Horizon Technology Finance Corp (HRZN) 2017 Q3 法說會逐字稿

Good morning. And welcome to the Horizon Technology Finance's third quarter 2017 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 introduction and the reading of the safe harbor statement. Please go ahead.

Thank you, and welcome to the Horizon Technology Finance third quarter 2017 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Dan Trolio, 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, 2016.

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.

Horizon made progress on many fronts during the third quarter. The important drivers by which we measure progress include earning strong net investment incoming, maintaining consistent distributions, which are covered by net investment income; growing the portfolio and pipeline, improving overall credit quality, improving profitability from use of leverage, and maintaining or growing net asset value.

We earned net investment income of $0.33 per share for the quarter, which covered our distributions of $0.30 per share. We were able to accomplish this through a combination of a high-yielding portfolio and profitable liquidity events.

During the quarter, we had three liquidity events, including a loan prepayment by Strongbridge Biopharma, which resulted in accelerated income from prepayment fees, end-of-term payments and recognition of income from commitment fees and warrants. This is another example of the earnings power from the regularly recurring portfolio turnover and the Horizon venture lending model.

Our debt portfolio yield was 16.5% for the quarter and was 15.5% for the 9 months. Horizon has one of the highest-yielding debt portfolios in the BDC industry.

Net investment income in excess of our distributions resulted in an increase in our undistributed spillover income to $0.11 per share, which may be used to support future distributions. Our board declared monthly distributions through March of 2018 that maintain our total quarterly distributions at $0.30 per share.

The challenge in the venture lending business is to maintain a strong pipeline and new originations to keep pace with early repayments. During the quarter, we were able to maintain our portfolio size while experiencing liquidity events and increasing our committed and approved backlog.

New loan fundings totaled $18 million to five borrowers. For the quarter, we had new commitments and approvals of $50 million, resulting in an increase on our combined committed and approved backlog to $54 million. Our pipeline of opportunities is robust, and our managing directors are actively pursuing over $400 million in new opportunities to close in the next several quarters.

With respect to the overall credit quality of our portfolio, there were no new loans placed on nonaccrual. And since year-end 2016, we have reduced the number and percentage of our portfolio accounts that are underperforming. Three of our previous 2-rated loans have been paid in full.

During the quarter, we reduced the carrying value of our loan to Interleukin, which is on nonaccrual, as we work through the liquidated of its assets. We expect that this process will continue through the next few quarters. Credit quality is always a work in progress. But overall, we believe that the credit quality of our portfolio has stabilized.

Recently, we successfully raised $37 million in an upsized offering of notes due in 2022, with a coupon of 6.25%. The proceeds were used to repay our outstanding 2019 notes, which accrued interest at 7.375%. We expect this should produce savings of approximately $0.03 per share annually going forward. It is important for us to take advantage of this cost savings and the availability under our KeyBanc facility to grow our portfolio and work toward our target leverage of 0.75 to 1.

Finally, our goal remains to maintain and grow our net asset value. We've had some positive momentum in the value of our warrant portfolio over the last several quarters, including the value of our [ends-met] warrants, which increased at quarter-end based on an increase in its public stock price following the announcement of positive clinical results. As a reminder, we hold warrant and equity decisions in most of our portfolio companies, including a great many of our portfolio companies that have repaid their loans. We believe that over time these warrants and equity positions will add to our shareholders' overall return.

Before I turn the call over to Jerry, who will provide details on our pipeline, the venture lending environment and competition; and then to Dan, who will elaborate on our operating performance; I want to emphasize that we remain focused on making further progress on all of these important fronts in the coming quarters. Jerry?

Thanks, Rob, and good morning, everyone.

Our Q3 marketing and portfolio performance can be summarized by improved loan origination activity, which is reflected in our growing pipeline and significant portfolio exit activity, which led to higher NII for the quarter. With $50 million in new commitments and approvals during the quarter, we increased our committed backlog from $12 million in Q1, $45 million in Q2, to $54 million at the end of Q3. In addition, we increased our pipeline of new opportunities from $310 million at the end of Q2 to $435 million at the end of Q3. We funded five transactions totaling $18 million in Q3, while continuing to increase our committed backlog during the quarter.

Subsequent to the end of Q3, we funded an additional three transactions in October totaling $27 million and were awarded two new transactions totaling $27 million. Also since quarter-end, we have exited five loan transactions totaling approximately $15 million.

In addition to our growth initiatives, we continued to be disciplined with respect to pricing, achieving strong onboarding yields of 11.9% and a debt portfolio yield of 16.5% for the quarter. Horizon's consistent history of strong overall portfolio yields demonstrates the success of its venture lending strategy of structuring each portfolio of investment with multiple income enhancement opportunities through, and among other things, prepayment fees and accelerated ETPs. Result of Horizon's income enhancement strategy has been to consistently make Horizon's portfolio one of the highest-yielding portfolios in the BDC industry.

As Rob mentioned, we exited Strongbridge Biopharma in Q3. This exit resulted in prepayment fees and ETP accelerate income of $900,000 and an overall investment yield of over 31%. In addition, we continue to hold warrants at Strongbridge. We now have warrant positions in 14 public portfolio companies, all life science companies developing and marketing proprietary drug and medical device products with the potential for significant warrant upside value if they meet critical development and revenue milestones. For instance, a warrant in ismet more than doubled in value in Q3 after its announcement of favorable top line results from its Phase III convert study.

We track our portfolio companies and their timelines of key milestones. And a number of our life science portfolio companies expect to complete key milestones over the next four quarters. While there is no guarantee of the outcomes of these milestones, we do have potential for upside in our warrant and equity portfolio over the coming quarters. At the end of the third quarter, our entire warrant and equity portfolio of 78 companies had a fair value of $9.5 million.

Turning now to the general venture capital environment -- U.S. venture capital investment remained healthy in the third quarter, with $19 billion invested across over 200,000 deals according to MoneyTree. Based on this, 2017 investment in venture-backed companies remains on track to meet or exceed 2016 levels and could be the highest we've seen in the past decade.

The number of companies receiving capital has declined so far in 2017. We continue to see mega-round activity including 26 investments of $100 million or more in the third quarter. While below second quarter totals, overall mega-round investments during the quarter was still well above 2016 levels. So while the overall health of VC investing remains favorable, we continue to see larger equity rounds to fewer companies.

VC fundraising was lower in the third quarter after coming off strong fundraising in the second quarter. While VC fundraising overall was currently below 2016 levels, it remains healthy. During the third quarter, VC firms raised $5.3 billion across 34 funds.

In the third quarter, VC-backed exit activity continued to decline as companies push out their exit timelines, due in part to a large pool of available private funding. During the quarter, we saw only 144 exit transactions compared to 156 transactions in the second quarter, representing the lowest quarterly total since 2009. The exit environment for 2017 to date has been lower than 2016 levels, with just 530 exits, representing $36.4 billion of value.

Turning to our core markets -- we continue to see high-quality deal flow in the life science market for drug development and medical device company. Same time, competition for the deals remains aggressive. We continue to be optimistic about our position in this market due to our [Advisors experienced origination] team and the overall increase in financing opportunities to first-time life science borrowers and borrowers seeking to refinance 2014 and 2015 loan balances.

We continue to view the health care market favorably as we view a number of new opportunities in our current pipeline. Substantial investments were made in areas such as disease diagnostics, personalized health and tele-health. In the third quarter, we saw U.S. digital health investments decline to just over $900 million. While digital health was slower market in the quarter, 2017 overall was a strong year for digital health investments. Year-to-date, digital health investments have already exceeded the combined total for all of 2016 according to MoneyTree.

Certain technology areas are receiving [notable] attention. Artificial intelligence is now a highly sought-after area of VC investment, with over $1 billion of venture capital invested for the third straight quarter. Internet companies represented the largest VC funding sector during the quarter, with 547 companies funded. The second-largest sector was health care, with 171 companies funded.

We remain cautious in regards to the cleantech market. We believe cleantech represents a potential growth area in the long term. But in the short term, venture capital investment remains limited.

Auto tech is another emerging market which has started to gain traction with VC investors. In the third quarter, funding increased by 51% as U.S. auto tech companies received $329 million in 17 transactions. This represents a pace of 17 deals or more for three consecutive quarters.

Also in the quarter, we saw a mega-round transaction fund to auto, representing the second-largest auto-tech transaction ever completed. We think auto tech represents an interesting market and are beginning to explore opportunities in this area.

With respect to the competitive landscape, we continue to see competition from technology banks in our targeted markets, which created some pricing pressure. Nonetheless, we are still seeing many investment opportunities with attractive onboarding yields. While banks are being more aggressive with lending, they also are becoming more proactive in portfolio management. We also continue to see rational competition from other venture lending competitors.

We believe the less-than-robust IPO and M&A markets in 2016 and 2017 continue to make venture debt an attractive asset class and an alternative source of financing for venture capital-backed technology and life science companies. Our expectations are that we will continue to see solid deal flow from later-stage VC-backed companies as they continue to wait for an overall exit market to improve.

Against this industry backdrop, with our improved lending platform and liquidity, we believe Horizon is well positioned to grow its investment portfolio over the next several quarters. At the same time, we are also confident in our ability to realize additional prepayment fees, accelerated end-of-term payments, and success fees and warrant gains, which will create significant value for shareholders.

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

Thanks, Jerry. And good morning, everyone. I will now briefly discuss our financial results for the third quarter of 2017.

Horizon earned total investment income of $6.8 million for the third quarter of '17 as compared to $7.6 million for the third quarter of '16. This year-over-year decrease was due to lower interest income on investments, given the smaller average size of our loan portfolio.

For the third quarter, we achieved onboarding yields of 11.9%, compared to 11.6% in the second quarter and consistent with our historical performance. Our portfolio yield rose to 16.5% for the third quarter of '17, compared to 14.7% in the second quarter and 14.2% for last year's third quarter.

Turning to our expenses -- total expenses decreased by 9.4% during the third quarter to $3 million, compared to $3.3 million in the third quarter of '16. This decrease was mainly driven by lower interest expense and base management fees compared with prior year, which were due to the smaller average size of our investment portfolio.

Interest expense decreased by 20% compared with the prior year, while base management fee decreased by 19% to $900,000, compared with $1.1 million in last year's third quarter. Professional fees and general and administrative expenses, which consist primarily of legal and audit fees, were essentially flat for the third quarter of '17 as compared with the previous year.

With regards to incentive fee expense -- as a result of the incentive fee cap and deferral mechanism under our investment management agreement, we recorded $600,000 of reduced incentive fee expense in additional net investment income in the third quarter. Net investment income rose during the third quarter as we earned NII of $0.33 per share, compared with $0.24 per share in the second quarter and $0.38 per share in the third quarter of '16. Our earnings of $0.33 per share for the third quarter covered our distributions of $0.30 per share. This brought Horizon's undistributed spillover income to $0.11 per share as of September 30, compared with $0.08 per share at the end of the second quarter.

As of September 30, our [NED] was $11.81 per share as compared to $11.87 in the prior quarter. As Rob discussed earlier, the sequential decrease reflects the unrealized appreciation from the Interleukin debt investment that we recorded during the third quarter.

Summarize our portfolio activity for the quarter -- new originations totaled $18 million, which were offset by $7 million in scheduled principal payment and $12 million in principal prepayment. As of September 30, our investment portfolio was $177 million, which includes earning debt investments in 33 companies with an average fair value of $55 million, a portfolio of warrant and equity positions in 78 companies with an aggregate fair value of $9.5 million, and other investments in three companies with an aggregate fair value of $6 million.

Looking out at our liquidity -- Horizon had $88 million available to deploy at quarter-end. This includes cash as well as funds available under our $95 million credit facility with KeyBanc, which we temporarily paid down to $0 at quarter-end.

On the capital markets front -- during the quarter, we took advantage of favorable market conditions to complete an upside notes offering. Horizon issued and sold $37 million of 6.25 notes due in 2022, resulting net proceeds of $36 million, including the underwriter's option to purchase additional shares early in the fourth quarter. Using the proceeds from this offering, we redeemed 100% of the outstanding balance for our 7.375 notes, which were set to mature in 2019. We expect this will result in net interest savings of $0.03 per share on an annualized basis.

Our goal remains to grow our portfolio size and increase our leverage ratio towards our overall target of 0.75 to 1. At September 30, our leverage ratio was 0.48 to 1. Taking into consideration our cash position and the current gap between our target and actual leverage ratio, we expect that if we reach our target leverage, our investment portfolio will have grown by approximately $60 million.

As previously mentioned, our share repurchase program has been extended by our board. During the third quarter, we repurchased minimal shares. However, since the plan was first approved, we've repurchased over 167,000 shares of our common stock at a total cost of $0.9 million. As we have stated on prior calls, almost 100% of the outstanding principal amount of our debt investment bear interest at floating rates that are structured to increase when interest rates rise, which we believe positions us to benefit from a rising rate environment and experience both increasing income and expanding net interest margins.

Before we go 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 5th.

This concludes our opening remarks. We'd be happy to take questions you may have at this time.

(Operator Instructions). Our first question is from Ryan Lynch with KBW. Your line is now open.

First one, I'm trying to understand how to think about your committed backlog number. So if I look at last quarter, you guys had about a $45 million committed backlog. In the third quarter, you only funded about $18 million of that, so about 40% funding rate. This quarter, you guys have a $54 million backlog. I believe you said you've funded $27 million just in October, so you've already funded about 50% of your committed backlog in this quarter versus the 40% you funded all of in the third quarter. So just how do we think about that $54 million backlog? And how should we kind of view just committed backlogs in general as far as fundings going forward.

Sure. Hi, Ryan, this is Jerry. Actually, kind of what happened at the end of the third quarter is we had one or two transactions that actually -- which both ended [or] funded in October. I think one of them actually funded on October 2nd. So if that had swung back into September, your ratios would've been different. And I think it would've been a little bit more balanced relative to the fundings. I think the way you should look at it is probably 70% of our backlog -- excuse me, our committed backlog -- is probably the right number to kind of look at relative to fundings. You do have to remember, though, that especially on the life science side, many of these transactions are tranched to meeting milestones. And so there is a lot of movement in that committed backlog and approved backlog during any quarter. So it's a little volatile relative to that. For insurance, at the end of the second quarter, we did have a $15 million deal on our committed backlog, which -- circumstances changed prior to our funding, so we kicked it out, we're not going to fund it. But it was replaced, obviously, by other deals which ended up increasing our overall committed backlog. But I think if you look at kind of a 60% to 70% funding pattern, you should be fine.

Okay. So when I look at kind of the fourth quarter, I mean, $27 million already funding in October, it sounds like maybe some of the third quarter deals might've spilled over into the fourth quarter. But that's a very robust number, $27 million. If you look at that, that's larger than any quarter you had since 2015. So I'll start at the $27 million already funding in October. What's your kind of view for the remainder of fundings in November and December this year?

Yes. So we obviously do expect to have some additional fundings. But of course, I have to caveat that. You saw what happened in the third quarter, where a couple of deals pushed into the fourth quarter. So we will see exactly how these transactions flow through. One thing I would just remind everybody of is we have been, over the last two or three quarters, signaling based on some changes we made relative to the Advisors Origination capabilities, as well as market activity, that our backlog was starting to grow. It wasn't necessarily being reflected at that moment in the pure numbers. But we could kind of see deals coming our way. So really, Ryan, when you think about the $27 million, there have been -- during our history, we have actually -- a $27 million to $50 million funding quarter is something that, really, is kind of down the middle of the plate for us, up until -- you're correct, up until more recently. But we've been trying to signal to the market that given some of the changes we made in the origination staff, given what we think is a pretty, very rational market right now. With demand for our product, that should be increasing. So I think for the fourth quarter, we're at $27 million now. We do expect to have a couple of more fundings. I think probably by the end of the quarter, with the payoffs and everything, we're probably going to be looking for growth somewhere in the $5 million to $15 million range.

Okay. And then, obviously you guys' portfolio yield for the third quarter increased pretty meaningfully, and it has some more volatile items in there. If I try to strip out the accretion from origination fees and end-of-term payment and fee income, it looks like your core interest income actually increased pretty nicely from the second to the third quarter. Meanwhile, your portfolio actually got slightly smaller in the third quarter. So can you just talk about what was driving the increase in kind of core interest income in the third quarter?

Ryan, it's Rob. A couple of things going on, depending on where you're looking at what the average portfolio is. In the second quarter, we were flat to down slightly. But during intra-quarter, the portfolio was smaller. So I think you're right, that the core earnings was better in the third quarter, because the average portfolio size was higher during the quarter.

Okay, (inaudible). Mainly just (inaudible) quarter portfolio size issue.

Right.

Got it. And then, just one last one, if I can, again, from a competition side, we've seen a lot of capital being flowed into VC equity providers. Obviously, you guys are venture lenders, your main competition is other venture lenders. But are you seeing borrowers -- are you guys, I guess, seeing any increased competition actually coming from the VC equity providers looking to basically refinance out your debt with providing you equity into companies? Are you seeing competition from that side at all?

Not so much in refinancing out our debt. But we are definitely seeing VCs leaning forward relative to wanting to put more equity into companies which at some level -- you're correct on this -- does compete with debt. But I will say most of the transactions we've been involved with recently have been a combination of more equity coming in plus debt, which is -- when I said I think the market is very rational right now, that's really what I'm talking about, is we're seeing a pretty good balance. The only thing we're not seeing, Ryan, is we're not seeing the exits we'd like to see at the valuations we'd like to see them. And part of that is because, as I mentioned, there is plenty of capital around the table. So companies are willing to sit back and wait for a better exit market and continue to finance themselves. Whereas I would say 2015, through at least the first half of 2016, what we saw was companies that were not being able to kind of raise the additional capital they needed to continue to grow. And so they were looking for exits, and it was a difficult market. We're seeing far more rational market across the board. We would like to see greater activity, obviously, both on the IPO and M&A side.

Okay, thank you for taking my questions.

Our next question is from Jonathan Bock with Wells Fargo Securities.

[Finesh] in for Jonathan Bock. Thanks for taking our questions. Just a couple of quick questions on the cap and deferral mechanism -- you noted how that reduced the incentive fee this quarter. So we were running some numbers. And pre-incentive fee net income, as most VCs we calculated, has been just over 6% since you started this mechanism. And that's handily below the 7% incentive fee hurdle. So in the meanwhile, you've accrued about 18% of NOI in terms of incentive fees, if our calculation is not wrong. Can you walk us through how that works?

Well, you have the advantage here of having done this work, [Fin]. So I don't have those numbers in front of me. But what's your specific question?

You've earned pre-incentive fee net income of 6% since starting your cap and deferral mechanism. And you've pretty much accrued your full incentive fee, let's say 95% of it, in that timeframe. So we're just trying to figure out how the look-back that you set to protect shareholders from credit losses works in their favor.

I think if you go and you look back at the calculation of the incentive fee and the total return, this is now the third year, the 13th quarter, that we've had this in place. And we've deferred over close to $3 million. So the mechanism has worked as we had intended. And we have both shareholders and management has their interests aligned. And working toward that, we'd have to look at little closer at your calculations to specifically talk about what you're talking about.

Very well. And just one more on the incentive fee -- how does the -- I didn't see much language in the K as to how the deferral mechanism works. Are you allowed to start accruing over 20% in forward quarters to make up for that amount that's deferred?

It is a deferral rather than a waiver mechanism. So there is the potential to recover. And the full explanation of it is in both the [N2] and the K.

The N2, okay. So basically, going forward, if you don't have more losses, your -- and again, we can go through the calculation later -- your incentive fee will be well over 20% of pre-incentive fee NII, and your NII will be well below the dividend. Do you agree to that?

I think the potential for that exists. I think that it will depend on -- as Dan mentioned, there's a new dynamic now that we're dropping off quarters for the 12-quarter look-back. So there's the potential to recover part of the deferred [inaudible] allow the actual incentive fee to be higher in the quarter than 20%, but certainly not cumulatively.

Yes, very well. Makes sense. Just one more global question -- does the manager have any private funds? Or does the manager have anything else under management besides HRZN?

We have a few -- a small balance on a sidecar fund.

Very well. And that will be all, thank you very much.

Our next question is from Robert Dodd with Raymond James. Your line is now open.

On the buyback fund, obviously you mentioned you hadn't bought back any stocks. Can you tell us what the full process is -- obviously, it's a board decision, but some board members are on the call -- about (inaudible), you talking about -- if you get to full leveraged credit portfolio about $60 million, looks like we're going to have a very good deployment quarter in the fourth quarter. But I think Jerry said that could be $5 million to $15 million net growth. So it could be a while before you lever up just by deployments net of prepays, et cetera. So wouldn't it seem -- it would seem to me that one of the potential and attractive avenues for deploying capital would be into buybacks. And I would've said that was true last quarter as well. So can you give any more color on what the dynamics are there in the decision process as to when you would be -- when the company, the board, would be more willing to be more aggressive on (inaudible) to buyback at all?

Well, I mean, we had a small purchase during the third quarter. The stock dipped right after earnings announcement. And we were in the market.

Okay. Yes.

And so that's a small window for when. We, of course, have the blackout periods. And if we see the stock price at an attractive price, we will buy it, Robert.

Ever hopeful. Any metrics that would determine or could clarify what you mean by attractive price?

No. But (inaudible) we have always maintained that because we have such high-yielding investments, if we can have and keep our capital availability -- and I know that we've had a hard time growing the portfolio this year, primarily because of the rapid turnover, but we do now have backlog. So we're constantly thinking about the pipeline, be it alternative investments, and the relative [environment].

Fair enough. Second one, kind of on the same theme, in terms of growing the portfolio, obviously, as you said, there's been a lot of turnover, there's been a lot of early prepays, et cetera. On the plus side, obviously, that generates fee income, which helps to cover the dividend in some situations. On the downside, it makes it a lot harder to grow the portfolio. Has there been a shift? Are you changing the types of deals you were doing so that they have a shorter expected life in the hopes of getting fee income, but then that moderating the portfolio growth? Is there any dynamic there about what you're deciding on the underwriting side or what you think the market -- now that it's more rational, et cetera -- is developing into over, say, the next 12 months, that kind of balances that fee income versus portfolio growth?

Yes. You raise a great question, an astute question. Because the reality is, in a venture debt portfolio -- this is true now, but it kind of always true, and it just depends on where the pendulum is -- but the reality is, what you want in a venture debt portfolio is you want the turnover for your older loans in the portfolio. Because the prepayment fees have been reduced. And so there's an opportunity, when you can get prepaid out of those deals. And we very carefully structure our deals when we underwrite. And we look at what the potential exit timing would be on a company. Now it's timing, we could be 100% right on the money, or we could be 100% off. But the reality is we look at what the company's expectations are, where their key milestones are, and when there'll be a potential exit. And we try to structure into each transaction our ETP and prepayment where we're going to maximize the value if in fact an exit happens during that period. Now if it doesn't, and the loan goes to full maturity, given the kinds of yields we get, onboarding yields we get, that's fine, it's still going to be a very profitable transaction in our portfolio. So when the market is rational, as it is today, we are seeing good prepayment activity. But we're also seeing really strong origination activity backed by additional equity financing from investors. And that's a really good place -- if you're in the venture debt business, that's a really good place for the market to be, as I said earlier. The only thing we would like to see is a little bit stronger exit activity with higher valuations at some of our portfolio companies. But that aside, I would think over the next four quarters, you're going to see kind of a greater velocity of both new deals going on but also prepayment activity. I do believe we're in a position now where we will be accelerating or increasing the difference between what we're putting on and what we're taking -- and the prepayments that we get. So we should be seeing incremental growth now over the next few quarters fairly consistently.

Got it. Thank you, helpful.

(Operator Instructions). Our next question is from Christopher Testa with National Securities. Your line is now open.

Just looking at the accelerated end-of-term payments for the quarter, just wondering if you can give us some detail on how much that was per share during the quarter.

The total acceleration of ETPs was basically around $1 million on our prepayment. So that's roughly $0.09 or so.

Okay. Got it. And looking at -- obviously, the incentive fee has under-earned given your cap and deferral mechanism the past couple quarters. If I look at potentially NAV improving, your incentive fee resuming, and then taking into account some kind of lumpy or nonrecurring fee income via accelerated ETPs, just wondering how you balance all that, looking at the distribution level going forward.

So we have always maintained that our policy is to set the distribution level at a level that it can be covered by NII over time. We recognize that there are some peaks and valleys in terms of the earning realized from these liquidity events. I actually think that our track record is decent in terms of covering our dividend from time to time. And so we look forward to the earnings power from the core interest income and what we expect to be regularly occurring exits going forward and believe that we have set our dividend at a level where we can cover it over time with NII.

Right, no, I appreciate that, Rob. What I'm getting at is, I believe Robert had raised the point earlier that while the market has become more sane and efficient, and you're getting more deal flow but obviously heavier prepayments, your asset quality improves and you're earning the full incentive fee, but at the same time you can't get the balance sheet leverage into the target range because of the prepayments, I'm just mathematically trying to see how the dividend can be earned with the full incentive fee being earned in that case.

Yes. So (inaudible) you set is if we can't grow the portfolio, then we will look at seriously and in great detail every quarter.

Okay.

We have a vision of the pipeline and what's coming. And based on that analysis, our board was confident to declare a dividend through March because of our monthly cadence. I mean, we've declared a dividend now through March of '18 at the $0.30 level. And we're continue to monitor all of the progress. That's how I started the script here. These are the things that are important to us -- the pipeline, the backlog (inaudible) encouraging.

Okay. And I know you've mentioned, obviously there's increased compensation as always from the other VC lenders, and the banks periodically step in and step out. But you'd also alluded to some new markets that are getting hot such as auto tech. Is that something that all VC lenders can get into, is that more specialized? I'm just trying to see where the onboarding yields shake out with the confluence of those factors.

Yes. As it relates to auto technology, it is a market that VCs that are familiar with technology and technology space certainly can get into. Because what's going into the future automobiles is technology that enhances the driver's driving experience. And that includes a lot of really kind of basic technologies that are in existence today, they just haven't been applied to automobiles. And that's everything from cameras and significantly enhanced GPS to other kinds of things that enhance the driver's experience. And so there's just a lot of activity in that regard. And of course, if you're following that market at all, the future is driverless cars. I think we're a ways away from that. But a lot of the technology that's being put into cars today is to move the car toward, I think, that objective. So you still need the driver today and, I think, will for a number of years. But the technology they're building into the cars is making it more efficient. So it's an interesting market. We've spent a lot of time with the VCs who seem to be kind of leading that area. Artificial intelligence in general is becoming a pretty interest market overall in its applications. And so we think that's good, because some of this is [transforminal] technology versus just improving things slightly. And usually when those markets come around, you see a lot of equity investment and a lot of opportunity to put our deb to work.

Okay. Great. That's all for me. Thank you for taking my questions.

Our next question is from Casey Alexander with Compass Point Research. Your line is now open.

Dan, this is really for you. With the bond refinancing and bond call, the baby bond that was called, there's going to be in the fourth quarter accelerated deferred offering costs and also some duplicated interest charges. And while I understand that those are one-time, can you kind of aggregate the two of those and give us, for modeling purposes, how much we should include in our models for the accelerated deferred operating costs and duplicated interest charges?

That's correct. So as we completed the note offering in September 29, we redeemed the 2019 notes. And we did that on October 30. But in the meantime, we've paid down our KeyBanc facility to reduce the interest expense in that sense. So the interest expense doubled. Duplication in having the two bonds isn't completely impacted 100% by having them both out. So that would be debt issue costs, which was basically a little less than $300,000. You could probably look at $0.03 to $0.04 impact on the transaction, the one-time impact.

Okay, $0.03 to $0.04. Great. Secondly, what was the composition of the realized loss in the quarter?

The realized loss, which was around $400,000, those were basically some warrants that had already been marked down to $0, where the companies either went under or were acquired at a price that was below our site price.

So there was probably an offset to that in terms of unrealized depreciation?

That is correct.

Okay. That's it for me, thank you.

Thank you.

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

Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon. And we look forward to speaking with you again in March. This will conclude the call. Thanks.