Horizon Technology Finance Corp (HRZN) 2016 Q3 法說會逐字稿

Good morning and welcome to Horizon Technology Finance's third-quarter 2016 conference call. (Operator Instructions) I would now like to turn the call over to Megan Bacon of Horizon for introductions and the reading of the Safe Harbor statement. Please go ahead.

Thank you. Welcome to the Horizon Technology Finance third-quarter 2016 conference call. Representing the Company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Dan Trolio, Vice President of Finance and Interim Chief Financial Officer.

Before we begin I would like to point out that the Q3 earnings press release and Form 10-Q are available on the Company's website at HorizonTechFinance.com.

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. I would like to begin our call today by welcoming Dan Trolio. Many of you know Dan, who has been with Horizon for over 10 years, and we are delighted to have him assume the role of Interim CFO after serving us so well as Controller. Dan will be providing details on our financials later in the call.

During the third quarter we continued to execute our venture lending strategy, making new investments and realizing positive liquidity events from our maturing investment portfolio. We also experienced credit challenges related to three of our portfolio accounts in the third quarter.

I would like to begin by discussing our new investment activity. In the quarter we funded two new loans totaling $13 million and increased our committed backlog to $19 million. The third quarter is traditionally a slower quarter for new investment.

In addition while we are experiencing strong demand for our venture debt products, many of the potential loan opportunities are from relatively slow-growth companies that are already highly leveraged with soft support from their equity sponsors. As a result, we remain cautious in evaluating these opportunities, which further slowed our investment activity during the quarter.

In the third quarter, we realized positive liquidity events, including prepayments and M&A activity, from our diverse and seasoned loan portfolio. This enabled us to generate a strong portfolio yield of 14.2%.

I would now like to discuss the impact that our debt investments in three specific portfolio companies had on our NAV. We have recorded unrealized depreciation of $11 million on these investments, which contributed to an NAV of $12.44 per share at the end of the quarter. To be clear, while we are evaluating these investments based on their current status and the status of the related portfolio of companies, none of these investments have been settled.

We continue to work to maximize the value of these investments and their underlying collateral.

The primary contributors to the change in our NAV during the quarter were our investments in ScoreBig, where we recorded unrealized depreciation of approximately $5.3 million; and New Haven Pharmaceuticals, where we recorded unrealized depreciation of approximately $4.8 million. The unexpected adjustment for ScoreBig resulted when, in September, a brand-name strategic investor declined to close on an expected equity investment which should have funded the Company until it reached profitability.

The loss of this strategic investor made the inside investors unwilling or unable to provide sufficient financing to keep the company operating in the short term. Subsequent to quarter end, ScoreBig entered into an assignment for the benefit of creditors and engaged an investment bank to find a strategic buyer for the company.

Since this process has just begun and the outcome is uncertain, we prudently have marked down the fair value of the asset.

In the case of New Haven Pharmaceuticals, in the third quarter we recorded unrealized depreciation on our investment, which we had downgraded to a 2-rated credit and placed on non-accrual during the second quarter. We are presently working with the company's investors and management to find a strategic partner for the company's primary asset, an FDA-approved product for the secondary prevention of stroke and acute cardiac events.

The company has hired an investment bank to help with this process. At June 30, the company had received an LOI from a pharmaceutical company to acquire their lead product with an upfront payment that greatly exceeded the amount of our loan. As a result, we carried the loan at par at the end of the second quarter.

During August the potential acquirer revised its offer to include lower upfront payments. As of today, there are multiple interested parties looking at acquiring the lead product.

Like ScoreBig, New Haven is not a settled account and we have marked down the value of the asset to reflect the uncertainty of the outcome.

Lastly, we also recorded unrealized depreciation of $1 million on our investment in Xtera, a public company, and we are working closely with its management to resolve our investment. I want to stress that we have marked down our investments in these three portfolio companies to reflect the uncertainty of their ultimate disposition. We expect to resolve these accounts over the next several quarters.

Our main goal, as always, is to maximize the ultimate value of these assets for our shareholders. We are working closely with each of these companies and are committed to achieving the best possible outcome in each case. We will provide an update on our progress during our next conference call.

Credit quality remains an utmost priority for us and we continually review our portfolio and underwriting criteria. Following a review of our recent downward fair value adjustments, we found that there was no commonality with these investments. One portfolio company was originally underwritten in 2011, one was underwritten in 2013 and another in 2015.

These companies are in different market sectors, and in each case the stress on the company was company-specific.

As a result, we believe that there are no systemic issues within our portfolio or in our underwriting process. We do believe, as Jerry will discuss shortly, that the soft M&A market and soft expansion stage investing markets are making it more difficult for these companies to attract capital or buyers when they run into operational or other issues. Recognizing the current market environment, we are taking additional steps to ensure that our underwriting standards remain strict and appropriate.

With respect to the overall portfolio as of September 30, our loan portfolio had a weighted-average internal credit rating of 2.9, and over 84% of our portfolio was performing as well or better than our expectations at the time of underwriting.

Now, I will briefly summarize our overall investment activity and NII results for the third quarter. Liquidity events continued to provide us with a steady income stream. During the quarter we experienced positive liquidity events from three portfolio companies, including $17 million in loan principal prepayments plus interest, end of term payments, prepayment and success fees. Given the three fair value adjustments I spoke of earlier, the incentive fee on pre-incentive fee net investment income was subject to the incentive fee cap and deferral mechanism under the Company's investment management agreement, which resulted in reduced expense of $900,000.

To provide some history here, the incentive fee and deferral mechanism was first introduced in June 2014 when we amended our investment management agreement. We believe this and other changes we implemented at that time, such as the permanent removal of management fees on cash, provide significant and meaningful benefits to our shareholders. These changes have also better aligned the interests between our external advisor and shareholders, which is best reflected in the implementation of the deferral mechanism during the third quarter.

The positive liquidity events we experienced during the quarter, coupled with this reduced expense, enabled us to generate NII of $0.38 per share.

With respect to our quarterly distribution, in October we declared distributions of $0.10 per share payable in each of January, February and March 2017. After careful consideration, both management and the Board determined that it was appropriate to lower our distributions in light of the size of our portfolio. We continue to maintain undistributed spillover income of $0.22 per share.

Since we went public in October 2010 we have now declared $87 million or $9.02 per share in cumulative distributions. Horizon remains focused on creating long-term value for our shareholders. We are committed to maintaining a stream of cash distributions to our shareholders that are covered by our net investment income over time and delivering further upside potential from our maturing [more on] portfolio.

As we look to grow our investment portfolio, we have ample liquidity to selectively originate attractive investments. Recognizing today's market environment, our underwriting criteria will continue to reflect our disciplined investment approach to sourcing loans that we believe will provide suitable risk-adjusted returns.

Since our inception, we have focused on being a pure play venture lender to technology and life science companies that create game-changing technologies. We believe we are well positioned to continue capitalizing on the strengths of this specialized venture lending investment strategy. We believe we have a unique opportunity over the coming quarters to take advantage of dislocation in our marketplace and to exploit opportunities in the life science and healthcare technology markets.

To capitalize on these market opportunities, the advisor will be investing in the business by adding additional investment professionals in both marketing and portfolio management to complement our experienced core team. Our focus will remain on originating high-quality loans with onboarding yields that are among the highest in the BDC industry.

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

Thanks, Rob. Good morning, everyone. During the third quarter we originated two new loans totaling $13 million to two new portfolio companies. We achieved strong onboarding yields of over 12% for the third quarter, consistent with previous quarters. We continue to see market conditions similar to what we saw in the second quarter.

From a competitive standpoint we are seeing the market accept a greater amount of leverage in development-stage companies. The greater leverage amounts are not consistent with Horizon's strategy of originating low loan-to-value transactions. So, while demand remains relatively strong for our debt products in the third quarter, our origination activity reflected our commitment to maintaining a disciplined investment approach in the face of new deal flow that offered few of what we would consider to be quality investment opportunities.

To reinforce what Rob said earlier, we are committed to long-term portfolio growth. But we will not sacrifice our underwriting standards to achieve it.

Entering the fourth quarter of this year, we saw an increase in our committed backlog. As of September 30, Horizon's unfunded loan approvals and commitments totaled $19.5 million to three companies. This compares to a committed backlog of $3 million to one company as of June 30.

Our pipeline of new opportunities at September 30 was approximately $120 million. Based on the demand we are seeing, the substantial liquidity we have built up during the course of 2016, and expected normal amortization and prepayment activity, we expect the size of our portfolio to remain flat or grow slightly in the fourth quarter.

Going into 2017, we will look to further expand our pipeline as our advisor adds additional marketing bench strength. We continue to selectively pursue new loan investment opportunities that meet our underwriting standards in those market sectors which we believe will be favorable.

At the end of the third quarter, we held warrant and equity positions in 87 portfolio companies. We experienced liquidity events from three portfolio companies during the third quarter, which included prepayments of $17 million compared to $7.5 million in the second quarter.

Of note was the successful acquisition of mBlox by CLX Communications, which resulted in mBlox prepaying $8.6 million of outstanding principal plus fees. To be more specific, Horizon loaned mBlox $11.5 million over a two-year period.

In addition to all of the principal returned, we received an additional $5.2 million, which included interest and end-of-term payments and a success fee, resulting in an IRR of 22%.

Turning now to the general venture capital environment, according to PWC's MoneyTree report, VC investment for the third quarter was $10.6 billion. While this was lower than the $15.6 billion invested in the second quarter, VC investment remained at a relatively strong level.

However, in terms of the number of deals, it is the fifth consecutive quarterly decline.

In Q2 of 2015 there were 1,234 companies funded versus 891 companies that were funded during the third quarter of this year. In other words, we continue to VCs remaining invested in private companies longer and doing fewer deals with larger equity rounds.

Perhaps the most compelling statistic as it relates to Horizon's market focus is the 63% third-quarter decline in expansion-stage funding for growth-stage companies according to PWC's MoneyTree report. From what we have observed, this decline is the direct result of a lack of material expansion or revenue growth by these types of companies in 2015 and 2016.

VC fundraising was $9 billion in the third quarter according to PitchBook, so down from $13 billion in Q2, which represented the highest quarter for fundraising since 2008. 2016 continues to be one of the best VC fundraising years in recent times and still on pace to exceed the $36 billion raised in 2015.

We have begun to see an increase in technology IPO filings. 11 technology IPOs were completed in the third quarter, which was the highest since the second quarter of 2015 according to PWC. With the number of new technology IPO filings already in the fourth quarter, we are starting to see indications of a more robust IPO market.

This is very encouraging and we will continue to watch how this trend develops. A stronger tech IPO market is typically a leading indicator of an improved M&A market for tech companies.

As it relates to M&A activity, PWC reports that the first three quarters of 2016 have reflected a significantly lower pace of activity than 2015 with the overall number of M&A transactions down 10% and M&A values down over 36%.

Despite this, we are beginning to see a silver lining in technology M&A activity, given the recent number of megatech M&A transactions that have been announced in the second half of 2016 including Dell's announced acquisition of EMC, AT&T's announced merger with Time Warner and, just this week, the announcement of Level 3 Communications will be acquired by CenturyLink.

These types of megamergers are another leading indicator that tech M&A activity could pick up as we go into Q4 and 2017. Specifically, we believe the combination of more check IPOs and IPO filings by technology-related companies, combined with recently improving M&A activity in the tech sector, could lead to a more robust exit market for tech-related companies over the coming quarters.

Activity within the life science IPO market remained steady with 30% of the 40 IPOs completed in Q3 being healthcare-related, according to PWC. We are also seeing life science and healthcare IP companies accelerating their growth plans related to drug development and rolling out new, disruptive technologies that address significant inefficiencies in healthcare delivery and administration.

We are continuing to see some interesting opportunities on the healthcare technology side and still view this as an attractive market for us. Most of the opportunities we are seeing are aimed at addressing cost-containment and inefficiencies in the healthcare industry. We expect over the next few years this will be a strong market in terms of both equity and debt.

Our approach to what has historically been called the cleantech market remains cautionary. We have seen the dynamics of that market change considerably over the past few quarters with increasing focus on technologies that support healthy living. Venture capital investing in this area continues to remain fairly muted.

Looking at the competitive landscape in the venture debt market, technology banks have continued to aggressively compete to provide short-term working capital to growth-stage technology companies. On the life science side we've continue to see a pullback from some competitors compared to the 2013-2015 time frame with increased opportunities for multi-partner transactions and later-stage life science transactions.

This should continue to drive rational pricing and our ability to obtain attractive onboarding yields across our target markets.

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

Thank you, Jerry. And good morning, everyone. I will now briefly discuss our financial results for the third quarter of 2016.

Total investment income for the third quarter was $7.6 million as compared to $8.4 million for the third quarter of 2015. The decrease was primarily due to lower interest income on investments resulting from the smaller average size of our loan portfolio.

Our portfolio yield for the third quarter was 14.2%, consistent with last year's third quarter. Onboarding yields in our portfolio were 12.2% and have remained stable in the 12% to 13% range since our inception.

Total expenses were $3.3 million for the third quarter, a 25% decrease as compared to $4.4 million in Q3 of 2015. Included in these expenses is interest expense, which decreased primarily due to a decrease in average borrowings.

As Rob mentioned earlier, due to the fair value adjustments, incentive fee expense for the third quarter was subject to the incentive fee cap and deferral mechanism under our investment management agreement. This resulted in $900,000 of reduced expense in additional net investment income.

Concluding with expenses, base management fee remained flat year-over-year at $1.1 million and professional fees in G&A remained flat for the third quarter at $500,000. We earned net investment income of $0.38 per share for the third quarter as compared to $0.35 per share for the third quarter of 2015 and $0.39 per share for the second quarter of 2016.

After paying current distributions of $0.345 share in earnings, $0.38 per share, we increased our undistributed spillover as of September 30 to $0.22 per share. Our NAV as of September 30 was $12.44 per share, an $0.83 per share decrease from the prior quarter. The decrease was primarily due to unrealized depreciation on three debt investments which Rob discussed earlier. The NAV impact of these fair value adjustments was partially offset by net investment income as generated during the quarter in excess of distributions declared.

New originations for the quarter totaled $13 million, which were offset by $10 million in scheduled principal payments and $17 million in principal prepayments. We ended the third quarter with an investment portfolio of $208 million, which consisted of secured loans to 47 companies with an aggregate fair value of $201 million and a portfolio of warrant and equity positions in 87 companies with an aggregate fair value of $6.6 million.

In terms of liquidity, Horizon ended the third quarter with $37 million available in liquidity including cash and funds available under our credit facility. As of September 30 we had $63 million outstanding under our credit facility, which was expanded to $95 million this April and contained an accordion feature which allows for an increase in size of up to $150 million.

In addition to our credit facility we continue to have $33 million in publicly traded bonds, baby bonds, which we expect will be held until maturity in 2019. As discussed on our last conference call in June, we refinanced the remaining balance on our asset-backed notes.

It remains our intention to increase debt levels and grow our leverage ratio towards our target of 0.75 to 1. At September 30, our actual leverage ratio was 0.67 to 1. Taking into consideration the current gap between our target and actual leverage ratio, we expect that we can grow our current investment portfolio by $36 million or approximately 17% based on our current NAV and utilization of our current available committed credit facility.

Lastly, I would like to provide an update on our stock repurchase plan. Since approving this share repurchase plan in September 2015, we have repurchased over 114,000 shares. As previously announced in July, our Board of Directors extended the share repurchase program until the earlier of June 30, 2017, or the repurchase of $5 million of the Company's common stock.

Before we open the floor for questions I would 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 6.

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

(Operator Instructions) Leslie Vandegrift, Raymond James.

Just a clarification question on NOMi. I know it was marked down last quarter to non-accrual and it's a newer investment there. But it's down from 27% fair value market costs to 6% this quarter.

And I was curious if you could give a bit more detail on this asset sale. I know you mentioned a bit earlier, but just what's going on there and outlook for that?

Sure. As you know, we marked NOMi down to $1.7 million at the end of Q2. That was based on the fair value of the assets. And we collected $1.4 million of cash based on the liquidation of the current assets, so that's why you see the fair value down to $300,000.

Subsequent to the quarter, we collected close to another $300,000 and the transaction has come close to completion and should be realized in the fourth quarter.

And then, just in general for the issues, you talked about ScoreBig and New Haven, etc. It seems that, although there doesn't seem to be specific commonalities, they in general have had issues with asset or product sales or the strategic buyers. Are you seeing a lack of demand on that end of the market for these distressed issues with either selling parts of the business or just wholesale having someone come in and buy the company?

That's exactly what we've seen in 2016 is that I would say it's a combination of companies that have significant leverage where the investors have -- are probably at the end of their funds and the M&A market is extremely weak, even for quality companies.

So, companies that experience some operational stress -- they just can't see their way to an exit when they look through -- the VCs look at their own portfolios, even the good companies, and their portfolios are not seeing the kind of multiples that they would need to get.

And so, when you take in combination the amount of equity that's in, the amount of debt the company has and the lack of material buyers on the marketplace, that has definitely impacted the market considerably. And we recognize that, and that's one of the reasons I think our overall funding volume for the year has been down is that we are not aggressively looking at when a company can exit and making the assumption that that will happen in the market will be there for them right now, because it just hasn't been.

As I mentioned earlier, we are seeing some improved activity on the tech side, but not enough yet for us to be any more aggressive than we have been.

When you are talking about the tech side, you talked about the megamergers and the increased M&A, if you are starting to see that on the large side but not so much in the smaller end of the market where you have to take advantage of, are you seeing that as something that you could get access to, in the next quarter or so? And with the higher repayments and prepayments you had this quarter, is that going to continue because of that? Or has that just been a few one-off quarters where they have been higher than expected?

Well, I don't expect there to be any material change in the fourth quarter relative to that, although what generally happens is once some of these bigger deal start getting done, buyers that have been sitting on the sidelines essentially letting the smaller companies take all the risk of product development or increasing market share begin to start thinking that if they don't act that they may lose an opportunity.

And so I think what you will -- hopefully we will start seeing some in the fourth quarter and then into next year is some of the higher-quality companies we have in our portfolio become far more attractive, some of the 3- and 4-rated credits become far more attractive. As I'm sitting here today, I'm not ready to put a stamp on that and say it's definitely going to happen.

But we do like some of the activity we've seen both on the IPO side and in the M&A side just very recently. So that does give us some optimism going into the next couple of quarters.

And as a result, I don't expect prepayment activity in the fourth quarter to be -- I don't actually expect it would be even a size as what we have experienced in the third quarter.

Okay, perfect. Well, thank you for answering my questions.

Ryan Lynch, KBW.

Thanks for taking my questions. Just first one -- I know you mentioned there was a lot of commonalities in the credit issues you guys have experienced. But clearly there's been a big uptick in credit issues over the past year. So have you all done any sort of internal review on the origination, underwriting or monitoring process? And are you guys looking to make any changes to any of those processes?

Anytime you experience this kind of activity you always are very introspective. And we have been. We always are, Ryan. And we appreciate the question.

I think the commonality that we did see is the distress that Jerry just described in terms of the M&A for distressed companies. But when we looked hard at our underwriting criteria and the markets that we are looking at in the opportunities, I think the adjustments we are making are at the bottom of the funnel as Jerry described in terms of being very selective of the amount of leverage and the investor support that's in the companies that we look to make new loans to.

And as it relates to our existing portfolio, we obviously are paying as close attention as we can to the timing and need for cash and the milestones necessary to do that so that the companies and we are thinking about plan A, B and C.

Okay. And just for the outlook for portfolio growth, you guys have a decent amount of cash on the balance sheet as well as some additional leverage, I think. You guys mentioned about $35 million of capital to deploy. But throughout the year, we have actually seen net portfolio repayments in every quarter, Q1 through Q3, so far.

So what is your outlook going forward on actually growing this portfolio? Are you guys fine with running at this level? Or do we expect to see some meaningful portfolio growth over the coming quarters?

We are being very focused and forward-looking on where we believe the markets are going, based on what we know today, over the next two to three years. As Rob had mentioned, we actually are going to be adding some marketing bench strength to the Company.

But it isn't just about putting three or four more people or five more people on the street; it's about being very focused on certain submarket sectors and finding the right people with the backgrounds in those sectors. And so we have a strategy for, certainly for 2017. We expect to lay the groundwork for that in the fourth quarter of this year.

So obviously, our goal is to obviously increase the portfolio during 2017, using the liquidity we have but also making sure that we are doing it in the markets that we believe are going to add the most value for our shareholders over time.

So that's -- we are very focused on that, that kind of narrow outlook of where we think the strongest places in our market are going to be over the next two to three years, and addressing those markets specifically. That's the plan. And we do believe we can grow the portfolio doing that and obviously improve the quality.

Would you say that the negative net portfolio growth year to date in 2016 is more a factor of market dynamics, maybe not seeing the right deals or seeing some frothiness in some deals in the market you guys just don't want to originate? Or are you guys limited by the number of investment professionals that you guys have in your organization, meaning that if you guys would have had a couple more investment professionals you guys would've expected to do a higher number of originations?

What was really the driver? Was it really a combination of those two or any other factors?

Well, it was definitely, I would say, on balance it was the first versus the latter. We have seen a lot of opportunities for refinancing of debt coming our way where growth just hasn't really been there. There's always a story behind it. The growth is going to come next quarter or the quarter after that or the year after that. Investors have been in these companies for a very long time.

Many of the investors need to exit because they are at the end of their fund. In fact, one of the things Pete just told me about two days ago was they are extending many, many venture capital funds beyond the 10-year fund maturity because VCs can't exit a number of their portfolio companies in the funds.

And so they are extending the terms. And so when we are looking at these transactions, that's what we met when we said investor support is soft. It's because they are looking to exit these companies. There isn't a strong exit market. Companies have probably more leverage than they should, based on their average performance as opposed to their projections when they got the debt.

So we're looking at a lot of those opportunities but we are just not getting through to a level of any type of comfort with them. So that has been the absolute driver.

I would also say that I think adding specific marketing bench strength in certain areas will allow us to access, probably better access some markets that we think are going to be very strong in the coming quarters that we don't have access to today, as well as we would certainly like.

Okay. And then just one more technical question -- when I run my model for the fourth quarter, assuming that portfolio, there's no appreciation or depreciation in the portfolio. So that just remains flat. I'm looking at a reduced incentive fee due to the total return of around $400,000.

Does that sound right and do you guys expect to have a reduced incentive fee in the fourth quarter, assuming that the portfolio -- there's no realized gains or losses in the portfolio?

We expect the impacts to continue into the fourth quarter. And you are in the ballpark, Ryan.

Thanks. That's all the questions from me, guys.

Christopher Testa, National Securities.

Just going off of Ryan's first question on the personnel and internal reviews, just wondering if you could remind us on the structure of your personnel and how many people you have in origination and underwriting and how that is divvied up by sector and whether or not you think that there is any need to make changes there.

So we are, total, about 16 professionals and staff, Chris. And we operate out of our main office in Farmington, in Connecticut. We have three people dedicated to the origination of loans right now. We have three people that do primarily portfolio management and underwriting. And they work very cooperatively and collaboratively together.

As we did say, the advisor is looking to add professionals in both origination and portfolio management and underwriting going forward. And as Jerry had alluded, what we want to do is be sure that we are focused on the target markets we think will be the best places for us to invest over the next couple of years.

Great. And just with things that potentially the advisor could do, while obviously you guys have had some issues this year with the asset quality, is there any inclination on behalf of the advisor to potentially commit to making either open market purchases or for you guys to revise and amend the management agreements to potentially reduce the base fee?

So the answer to the first part of your question is no. We have always been a direct origination company working directly with the investors and the management teams of our portfolio companies. That's the very core of our operating style. So I would not all expect us to do open market.

In terms of our management agreement, we did amend it two years ago. And right now we are continuing it as expected.

Right. I think on the first part of the question you might have misheard me, Rob. I was just asking if the advisor would potentially commit to purchasing your stock in the open market, to augment (multiple speakers) programs.

Oh, I'm sorry (multiple speakers). What we will continue to do is the stock repurchase plan.

Okay. And do you think that that is -- even if you end up at, let's say, a 25% discount to NAV, do you think that the repurchases are moving the needle enough? I know that obviously you are restricted somewhat because the volume of the stock isn't too robust.

Do you feel that that's making a difference? Or should we expect you more to focus on just using that money towards originations?

It's a balance, and we look at it every time we decide to make a purchase. We think, at a 25% discount, that that's an attractive opportunity for us to repurchase some of the shares. But we don't want to do it in a way that would not allow us to work our way back to our full leverage. So it's a balance we will always keep when we make decisions to either repurchase shares or not.

And do your estimates for the portfolio growth that you guys have described -- how is that -- what is that factoring in, in terms of repayments? Because obviously you guys have cited that there is some frothiness in the market and there's somebody willing to finance these borrowers at high leverage multiples.

So would it be reasonable to expect that that could drive prepayments higher than you would otherwise expect, if that continues?

Yes. So we have been averaging about $10 million worth of normal amortization every quarter. And if you look back over several years we have averaged about the same amount of prepayments per quarter. The prepayments don't line up quite as evenly as the normal amortization. But that's fairly normal activity for us. The three liquidity events we had in the second quarter -- one of them was in M&A and two of them were refinancings, one by debt and one by equity. So that's a fairly typical quarter.

But we don't really have a great outlook as to when and -- those will happen except that we are reasonable confident that that level of prepay is off a $200 million to $240 million portfolio. We'll continue because it's a normal part of the venture lending model.

Got it. And last one from me -- just on the dividend reduction, how much of that came more unexpected from non-accruals obviously weighing on the overall yield of the portfolio? And how much of that came from just spread compression, given the frothiness that's going on in the market?

Well, as I said in my prepared remarks, we gave careful consideration to this. We have covered our dividend for five quarters. Admittedly, part of it this quarter was through the incentive fee.

But we believe that the level of our current portfolio suggests that this is a dividend that we can cover over time, which has been our policy from the beginning. And it has much more to do with the size of the portfolio then earnings compression or yield compression.

Great, that's all for me. Thanks for taking my questions.

Jonathan Bock, Wells Fargo Securities.

Rob, maybe to dovetail off of the comment about the dividend, so as we look at the mass, in light of the new dividend level can you tell us what you would need to originate at today in order -- including losses, in order to effectively cover that dividend yield over time? What is the yield or investment target bogie from a return perspective from here on out?

So, it's our judgment that, going forward, if we can continue to attract new investments at the onboarding yield consistent with what we have been before, the 12% to 12.5% range, and we can grow the portfolio over the next two or three quarters back to the 0.75 to 1 debt to equity with a normal, conservative level of prepayments and amortization, so we can cover that dividend over time. So that's why we set it where we set it.

Okay, that's very helpful. And so, on the question -- in terms of talking about commonalities, in terms of credit losses -- and this is just through us reading the transcripts. The common theme in what we found with NOMi or New Haven or now comments on ScoreBig is that you didn't really expect a major loss.

In fact, I think last quarter you mentioned that you expected no principal loss at New Haven, as we pulled the transcript. So our views are going forward with 90% of your portfolio [marked at] par and such a substantial potential drop in the value of some investments, it leads to questions as to whether or not we have a pure handle on absolute credit quality in the portfolio.

And that brings us to a question on ScoreBig. Right? So there is some amount of value left, but we found that the company recently experienced liquidity crises, they shut down their site. There's also reports that the company has reduced its staff and is seeing some operations issues.

Is this really caused by the lack of equity investments? And really, when you think of an investment like that, how do you pull out of that tailspin? And why would there still be some amount of value left when it seems to us there's not much of a chance?

So what I would say is that we fair value these transactions at the point in time when we report our earnings. We do the very best we can in terms of what our expectations are for the future realization on the value of these assets.

As I think we said in the transcript for this quarter, we are working with several buyers to realize on these assets. The things you described which you may have gotten from Google searches represent some of the stress in the company -- anyway, I'm trying to emphasize what I said in our speeches, that we are trying to maximize the ultimate return on these assets, the same is true for New Haven, by working with management, working with the company, working with underlying business and assets to produce, over time, the best total cash return from these assets. And that's where we are on both of these at this point.

And to be clear, look, losses across the space over time -- it's inevitable, it's a part of business. So not to overemphasize it a bit. But now they be taking -- and I appreciate your honesty there, Rob. We understand you are working hard to try to realize value.

The next question gets to the lack of incentive fee, which is certainly a positive. We respect that alignment.

But now it brings about a question of platform. Over time, you have to compensate your investment talent to both stay, prevent flight, and attract new talent. So can you explain to us how you're going to be able to provide effective compensation, certainly relative to competitors who are obviously writing bigger tickets and attracting talent, how you are able to do that as your fee income to the manager and platform continues to fall as a result of losses?

Well, it certainly -- it reduces the cash flow to the advisor, there's no doubt. But that was part of what we were willing to do to align our interests with the shareholders'.

Having said that, it's on the owners of the advisor to attract new talent and convince them that over time this would be a great place to work and a great career for them. It's a good story.

Okay. And then as we think about the ability to grow leverage, etc., right, there are a couple of ways to grow leverage -- through making new investments, also through repurchasing shares.

And I'm wondering, just in the light of the volatility we've seen over the stock as a result of the cut, if you'd be willing to give one a preference over the other at this time, given the fact you are trying to move up into that leverage range of 0.75 times from the current level.

Yes. I think I answered that for Chris Testa from National, but I'll answer it again. We are willing to look at both of these. We have the repurchase agreement in place. At certain prices our stock will be attractive for us to buy. But I think we want to balance that with the ability to try to grow our Company, our portfolio back up to where it's at 0.75. So I think we will be doing both over the coming quarters.

And then just one last final point -- and thank you for that; sorry for the repeat. But one last, final point on the EOTs -- was there a level of EOT accrual reversals? And I'm curious what names that involved.

There was a small level of reversal in the third quarter for one of the investments that were on non-accrual. Don't really want to get too specific on the Company, but nothing of substantial amounts and nothing that should impact going forward.

Okay. All right, thank you for taking my questions.

Casey Alexander, Compass Point Research.

Most of my questions have been answered, I just have a couple. Your assets -- looking at the schedule of investment, it says that they float against LIBOR. Against what LIBOR do they float against? And can you share with me what, in general, the floor is?

Sure. The rates float against the one-month LIBOR. And the majority of the loans have a 50 basis points floor.

So a number of those have just recently moved into the money, then?

Correct.

Okay. Secondly, you started the year with seven credits in bucket 2 and none in bucket 1. And now we come out in this quarter with 12. And there has been a substantial increase in bucket 2 that we haven't discussed, which suggests that there are several other credits that have shown credit deterioration just and this quarter. So can we get some color on -- we are talking about almost 16% of the entire portfolio is under some level of credit stress. Can we get some sort of color as to that $20 million that's in bucket 2 and why we shouldn't be just as concerned, given the past history of what's happened with credits that have gone into bucket 2?

Well, yes, I'd be glad to give you as much color as I can, Casey. Just to back up a little bit, when we have a credit in credit 2 it's our assessment at the time that we write it a credit 2 that, although under a great deal of stress, we do not expect it at that time to realize a loss. And if you look at the history of their migration of loans into and out of that category, the great majority of them ultimately end up repaying us or migrating back, although there are those that do get downgraded to 1s, which I'm certain you follow very closely.

I think it would be fair to say that we are being critical of our accounts, as we have moved some of these to the 2 category, given the environment we found ourselves in this year and the level of distressed M&A activity and the results from that.

So I think we are being cautious about the Company's ability to raise additional capital and have tried to appropriately show that caution by moving them into the 2 category.

Okay. And my last question is based upon the portfolio value, the amount of loans that are not accruing income. And again, doing the math and aware of the fact that you have already declared the fourth-quarter dividends at the old dividend rate, it would be reasonable to assume, all other things being equal, that there is likely to be some NAV drag as a result of the size of the previous dividend in the fourth quarter. Wouldn't it?

I think that's fair.

Okay. All right, thank you. That's all of my questions. Thank you very much.

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

I want to start by thanking everyone for their question and, as always, for following the Horizon story. As we enter the fourth quarter we will continue to deploy our capital selectively, as we always have. We will maintain our strict underwriting standards as we work to rebuild the portfolio and our net asset value. We will continue to use our venture lending model to invest in dynamic technology companies that can produce long-term value for our shareholders through equity and success fee upside as well. So we look forward to sharing our progress with you again in March.

This concludes our conference call. And thank you and have a great day.