Horizon Technology Finance Corp (HRZN) 2016 Q2 法說會逐字稿

Good morning and welcome to Horizon Technology Finance's second-quarter 2016 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 second-quarter 2016 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 out would like to point out that the Q2 press release is available on the Company's website at horizontechfinance.com.

Now I will read the following Safe Harbor statement. During this conference call Horizon Technology Finance will make certain forward-looking statements including statements with regard to the future performance of the Company. Words such as believes, expects, anticipates, intends or similar expressions are used to identify forward-looking statements.

These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements and some of these factors are detailed in the risk factor discussion in the Company's filings with the Securities and Exchange Commission including the Company's Form 10-K for the year ended December 31, 2015. 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. Our second quarter was influenced by a variety of factors that produced mixed results. These results included strong net investment income which cover distributions for the fourth consecutive quarter but also included a decline in NAV mainly attributable to one underperforming loan we originated this year.

Before discussing our net investment income performance and the strong portfolio yield we generated, which we believe demonstrates the overall strength and profitability of the Horizon platform, I would like to discuss our NAV. During the second quarter we saw a reduction in our NAV to $13.27 per share. The primary reason for this decline was a loan we made to NOMi which we wrote down in the second quarter.

After we made the loan in January the portfolio companies business suffered a series of unexpected challenges and negative events that quickly impacted its results and put its financial plans in jeopardy. Based on our review of the portfolio company's performance and prospects we took prompt action to seek the best possible outcome. The company's management, investors and lenders mutually agreed the best course of action was to liquidate the assets of the company.

That process began in June with the sale of the company's hardware business and will continue during the second half of the year. Accordingly, the balance on the loan was written down and put on non-accrual.

While negative outcomes occasionally happen in venture lending it is rare to have a portfolio company become troubled and liquidate so quickly. Thus the outcome of this loan is very disappointing and needless to say we are not pleased. It is important to note that we believe this result is an outlier and based on our track record we do not believe it signifies any systemic issues with our portfolio or our underwriting process.

We believe our overall portfolio's credit quality remains strong as our internal rating migration during the second quarter was consistent with prior periods. Of note, nearly 22% of our loans at June 30 were rated 4, indicating performance better than expected. This is an increase over the first quarter of this year and the second quarter of 2015.

As of June 30, our loan portfolio had a weighted average internal credit rating of 3.1. And over 88% of our portfolio was performing as well or better than our expectations at the time of underwriting.

Now let's turn to investment activity and NII results. During the second quarter we continued to maintain a disciplined approach to investment selection with a focus on originating high-quality, attractively priced loans. While the demand for our venture loans remain consistent and we had ample liquidity to pursue investment opportunities with the recent expansion of our credit facility, many of the prospects we evaluated during the second quarter simply did not meet our underwriting criteria. For this reason, we chose to pass on most of the deals we evaluated.

At the same time during the second quarter we experienced positive portfolio outcomes from prepayments and M&A activity. The prepayments and lower level of new originations had the dual effect of reducing the size of our portfolio at quarter end while contributing to Horizon's strong net investment income which again exceeded our distributions. Additionally, the combination of prepayments and lower originations further strengthened our liquidity position heading into the second half of the year.

To briefly recap, during the second quarter we experienced liquidity events from three portfolio companies including $8.6 million in loan principal prepayments plus interest, end-of-term payments and prepayment fees. The positive liquidity events led us to generate NII of $0.39 per share for the quarter, a 56% increase compared to $0.25 per share in the second quarter of 2015.

During the quarter we realized an attractive portfolio yield of 15.5%. We declared to distributions of $0.115 per share payable in each of October November and December. Including our most recently declared distribution we have now declared distributions of $8.72 per share since our IPO.

Our coverage ratio for the declared distributions for this quarter was 113% and for the last four quarters was 107%. In April we added a lender to our banking group and increased our revolving credit facility to $95 million.

Although we saw a contraction in our portfolio during the second quarter, our positive results in the quarter are a direct result of our success in building a diverse and seasoned investment portfolio. Liquidity events are an inherent part of our business model and the liquidity events that occurred this quarter from our maturing portfolio are actual examples of the successful execution of our business model. While the specific timing of prepayments is often not predictable we have averaged $11 million in prepayments per quarter since going public in 2010. Considering the size and age of our portfolio we expect to continue realizing liquidity events for the benefit of our shareholders.

As an example of the earnings power of our platform and portfolio, in 2014 we made a $10 million loan to mBlox. In June 2015 mBlox approached us looking for flexibility and a liquidity cushion as it sought to find a strategic buyer for its business. As the incumbent lender we were able to provide an additional senior secured loan in the amount of $1.5 million that provided the liquidity necessary for the Company to have more time and flexibility to negotiate a sale.

In June of this year mBlox, prior to its sale, repaid the additional $1.5 million loan including an end-of-term payment equal to 100% of the original loan amount. This resulted in an IRR of 83% on the additional loan. Subsequently, in July 2016 mBlox completed its strategic sale for $117 million and prepaid our outstanding $8.5 million venture loan plus approximately $760,000 in the aggregate to be recorded as income from a prepayment fee, end-of-term payment and success fee.

As we move forward in 2016, we continue to execute on Horizon's disciplined strategy of sourcing investment opportunities in the form of secured loans to technology and life science companies. This strategy has served us well, enabling us to generate strong NII and consistently achieve an attractive portfolio yield. Based on our increased credit facility, the disciplined investment approach we have employed during the second quarter and a steady stream of end-of-term payment, prepayment and success fee income derived from liquidity events we have substantially improved our liquidity.

We will use our enhanced liquidity to pursue high-quality opportunities with solid onboarding yields as we seek to grow our portfolio. Our pipeline for new deals as robust as we continue to see strong demand from the technology and life science industries.

We expect the combination of origination activity and liquidity events will continue to drive our NII momentum and our ability to provide shareholders a steady stream of cash distributions. Complementing this, we continue to expect further upside from our diverse and maturing warrant portfolio.

Jerry will now update you on our business development efforts and market conditions. Chris will then detail our operating results and financial condition. Jerry?

Thanks, Rob. Good morning everyone.

During the second quarter we funded for loans totaling $14.5 million. Three of the loans were made to new portfolio companies and one was made to an existing 4-rated portfolio Company. We continue to achieve solid onboarding yields, over 12% for the quarter.

Although there was reasonably strong demand for our debt products in the second quarter our origination activity reflected our disciplined approach to investment in the face of a lack of quality investment opportunities. As of June 30, Horizon's unfunded loan approvals and commitments totaled $3 million to one Company.

In addition, so far in the third quarter we have been awarded $32 million in two new transactions. Keep in mind that many of our transactions are tranched to key funding milestones and Horizon may partner a transaction for portfolio diversity and other purposes. So there's no guarantee that transactions in our awarded and committed backlog will be fully funded by Horizon.

Our pipeline of new opportunities including awarded transactions and committed backlog was approximately $230 million at June 30. We expect to continue to evaluate quality opportunities during the quarter as we move toward meeting our funding goals based on our liquidity and stated leverage optimization. Subject to the level of actual loan prepayments combined with the impact of normal amortization, we expect the net portfolio change for the third quarter could be down $10 million to $15 million primarily due to expected loan prepayment activity.

Our venture capital investment continued at a historic pace with over $15 billion invested in the second quarter. The number of startup companies receiving capital continued to trend down.

We also continue to see a trend of VCs remaining invested in private companies longer with larger and larger equity ramps. This trend is evidenced by the fact that according to the National Venture Capital Association 10 VC-backed companies closed rounds of over $100 million in Q2.

We believe in institutional investors and VC funds may soon begin to pressure VCs to exit some of these mega-funded companies and return capital to their funds and their investors. As a result, we expect VCs to return to investing newly raised funds into earlier-stage technology and life science companies where valuations are more attractive and value can be built over time. We expect this will result in a more early-stage VC-backed companies which seek to accelerate growth in the key technology development milestones to come to the venture debt market to augment their newly raised equity.

Second-quarter VC fundraising of $8.8 billion was below Q1 levels but was equal to the average of the previous four quarters. VC fundraising is on pace to exceed the $28 billion raised in 2015.

Biotech companies with strong technology platforms and sound clinical development plans continued to attract IPO investors in Q2. However, the IPO bar is significantly higher than it was in 2014 and 2015. Nine of the 12 IPOs in Q2 were completed by biotech companies.

In addition, three VC-backed tech companies went public in the quarter led by Twilio which had the largest IPO raising $150 million. A positive sign is Twilio was trading at nearly 3 times its offering price by the end of Q2. While not a trend, Twilio's result might motivate IPO investors to take a hard look at VC-backed tech companies for IPO opportunities.

M&A activity in Q2 was once again dominated by the tech sector. According to NVCA information technology and Internet companies constituted 46 of the 64 reported venture-backed M&A transactions, down 29% from Q1.

We continue to view healthcare technology industry as a potential growth area for us and we see significant interest from VC investors. We will continue to look for quality opportunities in this industry as we seek to grow and maintain a diverse portfolio.

We haven't spent much time recently talking about what has historically been called the cleantech market. I think it is worth noting, however, that we are seeing new venture capital investment in this market, particularly in demand-side technologies which reduce energy consumption. The most obvious example of this is our car sharing services that make ownership cheaper by reducing the carbon footprint.

Another example of investment in energy reduction is big data technology companies that help utility companies reduce the cost of their services while creating a much more efficient means of providing energy. We are also seeing investment in food processing technology that reduces energy used in processing and reduces food waste while it brings healthcare and fresher food to the market more quickly. We see the potential for venture debt investment in the clean technology market, especially for companies supported by strong VC investment and with proven demand for their markets.

Looking at competition in the venture debt market in the second quarter we continue to see the tech banks falling back to their more traditional role of providing short-term working capital products. Technology banks continue to provide some competition for life science transactions.

As we have been expecting, we're seeing indications that the tech banks are inwardly focused on managing their respective portfolios. As a result of a pullback by the technology banks we are seeing improved pricing as reflected in our ability to obtain attractive onboarding yields across our targeted industries.

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

Thanks, Jerry, and good morning everyone. Our consolidated financial results for the period ended June 30, 2016 have been presented in our earnings release and our Form 10-Q both distributed after the market closed yesterday.

For the second quarter of 2016 total investment income was $9.1 million compared to $6.9 million for the second quarter of 2015. While onboarding yields in our portfolio have remained stable in the 12% to 12.5% range, the increase in interest income of 33% primarily was due to higher interest income on investments resulting from a 12% larger average size of the loan portfolio and a $1.7 million higher level of ETP income. Our portfolio yield for the second quarter was 15.5%, consistent with the first quarter and compares favorably to the 13.1% for the second quarter of 2015.

Total expenses were $4.7 million for the second quarter, an 18% increase as compared to $4 million for the second quarter of 2015. Interest expense increased primarily due to a 47% increase in average borrowings while offset by a decrease in our effective cost of debt to an annual rate of 5.8% for the second quarter compared to 6.9% for the second quarter of 2015.

Base management fee expense increased 16% to $1.2 million in the second quarter as compared to $1.1 million in the second quarter of 2015, primarily due to an increase in the average size of the investment portfolio. Professional fees and general and administrative expenses, which consist primarily of legal and audit fees and insurance premiums, remain flat for the second quarter compared to the second quarter of 2015.

We earned net investment income of $0.39 per share for the second quarter as compared to $0.25 per share for the second quarter of 2015 and $0.38 per share for the first quarter of 2016. After paying current distributions of $0.345 per share and earning $0.39 per share for the second quarter, the Company increased its undistributed spillover income as of June 30 to $0.19 per share.

Our NAV as of June 30 was $13.27 per share, or a $0.35 per share decrease from the prior quarter. This decrease was primarily due to the portfolio fair value adjustment we took on our loan to NOMi of $3.6 million in the second quarter. The impact on NAV of the fair value decline was partially offset by net investment income generated during the quarter in excess of the distributions declared.

We ended the second quarter with an investment portfolio $233 million which consisted of secured loans to 49 companies with an aggregate fair value of $207 million and a portfolio of warrant and equity positions in 85 companies with an aggregate fair value of $6 million. New originations in the quarter totaled $14.5 million and those were offset by $14 million in scheduled principal payments and $9 million in principal prepayments.

In terms of liquidity, Horizon ended the second quarter with $37 million in available liquidity including cash and funds available under our credit facility. As of June 30, we had $68 million outstanding under our credit facility. During the second quarter we announced the addition of a new lender, Union Bank, which committed an additional $25 million, increasing the size of the facility to $95 million.

The facility contains an accordion feature which allows for an increase up to $150 million. While we have seen a market supply of a variety of leverage products we have focused on the expansion of commitments under our credit facility as evidenced by the $45 million increase over the last 12 months. In addition to expanding our credit facility we continue to have $33 million in publicly traded baby bonds which we expect will hold until maturity in 2019.

On our last call I mentioned our intention to refinance the remaining balance on our asset-backed notes. We accomplished this leaving a zero balance as of June 30. Our intention remains to target overall debt levels to a debt-to-equity ratio of 0.75 to 1.

At June 30 rock show leverage ratio was 0.6 to 1. Given the room for growth between our target an actual leverage ratio we expect we can grow our current investment portfolio by $31 million or approximately 14% based on our current NAV and utilization of our currently available committed credit facilities.

Lastly, I'd like to provide an update on our stock repurchase plan. Since approving the stock plan in September 2015, we have repurchased over 110,000 shares. On July 29 the Company's Board of Directors extended the Company's previously authorized share repurchase program until the earlier of June 30, 2017 or the repurchase of $5 million of the Company's common stock.

Before I open the floor to questions I'd like to note that we plan to hold our next conference call to report third-quarter results during the week of October 31. This concludes our opening remarks and we'll be happy to take questions you may have at this time.

(Operator Instructions) Ryan Lynch, KBW.

Good morning and thank you for taking my questions. My first one just surrounds New Haven Pharmaceutical, that looks like that one went on non-accrual in the quarter but it still is marked at 100% of your cost. So the fair value market is very strong in that company but you guys aren't recording income off of that, so can you just provide some more color on that investment?

Sure. It's on non-accrual, it's on a cash basis non-accrual and they've paid all but the most recent monthly payment. There is also an end-of-term payment which is on non-accrual much like PIK interest going on non-accrual.

Okay. So it is on non-accrual but you guy's fair value mark reflects that you guys don't expect to take any loss on that?

Correct. The credit rating is a 2 rated credit which implies some level of distress in the Company. But we currently do not expect to have any loss of principal or interest or any of the other components that we're contractually entitled to.

Okay. And then just I wanted to clarify, did you guys say the portfolio guidance for Q3 was going to be net portfolio repayments of $10 million to $15 million?

That's correct.

That's correct.

So that's going to be I guess the third quarter in a row that you all have had negative net portfolio growth or net repayments, said another way. So what are the drivers really surrounding you guys having net repayments over the last several quarters and what changes can you guys make to reverse that and actually get some net portfolio growth? Because as you said you guys do have some capacity to grow your portfolio and increase balance sheet leverage.

So hi, this is Jerry. So good question, certainly something we're looking at and it's not historically we've actually done quite well on this particular part of our business.

We really see a pause in the market, have seen a pause over the last couple of quarters with many opportunities that we are looking at reflecting companies that have seen slower, not no growth, but slower growth with already high leverage on their balance sheet. And we just felt that this is especially on the tech side. So we really just felt like these were not opportunities that we should be pursuing in the marketplace today and we really wanted to see a return to a stronger growth market.

So that's really been the pause that has driven maybe the lack of fundings for the last couple of quarters. I would note that we have seen a very significant uptick in the quality of transactions we're seeing going into the third quarter which is very good news. We are also seeing on the life science side an uptick in the quantity of transactions and we believe something that we've believed for a while which is that life science companies would be coming back to the market here in the second half of 2016 after having burned off a lot of the equity and debt that was available to them in 2014, 2013.

So those trends are what we expected and expect to see. So we think there is going to be more opportunity for us to grow the business going forward. As you all know, it takes time to flush those transactions through the pipeline and get them to a position of actually reflecting funded deals.

So I think that that's true on the funding side. On the liquidity side we have a really nice aged technology portfolio now, so we are seeing more M&A activity and more liquidation activity but not outside of what might be normal. I think as Rob had mentioned I think if you average out since we've gone public it's been about $11 million per quarter.

That's not in outlier number, that's a pretty good number for an aged technology portfolio. So I think we will continue to see that at some level. But I do think the quality of opportunities we're seeing and the quantity on the life science side is better than what we saw coming into this year in the first and second quarter.

That's good to hear and that's great color and I definitely think that it's a wise move that if you guys aren't seeing good deals in the current quarter to slow down portfolio growth, don't reach just to deploy capital just to grow your portfolio. So I think that's a wise move. So that's all the questions from me, thanks, guys.

Jonathan Bock, Wells Fargo.

Good morning and thank you for taking my questions. We appreciate the discussion as it relates to NAV and I understand Ryan asked a question related to New Haven where you had said to expect no additional principal loss. And Rob, if we rewind the tape just a bit I think you said the same thing not expecting a realized loss or principal loss on NOMi last quarter.

And we understand investments can deteriorate faster than expected. But can you walk us through one, why you feel more confident in New Haven to maintain principal value? And then two, when you stated I think on May 4 that you didn't expect a principal loss in NOMi, what really changed from then to now as you were liquidating it?

Well, so I will take that into pieces. First of all, two very different companies in two very different stages. And, again, market position and status as you reach difficulties will impact that.

In the case of NOMi, we were at the very, very beginning of a process to decide what to do and how to enter into it. There was interest in the Company and its asset that gave us the confidence, we did a scenario analysis for our fair value and believed in that value firmly at the time that we published in May. Auctions are auctions and processes are processes and they result, they produce the results they do.

On the other hand New Haven is a life science company with an approved product in the market that creates a value proposition that we believe is much more supportable and sustainable today. So again it's a function of the fair value process and the prospects that we see for both companies at the time.

That's a fair question and I do want to put it out there that no one is expected to bat 1,000 and clearly the track record of earnings growth, etc., has been appreciated. And appreciate the candor on that one investment and understand that you've identified that as an outlier relative to a number of other loans that have very good things happening.

Perhaps transitioning to just new investments that you are dropping on the books, so Jerry, when you are originating to the extent that you find one that you do like, can you give us a sense of what you'd expect that total return, including an amortized EOT and let's try to be -- let's not assume it repays early, what type of all-in return proposition are you putting on the books from an NOI or earnings perspective if you are originate a loan? What type of impact does that give you on the revenue line adding both cash and non-cash, 10, 11, 12?

We haven't seen a deterioration in yields too much, Jonathan. Actually we haven't been losing deals to competition. That has not been the issue for us, so it's not been we've been at one price and the market is at another price.

We just haven't felt that the quality was good enough at any price to do these transactions that we had been seeing in the first part of the year. And we've seen a pullback from the tech banks which we totally expected. They felt very overaggressive in 2013, 2014, even the first half of 2015.

Combined with the M&As that they went through we're seeing a retrenching on their side. So we're not getting pressure from the banks, which is generally what drives pricing down if it's going to be. I think most of the other players in the market are fairly rational in their pricing.

So we still fully expect to be in that 10% to 12% range going into a transaction. We also look at the potential upside in the various warrants we're getting. So we may offset some current income if we believe that there's a really quality opportunity at a really good valuation that will lead to further upside later on or we might build that into a success fee like as we did in mBlox.

It turned out to have a pretty good result. So we're seeing still very rational pricing in the marketplace. And I think with improvement in the quality of the opportunities we're seeing that should bode well for us as we enter the second half of the year.

Fair enough and I appreciate that, Jerry. So Rob, if we take the higher view of the business and see that there is a view of some amount of repayment activity exceeding new originations, cautious focusing on a smaller subset of loans that are going to protect NAV and generate good returns, and then you couple that with one or two small little credit items that you have outlined, is now really the time to issue new equity considering that you are now at a level at which you can do so at a minimal impact to NAV?

Jonathan, you know, we're very focused on the things that we control. And those are finding good loans that we can originate, trying to be sure that we have built-in profit opportunities from exits or liquidity events if they happen, trying to protect NAV on the loans that are under stress. The stock price has improved, we're pleased at that but we don't have the NAV, below NAV boat today, so we're very focused on just managing our business portfolio.

That's appreciated because I know as folks look at the discipline on that item one could expect the share price to further appreciate the more you keep doing what you've done before. So thank you for taking our questions and we appreciate it.

Leslie Vandegrift, Raymond James.

Good morning. So just one last quick question on New Haven and then I will move on.

Obviously you guys have given a lot of color around that. But is there a specific asset there that backing those loans that's making that mark stay at 100%? Do you guys have specific collateral there?

As I said it's a company with an approved product that's on the market revenue producing. And so that's the value of the company that supports our loan.

All right. Then I guess my next question would be, you guys have talked about the pipeline and last quarter you said not good at any price for some of those transactions you saw.

So I guess my question would be how bad was that for those? Was it in a specific type of loan? Were those life sciences, were some of those new cleantech ones you guys saw coming up so some of the new guys trying to get in, is there a specific area we should watch for some irrational players there?

No, the market has actually calmed down quite a bit since the last couple of years where the banks got very aggressive and in fact there were some new entrants into the market. We're seeing a very rational market right now I think relative to pricing, relative to structures. We're not really seeing anything that concerns me.

You guys can remember I was for about four quarters, maybe even longer, talking about what I thought was irrational pricing on the life science side during 2013, 2014 and first half of 2015. We're seeing that come back now. We're seeing much better pricing on life science transactions and we are starting to see more those companies come back to the market as they need additional liquidity which is we think a positive event.

So no, it's a very rational market. We're very comfortable where we are. We have a great brand name in the marketplace and expect to leverage that over the next few quarters as we have in the past.

Okay. And then onto we talked about you had $15 billion for the whole VC space in the quarter but you've said you're looking for as it shifts back to early-stage funding. So that's kind of the trend you guys are looking forward to really invest in here.

Is there I know timing on these things is erratic to predict sometimes. Is that six months, a year? What's the outlook for that trend shift?

Right. So I think we're going to we're in it and we will begin to see it over time. The fact of the matter is these 10, $100 million deals in a quarter just three, five years ago would have been unheard of in the venture lending -- excuse me, in the venture capital market.

So I think this has morphed to a place now where it's both a concern to institutional investors relative to the capital that they put in VC funds. And so VC funds are not finding enough places to be able to do $100 million deals in the marketplace. That's just not a rational place for venture capital, that's more about private equity-type marketplace.

And institutional investors want their money back at some point. The VC funds are generally 10-year funds. Many of them are some of their older funds are coming up on that.

They need to start returning this capital. So they are going to start to need to execute some of these mega companies with extremely high valuations and redeploy that capital. And we are confident that it will be redeployed in lower valuation companies, earlier-stage companies.

There are some new technology fronts as I had mentioned. Especially in the cleantech side we're seeing a lot of interest in some areas there that are more demand driven instead of what has happened to cleantech before where it was all we'll build it and then everybody will come and buy the product, solar energy being a good example. The market today is being more driven by demand for products that improve the quality of life.

So we think that that is a good place for VCs. We have seen it and think we will continue to see it as a place where they will continue to invest along with healthcare technology where there's a kind of a merging of technology and life science to again move drugs to the clinical trials faster and things like that that are starting to move the market. So we like it when we are starting to see new technologies instead of just more investment in technologies that have had their run and that's what we expect to see over the next at least four to eight quarters.

Okay perfect. Thank you. That's all for me.

Casey Alexander, Compass Point Research.

Good morning. The mBlox bridge loan had 100% end-of-term payment that if I'm correct you were accruing that ratably over the course of the last year. Is that right?

Partially right. The normal accounting for ETPs is to accrue it ratably over the term of the financing which was a year unless you're not totally certain about its collectability. And when we first started the loan because the takeout wasn't an acquisition, we did not accrue the ETP for the first six months of the term of the loan until they were well into the LOI stage and there was much, much more certainty in the transaction being completed.

So in this transaction income was only taken during Q1 and Q2 of 2016. So 750 in each of those periods as opposed to over (multiple speakers)

All right. So that has had a really -- that one loan has had a real beneficial impact on your portfolio yield the last couple of quarters. So is it reasonable for us to assume that there is likely to be a considerably lower portfolio yield in the next couple of quarters absent the mBlox ETP accrual?

Certainly mBlox will not be a contributor to future periods beyond what Rob already talked about for the larger mBlox loan that paid off in Q3. So there will be some impact on (technical difficulty) positive way as already described.

The impact on future quarters on ETP will come from other transactions that are mature. Much like Jerry described with the mature portfolio we have other shots on goal as it relates to ETP acceleration from the portfolio.

Okay. The rest of my questions have been asked and answered so I appreciate it. Thank you.

Christopher Testa, National Securities.

Hey, good morning guys. Thanks for taking my questions. Just with the discussion around the deals being passed over during the quarter, a lot of opportunities that were passed over, can you just give some color on those whether in general it was because the borrower wanted too much leverage, was it pricing, was it just the quality of the deals and if there was any specific vertical where the poorer quality deals were concentrated?

Right. So I don't want to be too simplistic about this but for the most part what we saw in the technology side were companies that were coming to the market with a lower growth story that they expected to turn around but they had taken on a substantial amount of leverage over the last couple of years to get to where they were in their growth. And so we saw companies that had very nice growth over the last couple of years but now the growth was slowing.

Investors were not putting in additional equity, not that they didn't indicate they were supportive but they were not putting in additional equity and they were trying to add further leverage to the Company to get them to whatever their new growth strategy was to increase growth going forward. We just didn't see enough support from the investors not based on what they said but what they were actually doing. We were concerned that the valuations of these companies were at a point where the investors would be concerned that if that growth didn't happen going forward their investment could be impaired at some level.

We just didn't find those kinds of transactions supportable with additional leverage. So we definitely paused on those for the better half of the first part of the year. And that I think -- there were other things but for the most part that was the primary I think driver in us not being able to find the quality opportunities that we had hoped to find in the first two quarters.

This is not totally outside of what happens in our industry at times, especially when technologies have run their course whether it's software or whatever it might be. So you have to see this pause while the new technologies they are going to advance in the markets come to light and there's more healthy investment in that. And we did start to see that again in the second half of the year and between that and growth in the life science opportunities I'm fairly optimistic about the second half of this year and certainly going into next year.

That's great color. Thank you.

And just with the ABS completely run off and now you've expanded the borrowing base on the credit facility rates are low. Should we be expecting potentially another fixed rate issuance from you guys at some point in the next several quarters?

No, I think we've tried to be clear that based on our target leverage we have the commitments on our facility for a little over two years now -- somebody calling in on a hotline here -- so I think we will be doing no fixed-rate financing. I think the securitization was great for us over the past three years but that has run its course and it's really about the revolving feature of the credit facility that is now in place with KeyBanc.

Got it. And just on the NOMi non-accrual, can you give some color on which assets are now being sold? I know you had mentioned it was a hardware business.

Just what assets are being liquidated during the current quarter, what types of assets are those? And I guess what's the degree of certainty of these being sold at the mark? How liquid are these or how often are these used, etc.?

It's actually a combination of both, both tangible and intangible. Most of them -- most of the value remains in some intellectual property on the software aspects of the business as well as some lumpy accounts receivables with very good credits. So we're feeling pretty good about the mark that we have as of the end of the quarter.

Okay great. That's all for me. Thank you.

There are no further questions at this time. I would now like to turn the call back over to Robert Pomeroy, Chairman and CEO, for closing comments.

Thank you. To summarize, during the second quarter our investment activity reflected our disciplined investment process as we continued to experience all the demand for our loan products and had ample liquidity to compete for those investment opportunities.

We also continued to generate net investment income during the quarter in excess of our distributions due to our attractive portfolio yield which is driven by positive M&A and prepayments. Our success in generating NII bolstered our ability to provide stable distributions to our shareholders. We have now entered the second half of 2016 with an enhanced liquidity position which provides many opportunities for us to pursue our pipelines of debt investments with attractive risk-adjusted returns.

We also remain optimistic about the ability of our diversified and maturing warrant portfolio to provide additional upside to our shareholders. We want to thank you for your interest in Horizon and we look forward to sharing our progress with you again in November. This concludes our conference call and thank you and have a great day.