Horizon Technology Finance Corp (HRZN) 2014 Q4 法說會逐字稿

Good morning, and welcome to the Horizon Technology Finance's fourth quarter 2014 conference call. Today's call is being recorded.

(Operator Instructions)

I would now like to turn the call over to Megan Bacon of Horizon for introductions, and reading of the Safe Harbor statement. Please go ahead.

Thank you, and welcome to the Horizon Technology Finance fourth quarter 2014 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 that the Q4 press release is available on the Company's website at www.horizontechnologyfinancecorp.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 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, 2014. 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. 2014 was an important year for Horizon as we significantly improved the strength and credit quality of our investment portfolio. During a period of increased competition in the venture lending market, our disciplined approach to originating high-yielding loans and maintain a diversified portfolio enabled us to generate solid and consistent onboarding yields while maintaining credit quality.

Complementing our success in 2014, we experienced a record number of liquidity events from portfolio companies which further enhanced our yield. In the fourth quarter of 2014, we earned net investment income of $0.33 per share, and for the full year we earned NII of $1.11 per share. We generated these solid results despite a reduction in the size of our portfolio during the second half of the year, which resulted from planned deleveraging and liquidity events.

Importantly, we also had an increase in net assets from operations of $1.60 per share for the full year, as we rebuild our NAV from the resolution of nonaccrual loans at the beginning of 2014. Our ability to manage through these problem accounts is a testament to the Horizon venture lending model of maintaining low loan to value, and our experience in aggressively managing these situations. The steps that we have taken to resolve non-accruals in 2014 have ensured that the negative impact of lost interest income, high professional fees, and reduction in fair value from these accounts are largely behind us.

We achieved a portfolio yield of over 15% for the fourth quarter, and 15.3% for the full year, which compared favorably to 14.4% for the full year of 2013. While we experienced some pricing pressure in certain sectors, we continued to generate consistent onboarding yields from new loans, and combined with liquidity events, we achieved solid portfolio yields for the year which continue to be among the highest in the BDC industry.

Our direct origination engine continued to produce in the fourth quarter, as we achieved our highest funding quarter of the year by originating $29 million in new loans to nine companies. Total originations for the year were $92 million, and we added 17 new companies to our portfolio.

We experienced liquidity events from 5 portfolio companies in the fourth quarter, and 18 portfolio companies for the full year, as compared to 11 liquidity events in 2013. Liquidity events produce accelerated income and the return of capital for redeployment into new borrowers, often while we retain our warrants in the borrowers that paid off their loans. Subsequent to December 31, we experienced additional liquidity events from three portfolio companies totaling $14 million.

We ended 2014 with a portfolio of venture loans to 50 companies with an aggregate fair value of $199 million, as well as a portfolio of warrants and equity investments in 79 companies. With several of our warrants in companies that are already public or in registration, along with warrants and success fee agreements in private later stage revenue companies ripe for M&A exit, we believe that future realizations of these warrants and success fee agreements will produce a meaningful income to our shareholders.

In the fourth quarter, we covered 96% of our distributions to our shareholders with NII. Taking into account our fourth-quarter performance and future outlook, we declared monthly distributions totaling $0.345 per share payable during the second quarter of 2015. This represents an annualized yield of [9.6]% based on our NAV as of December 31. Since our IPO, we have now declared cumulative distributions of $6.65 per share.

In maintaining our commitment to provide shareholders with a steady stream of cash distributions, we continue to maintain undistributed or spillover income of approximately $0.41 per share as of December 31. We look to increase NII in future quarters through incremental growth in the portfolio, as we return to targeted levels of leverage. Our net investment income will also benefit from a continuation of favorable onboarding yields and liquidity events, a lower cost of debt, reduced professional fees to more normal levels, and the completion of accretive financings such as the SBIC program, and incremental commitments under our existing multi-year credit facility.

With regard to credit quality, our loan portfolio is in sound condition. Our loan portfolio had a weighted average internal credit rating of 3.1, and 92% of our loan portfolio was performing at or better than expected at the time of underwriting. There are only two small loans rated 1 with an aggregate cost and fair value of [$5 million]. This compares to five investments with a rating of 1 at the beginning of 2014, with an aggregate cost of $23 million and a fair value of $14 million.

In terms of liquidity, our debt to equity ratio has improved from 0.9 to 1 at the beginning of year, to 0.6 to 1 in the fourth quarter. We maintained $40 million of availability under our revolving credit facility, and have the ability to increase that facility if necessary, as our securitization debt continues to amortize.

Our liquidity also continues to benefit from normal amortization and positive liquidity events from loan prepayments and the sale of warrants. Credit availability, combined with unrestricted cash, provides adequate capital to fund our existing pipeline of quality venture loan opportunities.

As an update to our SBIC application, our formal application was accepted by the SBA late in the quarter, following our receipt of the green light letter earlier in the fourth quarter. The SBA is working through the application process with us, but as we have cautioned, that process is thorough and moves in an unpredictable pace.

Based on the considerable progress we made in 2014, we enter 2015 in a much stronger position than when we spoke to you last year at this time. In addition to materially improving our portfolio's asset quality, we implemented strategic initiatives that enabled us to lower our cost of borrowing, migrated our loan portfolio to largely floating rate, filed an application for an SBIC license, and further aligned our interest with shareholders.

As a result of these efforts, we have enhanced Horizon's future prospects and are well-positioned to draw upon our solid liquidity position to continue to selectively pursue attractive loan opportunities with good onboarding yields. Additionally, we expect to generate incremental income from early exits, and income from harvesting our growing warrant portfolio, while continuing to provide shareholders with an attractive and stable dividend.

In a moment Chris will detail the financial results for the fourth quarter which will provide more color on these events, but first Jerry will provide an overview of the market. Jerry?

Thank you, Rob, and good morning, everyone. We continue to operate in an active venture lending market where deal flow was strong, and activity level for liquidity events remained solid, leading to a greater number of exits. We experienced consistent and relatively strong demand for our venture debt products in the fourth quarter, as the VC-backed companies continue to take advantage of favorable market financing conditions. In the fourth quarter, our advisor originated a total of $34 million in loan investments to nine companies, of which Horizon funded $29 million and partnered the remaining $5 million.

We generated consistent performance in the quarter, as we executed on our investment strategy of originating loans to VC-sponsored technology and life science companies that offer attractive yields. By entering into high quality deals and maintaining our pricing discipline, we continued to focus on credit quality and generating portfolio yields and onboarding yields that are among the highest in the BDC industry. Our onboarding yields averaged 12.4% for the quarter, and 12.5% for the year.

At the end of the fourth quarter, we held warrant and equity positions in 79 portfolio companies, and had success fee provisions in six portfolio companies. In the first quarter of 2015, one of our life science portfolio companies, Inotek Pharmaceuticals Inc. completed its initial public offering. In addition, one of our technology portfolio companies, eASIC Corporation filed for an IPO, and another Horizon portfolio Company filed for an IPO under the Jobs Act.

With the Inotek IPO, Horizon now has 12 publicly traded portfolio companies, 10 of which are life science drug development companies with ongoing clinical trials that have the potential for significant valuation upside, if and when they meet clinical and regulatory milestones. Since going public in 2010, we have realized $10 million in warrant gains. Our promising warrant portfolio creates added upside potential for our shareholders, and we are optimistic that we will continue to realize warrant gains over time.

At the end of the year, our pipeline of new investment opportunities was approximately $100 million, consistent with our historic average. Our awarded, approved and committed backlog as of December 31 totaled $37 million to 13 companies, compared to $32 million in nine companies at the end of September 30. In addition, we added $20 million in new awards in January and February. Our backlog, combined with our pipeline of new opportunities highlights our positive outlook for new originations in the first half of 2015.

In our core markets we continue to see demand for IPOs in the life science market in Q4. However, it is clear that investors are becoming more selective and more price sensitive. According to the National Venture Capital Association or the NVCA, 16 late stage life science companies completed IPOs in the fourth quarter raising over $1.7 billion. Specifically, biotechnology achieved its strongest annual period for US-listed venture-backed offerings since records began in 1994.

However, according to NASDAQ, there were 25 IPOs that were withdrawn during the fourth quarter. In addition, a total of 14 IPO ready companies have already withdrawn their IPOs in the first quarter. We have seen a number of completed IPOs go out at valuations below the stated range. This trend suggests IPO investors are becoming more selective, and companies that are able to go public will be subject to some pricing pressure.

Our life science portfolio company, Inotek, completed its IPO in Q1. Inotek is a great example of an early stage life science development company in which we retain significant upside potential from our warrants position, which could be realized over the coming quarters if the company meets development milestones.

Horizon was able to win a number of quality life science transactions in Q4 of 2014, and thus far in Q1 of 2015 at attractive pricing, compared to pricing in what has been an overheated market for the last 18 months. While we expect to see a high level of competition for life science transactions in 2015, we also expect to see more opportunities. Later stage life science companies are expected to mitigate the risk of a volatile IPO market, and augment their liquidity with venture debt to provide necessary funding to move their drug candidates through clinical trials.

Turning to the technology industry, we continue to see strong M&A activity. The NVCA reported that 80 of the 95 M&A transactions reporting during the fourth quarter were technology-related transactions, a decrease from 91 tech deals in the third quarter. While the number of tech deals declined sequentially, valuations were sharply higher in the quarter, and as a result represented the strongest annual period for US venture-backed M&A exits since 2007.

Two of Horizon's technology portfolio companies, Construction Software and Optaros completed M&A transactions in the fourth quarter, and we've already experience one additional M&A transaction in our technology portfolio in 2015. In addition, one of our technology portfolio companies has signed a term sheet to be acquired in 2015. While there is no guarantee that the transaction will be completed, we anticipate it will likely close in the second quarter.

We believe that our technology portfolio which we strategically grew over the last eight quarters, is poised to take advantage of what we expect will be a favorable year for M&A activity in the tech sector. We are seeing more transaction opportunities in the healthcare information and service industry, as a result of significant VC investment over the last two years. The increase in deal flow is primarily attributable to the healthcare and IT companies collaborating to improve our healthcare system.

We believe this industry will be much more active in 2015, compared to 2014. However, we expect increased competition for these transactions as well. We will continue to maintain a disciplined approach on originating loans, solely pursuing opportunities that meet our pricing and underwriting criteria.

Finally, we remain bearish on the clean tech market, as deals and funding by VCs declined during the second half of 2014. Clean tech was affected by weakness that persisted in the energy market, however, our portfolio has no direct exposure to oil and gas prices. We will continue to monitor the impact reduced fuel prices have on competing alternative energy technologies.

Regarding venture capital activity during the quarter, according to the NVCA VCs invested $15 billion in just over 1,100 companies in the fourth quarter, compared to $10 billion in more than 1,000 companies in the third quarter of 2014. For the full year, VCs invested $48 billion, a 61% increase in dollars on just a 4% increase in total number of deals.

Turning to the overall market landscape, the venture lending environment remains highly competitive, as we continue to see tech banks reach for deals resulting in yield compression resulting in transactions that may not provide adequate risk-adjusted returns. We anticipate these trends will persist, and continue to pressure yields at least through the first half of 2015, with the focus turning to more portfolio management and less on originations in the second half of 2015, which may lead to some pricing improvement.

That said, we expect the venture capital backed technology and life science markets will continue to value experienced venture lenders who have a strong record of providing value added financial products that extend cash runway, by providing operating flexibility to these dynamics growth-oriented companies.

Looking ahead, our pipeline for new deals remains robust, and we see strong demand for the tech and life science industries, and increasing activity in healthcare information and services industry. We remain focused on executing on our disciplined strategy of sourcing investment opportunities in the form of secured loans to high-quality companies. We expect our healthy liquidity position going into 2015 will allow us to select quality venture debt opportunities from our growing pipeline.

In addition, in 2015 we expect to harvest warrant gains from our growing and maturing warrant portfolio, as our publicly traded portfolio companies continue to move clinical stage drug candidates through the clinical process, and a number of our private stage revenue growth companies become M&A targets. With that update, I will now turn the call over to Chris.

Thanks, Jerry, and good morning, everyone. Our consolidated financial results for the three months and year ended December 31, 2014, have been presented in our earnings release distributed after the market closed yesterday, and we also filed our 10-K with the SEC last night. For the three-months ended December 31, total investment income was $7.3 million, compared to $8.8 million for the fourth quarter of 2013. This change was primarily due to lower interest income on investments, resulting from the decrease in our average investment portfolio. Total investment income for the quarter included $6.9 million from interest income on investments, as well as approximately $400,000 of fee income.

For the year ended December 31, total investment income was $31.3 million compared to $33.6 million for 2013. This change primarily due to the lower average balance of investments held throughout 2014, partially offset by higher fee income.

New loans funded in the fourth quarter had an average onboarding yield of 12.4%, consistent with the onboarding yields throughout the year. We have successfully shifted our loan origination efforts to include a focus on floating interest rate investments. In 2013, our portfolio consisted of just 11% of floating-rate investments.

As of December 31, 2014, [64%] of the outstanding principal amount of our loan portfolio bore interest at floating rates. And further substantially, all of older fixed-rate loans are match-funded in our securitization, which has a fixed 3% annual interest rate. As a result of this delivered shift, we are now in largely protected from a rising rate environment in the broader markets. We continue to see strong demand for our floating rate loan product, and as of December 31, 2014 we reported unfunded loan approvals and commitments totaling $26 million, with all priced at floating interest rates.

For the fourth quarter, our portfolio yield was 15.1%, compared to 15.5% for the fourth quarter of 2013. The primary changes quarter to quarter to 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 transaction fees.

The Company's total expenses were $4 million for the fourth quarter, as compared to $5.3 million for the fourth quarter of 2013. Interest expense for the quarter decreased 38% year-over-year, primarily due to the decrease in our average debt outstanding, and a decrease in the effective interest rate on debt. Our effective debt cost was lower due to the termination of our term loan facility in the second quarter, the reporting of a full year with our securitization in place compared to only six months in 2013, and securing a lower interest rate under our revolving credit facility.

Base management fee expense for the quarter decreased by $340,000 or 25% year-over-year. Base management fee expense declined primarily due to a decrease in the average gross assets, and also our advisors waiver and elimination of base management fee on cash. As expected, professional fees return to normalized levels for the fourth quarter, as they decreased 27% year-over-year to $350,000. The decline of professional fees was primarily due to the resolution of certain nonaccrual investments and other assets that were previously generating increased legal fees and other costs.

We earned net investment income of $0.33 per share for the three months ended December 31, 2014, as compared to $0.35 per share for the fourth quarter of 2013. We elected to carry forward into 2015 taxable income in excess of current year distributions of about $4 million or $0.41 per share. This is commonly referred to as our spillover income.

Our NAV as of December 31 was $14.36 per share, which increased $0.22 per share from a year ago, primarily due to an increase from net unrealized depreciation on investments in the year, and decreased $0.02 per share compared to the Q3 2014 balance, primarily due to the distributions to shareholders exceeding our NII in the period. As expected, we had a slight increase in the portfolio sequentially, and ended the year with an investment portfolio of $205 million.

New originations in the quarter of $29 million in loans to nine portfolio companies, were offset by $11 million in scheduled principal payments and $14 million in principal prepayments. New originations for the full year of 2014 of $92 million to 27 portfolio companies, were offset by $43 million in scheduled principle payments, and $67 million in principal prepayments. Subject to the level of actual loan originations and prepayments, combined with the impact of expected scheduled principal payments of approximately $10 million, we expect the net portfolio for the first quarter to decrease in the range of $5 million to $10 million.

In terms of liquidity, Horizon ended the fourth quarter with $44 million in available liquidity, including cash and funds available under our credit facility. As of December 31, we had $10 million outstanding under our revolving credit facility, which has a current commitment of $50 million and contains an accordion feature allowing us to increase the total loan commitment up to an aggregate commitment of $150 million. We also have $39 million outstanding under our investment grade securitization, and $33 million outstanding on our publicly traded [baby] bonds. We believe there is demand for all of these loan products in the market to add to our current commitment levels when warranted.

87% of the Company's total debt outstanding was at a fixed interest rate, with 47% of our total debt fixed at an interest rate of 3%. We intend to increase our current debt levels, and grow our leverage ratio as we use our revolving credit facility as a source of capital to grow our investment portfolio. This planned growth is expected to be partially offset by the continued paydown of debt under our securitization, through normal amortization and prepaymemts within the active loan portfolio. As of today, we have significant liquidity in place to fund our current commitments, as well as the initial commitment under the SBIC license should we receive it.

Before we open the floor to questions, I would like to note that we plan to hold our next conference call to report first-quarter results during the week of May 4. This concludes our opening remarks, and we'd be happy to take questions that you may have at this time.

(Operator Instructions)

Troy Ward, KBW.

Good morning. Just real quick, following up on that last bit of conversation there, where you were talking about second half of the portfolio actually declined, and you're expecting a slight decline in Q1. Can you just talk about what your expectations are for 2015, as you think about getting the SBIC capital, and how do you view that versus using your current leverage to grow the portfolio?

Sure. Hi, Troy. So from a leverage target perspective, we continue to target our leverage overall at 0.75 to 1 for the next couple of quarters. We expect the portfolio to be flat, as I've mentioned flat or down slightly for the first quarter. So long-term leverage target will be in the 0.75 to 1, a little lower than that for the first couple of quarters, and that would exclude the SBIC debt. Remember the SBIC debt will -- as long as you have redemptive relief, which we already have available to us, we can leverage the SBIC subsidiary up to 2 to 1 over time. So we would generally expect to still have a 0.75 target for non-SBIC debt.

Okay, and you indicated you already had the SBIC regulatory capital. You have that at your disposal now. So when we think about where we should take leverage in the models say, for 2015, should -- what should we assume is earmarked for regulatory capital for the SBIC facility?

Right. So the maximum regulatory capital is $75 million under the SBIC, as I know you know. To get the license, you don't have to commit the full amount at the onset. Many firms commit anywhere from $20 million to $40 million levels to get the initial licenses, and then ramp up their capital base from there. So in the near-term, we still would expect a 0.75 target overall. And then, as we ramp up into the SBIC license, you would start to see a higher leverage levels beyond that as we fully use the license, and the permitted 2 to 1 leverage over time.

Okay, great. And then, Rob, can you speak a little bit to what's been happening in the VC lending market? I mean, obviously, two large transactions with RBC taking out City National and PacWest and Square 1, can you just speak to on a broader outlook, does that have much impact on your direct lines of business? And how do you think that affects the overall VC debt market?

Thanks, Troy. I'll start, and I'll let Jerry give you the feet on the ground. But it is interesting to see how a year ago, we were seeing new entrants and BDCs coming into this space, and talking quite a bit about increased competition. And then, you see on the tech bank side as you mentioned, consolidation, acquisition which will take some time to play out, but what's -- probably will be disruptive to those players along the way. And Jerry, maybe you can comment on what we're seeing, in terms of the actual on the ground?

Yes, Troy, actually it's a great question, and I expected too, that we would get into this at some point. Actually there has been -- in the last 45 days, there have been three announcements of acquisitions of venture debt banks that have actually been acquired: Bridge Bank, day before yesterday announced they were being acquired by Western Alliance Banks, Square 1 Bank by PacWest, and City National by RBC. In addition, we are aware of one of the other lenders in our life science market also has -- is up for sale as well, and one of the other BDCs had pulled back from the venture lending platform, to Rob's point that they had initiated a while back. So this is going to be a very interesting year.

I think Rob's right, that we won't -- that there will be a distraction with these banks as they complete the M&A for sure, at certainly at the management level. So we expect -- Rob and I have been through an M&A, and that is a distraction to the management of these companies. So we expect that to cause -- create some short-term issues.

But I think long-term, if you look at the acquirers of these banks, none of them are in fact venture banks, so there really wasn't consolidation here. What it was is, essentially other banks getting, buying venture banking platforms, primarily for the deposits I would add. So we think long-term there's going to be significant disruption in the banking environment, and overall there's going to be disruption in 2015, with some other lenders starting to pull back. So as I had mentioned in my comments, I think the second half of 2015, we're going to see probably a less competitive environment than we have seen probably for the last year and a half, which bodes well for us. The market is kind of coming back to us so.

Jerry, just to put a finer point on it, if I could just ask a question. So as you look at the M&A that we've seen so far, whether it's City National, Square 1 or Bridge Bank, do you feel it's more of those institutions for whatever reason had kind of reached their -- hit a wall, or reached their maturity, versus these larger institutions like RBC and PacWest saying, boy, this is a great channel, and they're killing it, and we need to pay up and go buy one of these guys?

But you're saying, they didn't really necessarily buy it as much for the channel and the exposure in the channel, it's much more of just buying the deposits and the relationships? Do you see the difference, where I'm getting at?

Yes, I do. I do, and it would be speculative on my part to understand exactly what was going through these bank's minds, both on terms of the buyers and the sellers. All I can say for sure, is this will be a disruptive process in the venture baking space without question, and we'll just have to see how it plays out. I mean, if you just read the press releases, they all say it's going to be business as usual, but time will tell.

Okay. And then one final one, and you touched on it already. For years, it was Hercules and you guys in this space, kind of model line, this is what you do. And then you add others, including Solar and Ares and Fifth Street from the BDC side step in. Can you speak to how much competition have you seen those peer organizations provide when you're looking at deals, and also speak to maybe talent retention and things like that?

Yes, I mean, I think one of the benefits that Horizon has had since we actually started this business, Troy, is we have been a pure venture lender for venture-backed companies in the $5 million to $20 million range. That's what our portfolio has been built on since day one. And if you think about the people you just mentioned, and you look at their portfolios, you're going to find very few deals in their portfolios of that size. They all have gone after later stage, almost orphaned venture capital-backed companies, where the VCs are trying to move out of the Company, and not continuing to support.

I think that's a big differentiator in our market place and it's recognized by the VCs, is we continue to support these companies while they are continuing to invest, and that is part of our underwriting model. And so, I think we have had a distinct advantage in that specific part of the market over the last 11 years, irrespective of who's been coming in and going out. It's -- for us, these transactions represent a good size, a great diversification in our portfolio, with a long-term potential upside from the warrants that we get. So that's been consistent, irrespective of some of the other players that you have mentioned who have come in, who have really been at the higher end of our market.

Great. Thanks.

Robert Dodd, Raymond James.

Thanks for the color so far. I mean, the question for me is more about -- on the dynamics of say, the quarter and the year, when you are saying obviously, for the first quarter you expect the portfolio to be down somewhere in the range of $5 million to $10 million. From your comments, I presume that's because you expect a lot more prepayment or exit activity rather than lower originations, and obviously, there's a lot of fees tied with that.

So can you give us, and I know it's hard to project, a ballpark idea of what you are expecting for growth, versus gross originations versus the net that you expect, because that obviously affects the dynamics of fee income, prepayments, accelerated amortization, and you can have quite a good earnings number, while the portfolio is shrinking, depending on how that works out?

Thanks, Robert. The first quarter is always impacted by a couple of things. Traditionally a big buildup to year end, and we had a very good funding quarter in the fourth quarter, even though it was slow to get started. Offset this year, by having -- the payoffs that we already had were early in the quarter, and first quarter typically the fundings come very late in the quarter, and in fact sometimes don't get done.

And so, that's the dynamic we are speaking to, as it relates to the first quarter. We are very focused on working our way back into the leverage, and increasing the portfolio, and growing quarter over quarter. So our goal is to grow above and beyond the level of prepayments and normal amortization in every subsequent quarter during 2015.

Okay, perfect. It's kind of unrelated largely follow on. Unfunded commitments up to about $26 million. They were $20 million last quarter; at the beginning, they were $7 million. And obviously, the beginning of the year with the leverage, I think you deliberately rotated away from taking those kind of positions. Now you've got much more flexibility on where your leverage is, has there been a change? Has there been a deliberate change to address those? And is that a change in the area of the market, and the types of deals that are getting done, now that you have more liquidity flexibility and leverage availability?

Well, actually a little bit is a result of that. But for the most part actually, and I mentioned this, we've actually had some success in the life science base in the fourth quarter --

Right.

-- in the first quarter, those deals tend on occasion to be tranched, whereas we were primarily focused on the tech sector for most of the early part of the year. So that has in fact, built up now some committed backlog for us, which you're correct, our liquidity position -- with our liquidity position, we feel quite comfortable with.

Okay. Got it. Thank you.

Hannah Kim with JMP Securities.

Hi, thanks for taking my questions. Calling in for Chris York this morning. I just wanted to start off talking about the asset-backed note you have on your balance sheet. It's amortizing at a pretty rapid pace. And from a modeling perspective, just wondering are you expecting this to be fully amortized in year 2015, if I were to assume the pace continues?

Yes, the securitization was done in June a year and a half ago, and we actually, at that time, the weighted average life of that static pool was a year and a half. So we are now in the tail of that.

We did have a little bit of acceleration on paydown earlier this year, because of some of the prepayments we had were in that static pool. We do expect that by the end of the year, it will be at a level that we can clean it up, and either refinance it, or just at least pay off the debt and use our other credit facilities like KeyBanc to finance what's left over.

Okay. Great. Thank you, that is all.

(Operator Instructions)

Jonathan Bock, Wells Fargo Securities.

Good morning, and thank you for taking my questions. Chris, you mentioned $20 million to $40 million of capital that you would like to put into the SBIC to the extent that you receive it. I understand that the application has been filed. As I look at your sources, would I understand that a majority of this would come from just additional leverage on the portfolio, allowing you to effectively cash out, and then perhaps fund the facility that way? Or you will keep liquidity on hand from repayments, and allow the cash balance to grow, which is I guess, about $8.5 million or so, and then choose to fund it that way?

Yes, it's actually a combination of both. If we were to get the license today, which we don't expect to get it today, but if we did, we would just drawn down under our available amounts under our key facility, and that's how we would fund it. It would drop down, and become equity in our wholly-owned subsidiary to fund new transactions.

And so, the reality is it's a combination of that current liquidity, plus prepayments, plus the normal amortization that averages around $10 million or $12 million per quarter. It's that combination of liquidity, where we can fund the license at that time.

Okay. And then, as I -- we look forward, in terms of dividend and earnings coverage, can you give us a sense that -- first off, obviously the SBIC is a wonderful way to drive earnings power. But if we look at what we're considering today, can you walk us through the path to dividend coverage on the year, outside of what we would consider end of term, or shall we say less sticky or less reliable fee income, given that a smaller portfolio, your ability to leverage is good. Of course, that's also predicated on, do you get the SBIC, do you not, et cetera? Just walk us through dividend coverage and the path to that dividend coverage on a balance of 2015, just in light of how we ended December 2014, and the fact that the portfolio is likely going to get a bit smaller?

Yes, so I'll take that, and then Chris can fill in, Jonathan. So the main way to think about it is, is that we work our way back up from 0.6% to 1%, to 0.75% in the target leverage, and our onboarding yields are in the mid12%s, and our marginal costs to borrowing on the revolving facilities is 4%. So that provides the bulk of where we expect NII, incremental NII to come from. We also will benefit from reductions in professional fees, which we mentioned, lower overall costs to capital on the debt side.

And so, it's really those things from the core benefit. We continue to maintain that we've had about four years of very consistent levels of prepayments. It's important -- we call it our sticky part of our venture lending model. The only real problem is it's not completely [pertinent] for the fourth quarter. But if you look back over the levels of prepayments we've had in 2012, 2013 and 2014, it's all been $50 million to $60 million a year, which makes that interest income and acceleration income pretty sticky in our model.

And so, the timing of it quarter to quarter is not always great, but if you look at it, in any trailing four quarters, I think you'd say it's a fairly predictable. But I understand your question about sort of the two elements. But if you think just about the incremental volume we could do, raising the portfolio back up. And then, we are endeavoring to do that. Robert Dodd's question about capital flexibility is helpful in our ability to grow that portfolio [within the leverage].

And then, just a risk mitigation question. Obviously, seeing what we saw last quarter, obviously early parts of this quarter, the market can be fairly unpredictable of credit in general. And so, walk us through the comfort level that one would take to bring leverage a bit higher, at a point when we see a good fair amount of venture lenders operating, one in particular operating at a fairly low level of leverage, that it would be subjected to, obviously, covenants that could end up running us into trouble. So I am just curious about the comfort level, moving to 0.75% at a point when we've seen some volatility hurt a few people in the credit market?

So for venture lending, we have historically been in anywhere from 0.6% to 0.9% at, here at Horizon. We've often discussed offline with others in this space, whether higher leverage is something that is good for the industry. There is legislation out there for increasing leverage. So that kind of topic comes up.

But we are very comfortable going back up to 0.75 to 1, we think that that gives us enough cushion above the regulatory limit. The portfolio we have is pretty dynamic right now, with much of it having already seasoned for more than a year. So we think that we'll have turnover anyway. And as you know, 18 months ago, we talked about deleveraging the portfolio naturally, because of the dynamic nature of the portfolio, and we saw that happen pretty quickly after we did the securitization. So we're very comfortable going back up to 0.75%.

Got it. And then the last question. So comfort level of moving up to 0.75%, how would you characterize the percentage of second lien in your portfolio today? I understand you have it limited -- have it outlined term debt. But of course people breaking out second liens, it's very important for folks in the BDC space. So give us a sense on what second lien is today in your portfolio, versus true first lien senior secured collateral?

So two things -- I'll give you -- things we want to reemphasize, Jonathan. Just remember, when we do -- we talk a lot about low loan to value in our business, and what we do whether we're senior or we're sub to working capital facility, we use the same low loan-to-value metrics for our junior lien business that we do for the second -- for the first lien. But I would say our portfolio today is about 50-50, senior-senior versus senior with a line in front of us (inaudible) a formula-based AR line in front of us.

Okay. Great. Gentlemen, thank you.

Casey Alexander, Gilford Securities.

Hi, good morning.

Good morning, Casey.

I realize we're sometimes a little uncompromising on the analytical side. When you're under levered, we worry about your earnings capacity, and when you're over levered, we worry about your origination capacity. But I am not sure we quite got the answer to the question. The sort of expected portfolio decline in Q1, is that a planned issue to prepare yourself for the day that SBIC is hopefully approved, or does that have to do with an elevated level of prepayments that you see coming in Q1?

Casey, well, it was asked and answered. You've asked what we've tried to pitch, which is we've delevered the balance sheet over the past year in preparation to have sufficient liquidity to both fund our current commitments, and also to fund the initial portion of the license, and we have that now. The first quarter's impact, as Rob had mentioned from someone else's question, we've had some prepayments that Jerry already mentioned this quarter, and that happened early in the quarter. Oftentimes, those prepays happen later in the quarter.

And so, we're rebuilding the portfolio. But just being cautious that some of the transactions that may fund this quarter, may just slip into the following quarter. So, we are being cautious about what we think the net portfolio will look like at the end of the quarter, with only three weeks to go. (Multiple Speakers). But we see plenty of top line portfolio activity pipeline.

Okay. My second question is, we've all seen years of SBA eligible investing amongst traditional middle market lenders. I am not sure how much we've seen from venture lenders. How different and difficult is it to find SBA eligible loans in the venture-backed debt arena, as opposed to the more traditional middle market arena?

That's a good question, and I think I would describe it as, the attributes that SBA looks for, is almost directly matched one for one, for how we look at transactions. So it's highly correlated, other than years ago when we looked at some foreign transactions, which those would not be eligible. But US based venture capital backed companies fits perfectly into the mandate that the SBA has.

Okay, good. Thank you. And lastly, the Horizon funding trust, is there any contemplation about taking it out, and refinancing it into a new collateralized trust that's larger, and gives the Company a little bit more flexibility?

Currently, we're focused on the SBIC leverage, and the utilization of the KeyBanc facility. Our next step would probably be to add an additional commitment level to the KeyBanc facility. But those are the two initiatives we are looking for strategically right now. I think down the road, we could consider another facility that's rated securitization. But at this point, the best value for the shareholders would be to focus on the SBIC and the KeyBanc facility.

Okay, great. Well, thank you for taking my questions.

At this time, there are no additional questions. I would like to turn the call over to Rob Pomeroy for closing remarks.

Thank you. We appreciate your questions, and your interest in the Horizon story.

2014 was a year of progress at Horizon as we executed on several important initiatives. This includes improving the strength and credit quality of our investment portfolio, lowering our cost of borrowing, adjusting our investment advisory agreement, and following our application for an SBIC license.

Looking ahead to 2015, we look to expand upon the success of our strategic accomplishments, while maintaining a disciplined approach to originating high yielding loans. We remain committed to build our portfolio as we grow toward our target leverage, benefit from lower costs of debt and debt initiatives, increased return on equity from lower cost of operations, and position the Company to realize upside from our expanding warrant portfolio, and we look forward to sharing our progress with you in the future.

This concludes the Horizon Technology Finance Corporation's conference call. Thank you, and have a great day.