Horizon Technology Finance Corp (HRZN) 2018 Q3 法說會逐字稿

Good morning, and welcome to Horizon Technology Finance's Third Quarter 2018 Conference Call. Today's call is being recorded. (Operator Instructions). I would now like to turn the conference over to Megan Bacon of Horizon for introductions and a reading of the safe harbor statement. Please go ahead.

Thank you, and welcome to the Horizon Technology Finance Third 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 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 regards 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. Building on the positive momentum we established in the first half of 2018, we generated strong results for the third quarter. Implementing our strategies established early in the year, we made notable progress in a number of important areas. Specifically, we grew our portfolio and committed backlog for the second consecutive quarter, highlighting the strong demand for Horizon's venture debt products. We posted our third consecutive quarter of net investment income growth, earning net investment income of $0.30 per share that covered our distribution for the quarter. We've had only one new nonaccrual since the beginning of 2017, finished the quarter with no loans on nonaccrual, and grew our NAV by $0.06 per share.

Finally, yesterday our shareholders approved the proposal to implement the increased leverage made possible by the Small Business Credit Availability Act passed earlier this year. These steps should strengthen our liquidity and growth potential as well as ensure our interests remain strongly aligned with shareholders. Today we will discuss this progress in more detail.

The growth of our loan portfolio by over $23 million during the past 2 quarters has contributed to higher investment income. We continue to maintain one of the highest yielding floating rate loan portfolios in the BDC industry. For the third quarter, our debt portfolio yield was 14.8% and 14.4% for past 4 quarters, which takes into consideration regularly scheduled interest and fee income as well as income from liquidity events.

As we have discussed on previous calls, the pace of prepayments has normalized in 2018 relative to 2017's higher levels. Prepayments will continue to present opportunities for accelerated income from liquidity events and a more stable portfolio in terms of size and earnings power. We funded 7 new loans in the third quarter of 2018 totaling more than $24 million which enabled us to increase our portfolio by over $13 million. We also closed $50 million in new approvals and commitments that increased our committed and approved backlog to $47 million which we believe highlights the strong demand for our growth capital.

We continued to make progress during the quarter on the portfolio's credit quality. Again, since the first quarter of 2017, we have had only one new nonaccrual loan and no loans on nonaccrual at the end of the third quarter. We are continuing to see some activity in the technology market for M&A that has improved the prospects for our portfolio companies. Three portfolio companies entered into a definitive agreement to be acquired during the third quarter.

As I mentioned earlier, we had an increase in our NAV. This can be attributed to stability in the fair value of the loan portfolio and an increase in the fair value of the warrants we hold in private portfolio companies. Based upon the growth in our NII over the past 3 quarters and our outlook, our board declared monthly distributions of $0.10 per share for January, February and March, 2019. We have now declared distributions at this $0.30 per share level for 9 consecutive quarters. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time and maintain an undistributed spillover of $0.05 per share in support of future distributions.

We are pleased that our shareholders voted to approve the early implementation of the Reduced Asset Coverage Test which was approved by our board of directors in June. We believe the additional leverage at Horizon will complement the joint venture that we established in the second quarter with Arena Investors and leveraged with New York Life to expand our venture lending brand and market position. Specifically, and effectively immediately, Horizon's asset coverage requirements for senior securities have been reduced to 150%, equivalent to a 2:1 debt to equity ratio, from 200%, equivalent to a 1:1 debt to equity ratio. It's important to note that Horizon will continue to be prudent in its utilization of leverage and will not alter its investment strategy. Rather, we intend to continue to provide senior secured loans to well sponsored development stage companies in the life science and technology markets. As we mentioned last quarter, taking into consideration the yields that we are able to achieve in the current market, the increased leverage, even at moderately higher levels, can produce improved return on equity and increase net investment income for our shareholders.

Now that the Modified Asset Coverage requirements are in effect, we expect to seek opportunities to increase our target leverage into a range

From 0.8:1 to 1.2:1. We will execute this strategy judiciously over the coming quarters in a disciplined manner from the previous target of 0.75:1 which will provide us increased flexibility to grow and diversify our assets and investment portfolio. In addition to the approved asset coverage proposal, a new agreement with our advisor was approved that ensures we continue to align with the interests of our advisor and shareholders as we access increased leverage. The advisor has reduced the base management fee percentage to 1.6% on the amount by which gross assets less cash and cash equivalents exceeds $250 million. The new investment advisory agreement continues to provide our shareholders with protection through the fee cap and deferral mechanism implemented in 2014. The advisor has further agreed to waive the recoupment of previously deferred incentive fees during 2018 and that waiver includes $400,000 waived during the third quarter. Total amounts waived now total $700,000.

To conclude, Horizon's third quarter performance was strong as we achieved substantial success on a number of fronts. We grew the portfolio, earned solid NII covering the dividend, and continued to strengthen credit quality while making further progress to enhance our liquidity and growth potential. At the same time, we continue to see strong origination activity and have expanded our backlog.

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.

Thanks, Rob. Good morning, everyone. During the third quarter, we continued to execute on our strategy of sustained managed growth based on adding high quality venture debt loans with attractive yields to our portfolio. We added 7 new floating rate transactions to our portfolio totaling $24 million. When combined with the portfolio growth we achieved in 2017 and year-to-date 2018, our portfolio has now grown 23% over the last 7 quarters while we have maintained a strong focus on credit quality and consistently achieved strong onboarding yields. During the quarter, our onboarding yields of 13.3% reflected the economic benefits of our strategy to provide senior secured debt solutions to growing technology and life science companies as well as the reality of a rising rate environment.

We had 2 portfolio exits during the quarter totaling $6.6 million including the successful exit of SavingStar which was a 2 rated credit in our portfolio in Q1 of 2018. The prepayment and accelerated income from these events resulted in a loan portfolio yield for the quarter of 14.8%. While prepayment activity was lower than prior quarters, when it was combined with our growing portfolio of high yielding loans, we continued to maintain one of the highest yielding debt portfolios in the BDC industry with a more predictable income stream, all the while getting new investments with higher ETPs and prepayment opportunities going forward. In addition to our funding activity during the quarter, we also closed $50 million in new loan commitments and approvals and ended the quarter with a committed backlog of $47 million compared to a backlog of $29 million at the end of Q2.

At the end of the third quarter, we held warrant and equity positions in 78 portfolio companies with a fair value of $12.5 million. In addition to exiting 2 of the loan investments during the quarter, we also had 3 of our warrant portfolio companies, eAsic, Spring CM and Ekahau, announce M&A transactions which had an impact of approximately $1 million of increased warrant value at Q3 and $1.2 million of warrant proceeds received in Q3 and early Q4.

Subsequent to our quarter end, we have been awarded 2 new transactions totaling $28.5 million and approved one new transaction totaling $12 million. Our committed, approved and awarded backlog as of today is $75.5 million to 10 companies, a pipeline of new opportunities of over $445 million. In addition, we have exited 2 portfolio companies already in the fourth quarter, resulting in accelerated and prepayment income of $1.2 million. We are also aware of one additional exit that could take place in the fourth quarter as well.

With our solid committed backlog coming into the quarter and anticipated exit activity, we expect Q4 to be a very active quarter. Our ultimate goal for the quarter will be to continue to achieve modest portfolio growth while enhancing NII with prepayment and accelerated income combined with a growing, more predictable income stream from our growing high yield portfolio.

Turning now to the Venture Capital environment, VC investments strengthened to new highs during Q3. Investments to VC backed companies were up 17% for the third quarter over Q2 with $28 billion invested across 1,229 transactions according to Money Tree. During the first 9 months of 2018, $84 billion was invested in VC-backed companies which already reflects a decade high in terms of annual deal value. Despite a slight reduction during the third quarter in deal value across early, angel and seed stages, 2018 remains on pace to meet or exceed 2017 levels which we continue to view as a positive indication of new company formation and potential debt prospects in future quarters.

In terms of VC fundraising, we have already seen over $30 billion raised in 2018 reflecting the fifth consecutive year that milestone has been achieved. 2018 remains on pace to exceed 2017 totals and fundraising shows no indication of a significant slowdown.

VC-backed exit activity in Q3 is encouraging as the number of exits in 2018 should now met or exceed 2017 totals. Total capital exited is expected to easily surpass 2017 by the yearend due in part to a greater percentage of companies being exited at larger valuations according to PitchBook. A healthier IPO market continues to provide much needed returns to LPs and capital for reinvestment. In the third quarter we saw 23 venture-backed IPOs including 17 in the life science sector which bodes well for Horizon. Given favorable public market conditions for IPOs, we expect IPOs, in biotech especially, to continue their strong run. One of our life science portfolio companies has recently filed to go public under the Jobs Act.

Turning now to our core markets, in the third quarter, the life science market remained robust with solid demand for equity and debt. Horizon continues to see an active market related to medical device companies. During the quarter we closed a $15 million venture loan facility to CSA Medical, a developer of novel, protected cryotherapy medical devices. Additionally, the healthcare technology market for debt and equity continues to grow. We added MacuLogix, a pioneer in the detection of age-related macular degeneration and incurable eye disease to our healthcare portfolio in the third quarter. The broader technology sector remains very active with funding available for new and growth-oriented companies. AI technology, autonomous vehicles, FinTech and internet companies continue to dominate the VC investment landscape and we are beginning to see positive signs for a healthy tech IPO window. As mentioned earlier, in our own portfolio we had 2 exits during the third quarter and one already in Q4.

Regarding the general venture debt competitive landscape, the environment in the third quarter was consistent with what we have experienced in prior recent quarters. While we continue to see overall strong demand for our debt products, during the past 3 quarters we also have seen an increase in larger debt transaction requests by borrowers and relaxed terms and milestone structures provided by other lenders which raises a cautionary note to an otherwise positive venture debt market. Covenant-lite debt transactions have been afflicting middle market lending for the past 24 months and we are now beginning to see some of that same pressure being applied to the venture lending market. We recognize this potential risk to our market and have taken a more strategic defensive market position over the past 3 quarters related to these issues. On the positive side, the trends of larger loan sizes and lighter covenants are often driven by a combination of significant revenue growth and larger equity rounds.

Despite competition from many different funding sources, Horizon's 15-year market presence and reputation makes us well positioned to provide growth capital to innovative companies in our core markets and we continue to identify and win attractive investment opportunities. Additionally, with sustained strength in the IPO market, particularly for life science companies, and near record levels of VC investment in the third quarter and preceding quarters, we expect continued opportunities to both exit investments and provide debt financing to VC-backed companies. Based on these trends and the robust investment pipeline, we believe Horizon with its focus on credit quality will continue to deliver long term, disciplined portfolio growth. 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 2018. Horizon earned total investment income of $7.8 million for the third quarter of 2018 as compared to $6.8 million for the third quarter of 2017. The increase was due to higher interest income on investments given the larger average size of our loan portfolio. For the third quarter, we achieved onboarding yields of 13.3% compared to 11.9% in the second quarter. Our loan portfolio yield was 14.8% for the third quarter of 2018 compared to 15.3% in the second quarter and 16.5% for last year's third quarter.

As mentioned in the past, the primary changes period to period to our portfolio yields are driven by the timing of new loan originations, and the timing and extent of loan prepayments and the related fee income from those prepayments, including prepayment fees and acceleration of previously unamortized end of term payments.

Turning to our expenses, total net expenses for the third quarter were $4.4 million compared to $3 million in the third quarter of 2017. Interest expense increased year-over-year to $1.7 million compared with $1.1 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 $1.2 million compared with $0.9 million in the prior year period. This change was primarily due to growth in the average size of our investment portfolio. In addition, we recorded $850,000 of incentive fee expense in the third quarter of 2018. As previously mentioned, in March of 2018, the advisor irrevocably waved the receipt of incentive fees related to the amount previously deferred that it may be entitled to receive under the Investment Management Agreement for the 2018 year. During the third quarter of 2018, the advisor waived performance-based incentive fee expenses of $400,000 which the advisor would have otherwise been paid.

Net investment income was $0.30 per share for the third quarter, compared with $0.33 per share in the third quarter of 2017 and $0.29 per share for the second quarter of this year. As we covered our distributions with net investment income for the third quarter, the company's undistributed spillover income as of September 30 remains at $0.05 per share. Our NAV as of September 30, was $11.66 per share, as compared to $11.60 in the prior quarter. The increase is primarily due to successful portfolio company events which increased the fair value of our warrants.

To summarize our portfolio activities for the third quarter, new originations totaled $24 million, which were offset by $6 million in scheduled principal payments and $7 million in principal prepayments. We ended the third quarter of 2018 with an investment portfolio of $240 million, which includes debt investments in 33 companies with an aggregate fair value of $215 million, a portfolio of warrant and equity positions in 78 companies with an aggregate fair value of $13 million, other investments in 4 companies with an aggregate fair value of $8 million, and equity interest in our JV with an aggregate fair value of $4 million. As we highlighted in the past, nearly 100% of the outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase as interest rates rise. As such, we believe Horizon remains 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 $20 million in available liquidity. This include $6 million in cash and $14 million in funds available under our existing credit facility. As of September 30, we had $76 million outstanding under our credit facility with KeyBank. As Rob mentioned, our shareholders recently approved the proposal to lower our asset coverage requirements. As a result, we intend to seek opportunities to increase our target leverage range to 0.8:1 to 1.2:1 from the previous target of 0.75:1. In addition, as we discussed on the prior call, we established a joint venture in the second quarter owned on an equal basis by Horizon and Arena Investors. We continue to expect the pipeline of JVs over the next several quarters and expect to reach certain investment thresholds during this year's fourth quarter or the beginning of 2019 which will enable us to access leverage from New York Life.

Lastly, I'd like to note that we plan to hold our next conference call to report fourth quarter 2018 results in early March. 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 Ryan Lynch from KBW. Your line is now open.

Good morning. First question I had, you guys actually had good portfolio growth, net portfolio growth in this quarter. I was just curious, can you walk, but I guess you guys didn't have any growth in Horizon senior loan fund. So can you maybe just walk me through what is the determination between what loans actually get placed on Horizon's balance sheet versus which loans go into the Horizon senior loan fund or what sort of loans could actually be on balance sheet and in the senior loan fund?

Yes, Ryan, this is Dan. So as we mentioned the strategy in the senior loan fund is similar to the strategy at Horizon. It's early in the process with the JV and we closed it in the end of Q2, so we're in 3 to 4 months and we're working through the JV process with Arena and our investor. So Horizon manages its investment portfolio and opportunities as we normally do and then the JV is another platform. We discuss those opportunities with Arena and we decide what goes in there through that process.

So could the loans that you guys place on the balance sheet today also be split and put some on the balance sheet as well as some within the fund? And if that's the case, were those loans essentially, was it because you guys put them on your balance sheet, so you got the options of the loans with Arena this quarter? Were they the ones who you didn't want to actually put those loans in the fund? I'm just trying to get an understanding of why none of those loans were actually placed into the fund this quarter when you guys made some loans last quarter.

I'd think about it, Ryan, this is Rob, more of a timing thing. It's our intention to split deals between on balance sheet and the joint venture. As Dan said, we're working through the process to make that work effectively and so I would expect to see some of the loans that we have already funded end up in the JV, and going forward for those loans, new loans to be placed some in the JV and some on the balance sheet.

Okay. And then regarding the fee waiver, you guys have made a decision to waive the deferred portion of the incentive fees through the remainder of 2018. That's not an immaterial amount. So I'm just wondering as you kind of look to 2019, what are the thought process for potentially continuing that waiver?

We made the decision in March to do that for 2018. We'll take a look at the outlook next year and make a decision at that time.

Okay, those were all my questions. Thanks for your time.

Our next question comes from Robert Dodd from Raymond James.

First, congrats on covering the dividend in the quarter. A couple of questions. On the spread, if I got it right, the onboarding yields this quarter, 13.2%, they were 11.9% last quarter and if I just look at overall yields as well, 14.8%, in the last 4 quarters it's been 14.4%, obviously base rates have gone up over that period. But if I just look versus prior quarter, I mean LIBOR was stable versus the third to second quarter, prepay and regular amortization fees seemed pretty stable Q2 to Q3, in fact it maybe ticked down a tiny part in Q3 on the amortization side. But the yield was up. And then to Jerry's point, the market is pretty competitive. So can you kind of reconcile those 2 things for us a little bit? Higher onboarding and higher average yields in a competitive market when fee income seems to be stable. I mean it sounds like spreads are going up and that's pretty rare in a highly competitive market. So can you reconcile those issues for us?

Yes, Robert, this is Jerry. I wouldn't take one quarter as an indication that there was a trend, a particular trend going on here. It could be related to one or 2 transactions that we just were able to kind of maybe have the inside track on relative to the transaction and the relationship we had with the borrower and their investors which could have impacted yield. So I wouldn't take this necessarily one quarter. But we are absolutely focused on where rates are today, where they are going. And you are absolutely right, both relative to interest rates as well as other structure points in a transaction, it is a very competitive market and we are finding ways to compete relative to all those things. But again, it was actually a relatively, overall the $24 million I think in fundings, third quarter is always relatively lite compared to the other quarters. So I would give it a couple more quarters before we kind of draw any conclusions on that.

Got it. On the liability structure, obviously there you've got shareholder approval to go over 1:1 debt to equity. Do you think the covenants in obviously the key facility which looks like it's just a net worth covenant and a bond base, and then also on your baby bond which I presume is just a 40 Act covenant. Or does, do either of those things need to be adjusted before you can take advantage of the shareholder approval or are you just ready to go right now?

There's nothing in either of those documents that will prohibit us to take advantage of it as they are today.

Got it. Then if I can have one more on the fee, obviously you've announced that you'll lower the incremental fee to 1.6%. If it seems like you've done that for me, now I want more, I mean why 1.6%? It's -- why not 1.5%? Why not 1.75%? I mean what was the process the Board went through to come up with that 1.6% on the incremental? And is it related to a desire that that's what it needs to be above an asset base in order to cover the dividend in 2019? Or was that a separate consideration?

I appreciate your preamble, Robert, because no good deed goes unpunished. The thought was, we took a hard look at our peers and where they are. There's a lot of people at 1.75%, we thought we would in essence average down to 1.7%, and on the margin, the 1.6% also helps with the argument about leverage that said this was all about the manager. It's not all about the manager, it's about ROE and increased NII. And so we decided on 1.6%. And going forward, I think you should note that we did it on assets, not on just those loans, just when we were above 1:1 leverage. If we're able at some point to grow both debt and equity on the margin, the fee will continue to average down.

Our next question comes from Casey Alexander from Compass Point.

Can you explain the technicalities of the vote for the increased leverage? And the only reason that I ask that is looking at the filing from last night, it appears that only 45% or so of your shares outstanding actually voted for the leverage, not 50%. So I'm just curious what the technicalities are of achieving a positive vote when less than 50% of the shareholders voted for the new proposal.

So the technicalities, I'm not a lawyer, Casey, but as I understand it, there are 2 hurdles you have to meet. One is you have to have a quorum of shareholders that vote. In the case for the shareholder, for the leverage vote, that quorum was more than 50% of the stock shares held on the registered date which I think was early in September. And then of those voters, you needed to achieve for the leverage vote more than 50% voting for. So we had close to 90% of the people who voted, voted in favor of the proposal and we had about 53% of our total shares voted.

Okay, that explains it for me. And believe me, I appreciate how difficult it is to get retail BDC shareholders to vote for a special provision. It's not a simple task. Jerry, this is for you. I'm curious about your cautionary note about cov-lite and looser structures entering the venture debt space. The company has as big a backlog as I can remember and yet in your comment you said you're taking a defensive market position. Could you explain to me what that means in regards to a defensive market position?

Sure, absolutely. We absolutely over the last 3 quarters, Casey and others on the phone, we have seen a significant increase in the requests from borrowers for larger debt transactions. As I also mentioned, generally speaking, they are being accompanied by larger equity routes as well as either if it's a revenue company actually attractive revenue growth from the companies as well. So what we are trying to do is not be enamored with the growth or the equity round that they've done, but looking forward relative to if we make our investment today, are they going to be able to continue to do that? The way we go about structuring the transactions is all about that. It's not about the fact that they may have just done a $25 million equity round and they grew revenues 40% in the prior year. It's about will they be able to continue with that trajectory? And if they can't, what does that mean to us and what do we need to do to protect ourselves in case they can't continue on that base? So we will continue to use things like milestones relative to tranching our deals and making maybe a larger debt commitment. But access to that money, based on them continuing to perform the way they historically have performed over the recent year. So that's the first thing. Then the second thing is we would look at the same thing relative to covenants. So we are still trying to put in covenants that we believe that down the road we may need to protect ourselves. So that's one thing we are doing. Yes, there is pressure on that from a competitive standpoint, but we are continuing to do that, we have plenty of pipeline, so if we can't win all the transactions, and we have lost some pretty attractive transactions because we couldn't get the right structure. So that's one thing. Second thing is we're looking at where we are in the cap structure. The more senior we are in the cap structure, the better feel we have for the company because we have a pretty good database of transactions since we started 2003 and we know being senior in a transaction can have a material impact when things don't go well on a comparative basis to being further down the cap structure. So we're basically incorporating all of that in our thinking as we evaluate these transactions and not trying to be enamored because the market is very, very strong relative to equity investment now, relative to some actually good growth in revenues. But we look out over the next 2 years, and I don't know, I know you probably go to some conferences, certainly I've gone, I on a regular basis go to conferences and whether I'm on the panel or I'm sitting in the audience, someone is going to suggest that we're about to hit a downturn in the credit cycle. They're not going to give us a timeframe on that, but everyone sees it coming. So we are, we recognize that, we're cognizant of it, and trying to structure transactions that won't be in a perfect, or I should say just a really strong environment that we're in today

The prevalent comment I've heard is we're in the fourth year of the eighth inning of the credit cycle. But I'm not sure in terms of evaluating companies by looking forward at what you think they're going to do over the next couple of years and whether that's sustainable versus the loan that you're making is anything different than what you might have already done. Let me ask you a different question. You mentioned that the deal sizes, that the equity raises in the deal sizes that are being asked are larger. Can you protect yourself a little more by clubbing out a portion of the deal or syndicating out a portion of the deal and thereby keeping your hold sizes smaller and your portfolio more diversified?

That's something of course we've always done. Actually, it's always been a part of our strategy. So yes, certainly that hasn't changed relative to how we think about hold sizes in our portfolio. I think right now our committed backlog is about, committed and awarded backlog, is about $75 million. That's 10 deals, that's $7.5 million hold size. That's the place where we're comfortable.

And our last question comes from Christopher Testa from National Securities.

Just touching a little bit on what Casey was getting at regarding the cov-lite and kind of deterioration in terms and what you guys are seeing, are there any instances where you might find it good to do a loan that might be cov-lite or might have some looser terms if it's with a VC that you guys have repeatedly done business with and you feel comfortable with? Or is this something that just gets passed on immediately if the proper protections aren't in place?

I think that's a great question actually. But there's no perfect answer to it. We went through 2007 through 2010 which was a horrible time overall globally. Our portfolio in many ways came through that probably in most asset classes. And in part, the reason for that was in fact that we did work very closely with the VC investors in the portfolio companies. And to the extent that the companies themselves were doing what they were supposed to do, relative to developing their product or whatever, but the markets weren't allowing them to raise capital because things were so bad, we worked very closely with the VC investors. And that did allow us to get a lot of companies in our portfolio and their portfolio through that period. So who the investors are absolutely do matter as we are looking at transactions. That said, I think that you can find yourself on the wrong side of that ledger if you are just basing your decision on the fact that you have good investors. Because no matter how good a VC firm might be, they have a portfolio just like we do. And they rank their portfolio companies just like we do. And when things get difficult, the bottom part of that portfolio is going to be exposed because they probably aren't going to be putting more capital at work there. So we are -- we have to do our own very solid underwriting and structuring relative to the transaction, but it is helped by the fact of who the VCs are, what relationship we have with them, how we've worked with them in the past, not just on good results, but on difficult situations as well.

Okay, that's definitely a good explanation, Jerry, thank you. Kind of sticking with that theme, has a lot of the deterioration in terms come from kind of later stage companies or has that also affected the more early-stage and kind of the mid-stage sort of companies that you guys will look at?

Well, there has been what I would call a trickle-down effect. I would say most of it is in fact later stage. That's true with the larger transaction sizes that have come in. But there was also, which is not unusual in our markets by the way, where there is a trend toward a certain kind of technology, maybe it's AI technology or whatever where the VCs are putting a lot of money to work, sometimes the debt requests that come from pretty early-stage companies that are in very specific technology markets that are trending positive, it can absolutely trickle down to earlier stage companies. And we have seen some of that.

Got it. You guys had a slight increase in the investments that were rated 2 on your internal system this quarter. I'm assuming by the dollar amount it was probably just one investment. Could you just give some color on what moved there and why?

This is a normal part of the way we manage our credit portfolio. If a company needs to raise money or is materially behind plan and we feel that that is putting stress on the company, we'll move it into the 2 category, Chris. I think our history of moving those in and out, including the deal that Jerry mentioned in the text was SavingStar, that was a 2 rated credit earlier this year, was similar to the deal that we moved this quarter. It was able to be sold -- the company was actually sold and we were able to get a full repayment and full recoupment. It's a deal that we're watching and managing very aggressively. But we expect, as we do for all of the 2s, that we will come through the other side with a full recovery.

Got it. Okay. And just switching gears and kind of looking at the financing side of the equation, you guys still do have some room on the credit facility, but obviously as you pick up more leverage it seems that that capacity could kind of get utilized almost in full going forward. So I'm just curious, are you more prone to kind of upsize the facility? You guys have also done a securitization in the past and it seems that that market is opening back up for BDCs. Or is potentially another unsecured note in the mix? I guess given where spreads are and what you guys are seeing in your backlog, what do you think actually makes the most sense for Horizon?

Chris, that's a great question and you're correct on all 3 of those options. As you said, there's a lot of activity in the baby bond market and the securitization has opened up for a couple of deals that just finished. And so we are analyzing those currently and we are in discussions with KeyBanc and our current facility. So there's, we're analyzing those and there's good opportunity for us in all 3 of those. And as we get close to that, obviously we'll announce that when we get there, but we're still in the process of analyzing it.

Okay. And just last one for me, just I might have missed this. You guys had alluded to a certain amount of prepayment related income received I believe in the fourth quarter thus far. What was the number on that?

$1.2 million.

Okay. And is that all prepayment fees or does that include any acceleration of OID?

That's both.

Both. Okay, got it. Thanks so much for taking my questions today.

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 our call. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.