approaching an additional round of new equity capital investment. It
is expected that venture growth stage companies typically require
multiple additional rounds of equity capital, generally every 9-14
months, since they are not generating positive cash flows for their
operations. Various companies in the Company’s portfolio will require
additional rounds of funding from time to time to maintain their
operations.

As of December 31, 2018, grading of the debt investment portfolio at
fair value, excluding warrants and equity investments, was as follows:

  Credit Grading at Fair Value, Q4 2018 – Q4 2017 ($ in millions)                                
       

Q4 2018

       

Q3 2018

       

Q2 2018

       

Q1 2018

       

Q4 2017

Grade 1 – High       $ 311.6     18.0 %         $ 150.2     9.4 %         $ 247.5     16.0 %         $ 141.8     10.6 %         $ 345.2     24.4 %
Grade 2 $ 885.1 51.1 % $ 987.5 61.6 % $ 791.9 51.2 % $ 599.8 44.9 % $ 583.0 41.2 %
Grade 3 $ 474.9 27.3 % $ 420.2 26.2 % $ 463.7 30.0 % $ 548.0 41.0 % $ 443.8 31.3 %
Grade 4 $ 60.3 3.5 % $ 44.5 2.7 % $ 42.0 2.7 % $ 33.6 2.5 % $ 41.7 2.9 %
Grade 5 – Low $ 1.6 0.1 % $ 0.9 0.1 % $ 0.9 0.1 % $ 13.2 1.0 % $ 2.3 0.2 %
                                                                               
Weighted Avg.         2.18    

 

          2.23                 2.21                 2.43                 2.17      

Non-Accruals

Non-accruals declined as a percentage of the overall investment
portfolio in the fourth quarter of 2018. As of December 31, 2018, the
Company had two (2) debt investments on non-accrual with a cumulative
investment cost and fair value of approximately $2.7 million and $0.0
million, respectively, or 0.1% and 0.0% as a percentage of the Company’s
total investment portfolio at cost and value, respectively.

Compared to September 30, 2018, the Company had two (2) debt investments
on non-accrual with cumulative investment cost and fair value of
approximately $2.8 million and $0.0 million, respectively, or 0.2% and
0.0% as a percentage of the total investment portfolio at cost and
value, respectively.

      Q4 2018     Q3 2018     Q2 2018     Q1 2018     Q4 2018
               
Total Investments at Cost $ 1,980.5 $ 1,813.1 $ 1,757.6 $ 1,576.3 $ 1,619.8
 
Loans on non-accrual as a % of Total
Investments at Value 0.0% 0.0% 0.0% 0.0% 0.0%
 
Loans on non-accrual as a % of Total 0.1% 0.2% 0.2% 0.8% 0.9%
Investments at Cost                          

Liquidity and Capital Resources

The Company ended Q4 2018 with $156.2 million in available liquidity,
including $34.2 million in unrestricted cash and cash equivalents, and
$122.0 million in available credit facilities, subject to existing terms
and advance rates and regulatory and covenant requirements.

On November 1, 2018, the Company completed a term debt securitization in
connection with which an affiliate of the Company made an offering of
$200 million in aggregate principal amount of the 2027 Asset-Backed
Notes. The 2027 Asset-Backed Notes were rated A(sf) by Kroll Bond Rating
Agency, Inc. (“KBRA”). Interest on the 2027 Asset-Backed Notes will be
paid, to the extent of funds available, at a fixed rate of 4.605% per
annum. The 2027 Asset-Backed Notes have a stated maturity of November
22, 2027.

On January 22, 2019, the Company completed a term debt securitization in
connection with which an affiliate of the Company made an offering of
$250 million in aggregate principal amount of fixed-rate asset-backed
notes due 2028 (the “2028 Asset-Backed Notes”). The 2028 Asset-Backed
Notes were rated A(sf) KBRA. Interest on the 2028 Asset-Backed Notes
will be paid, to the extent of funds available, at a fixed rate of
4.703% per annum. The 2028 Asset-Backed Notes have a stated maturity of
February 22, 2028.

On December 7, 2018, the Board of Directors approved a full redemption,
in two equal transactions, of $83.5 million of the outstanding aggregate
principal amount of the 2024 Notes. The 2024 Notes were fully redeemed
on January 14, 2019 and February 4, 2019.

During Q4 2018, the Company sold 94,000 shares of common stock, which
were issued under the equity ATM program, for total accumulated net
proceeds of approximately $957,000, including $150,000 of offering
expenses.

For the twelve months ended December 31, 2018, the Company sold 5.1
million shares of common stock under the equity ATM program for total
accumulated net proceeds of approximately $63.3 million, including $1.5
million of offering expenses.

Bank Facilities

As of December 31, 2018, Hercules has two committed accordion credit
facilities, one with Wells Fargo Capital Finance, part of Wells Fargo &
Company (NYSE: WFC) (the “Wells Fargo Facility”), and another with Union
Bank (the “Union Bank Facility”) for $75.0 million and $100.0 million,
respectively. The Wells Fargo and Union Bank Facilities both include an
uncommitted accordion feature that enables the Company to increase the
existing facilities to a maximum value of $300.0 million and $200.0
million, respectively, or $500.0 million in aggregate. Pricing at
December 31, 2018 under the Wells Fargo Facility and Union Bank Facility
were both LIBOR+3.25%, and no floor, respectively. There were $39.8
million in outstanding borrowings under the Union Bank Facility and
$13.1 million in outstanding borrowings under the Wells Fargo Facility,
for a total of $52.9 million at December 31, 2018.

On January 11, 2019, the Company entered into the Seventh Amendment to
the Wells Facility. Among others, the amendment amends certain key
provisions of the Wells Facility to increase Wells Fargo Capital
Finance’s commitments thereunder from $75.0 million to $125.0 million,
reduces the current interest rate to LIBOR plus 3.00% with a natural
floor of 3.00%, and extends the maturity date to January 2023. The
advance rate was increased to 55% against eligible loans.

On February 20, 2019, the Company replaced its existing $100.0 million
credit facility with MUFG Union Bank with a new credit facility under
which City National, Umpqua Bank, Hitachi Capital America Corporation
and Mutual of Omaha Bank, together with MUFG Union Bank, have committed
a total of $200.0 million in credit capacity subject to borrowing base,
leverage and other restrictions. The new credit facility also includes
an uncommitted accordion feature of $100.0 million. The interest rate
applicable to borrowings under the new credit facility has been reduced
to LIBOR plus 2.70%. The new credit facility matures in February 2022,
plus a 12-month amortization period. The advance rate under the new
credit facility has been increased to 55% against eligible loans.

Leverage

On December 6, 2018, the Company announced that its stockholders
approved the proposal to reduce its asset coverage requirement from 200%
to 150% at the Company’s special stockholders meeting (“Special
Meeting”) held on December 6, 2018. This reduction applies the modified
asset coverage requirements as amended by the Small Business Credit
Availability Act, which was passed into law on March 23, 2018. At the
Special Meeting, a quorum was reached with stockholder’s voting 91.5% in
favor of the proposal.

Hercules’ GAAP leverage ratio, including its SBA debentures, was 102.6%,
as of December 31, 2018. Hercules’ regulatory leverage, or debt to
equity ratio, excluding our Small Business Administration “SBA”
debentures, was 87.0% and net regulatory leverage, a non-GAAP measure
(excluding cash of approximately $34.2 million), was 83.4%, as of
December 31, 2018. Hercules’ net leverage ratio, including its SBA
debentures, was 99.0%, as of December 31, 2018.

Available Unfunded Commitments – Representing 7.1% of total assets

The Company’s unfunded commitments and contingencies consist primarily
of unused commitments to extend credit in the form of loans to select
portfolio companies. A portion of these unfunded contractual commitments
are dependent upon the portfolio company reaching certain milestones in
order to gain access to additional funding. Furthermore, our credit
agreements contain customary lending provisions that allow us relief
from funding obligations for previously made commitments. In addition,
since a portion of these commitments may also expire without being
drawn, unfunded contractual commitments do not necessarily represent
future cash requirements.

As of December 31, 2018, the Company had $139.0 million of available
unfunded commitments at the request of the portfolio company and
unencumbered by any milestones, including undrawn revolving facilities,
representing 7.

Contacts

Michael Hara
Investor Relations and Corporate Communications
Hercules
Capital, Inc.
650-433-5578
[email protected]

Read full story here

error: Content is protected !!