Horizon Technology Finance Corp (HRZN) 2015 Q3 法說會逐字稿

Good morning, and welcome to Horizon Technology Finance's third-quarter 2015 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 the read of the Safe Harbor Statement. Please go ahead.

Thank you, and welcome to the Horizon Technology Finance third-quarter 2015 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 Q3 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 the future performance of the Company. Words such as beliefs, expects, anticipates, intends, or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties 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 factors 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. During the third quarter of 2015, we continue to selectively grow our investment portfolio. Our success in both originating quality loans with attractive onboarding yields and realizing profitable liquidity events during the quarter enabled Horizon to generate strong net investment income of $4.1 million, or $0.35 per share, which covered our distributions to shareholders.

As we stated on the second-quarter call, our target was to cover our distributions with NII by year end, and we achieved this objective in the third quarter.

We also experienced merger and acquisition activity in our portfolio, which resulted in success fees and warrant gains. This highlights our ability to provide both interest income and an upside opportunity to our shareholders.

During the quarter, we funded new loans totaling $33 million, growing the portfolio by $9 million. Notably, for the nine-month period, our disciplined approach to sourcing and pricing high-quality loans has resulted in portfolio growth of approximately $44 million.

We experienced eight liquidity events in the third quarter as compared to five liquidity events during last year's third quarter. Five of the liquidity events were prepayments which produced accelerated income and returned capital for redeployment into new investments, while we often retain warrants in the prepaying portfolio of companies. As a reminder, the number, dollar amount and timing of prepayments in any quarter are not predictable but are an important aspect of the venture lending model.

Our success originating loans with attractive onboarding yields and realizing profitable liquidity events enabled Horizon to earn a portfolio yield of 14.2% for the quarter and 14.1% for the first nine months of 2015.

We ended the third quarter with a portfolio of secured loans to 52 companies with an aggregate fair value of $242 million. As of September 30, we also hold warrant and equity investments in 88 portfolio companies. These warrants include 14 companies that are already public or in registration. In addition, we have warrants and success fee agreements in private companies that may be ripe for M&A. During the third quarter, we had five portfolio companies announced M&A transactions, four of which have now closed into the third quarter or early in the fourth quarter.

With increasing M&A activity in the technology industry, we believe technology companies in our portfolio remain ripe for additional exit, and we expect the future realization of warrant and success fee agreements will produce upside to our shareholders.

With regard to credit quality, at the end of the third quarter, our debt investments had a weighted average credit rating of 3 consistent with the second quarter of 2015. At quarter's end, 88% of our loan portfolio was performing at or better than expected at the time of underwriting. Importantly, at the end of the third quarter, no loans were rated one or were on nonaccrual, allowing -- following the settlement in the third quarter of one debt investment and the upgrade of another debt investment to a 2 rating.

We experienced a normal migration of loans within our portfolio, with some of our 4-rated credits being acquired and prepaying their loans, and some 3-rated credits needing to raise capital being downgraded to a 2 rating. Although the number of 2-rated loans increased, the dollar exposure of these loans is within historical ranges.

As of September 30, our net asset value was $13.94 per share, a decline of $0.05 compared to the end of Q2. This decrease was primarily attributable to a reduction in the fair value of our public Company equity and warrants and certain loan investments.

Turning to liquidity, our debt-to-equity ratio at the end of the quarter was 0.64 to 1, compared with 0.58 to 1 at the end of the second quarter as we increased the use of our revolving credit facility. We intend to leverage our portfolio to our target ratio of 0.75 to 1 in the coming quarters. We are currently targeting our investment portfolio to reach approximately $260 million at the end of 2015.

As of September 30, we had liquidity of $31 million. Importantly, in mid August we increased the commitment of our credit facility to $70 million, enhancing our ability to fund attractive loan opportunities.

We declared monthly distributions totaling $0.345 per share payable through March of 2016. This represents an annualized yield of 9.9% based on our NAV as of September 30, and over 13% based on our recent stock price. Since our IPO, we have declared cumulative distributions of $68 million, or $7.685 per share.

At September 30, we continue to have undistributed or spillover income of $0.22 per share. Building on our success covering our distributions in the third quarter, our strategy remains to earn NII that covers our monthly distributions over time.

Late in September, our Board authorized the repurchase of up to $5 million of our common stock at prices below Horizon's net asset value per share, as reported in our most recent financial statements. The repurchase program will be in place until September 30 of 2016 or until we repurchase $5 million of Horizon's common stock. We believe this is an appropriate size to allow Horizon to opportunistically purchase shares below NAV as we seek to complement our distribution policy and growth strategy.

I would like to briefly comment on the unfunded commitment topic that was discussed on our second-quarter call. Horizon typically has shorter and more manageable commitments to its portfolio of companies relative to its equity base and other BDCs. Based on how unfunded commitments are currently calculated by the SEC as well as how they may be calculated under new SEC guidelines, we believe there will be minimal impact on Horizon's business.

As we progress through the fourth quarter, we believe Horizon remains well-positioned to create shareholder value. First, we have made significant progress executing on our disciplined growth strategy and continue to have the balance sheet strength to originate high-quality loans with a focus on achieving attractive onboarding yields.

Second, our success shifting our portfolio almost entirely to floating rates, which make up 91% of the outstanding principal of the loan portfolio as of September 30, has allowed us to minimize negative impacts from the potential of rising interest rates.

Third, Horizon has no direct exposure to industries or companies that are directly impacted by changes in the cost of oil and gas.

And finally, we continue to have a sizable warrant portfolio which we believe provides considerable upside potential to shareholders.

In a moment, Chris will detail the financial results for the third quarter, but first Jerry will provide an overview of our target industries and the venture lending markets.

Thank you, Rob. Good morning, everyone. During the third quarter, Horizon continued to successfully execute on its strategy to selectively grow its venture loan, warrant and success fee portfolio. Horizon also benefited from liquidity events, which were partially driven by an improving M&A market in the technology industry.

In Q3, Horizon funded $33 million to 8 companies; 3 of which were new portfolio companies. These results compare favorably to $23 million in new fundings to 9 companies in Q3 of 2014. Horizon continued to earn attractive onboarding yields 11.9%, which, when combined with eight portfolio liquidity events in the quarter, resulted in a portfolio yield of 14.2%. The loans funded in Q3 were senior term loans; 3 of the transactions were senior term loans secured by a first lien, and 5 transactions were senior term loans secured by a first lien behind a bank revolver.

After funding $33 million in the quarter, our committed, approved and awarded backlog at the end of the third quarter was $50 million. Subsequent to the end of the quarter, we have been awarded 3 new transactions totaling $17 million.

In the fourth quarter, we are taking a conservative approach in narrowing the number of opportunities at the top of our pipeline to account for a tightening funding environment for both debt and equity in the VC market over the coming quarters. With our current backlog and our discretion to be highly selective on new opportunities, we are well-positioned to use our liquidity to grow our venture loan portfolio in the coming quarters and expect to increase our portfolio by between $5 million and $10 million during the fourth quarter.

At the end of the third quarter we held warrant, equity and success fee positions in 98 portfolio companies. During the quarter, we monetized 2 warrant positions, receiving total proceeds of $578,000 and received a $300,000 success fee. In addition, 2 of our portfolio companies have been acquired in Q4, one of which resulted in Horizon receiving a $325,000 success fee, and the other is expected to result in $125,000 realized warrant gain.

Also, one portfolio company has entered into a letter of intent to be acquired in Q4, which, if closed, will result in additional realized warrant gains in Q4. However, there is no guarantee this transaction will close in Q4 or at all.

Turning to venture capital activity in the third quarter, while VC investing continued at a robust pace in Q3 with over $19 billion invested in the quarter, VC fund-raising was down significantly with a 64% drop in funds raised in Q3 compared to Q2 according to Dow Jones Venture Source. Some of this can be attributed to a slow summer fund-raising season. However, we believe VC fundraising and investing will be slower over the coming quarters.

With the significant amount of VC equity and debt that has poured into the market since 2013, we anticipate there will be a normal digestive period where VC-backed portfolio companies will need to demonstrate they have created real value for their investors. In turn, we expect fund investors will take a wait-and-see approach as to how VC funds returns look over the coming quarters.

Against the backdrop of a changing VC environment and, as a result, a slowdown in high-quality new origination opportunities, we expect to maintain a conservative approach to originating loans in the fourth quarter. We believe there will be opportunities in the fourth quarter to achieve modest portfolio growth by focusing on originating quality loans with attractive onboarding yields to existing portfolio companies and select new companies. With the strengthening M&A market, we also believe we are in a strong position to realize additional success fees and warrant gains from our portfolio.

Turning to activity in our core industries in the third quarter, in the life science industry, we saw less VC investment activity this period, with life science investment decreasing 7% from the second quarter. The number of life science IPOs was also down during the quarter, primarily due to global stock market volatility. According to the NVCA, there were only 10 VC-backed life science IPOs in the third quarter compared to 19 in the second quarter.

We also experienced a significant decrease in new life science loan origination opportunities in the third quarter. However, we were able to provide additional debt financing to 3 of our top-tier life science portfolio companies. Two of the companies, Palatin Technologies and Argos Therapeutics, are publicly traded, and the third, New Haven Pharmaceuticals, is a private company that recently received FDA approval for its one-of-a-kind, low-dose, extended-release aspirin.

Turning to the technology industry, M&A activity increased substantially in Q3, increasing 42% over Q2. 69 of the 90 announced M&A transactions in the third quarter were technology-related. In Q3, we saw increased M&A activity in our technology company portfolio, which we have strategically built up over the last 12 quarters. With the recent announcement by Dell that has entered into a definitive agreement to buy EMC, as well as ongoing high-profile M&A activity in the tech industry, we expect M&A activity in the tech industry to remain favorable.

We believe that an improved M&A environment in the coming quarters will create additional opportunities for Horizon to benefit from warrant gains, success fee associated with our quality technology portfolio.

In the healthcare information and service industry, we saw few new opportunities but believe that venture capital investors will continue to invest in this industry over the long term. Innovative healthcare technology companies and service providers are becoming the catalysts for improving healthcare service while driving down costs, which will be fundamental to changing how healthcare is delivered in the US.

As it relates to the [cleansech tector], Horizon has been taking a cautionary but opportunistic approach to the market. In Q3, we added one venture loan transaction to our cleantech portfolio.

Looking at the competition in our market in Q3, we saw a pullback in investing by the tech banks related to refinancing loans within their own portfolios. We also observed a number of non-venture lending VECs who had stated an interest in the venture debt market over the last three years pull back. We also observed lenders in the life science market placing a greater emphasis on partnering as opposed to originating large life science venture loans.

We believe that tech banks are becoming more focused on managing the significant increase in their respective venture loan portfolios built up over the last three years. As a result, we expect to see an improvement -- an improving pricing environment.

With that update, I will turn the call over to Chris Mathieu.

Thanks, Jerry, and good morning, everyone. Our consolidated financial results for the third quarter have been presented in our earnings release and our Form 10-Q, both distributed after the market closed yesterday.

For the three months ended September 30, total investment income was $8.4 million, compared to $7.7 million for the third quarter of 2014. This increase was primarily due to higher interest income on investments from the higher average size of our loan portfolio, partially offset by a decrease in accelerated fee income from lower prepayments and lower fee income.

Total investment income for the quarter included $7.7 million from interest in common investments and $700,000 of fee income.

New loans funded in the quarter had an average onboarding yield of 11.9%, compared to 12.2% in the third quarter of 2014 and 12.4% in the second quarter of 2015.

We continue to focus our loan origination on floating-rate debt investments, which make up 91% of the outstanding principal of the loan portfolio as of September 30. Further, 51% of the outstanding principal amount of the loan portfolio was made up of floating-rate loans with no caps. 40% was made up of floating-rate loans with caps. And 9% were fixed-rate loans which were match-funded to our asset-backed notes which have a fixed 3% annual borrowing rate.

We continue to focus our loan originations on secured term loans. As of September 30, 47% of our loan portfolio was senior term loans secured by a first lien, and 51% of our loan portfolio is senior term loans secured by a first lien behind a bank revolver.

For the third quarter, our portfolio yield was 14.2%, compared to 15.8% for the third quarter of 2014 and 13.1% for the second quarter of 2015. 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, including prepayment fees and acceleration of previously unamortized transaction fees.

The Company's net expenses decreased slightly to $4.4 million for the third quarter as compared to $4.5 million for the third quarter of 2014. Interest expense for the third quarter decreased by 4% year over year, primarily due to a decrease in our effective cost of debt and offset by average borrowings for the quarter increased by 4%.

Interest expense for the nine months ended September 30, 2015 decreased 41% year over year due to a decrease in our effective cost of debt, a 24% decrease in the average borrowings for the period and the one-time cost associated with the prepayment of our term loan facility in 2014.

Base management fee increased slightly year over year, primarily due to an overall increase in the average portfolio and gross assets of the Company offset by the waiver of management fees on the proceeds raised from our March 2015 public equity offering.

Professional fees for the quarter and for the year to date are now more in line with our normal level of operations as compared to 2014. We earned net investment income of $0.35 per share for the three months ended September 30, as compared to $0.33 per share for the third quarter of 2014.

As of September 30, we elected to carry forward taxable income in excess of current distributions or spillover income of $0.22 per share. Our investment portfolio grew to $249 million at the end of the third quarter, an increase of $9 million from the second quarter. New originations in the quarter of $33 million were partially offset by $16 million in principal prepayments and $6 million in scheduled principal payments.

Subject to the level of actual loan originations and prepayments, combined with the impact of expected scheduled principal payments of $8 million, we expect the net portfolio growth for the fourth quarter to increase in the range of $5 million to $10 million.

In terms of liquidity, Horizon ended the quarter with $31 million and available liquidity, including cash and funds available under our credit facility. As of September 30, we had $52 million outstanding under our credit facility, which has a current commitment of $70 million. As we announced in August, we amended our credit facility with KeyBanc to increase the size of the facility to $70 million by adding a new lender with a $20 million commitment. The amendment also extends the period during which the Company may request advances until August 2018, and the date on which all outstanding advances under the credit facility are due and payable to August 2020.

In addition to our credit facility, we had a balance of $19 million outstanding under our asset-backed notes, which are currently expected to be fully paid off in early 2016, and the balance of $33 million outstanding on our publicly traded 2019 notes, which is currently expected to be held until maturity.

We intend to increase our debt levels and grow our leverage ratio towards our target of 0.75 to 1 as we continue to increase the utilization of our credit facility as a source of capital to grow our investment portfolio.

Before we open the floor to questions, I'd like to note that we plan to hold our next conference call to report fourth-quarter and year-end results during the week of March 7, 2016.

This concludes our opening remarks, and we'll be happy to take questions you may have at this time.

(Operator Instructions) Jonathan Bock, Wells Fargo Securities.

This is Jamie [Sirofan] filling in for Jonathan. I have a couple of quick questions here. First, you guys talked about the slowdown in the venture market. Just kind of curious with the volatility in the equity markets, are you seeing an increase in certain companies' demand for loans, given it might not be an opportune time for them to IPO or issue equity?

This is Jerry Michaud. So the answer to that is we have not seen that yet. I think that there is a substantial amount of liquidity that has come into the market over the last couple of years, particularly in terms of IPOs and venture debt. And so I think there is a digestive process going on in the marketplace right now where that liquidity is being used up by companies. And investors are looking for that liquidity to demonstrate some value creation for potential exits. We are actually seeing a very significant improvement in M&A activity, specifically on the tech sector, which has been very slow for the last really 8 quarters almost. So we think that that's a very interesting and positive kind of silver lining to the slowdown in overall credit.

But we have not seen yet -- but I do believe if things continue, we probably will see -- increased activity on the life science side relative to venture debt demand increasing next year if the IPO market continues at its present level.

Sure, sure. Thanks. And then a question on the share repurchase program. Last quarter, you guys stated that you didn't think it was the right time to repurchase shares and it might not be in the best interest of shareholders. I'm just curious what changed for you guys to implement this program?

Thanks, Jamie. The principal thing that changed was the stock price. At the time we met and made those decisions in August, the stock price was trading higher. And our stock, by the time we made this decision, had traded considerably lower. There are a lot of strategic and other issues that went into our decision both in August and September, and those are still valid. But we did make that announcement late in September.

Sure, sure. And then, obviously you guys are trading lower and share repurchases are definitely going to be beneficial. You mentioned the slowdown in the venture market. Is $5 million the right amount or could there be opportunities for more?

We believe that for us and on our balance sheet, our market cap and our equity that $5 million represents about 5% of the shares. So, at these prices we think that is scaled appropriately for us.

Awesome. And then just one quick follow-up. Just curious if any of your credit providers have any kind of limitations regarding the amount of equity you can repurchase.

The quick answer is no. The size of our facility that we put out there, there's no restriction.

Okay, awesome. Thanks. That will be all for me.

Troy Ward, KBW.

One of the companies in your portfolio, Semprius -- I think it has been there since 2012 -- has been on and off nonaccrual, mainly on nonaccrual. I saw it come off this quarter. Could you just provide some color?

What's interesting, though, it's always been marked really high as a cost to fair values, quite honestly. Been at 100%, I think, most of the time. What's going on there, why that keeps kind of oscillating on and off nonaccrual?

It's actually been on nonaccrual since March of 2014. It was a company that was in stress early in 2014. And in the solar-related industry and not only (technical difficulty) loans. We had several issues back then, Troy, as you know. So we were, I think, appropriately cautious and downgrading it to a one and putting on nonaccrual. It has actually been paying us for almost two years. And we finally got to the point where the investors who have been supporting it, they have made -- they are making regular P&I payments. Our debt is down now to one -- around $1 million. And their prospects have continued to improve. So we did upgrade it to a 2 at the end of the third quarter.

So as they kept paying you, instead of running it through the income statement you were using that to pay down the principal on the outstanding?

We actually had it on cash nonaccrual. It means that we -- to the extent that they paid us, we recognized the income and reduced the principal when they made principal payments.

Okay. And then this quarter, was it getting the upgrade to number 2 and then going on accrual status, did it have any additional income outside of what we would expect for a three-month quarterly period?

No.

Okay, great. And then, Chris, you talked a little bit about professional fees just from a modeling standpoint. They have -- this quarter them and other G&A both were lower than our expectations, which is great. And you mentioned that the professional fees you thought could stay kind of in this level. Are there any seasonal professional fees as we look towards year end that are kind of one-time that you would expect to bump them up, or is the third-quarter run rate, you think, a good number?

Yes, I think the only real seasonal item is the first quarter for pretty much all BDCs, which is the period where audit fees come through. But otherwise, I think you're right. If you take an average of the past couple of quarters for each of those G&A and professional fees, that's a good number.

Okay, great. And then one bigger kind of big picture to follow up little bit what Jamie was talking about. There is pretty high profile. We see journal articles all the time about how the IPO market has slowed. And just remind us how -- when you think of that, how much does that change your business? Or does it concern you at all that the IPO market maybe isn't -- the window's not kind of wide open right now?

This is Jerry. It doesn't concern us because these are very rational and, I think, normal cycles in the venture lending process. Sometimes, generally speaking, when the IPO market slows, at some point in time you're going to see an increase in loan originations because companies look for alternative financing. I think we'll see that not necessarily now but probably in the first or second quarter next year if that continues on that basis.

It sometimes improves M&A activity. Companies recognize that there isn't going to be an opportunity to go public in the recent future. They'll be more active in looking at M&A. I think we saw a little bit of that here in the third and fourth quarter.

So, these are normal cycles. And the great thing about -- one of the great things about venture debt is because we're fully secured, no matter how the cycle works, we are going to be the first one to be paid out. And we're going to recognize value whether it's from an M&A or it's an IPO.

To kind of get to the root of your question, I guess, if it was an extended period of no IPOs and so that drove down value significantly relative to M&A's because the buyers would have a very large advantage not having to compete against the IPO market. Then you have to start looking at what that means to the marketplace.

But right now, we see a lot of what's going on as really just a normal digestive period. Some companies have taken on a lot of equity and debt. They are now being acquired because they actually created value with that money. Even in our own portfolio, we're seeing, in fact, two of the four companies that were acquired between Q3 and Q4 were 4-rated credits in our portfolio.

So, this is kind of normal activity. We actually like to see this kind of activity at some point, even if it does mean slower originations for a period of time, kind of flush out the portfolio. So, this is pretty normal, and right now we feel pretty good, in a good spot.

The only other thing I would mention is that because of a little bit less competitive environment, we're beginning to see that we are getting better pricing, a little bit on the cash-on-cash side of it, but more so on the warrant and success fee side where we are getting higher concentrations of warrants for size of our commitments.

And then just one follow-up kind of on that last topic there. You talked in your prepared comments about a lot of fundraising activity over the last several years, but really slowed down in the most recent quarter very near term. How will that play out -- I mean, how much of that capital that's been raised is still on the sidelines? And how long will it take, kind of the slowdown in DC fundraising, to filter through into what should be lower dollars chasing new ideas, which could, and like you said, maybe be higher yields in the future? How does that play out from a timing perspective?

Yes. One of the things that happens in this kind of market is VCs start taking a look at their own portfolios and increasing reserves for those companies that have been executing successfully. And they want to continue to fund them and let them grow during this period where maybe the IPO market is not as interesting to them. So it's not just a question of how much money they have on the sidelines; it's a question of what they're doing with it. And generally speaking, what happens is you see fewer new investments and you see more capital going into existing companies.

And it's funny because even if you look within our own portfolio in the last quarter, some of the best investments we made were in existing top-tier transactions in our own portfolio of companies, which we created that opportunity early on and now there's an opportunity as they have gotten more successful to increase our investment there. So, I think the venture debt market in some ways mirrors that as well.

You know, we'll see what happens over the next couple of quarters. I do think that there is still a fair amount of dry powder, especially with some of the bigger VCs who, no matter what the market is -- good, bad or indifferent -- are certainly capable of rating out their fund. Maybe it won't be as big as they would like, but they are certainly capable.

So, again, this is all part of what we're noticing is just a normal progression of transactions, companies coming into the market, doing what they're supposed to do, building value. VCs exiting the companies, taking some liquidity off the table; and then obviously they have that available for reinvestment.

So I think it is -- we're going to see a slowdown over the next couple of quarters, but this isn't 2008 or anything like that where everybody had to pull back, the global markets, everything just pulled back. This looks like a more normal course for us.

Great. Thanks, guys.

Leslie Vandergrift, Raymond James.

I just had a quick question about -- I know you mentioned in your prepared remarks the unfunded commitment issue. I know there's been a lot of back-and-forth with the SEC, not just with you guys but with other companies as well. Your correspondence this summer that was released recently with the SEC was a much different response than a lot of your peers on that issue. I was hoping you could give a little bit of color around that and also if there's been anything since then. Obviously, we talked about this quickly at the end of the second quarter, but that correspondence just kind of (inaudible).

Yes. As it relates to further correspondence or discussions with the SEC, right now there's been no conversations. I think everyone has gone back to business as usual waiting for further guidance. I think the updating of the shelf registrations that everyone had to go through in the first half of the year was when they had the engagement with the staff in that process.

For Horizon, the reason we believe that it will have a minimal impact is, as we've said on the prepared statements, is that we tend to have a more modest level of committed backlog. We essentially fund at the time of making the commitment as opposed to other strategies, which include kind of unit tranche structures with very long commitment periods where others have to manage that. So we're just different in that way. Not that one strategy necessarily is better than another; we like our strategy, and others like their strategy.

Yes, I was just -- I was more in the context of how you guys broke down that you would not -- if you had to, you would not consider the ones you do have as unfunded commitments as senior securities for the determination of (inaudible) coverage. That was more what I was talking about.

You're saying why do we believe that unfunded commitments are not senior securities?

Yes, I mean, we've read the breakdown, but I didn't know if you had any more color around that. Obviously it was a lot into the derivatives rules and just different parts of the investment company act itself. But just some color around your reasoning why you wouldn't count that for your asset coverage.

Yes, we don't think we need to, and along with pretty much everyone in the industry. And what we're really trying to communicate to the Street is that even if the SEC was to mandate it, based on our strategy we would be in compliance. So we actually run the test both ways with the right way, the current regs, and then the way that the staff is communicating that they may want to see it in the future. And for Horizon, we need to test in both methods. And beyond that, we're not really commenting on what the staff should or should not be doing. We're going to wait and see.

Okay, I understand. Thank you.

Christopher Tesla, National Securities.

Just with regards to the kind of broader picture on leverage, I know you've mentioned trying to ramp towards 0.75 to 1. I knew you've mentioned that the opportunities in the next couple of quarters are going to kind of be light. What potential is there? Do you get to 0.75 times and start to shed assets and delever? Or if you do see a robust pipeline and things turn around, are you comfortable taking that up to 0.85, 0.9? Just a broad sense of how to look at that.

Yes, a couple of things. One is that we continue to see good opportunities. We are managing the top of our funnel, Chris. Our target leverage is 0.75 to 1. I think you have to remember that we have both an amortizing portfolio and a dynamic portfolio with prepaids. So we are trying to stay fully invested as we move from the level at September towards the 0.75. But we're not really considering going past that.

Okay, great. And really so the tech M&A market remains strong. What do you think is driving the tech M&A markets kind of buck the trend in the IPO market in general? And how long do you think that this could kind of remain robust?

Yes, so I think there are a couple of things that are driving it. First of all, M&A activity in the tech sector has been on the sidelines for a very long time. So I think that that's part of it.

Secondly, what generally happens is you get a catalyst of a couple of large M&A transactions that take place. And the rest of the buying market sees that and recognizes that if they want to update their products and continue to be relevant in the marketplace, they can no longer sit on the sidelines because there are a couple of active players in the marketplace that are acting -- actively acting.

So it tends to beat on itself a little bit. And then the question is how long does that go? Could that be just one or two quarters, or does it go well into 2016 as companies really start looking strategically at new products they need to get in? How are they -- what their competitors are doing. And it can run for a few quarters depending on, again, how that cycle looks.

There's no question there's been a couple of big events that have taken place. And also, again, I think there's just been -- the tech sector has been sitting on the sidelines for quite a while, both as it relates to both M&A and of course IPOs. Very few technology IPOs.

So I think we're starting to see that loosen up a little bit. We feel pretty good about that given that we've made a substantial investment in the technology sector relative to our own portfolio over the last eight quarters. So we expect it to continue at least in the first half of 2016.

Okay, great. And sorry if I missed this earlier on the call; I got disconnected. But was there -- so you had $373,000 about in prepayment fees. How much of the prepayment for that company went into acceleration of interest payments?

Let me just correct it. The number that we mentioned, that was a success fee. We had also gotten normal prepayment and accelerated payment in addition to that. So that was just a success fee in lieu of a warrant, to be clear.

Got it. Okay. And just given the spillover income, is there a chance for potentially a special distribution, albeit maybe a small one, declared in the fourth quarter this year?

Our strategy has been and continues to be to cover our distributions with net investment income, and that will be -- remain, Chris. (multiple speakers) income to help make sure that that happens.

Okay. And last one for me, just the -- you had mentioned the higher concentration of warrants coming through pricing power along with the cash-on-cash yield. Is that something that you are already experiencing, or is that something you expect to continue to tick up?

We did experience some of that in the transactions we did in the third quarter. And we do expect that we will have an opportunity to get higher levels of warrant coverage or success fees, at least, probably well into the first quarter of next year.

Okay, great. That's all for me. Thanks, guys.

Casey Alexander, Ladenberg.

First of all, there seems to be a reduction in the speed of the regular amortization of payments. Is that kind of a good go-forward rate, or do you expect that to pick back up in future periods?

It's a function of a couple of things. And it sort of ebbs and flows, Casey; you're right. The $6 million we had in the third quarter seemed a little low. It has to do with the relative age of the portfolio, so that what's interest-only was not. And also the fact that with M&As and prepays, sometimes the later-stage amortizing loans are the ones that are taken out. We would expect it to be at a sort of increasing level in the coming quarters from that $6 million level.

But more of a gradual ramp than a step function?

Yes.

Okay. Secondly, you mentioned that three portfolio companies signed letter of intents to be acquired in Q4. Is the acquisitions value of those already incorporated in the equity marks on those companies?

Two have and one has not.

Okay. Lastly, what would you suggest is the -- sort of the cash yield on the portfolio right now?

The onoarding yield for kind of an extended period has been between 12% and 12.5% excluding any acceleration benefits. So I would say that is a good estimate would be kind of that 12.5% range.

Okay, great. Thank you for taking my questions.

Thank you. There are no further questions. I will now turn the call back to Rob Pomeroy for closing comments.

Thank you. We appreciate your questions and your interest in the Horizon story. We are pleased with our third-quarter results and the momentum we carry into the remainder of the year. We continued to grow our portfolio, enabling us to increase NII and cover our distributions. Our strategy remains to originate high-quality loans with attractive onboarding yields, to earn NII that covers our monthly distributions over time and to enhance shareholder value.

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