Horizon Technology Finance Corp (HRZN) 2018 Q1 法說會逐字稿

Good morning, and welcome to Horizon Technology Finance's First Quarter 2018 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 First Quarter 2018 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 Q1 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, 2017. 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 on this beautiful morning in New England.

Coming off the strongest origination quarter in our history, we enter 2018 with the larger, younger and stronger portfolio that Horizon has had in some time. Our goals looking forward as always are to maintain our strong portfolio, continually build our pipeline, aggressively manage any underperforming loans and continue to earn high yields. Today, we will discuss our progress on these important goals.

For the quarter, we earned net investment income of $3.2 million or $0.28 per share. This is an improvement from our fourth quarter earnings driven largely by our increased portfolio which funded late in the fourth quarter. Our debt portfolio yield for the quarter of 14.4% was consistent with our historical yields which are among the highest for BDCs. During the quarter, in addition to our normal portfolio interest, we earned income from accelerated income events and from a portfolio companies payment to Horizon of a success fee upon its sale. Notably, we received this success fee long after the company had repaid its loan in 2013. The high yield of our debt portfolio, our receipt of accelerated income and receipt of success fee, highlight the earnings power of our portfolio. For the quarter, we funded $11 million in loans to 3 companies. This resulted in a decrease in our portfolio of about $10 million due to prepayments, refinances and normal amortization totaling $20 million. As we mentioned on our March conference call, the pace of prepayments slowed in the first quarter. We expect prepayments in 2018 to be at a more historic levels compared to 2017's higher levels. The more normalized levels will continue to present opportunities for accelerated income from liquidity events, while supporting a portfolio with a more stable size and earnings power than we saw in 2017. Our selectivity and pursuing, and approving new opportunities also impacted our portfolio growth during the first quarter as many opportunities did not meet our standards. During the quarter, one transaction that we have been awarded was not approved following due diligence and as a result of new information uncovered in the process. Also, 3 open commitments terminated during the quarter because the borrowers did not meet the milestones established to allow them to access the additional commitments. In addition, we worked with our borrowers during the first quarter to assist them and entering into important collaborations, attracting new capital and or consummating sales of their businesses. All of which resulted in the company's paying down or paying off Horizon's loans. This activity demonstrates that Horizon's portfolio is dynamic and involves active management. During the quarter, we resolved our Digital Signal Corporation loan, which had been on non-accrual for several quarters. We ended the quarter with no new non-accruals and no loans on non-accrual. We did have an increase in 2-rated loans during the quarter due to stress in their performance. Any 2-rated loan is a concern, but historically the high percentage of such loans are resolved by improved performance, refinancing or repayment in full. We will as with our entire portfolio be actively involved in managing these accounts. We have continued our distributions at the $0.10 per month level through September of this year. It has always been our practice to set our distributions at a level that can be covered by net investment income over time. We currently maintain $0.07 spillover in further support of this distribution level as we look to maintain and build our portfolio throughout the year. During the first quarter, the fee cap and deferral mechanism reduced the incentive fee by $200,000. As announced on the March conference call, the advisor has agreed to waive any recoupment of previously deferred incentive fees, as a result of the fee cap and deferral mechanism for the full calendar year of 2018. Based upon the 12-quarter look-back period, the advisors waiver of these deferred fees could be impactful during the balance of 2018. Finally, we are continuing the work to improve our overall execution and further develop our platform. We recently extended and increased our KeyBank facility and we'll be looking for ways to improve our efficiency and performance in the future.

The recently passed legislation allowing BDCs to lower their asset coverage ratio provides the potential for increased returns to shareholders. Our board is currently reviewing the opportunities presented by this legislation. I will now turn the call over to Jerry, who will update you on our business development efforts and market environment, and then to Dan, who will detail our operating performance and financial condition. Jerry.

Thanks, Rob. Good morning, everyone. During the first quarter, we originated 3 new floating rate loans totaling $11 million and closed $8.2 million in new loan commitments. We continue to achieve strong onboarding loan yields of 31% and generated a loan portfolio yield of 14.4% for the quarter as we remain disciplined with respect to pricing. Since inception, Horizon has consistently had one of the highest yielding debt portfolios in the BDC industry with an average portfolio yield of 14.6%. This reflects our ability to consistently maintain strong onboarding yields and strategically pricing structure transactions with prepayment fees and ETPs in order to maximize returns when our portfolio companies exit our loan portfolio.

Consistent with what we said on last quarter's call, all of the transactions we funded in Q4, 2017 and Q1, 2018 [adding] investments with the potential for higher prepayment fees and with new ETPs has replaced aged investments that had lower prepayment fees and significantly accreted ETPs. As a result, we now have a large portfolio with enhanced prepayment fee and ETP potential as well as a more predictable interest income stream for newly originated transactions in their interest only periods. Included in our new loans was an upsized investment in HealthEdge Software, a health care technology company that is providing next-generation technology products to the health insurance market. It is one of our high performing portfolio companies and we were pleased to have made an additional investment in it. At the end of the quarter, we held warrant and equity positions in 76 portfolio companies with a fair value of $11.2 million. We experienced liquidity events during the quarter from 2 portfolio companies, LeTote and Digital Signal totaling $9.5 million and we had one of our portfolio companies Titan Pharmaceuticals pay down their loan from $7 million to $1.6 million in conjunction with entering into an important strategic relationship. We also refinanced a $2.5 million loan with Lantos and reset our prepayment fees and end-of-term payment. Partial and full prepayments and refinance transactions totaled $17 million in the quarter.

At the end of the quarter, our committed and awarded backlog totaled $26.5 million. Subsequent to the end of the quarter, we were awarded 3 new transactions totaling $15.2 million. As of today, we have a committed and awarded backlog of more than $40 million to 10 companies and a pipeline of new opportunities of over $300 million.

Turning now to the Venture Capital environment. VC investments remain strong with more money invested in the first quarter than total VC investment for the entire year in 2009 according to PitchBook. The $28 billion invested in Q1 was the highest in a decade and up substantially from the fourth quarter. We continue to see the trend of more VC investment going into fewer transactions driven by 25% of the total capital being deployed into 17 [unicorn] companies each valued at over $1 billion. We also continue to see seed stage and early-stage funding, trailing expansion in late-stage funding as VC seek larger investment opportunities to impact their larger funds. VC fundraising was approximately $8 billion in the first quarter, matching the same period a year ago.

VC-backed exit activity trended down once again in the first quarter after a 3-year high in Q1 of last year. $8.1 billion was exited across 188 deals in the quarter, but the pace of exits is expected to increase going forward due to increased IPO activity and corporations having more cash available for acquisitions from recent changes in the tax laws. There are signs of IPO interest in VC-backed tech companies. Dropbox launched a successful IPO in the first quarter and both DocuSign and Smartsheet completed successful IPOs last week, and there are number of life science IPO filings heading into Q2 signaling a potential stronger IPO market for the balance of 2018.

Turning now to our core markets. In the first quarter, life science market remained active and we continue to see high-quality deal flow and increased IPO activity. Horizon's life science portfolio experienced significant activity as well. Subsequent to the end of the first quarter, one of Horizon's public biotech companies vTv Therapeutics announced a Part A of its Part III trial for Azeliragon, an Alzheimer's therapy, failed to meet its [2] co-primary endpoints. As a result, vTv announced it will discontinue its trial for Azeliragon. As a reminder, vTv also has 2 ongoing Phase II clinical trials for diabetes as well as other platform technology that is continuing to evaluate and develop. Also subsequent to the end of the quarter, NinePoint Medical, one of our medical device portfolio companies announced a strategic partnership with Merit Medical Systems. As a result of the transaction, NinePoint paid off its loan to Horizon including a prepayment fee and ETP. Horizon continues to hold a warrant and a potential success fee in NinePoint Medical. Another one of our life science portfolio companies, Titan Pharmaceuticals entered into a collaboration transaction with a European drug company for Titan's FDA approved drug product, Probuphine which is used to treat opioid addiction. As a result of the transaction, Horizon's loan to Titan was paid down to $1.6 million during the quarter.

In addition, another Horizon portfolio life science company, Revance Therapeutics announced a collaboration transaction with Mylan Pharmaceuticals, which included $25 million upfront payment and additional milestone and royalty payments. As a reminder, Horizon's loan to Revance has been repaid but Horizon still holds warrants in Revance. Healthcare technology is a growing market sector with a great deal of VC capital entering the space. In our own health care portfolio, we were recently awarded $7.5 million transaction for a digital health care company that uses big [better information] to treat patients with behavioral diseases.

Regarding the broader technology sector, the overall market remains very active. This was led by robust VC investing in Internet, Artificial Intelligence and cyber security companies. Internet companies again represented the largest VC funding sector during the quarter with [$7.0 billion] raised according to MoneyTree. We are seeing more opportunities for later stage technology transactions, which is partially result of VCs looking for exits rather than future equity investments in mature, revenue-generating technology companies.

Now to the ventured debt competitive landscape. The environment in the first quarter was consistent with what we experienced in the fourth quarter. It was [intense] competition in all of our markets, particularly life sciences creating some pricing pressure, but we continue to see many quality investment opportunities with attractive onboarding yields. As noted previously, the life science IPO market saw some strength at the end of 2017 and into 2018 creating competition for our debt as well as opportunities for exits. While the IPO market has showed signs of improvement, it is still not a reliable source of capital or exits for VC-backed companies. Based on this and very strong VC investment in Q1, we expect continued opportunities to provide debt financing to VC-backed companies. As we progress through the year, we will continue to focus on building our investment pipeline of quality opportunities with our enhanced platform, we remain in a strong position to capitalize on attractive venture loan activity while maintaining pricing discipline in order to achieve strong onboarding yields and upside exposure through equity and warrant positions.

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 first quarter. Horizon earned total investment income of $7.2 million for the first quarter of '18 as compared to $7 million for the first quarter of '17. The increase was due to higher interest income on investments given the larger average size of our loan portfolio. For the first quarter, we achieved onboarding yields of 13.1% compared to 11.6% in the fourth quarter and consistent with our historical performance. Our debt portfolio yield was 14.4% for the first quarter of '18 compared to 15.5% for last year's first quarter.

Turning to our expenses, total expenses for the first quarter were $4 million compared to $3.6 million in the first quarter of '17. Interest expense increased year-over-year to $1.5 million compared with $1.3 million in the prior year period. This change was primarily due to an increase in average borrowings. Base management fee increased year-over-year to $1.1 million compared with $1 million in the prior year period. This change was primarily due to an increase in the average size of our investment portfolio. In addition, incentive fee expense for the first quarter was subject to the incentive fee cap and deferral mechanism under our Investment Management Agreement. This resulted in $200,000 of reduced expense and additional net investment income. Net investment income was $0.28 per share for the first quarter, compared with $0.29 per share in the first quarter of '17 and $0.21 per share for the fourth quarter of last year.

After paying distributions of $0.30 per share and earning $0.28 per share for the quarter, the company's undistributed spillover income as of March 31, was $0.07 per share. Our NAV as of March 31, was $11.65 per share, compared to $11.72 in the prior quarter. The decrease was due to our monthly distributions exceeding our net investment income and a slight decrease in fair value.

To summarize, our portfolio activities for the first quarter. New originations totaled $11 million, which were offset by $3.4 million in scheduled principal payments and $17.3 million in principal prepayment. We ended the first quarter of '18 with an investment portfolio of $212 million, which includes earning debt investments in 32 companies with an aggregate fair value of $193 million, a portfolio of warrants and equity positions in 76 companies with an average fair value of $11.2 million and other investments in 4 companies with an aggregate fair value of $7.7 million. As we discussed in the past, almost 100% of the outstanding principal amount of our debt investments bear interest at floating rates with coupon that are structured to increase when interest rates rise. Considering that, we believe Horizon is well positioned to benefit from a rising rate environment and experience both increasing income and expanding net interest margin.

Looking at our liquidity, Horizon ended the quarter with $40 million in available liquidity. This include $16 million in cash and $24 million in funds available under our existing credit facility. As of March 31, we had $58 million outstanding under our credit facility with KeyBank. As Rob mentioned, on April 6, we amended the credit facility with KeyBank to increase the aggregate commitments to $100 million and extend the revolving period to April 6, 2021, and the maturity date to April 6, 2023. The amended facility not only extends its draw period and maturity, it also strengthens our ability to capitalize on compelling opportunities that will allow us to maintain our high portfolio yield and grow net investment income in a disciplined manner. We appreciate Key's ongoing support and confidence in Horizon and look forward to continuing our beneficial relationship with Key and our syndicate partners.

As of March 31, our leverage ratio was [0.71]. Based on our cash position, the room we still have within our target leverage ratio and the cash flow from normal portfolio, amortization and prepayments, we continue to expect to maintain or slightly increase the current size of our portfolio in 2018. On April 27, our board extended our previously authorized share repurchase program until the earlier of June 30, 2019, for the repurchase of $5 million of the company's common stock. Since the share repurchase plan was first approved in September 2015, we have repurchased over 160,000 shares of common stock at a total cost of $1.9 million. Lastly, I'd like to note that we plan to hold our next conference call to report second quarter 2018 results during the week of July 30. This concludes our opening remarks. We'll be happy to take questions you may have at this time.

(Operator Instructions) Our first question comes from Leslie Vandegrift of Raymond James.

Just a quick question on Digital Signal. What was the numbers on the exist there. I missed that at the beginning.

So yes. So we -- hang on 1 sec. We will -- the loan was repaid by purchasing the assets by StereoVision. The amount of the loan at the time of the acquisition was about $2.8 million.

And then on the new non-accrual, Mederi. I know it's small, but just a little bit of color there would be great.

So Leslie, Mederi was non-accrual. We ended the quarter with no new non-accruals and no loans on non-accrual.

So I know you mentioned earlier in the call that the board is reviewing the leverage opportunities with the new rules, but the credit facilities that you just redid in early April, does that have any changes to covenants or any covenants at all limiting leverage in it?

No, it does not. The amendment, we started talking with KeyBank back in December and it was basically to extend the revolving period and the maturity period.

Okay. And on the yields for the quarter, 14.4%, I know onboarding was up a little bit this quarter but you have 110 basis points of yield decline over the last year. But LIBOR itself has gone up, I mean, almost -- little over 100 basis points in that same period. I know competition has been heavier in the venture space, but you talked about where you were seeing the money in life sciences versus health care, tech et cetera. Where is the lot of that compression coming from? Is it concentrated somewhere and are there other major drivers than competition doing that?

Yes. So actually on a quarter-to-quarter basis, much of our yield or a portion of our yield is obviously highly dependent upon prepayment activity in the venture debt portfolio because you do get, as you well know, you do get a lot of churn in the portfolio through [exits] and refinances and things like that. So I think onboarding yields actually haven't been as impacted as much, that said, I think we've talked about this really for the last year. We have become far more strategically focused on what parts of the venture kind of technology and life science spaces that we're interested in investing in and we are looking for higher quality opportunities with a better strategic alliance with the investors and so that does -- those deals are in fact going to be a little bit more competitive and a little bit more price sensitive. But I think, overall, we can still get a very nice kind of bell curve blended onboarding yield, and I think, we have been doing that and I would just remind you that everything we do is floating rate, so as rates go up on our existing portfolio. The rates on those transactions, obviously float up with us.

Okay. And on that, and so $11 million originations in the first quarter, but you talked about the drivers there and in the press release discussed since the portfolio is rather new -- newer vintages at least, that you think, the income is more predictable, does that mean, you think the originations are going to be more predictable, more steady or just the prepayment flow.

I -- certainly prepayments will. In terms of originations, a lot has to do with timing. Many of our commitments and even term sheets that have been awarded are oftentimes subject to equity raises happening. And so those were relying on something that's not as much in our control to get those equity financings done before we put in our debt. And so those are timing issues which are going to impact. What I will say is that in looking at our pipeline, the number of opportunities are quite favorable. We're seeing plenty of incoming opportunities to refinance. Rob did mention and I would second that, that we actually kicked a lot of opportunities in the first quarter. We saw it to the curb because they didn't fit into our kind of strategic goal of -- or narrower strategic goal, I guess in terms of the kinds of companies we're looking to finance in the markets that they're in. So there will be some of that, we're going to be patient on that. Our leverage is [0.71], what I think was about the same last quarter, so we have liquidity. We are in a pretty good position to be able to invest but we're going to continue to be very focused on finding the right kind of transactions for the portfolio.

And would those parameters change materially, if you did end up getting that extra ton of leverage?

No, actually I think that that would just allow us to do higher quality deals and be a little bit more competitive on pricing.

Just last note. I did just flip through the key -- Mederi is marked as non-accrual in the first quarter that was the source of my question on that. Again, it's too small term loans but it is marked. Is that an error then?

Yes, that must be an error.

Our next question comes from Jonathan Bock of Wells Fargo Securities.

And gentlemen greatly appreciate the analysis that you're putting into the approach to two-to-one and also happy to see kind of the amendments as well. And so this does brings up a current question. So Rob, Jerry, Dan, if you were, let's say, forget the constraint of one-to-one leverage, unless just imagine it doesn't exist. How much current capacity to your borrowing base do you have to grow the portfolio without any consideration of additional equity issuance? Just a ballpark.

Yes, it's -- we could grow the portfolio about $20 million to $30 million net.

So then Rob, as you mentioned how the board is reviewing two-to-one, do you feel that an additional -- #1, we will separate it, getting the statutory or getting the approval for a two-to-one leverage is much different than actually using it, right. I know there is lots of questions really -- so the rating agencies, et cetera, and it can absolve a few risks that relate to bond that have covenants tied to it. Is it your intention, Rob, if you were to have an additional turn of leverage? Does the investment strategy change? Do you choose to focus on any different types of assets to further diversify or staying in the same niches is what you do and what you will continue to do on a go-forward basis?

Yes. So the answer is only slightly on the margin, I think Jerry said it in his answer to the previous question is that we would be looking to do more of the higher quality, better transactions. As a reminder, we entered this world with a credit facility that was three-to-one leverage as a [public company in 2010]. So the strategy -- there is no intention to go somewhere we are not currently competing because of very low rate buying participations in the market...

Sure, that makes sense. And then the question is so and Jerry discussed. I know you see everything, all of it, you see it all. To the extent that you were going to focus on lower risk, well perhaps more senior in the stack style venture loans within your wheelhouse, what would be the onboarding yield that you would be able to kind of put on in today's environment?

Yes, that's a really good question, Jonathan. And honestly, it's exactly the kind of things that we are looking at right now and discussing with our board, so we can articulate kind of a -- not just a strategy related to whether we go to the two-to-one leverage, but to your point, where in our market can we take advantage of having the two-to-one leverage. Obviously, I think in the life science space, there is a significant amount of opportunity relative to transactions that we look at that, that if you have greater leverage, you can provide to those types of companies really quality financings that A, help the company but they're also willing to pay you for it in terms of warrants and things like that. So yes, you may give up some yield which you can recover somewhat from the higher leverage but you also get higher -- the potential for greater warrant coverage. If I could just like give you one kind of -- one example when we...

And this is all conceptual, Jerry. So I appreciate it, no one is pushing you down this road just trying to get an understanding of what may be....

Jonathan, it's a really good question and of course, it's very timely. So we did a deal with Pharmasset back in 2009 before [we] went public. It was got $30 million commitment. Now I'm not going to put a $30 million commitment on Horizon's balance sheet today. Okay, given the leverage we have but we -- that ended up being a great transaction. The interest rate on the transaction may have been a little bit lower than where else we were getting in the marketplace on, tech deals and things like that, but the company was ended up being sold for $11 billion and our warrant turned out to be extremely valuable. So those kinds of transactions or things that we have done in the past that we know that we are capable of doing, we know where to find them, we know the investors who invest in them and that would give us an opportunity to look at those.

So then maybe just another hypothetical, so you know, Jerry would that mean that what we would be looking at would be a L5 and L6 instead of L7 and L8?

Yes, no, not.

No, so maybe a little higher or?

Yes, I mean, it's -- still look. This is venture lending still. There is the perception and the reality of risk. I don't think. I have in my 30 years, I've never seen the market, no matter how competitive it has got Jonathan, relative to competition coming in. Go to that kind of pricing over any kind of sustained period of time, and I wouldn't expect that the additional leverage is great, but it wouldn't impact pricing to that extent. At least not (inaudible).

Not on our book.

Yes, not on our book

Go it. And so then here is the genesis is Rob and Jerry, if you have and grow the ability to leverage your current equity base. The question is if you invest in "Lower yielding more senior transactions" Is there an available or can you point to a tangible increase in NIM and or shareholder ROE as a result of moving down in that stack. In the middle market world, spreads are so tight and the fees on assets are at a point where there is no incremental spread that flows through to the bottom line to investors. So what you're -- what it sounds like you are telling me and you can say, yes or no. Is that, John, yes, if we utilize incremental leverage there is definitely something leftover from -- that will fall to the shareholders after our fees paid and or will consider perhaps adjusting the fee to ensure that some level of flow-through occur so that not all of incremental spread is gobbled up by fee and interest costs.

Yes, we will -- absolutely that's exactly what our board is considering as Jerry says, we're looking at the market opportunity, the pricing structure, the return. We will do this if we feel it advantageous for our shareholders.

I just add real quickly to that Jonathan because your -- I saw your model on that. And you just asked a very [interesting] question a minute ago, which is we have to change our strategy or anything like that. That's exactly, I mean, with one of that reasons we feel we're in a very strong position is because we are not one of those companies. We are not a middle market lender fighting for every half interest rate point on yield and fees and things like that. We're in a different market that requires a different strategy and a different knowledge base and a different understanding. And I think, that when we use the same kind of dynamics you use in your model, we came out with obviously a different result because actually the kind of yields that we have historically been able to get very consistently. We will capture some of that, we might be willing to give it away -- a little bit away for higher quality but we will still capture a fair amount of that. And I think that that it makes a very big difference in your model, which is...

And at the end of the day, this is what shareholders. I would argue a certain group that Leslie and everybody else on this phone speaks to is that if there is some element of shared incremental upside, please diversified portfolios matter, Jerry and Rob, we would love for you to be in safer loans and a Pharmasset repeat would also be amazing, but also keeping in context. What is left over for shareholders because if there is no incremental spread and leverages are increasing their stance to be a -- some set of public disappointment because they would believe that all incremental returns go in favor of the external manager, which in this case, given how you yield wouldn't be the case but you understand the problem for the industry large. You have to demonstrate how it actually helps them. So a credit to you for thinking about it, there is no any, there is no right answer and you are clearly in a different market but sounds like everybody is on the right track and we greatly appreciate the context, you gave us today.

Our next question comes from Christopher Testa of National Securities.

You guys had previously done a securitization and with risk retention just about [dead], I'm just curious if this is something that you guys would consider again for source of financing going forward?

Yes, Chris, we are always looking at the different avenues and ways to leverage our balance sheet and I have talked to numerous people relating to that, but we believe right now that our KeyBank facility that we have and the availability that we have make sense with our balance sheet as it currently stands.

Okay and just touching a bit on the credit facility and I know you guys just gave an exhaustive amount of detail on the potential for a leverage increase. But as you guys explore the process of potentially reducing the asset coverage. I'm just curious what your discussions have been with the banks on your facility whether they're seemingly more receptive to look at this on a case-by-case basis or whether they're kind of painting everything with a broad brush like S&P had done.

Yes. When we spoke to Key and our syndicate, they are looking at it as a case-by-case basis. And like everyone else they are waiting and seeing how the market turns and won't be leaders in that, but they like our facility, we like our relationship with them and time will tell.

Got it. So would you say, Dan, that they have been very receptive to the potential for you guys or the sector in general increasing in that you wouldn't expect a major in terms or rates?

They've been very receptive and as we mentioned, we just amended it and went through a view with them and going through their due diligence and they appreciate our relationships and we appreciate the relationship also. So everything has been very positive.

Got it. And how the discussions been with your shareholders. I'm sure, you've spoken to many of them, whether you call them or they call you out to discuss, put your plans for that potential. I'm just curious, what you've kind of taken away and what the highlights have been with the discussions from people holding your stock.

Yes, remember most of our stock is, we're largely retail. Chris, so not a lot of feedback.

Okay, that's fair. And I know you guys had mentioned that you had a few of the open commitments were terminated during the quarter, the milestones were not met. Just wondering, was this concentrated to a particular sector or was this just idiosyncratic on a case-by-case basis with these?

Yes, absolutely on a case-by-case basis. Nothing abnormal relative to anything that we historically see in our portfolio.

Got it, okay. And the loans that you guys have rated to increased pretty significantly about $15 million or so quarter-over-quarter. How many companies and which companies in particular were ranked to during the quarter?

So the primary -- one loan vTv Therapeutics that we mentioned. We downgraded to a [2] based on their clinical news that Jerry mentioned in his part of the script. So that was the major dollar amount movement. (inaudible) normal course in the process of raising funds, some stress in that process, but so when that happens, we will downgrade those from 3s to 2s and watch them closely as we watch all of our accounts.

Our next question comes from Chris Kotowski of Oppenheimer.

Most of mine were asked but just you mentioned at the outset that in the quarter, you recognized accelerated income and success fees, did you tell us how much those were? This quarter, and is there a typical run rate?

Yes, we did not mention how much they were, but they were in the ballpark of around $500,000 between the ETPs and the success fee. And there isn't a normal run rate that you can typically model, it's very dependent on the prepayments that happen in the quarter.

And just could you ballpark how much say in the last 3 years on average per year or but this...

I would say, ballparking, it's about 2.5% to 3% related to the prepayment activity that happened in the quarter and on a normal quarterly prepayment run rate would be about $10 million to $15 million of prepayments a quarter.

Our next question comes from Casey Alexander of Compass Point.

I'm not sure I understood, did you say that there was a success fee that was earned during the quarter. That was a delayed success fee that came from a loan that was paid off in 2013?

That's correct.

And how much was that?

Ballpark $200,000.

$200,000, okay. As it relates to the portfolio, 100% of the portfolio was senior secured, isn't that right?

That's correct.

And how much of that would you consider to be first lean?

So included in that 100% senior secured are some loans that are secured behind a revolving credit facility. Yes, it is around 45% of the portfolio.

Okay, because to John's question, it seems as though -- what you said was that your -- there are higher quality deals that you're currently turning down that you would not turn down in the event that you were able to access the second turn of leverage. What type of higher quality deals are you turning down?

Not turning them down, Casey, we're not winning them or we're not able to control the pricing because of the competition. We're not turning them down.

Our next question comes from Ryan Lynch of KBW.

I just have one question. When I kind of look at the outlook in 2018 as far as prepayment and end-of-term fees. As I think about the comments you guys said, you guys now have a younger portfolio which means you have higher prepayment and end-of-term fees. In the portfolio, you also said that the portfolio or the markets are conducive of potential IPOs and M&A which means to me, there could be some higher prepayments as actually loans prepaid in the quarter or throughout 2018 and if you have those higher end-of-term in fees and prepayments due to a younger portfolio. Should we expect fee income to increase from an annualized basis in 2018 versus 2017 considering the younger portfolio?

It's sort of a balanced position, Ryan, because the portfolio is younger the loans are in interest only, most of them. So it takes an liquidity event or an exit event like the ones you describe to happen, but when they do happen, they will produce superior income because the prepayment fees are higher and the end-of-term payments have not been accreted. So the incidence might be lower, but the profit from each even will be higher.

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

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 August. This will end our call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.