Horizon Technology Finance Corp (HRZN) 2020 Q1 法說會逐字稿

Greetings, and welcome to the Horizon Technology Finance Corporation First Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to Megan Bacon. Please, go ahead.

Thank you, and welcome to the Horizon Technology Finance First Quarter 2020 Conference Call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; Dan Trolio, Chief Financial Officer; and Dan Devorsetz, Chief Investment Officer. 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.

Before we begin our formal remarks, I need to remind everyone that 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, 2019. 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. These are extraordinary times we are experiencing and our hearts go out to all of those suffering from both the Coronavirus pandemic and the economic shutdown. When we last spoke to everyone in early March, COVID-19 was just beginning to reach the US and we felt the gathering storm. The rapidity and depth of its onset has had a dramatic impact on all of our lives and on businesses worldwide. Everyone now has had a family member or friend touched by the disease and many families are suffering from the loss of income. But life goes on and we must carry on. So I'd like to thank you for taking time today to hear Horizon's update.

The events of the first quarter have come on us quickly and unexpectedly. We believe our efforts over the past few years to grow and diversify our portfolio and to strengthen our balance sheet, have placed us in a position to navigate through these unprecedented times. Against this backdrop, we did have a productive first quarter. During the quarter, we grew the size of our debt portfolio for the 8th consecutive quarter. We generated net investment income of $0.26 per share below our distribution due to traditionally lower prepayment activity in the first quarter. Our debt investment yield was 13.2%, our NAV as of March 31 was $11.48, down approximately 3% from year-end. Most of this reduction is the result of stress on some of our portfolio companies related to the COVID-19 pandemic and the resulting shutdown's economic impact.

We ended the quarter with $119 million of capacity to support our portfolio companies and to selectively make new investments. As it became clear that COVID was going to may -- have a major impact on the economy, we took certain steps to prepare. During early March, we borrowed an additional $30 million on our key credit facility to boost our balance sheet liquidity. In April, we acquired the 50% interest of our partner in our joint venture. The former joint venture is now wholly owned by Horizon, and in future reporting periods, its assets will be consolidated with the assets of Horizon. This acquisition will allow us to fully control the management of these assets through this uncertain time.

From a credit standpoint, the COVID situation and the economic shut down have impacted the credit profile of our portfolio. We have been communicating regularly, as we always do, with all of our portfolio companies. We are prepared to support our portfolio companies as appropriate in concert with their investors' support and their management's necessary cost-cutting. The liquidity of our borrowers is paramount in the current environment. Accordingly, the credit ratings and fair values of our investments reflect the increased risks that our borrowers may not be able to access additional capital and their operations may be negatively impacted by the economic shutdown.

Turning to our investment activity in the first quarter, we funded 6 new loans totalling $51 million and increased our debt investments on a net cost basis by $25 million from December 31. This first quarter activity carried over from the momentum, generated in the second half of 2019. Entering the second quarter of 2020, our committed backlog and overall pipeline remain active despite the pandemic. Demand for venture debt within our target industries continues to be strong and in fact may be increasing as companies seek additional liquidity and funding sources in these uncertain times. We are selectively pursuing new investment opportunities in companies that meet our high bar of liquidity. New originations may slow if the economic shut down continues and recession worsens. While our outlook is cautious, we are maintaining our current monthly distribution level at $0.10 per share through September. It is our board's policy to set our distribution where it can be covered by NII over time. The distribution level reflects our outlook for the balance to 2020 and our spill over income at March 31. I'm proud of the entire Horizon team as they have been working remotely since the start of the pandemic in the US, while maintaining the same high level of service to our customers and stakeholders.

We will continue to focus on managing our portfolio and supporting our portfolio companies, while we look to opportunistically fund new investments. By doing so, we look to generate -- to continue to generate additional long-term value for our shareholders. 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. First, let me say that I share Rob sentiment and I hope everyone remains safe and healthy. The first 2 months of the quarter were very active for Horizon, however, activity slowed in March as many technology and life science companies were distracted by the dislocation and complexity of the impact of COVID-19 on their business.

From March through today, we have continued to carefully review new opportunities through the lens of the COVID-19 pandemic and the resulting impact of a rapidly changing economic environment. That said, we continue to observe significant activity in competition in the venture lending market for investments in high-quality companies with strong liquidity, management and investor support, as well as products and services that are relevant and in demand today. There are some segments of our market we view with caution, such as consumer-oriented tech companies; while other segments we view with more optimism, such as life science, vaccine or drug development companies. These companies appear to be seeing continued demand for new drugs and vaccines and have strong balance sheets to further their development well into 2021. We are seeing some near term dislocation in the health care technology market as hospitals are focused on COVID-19 and private practice physicians are essentially closed for business, but we believe demand for health care tech products will bounce back as the economy opens up over the next few months and pent-up demand for healthcare services reemerges.

In the quarter, we made a total of $51 million in investments to three new portfolio companies and three existing portfolio companies. This resulted in growth in our portfolio for the eighth consecutive quarter or $25 million on a net cost basis. The onboarding yields for the investments we made in the first quarter was 11.2%. We experienced two loan portfolio prepayments during the quarter totalling $16 million, which contributed to our NII. In addition, the prepayment and accelerated income from these events helped drive a debt portfolio yield for the quarter of 13.2%. Our debt portfolio yield continues to lead the BDC industry.

Additionally, as Rob noted on our last call, structuring investments with warrants and equity rights is a key aspect of our predictive pricing strategy. Warrants or cashless investment for Horizon, which served as an additional value generator. During the quarter, we received proceeds of over $5.5 million from warrants in portfolio companies that experienced M&A transactions and from the equity and public company. In Q1, we closed $55 million in new loan commitments and approvals, and ended the quarter with a committed backlog of $44 million compared to $50 million at the end of 2019.

Our pipeline of new opportunities as of today is $440 million. In addition, post quarter-end, we increased our loan approvals and commitments from approximately $44 million to approximately $104 million today. All of the increase in our committed backlog is from life science or healthcare-related transactions with typical milestone-driven or tranched funding patents. From a portfolio perspective, despite the economic environment, we believe we remain well-positioned with our committed backlog and pipeline to selectively grow our portfolio in the first half of the year. As of March 31, we held warrant and equity positions in 70 portfolio companies with a fair value of $10 million. During the quarter, one of our warrant portfolio companies, Systech, whose loan had been repaid in 2017 completed an M&A transaction and Horizon received approximately $2.3 million in warrant proceeds. Bridge2 solutions was also acquired in the quarter. And along with the repayment of our principal balance and accelerated income and fees, Horizon received warrant proceeds of approximately $2.8 million. Post quarter-end, our portfolio company HealthEdge was sold to Blackstone. And along with repayment of our principal balance and accelerated income and fees, Horizon received warrant proceeds of approximately $500,000.

While the first two months of the first quarter seemed like business as usual, it was very much business as unusual in March. As we've communicated previously, we always engage with all of our venture-debt portfolio companies on a regular an as-needed basis. As the economy essentially shut down, the ability companies to raise additional capital became less certain. Accordingly, we ramped up contact with our portfolio companies and their investors to get a keen sense of the near-term needs, expectations and financing plans. A few of our portfolio companies have clearly been impacted by the national shutdown. As of March 31, we have six two-rated credits in our portfolio. We are consistently in touch with those portfolio companies and we'll work with them as much as necessary, to help them manage through the short and medium-term dislocation on their business. One of the ways we have done so is to quickly respond to requests with necessary consents and waivers for our borrowers to access the SBA's Paycheck Protection Program. The COVID 19 situation remains very fluid, thus we will continue to closely manage our portfolio.

I would now like to provide a brief update on some credits we have discussed last quarter. We collected a $5 million pay down on our IgnitionOne loan in February and placed it on non-accrual. The balance of the loan remains secured by private stock valued well in excess of our balance. Horizon kept its Odyssey loan on non-accrual as of March 31 and carries a loan at fair value of $1.8 million, an increase from December 31, due to some favorable regulatory approvals. The transaction to acquire Odyssey continues and is expected to close later this year. Subsequent to quarter-end, we received proceeds of $600,000 in settlement of our loan to [Synnex] which loan was fair valued at $500,000 at March 31.

Turning now to the venture capital environment. According to PitchBook, approximately $34 billion was invested in VC backed companies in the first quarter of 2020. But as one would expect, the last few weeks are a significant reduction in activity. To be clear so, investment activity has not stopped and we believe there remains opportunities for selective investment despite the market dislocation. In terms of VC fundraising, $21 billion was raised in the first quarter, a strong start to the year.

However, we would obviously not expect similar numbers in the near term. A positive note is that VC funds have $120 billion of dry powder available for investing. In terms of VC backed exit activity, there were 10 venture-backed IPOs in the first quarter contributing to a total exit value of $19 billion. With COVID-19, we expect 2020 IPO activity will decrease considerably from 2019. Although we could still anticipate some health care life science sector IPOs later in the year.

Turning now to our core markets. In the first quarter, we saw a greater activity in our life science and health care technology markets providing funding to two new portfolio companies. A $20 million venture loan to Castle Creek Biosciences, a developer of gene therapies and a $15 million venture loan to a digital health company providing remote cardiac patient monitoring.

We also funded an additional $4 million to CSA Medical, one of our existing life science portfolio companies. Finally, we made one select investment in the technology sector during the quarter, funding a $10 million venture loan to a new portfolio company that is creating access for high-quality online education.

As we look ahead, we will continue to closely monitor the economic landscape, and prudently originate new loans that meet our current underwriting criteria, while we keep a sharp focus on our current and diverse portfolio of senior secured loans. Our actions to strengthen our balance sheet over the past couple of years, including raising $16 million of equity early in the first quarter under our ATM facility, put Horizon in a solid liquidity position, with a leverage below our target. We believe our liquidity position will allow us to navigate through the current environment, and ultimately deliver additional long-term shareholder value.

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

Thanks, Gerry, and good morning, everyone. I'll start with reviewing our balance sheet and portfolio, and then I'll provide a quick review of our first quarter 2020 results before opening up for questions. On the balance sheet, as of March 31, Horizon had $52 million in available liquidity, consisting of $39 million in cash and $13 million in funds available to be drawn under our existing facility. As the COVID-19 volatility impacts the market, we drew down further on our credit facility to enhance our liquidity, and as of March 31, it was $45 million outstanding under our $125 million KeyBank credit facility. As a reminder, the KeyBank facility has a LIBOR floor of 75 basis points.

Our debt-to-equity ratio stood at 0.94 to 1 as of March 31, lower than our targeted leverage of 1.2 to 1, and based on our [capacity position] and the capacity on our KeyBank facility, our potential capacity was $119 million at March 31. Our asset coverage ratio for borrowed amounts as of March 31 was 206%. We continue to believe we have ample capacity at the company to navigate through the current environment and selectively invest where we see opportunities. The significant enhancement of our balance sheet and capital structure over the past couple of years has enhanced our overall position.

For the first quarter of 2020, Horizon earned total investment income of $10.1 million, a 22% increase compared to $8.3 million in the prior year period. This increase is primarily due to higher interest income on investments, given the larger average size of our loan portfolio. Our debt investment portfolio grew on a net cost basis to $317 million, a 9% increase from the end of 2019. For the first quarter of 2020, we achieved onboarding yields of 11.2%, compared to 12.2% achieved in the fourth quarter. Our loan portfolio yield was 13.2% for the first quarter versus 14.4% for last year's first quarter.

Turning to our expenses. The first quarter total net expenses were $5.8 million, compared to $5.1 million in the first quarter of 2019. Our interest expense was up $114,000 compared to the prior-year period, primarily due to an increase in average borrowings, partially offset by a 10% reduction in our effective cost of debt. Our net incentive fee expense increased $263,000 due primarily to higher pre-incentive fee net investment income, while our base management fee rose $285,000, driven by an increase in the average size of our portfolio.

Net investment income for the first quarter was $0.26 per share, compared to $0.43 per share in the fourth quarter of '19, and $0.28 per share for the first quarter of '19. The company's undistributed spillover income, as of March 31, was $0.38, compared with $0.42 as of December 31. As noted on our prior call, the first quarter is typically our lowest quarter for NII, as we usually see lower prepayment activity in the first few months of the year, and the COVID-19 pandemic in March further impacted potential prepayment, as portfolio companies pivoted to shoring up liquidity. We expect prepayment activity will continue to be muted in the near term.

Based upon our outlook for NII, our liquidity forecasts, and our spillover income levels, our Board declared monthly distributions of $0.10 per share for July, August, and September 2020. We have now declared monthly distributions of $0.10 per share for 45 consecutive months. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time. Our NAV, as of March 31, was $11.48 per share, compared to $11.83 as of December 31, 2019 and $11.55 as of March 31, 2019. The $0.35 reduction in NAV on a quarterly basis was primarily due to net unrealized loss on investments, due to the economic environment.

To summarize our portfolio activities for the first quarter, new originations totaled $51 million, which were partially offset by $9 million in principal payments and $17 million in principal prepayments. We ended the quarter with an investment portfolio of $335 million, consisting of debt investments in 36 companies with an aggregate fair value of $308 million, a portfolio of warrant, equity, and other investments in 71 companies with an aggregate fair value of $10 million, and an equity investment in our JV with a fair value of $17 million.

As Rob mentioned, last week, we purchased Arena's full stake in our joint venture, and it is now wholly owned by Horizon. We'll be consolidating the assets of the former joint venture into our financial statements beginning in the second quarter of 2020. As we've consistently noted, 100% of our outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase as interest rates rise with a LIBOR interest rate floor. As of March 31, the average LIBOR floor on the entire portfolio is 197 basis points, and 90% of our portfolio is at their specific floors. As a reminder, this provides interest rate margin protection in a decreasing rate market.

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

(Operator Instructions) Our first question today is coming from Tim Hayes from B. Riley FBR.

And appreciate your comments, and hope everyone at Horizon is doing well, given the circumstances. My first question here -- and I know you touched on this a little bit, but the unrealized depreciation recognized this quarter, was it more a function of actual credit deterioration in the book that you've seen so far? Or do the markdowns incorporate more adverse economic assumptions going forward? I'm just trying to understand if the portfolio is somewhat reflecting future loss potential, given the increased likelihood of a recession, or if that's going to be more layered on as you actually see it impact businesses over time.

Thanks, Tim. This is Rob. I think it's a combination of all of those things, but there are specific companies in our portfolio that we felt, due to the markets that they operate in, that they were significantly or potentially significantly impacted by COVID. And so, those are the ones that we moved into the two-rated bucket. We have -- as Gary and Dan have said, I mean, we're in constant contact with these companies. We're looking at the plans that they have to raise capital, and almost all of them are in process of raising capital. They needed or they have capital well into 2021. So it's -- we have a few historic twos that have been having issues raising capital or operationally, and those continue. But the impact of the COVID pandemic and the economic downturn heightened our interest in looking at a few of those companies and downgrading them to two.

And I know you said you have six two-rated companies now, but can you just give us an idea of how many companies were downgraded this quarter?

Maybe I'll ask Dan Devorsetz -- so we're pleased to have Dan Devorsetz on our call today, our Chief Investment Officer. Dan's been a key member of our senior management team for a long time, and we want to give him some exposure to everybody and welcome him aboard. Dan, you want to just kind of summarize sort of how many we had, the moves, ins and outs?

Sure. Good morning, everybody. Thanks, Rob. We have six two's in the portfolio this quarter. Three of them were two-rated credits in prior quarters in Q4, [Sparrow Decision] and IgnitionOne. And then we moved three companies that were three-rated credits in previous quarters to a two this quarter, Encore, Ken Esterow, and Updater, for the reasons that Rob mentioned.

Got it, okay. And can you touch on the types of, if any, the things you've had to do to work with portfolio companies to provide some type of reliever forbearance? Have you seen -- have you had to extend loans more than usual? Have you had to waive fees, or move more interest from cash to PIK, or done anything else, again, to provide forbearance at this time? And how has that translated to -- or I guess did that impact your debt yield at all this quarter?

So good question with lots of parts to it, Tim. Maybe I summarize by saying when we're in these kinds of situations -- and fortunately, unfortunately, our management team has been through some of these crises before, including '08, '09, and even back in the tech boom and bust -- we usually try to employ what we call the three-legged stool, which is to work with the companies and the three legs, or have management be real about the severity of the outlook, and make appropriate cuts in operating expenses, and do everything they can to right-size the business for the difficulty of the current environment. Second leg is to have investors support the companies through this process by providing additional capital or having commitments to have standby capital. And then the third is to have the lenders join those other two to help the company through the problem. The tools we use primarily are principal deferral, lessening of performance covenants, if that's necessary, and on occasion, making additional loans. We have not yet experienced having to transfer our interest payments to PIK, but that would be another possible tool that we would have.

So right now, we're working with -- that's what we're doing, is trying to be sure everybody is focused on raising the liquidity of the companies through 2021 into that timeframe. And we're really engaged with the investors and the management teams.

And I know this is a granular question, and sorry if you don't have it in front of you, but do you have an idea of how many companies you've had to employ some of these legs of the stool here so far?

Well, I think you can be sure the ones that are in the two bucket and some of the others, we're in constant conversation with them. But the ones from the two, we're having dialogues with. We're extending interest only periods or those kinds of things. It's a handful right now, Tim.

Okay, got it. And then how have conversations with sponsors been? Over the past couple of months, have you seen them step in the support portfolio companies so far? And would you say that the lack of fiscal aid for sponsored companies incentivizes the VC sponsors to be more proactive at this time?

I'm going to ask Gerry to answer that one because he's on the frontline with several of our companies. Gerry, take your phone of mute.

Hi, Tim. Sorry.

No problem.

So it's been a pretty vigorous and busy process relative to working with the investors. I think generally speaking, they're all very focused, as we are. I don't think any of them are -- don't understand the economic condition of their portfolio companies. They're very focused on them. Our conversations with them have been, I would say, extremely good for the most part, almost across the portfolio. A couple of companies -- one's would move to two. Obviously, those are taking a little bit more of their time and our time, but we're working through those. 10 of our portfolio companies raised money in the first quarter or got signed term sheets that they'll be closing shortly. So the funding is coming in. And to Rob's point with that, we're trying to help the companies with interest only extensions and things like that with the idea of getting everybody well into 2021, and I think we made great progress in a very, very short period of time.

I would just mention to everybody we're in the second inning of a -- I hope it's only a nine-inning game. So we got a ways to go. But the VCs are definitely focused on their portfolio companies and what they need to do to support them, making sure the management teams are focused on, to Rob's point, cutting costs and things like, and then whatever help we can provide. I did mentioned in the script that, unlike 2008 really, VC capital is at a much higher level right now than going into that period. So they have capital. They have plenty of capital, and it's a question of which companies are they going to support. It’s not unusual in times like this that VCs start fore shrinking their portfolio companies. It's kind of a natural thing you do with what -- they take a step back and say okay, we're in a difficult time. How are our portfolio companies doing? But what we have seen, generally speaking, is a very supportive group of investors.

Our next question today is coming from Ben Zucker from Aegis Capital.

Can you hear me all right?

We're good, Ben.

Cool. I wanted to touch -- Tim did a nice job covering kind of the landscape in the portfolio. Real quickly, on share repurchases, I think you have a remaining authorization for a little over $3 million, which would come out about 2% of the company's outstanding shares at these current prices. I saw that you extended it. Were there any discussions around potentially increasing the size of that authorization? Or kind of what were those conversations like?

So we did have a discussion about it -- appreciate the question -- both with the senior management and with our board. I think there is a real strong emphasis here on liquidity and conserving cash. I have to say there were a few days when the stock price was extremely low that it was a topic of conversation. But we did decided to extend it. We have had it in place I think two years or three years anyway. And so, at the current -- we bought about $1.6 million worth of shares since we initiated it, and it's there if we need it and want to use it. But right now, our focus is on conserving cash on the balance sheet.

That makes sense. Definitely feels like an environment where cash is king. So I guess you'd have a similar response if I were to ask about your ability or interest in maybe buying back some of the 2022 notes that seem to be trading at, I don't know, $0.90 on the dollar right now? Would your comments around the share repurchase usage hold true for that as well?

Same question, same answer. Again, very attractive at $16, I have to say. But that only lasted for a few days. But, yes, you're right.

Yes, I hear you. Do you have any idea of how many companies or what percentage of your portfolio companies applied for some kind of government aid or the lease program?

We're aware of about a little less than half of them that are either in the process or have received the payroll protection loans. We know they usually require our consent under our loan agreements. So that's how we become aware. And we've been willing to grant those consents.

Got you. If I heard you right, in the press -- I think I saw in the press release and Dan's comments that the first quarter has the typical slowdown in prepayment activity, and given the market, you're expecting that trend to maybe persist for the next few months. Now, I guess that negatively impacts your NII yield. But that does give your portfolio more duration. So I'm just kind of curious what your thoughts are on this dynamic and how do you guys feel about kind of the trade-off between the out-sized debt yields we've been seeing previously versus adding a little bit more duration to the portfolio?

Well, I'll take an initial stab at that and then ask Dan to give you a little -- Trolio will give you a little bit more color. Typically, the first quarter's lighter. We actually had a good prepayment for our Bridge2 Solutions. That was a very profitable exit for us including a warrant gain, but some of the PE impact was a little less than we thought. We'd hope that the HealthEdge acquisition which happened in early April was scheduled to happen in March and so, it got delayed in March because of the COVID uncertainty and ultimately closed a couple of weeks after the end of the quarter. But looking forward, we expect it to be modest, only because refinancing is one of the sources for prepayments for us and our outlook for that is unknown, uncertain. So that's why we're being cautious about that. Dan, do you want to add some additional color to that.

No, I think you hit it right on the head there.

Yes.

That's helpful. The fifth -- you bought out the arena interest, I think I saw for just over $17 million. Is that just kind of simple math, you're bringing over $17 million of assets in that transaction on to the balance sheet that will be consolidated?

Yes, Ben. That's basically how it works is a little bit more nuance based on timing. The HealthEdge pre-payment was in the JV also. So how you think about it going forward is that the dividend line income coming in will be gone, but on a portfolio basis, on the Horizon balance sheet, it will be $30 million of additional investment net positive to Horizon of $15 million increase in portfolio on an income basis.

Got you. And could you just remind me, was the decision to kind of collapse that or buy them out, was that just -- you guys had some excess liquidity, you had these interest earning assets already there, so it was just a nice kind of immediately accretive way to deploy that capital into assets, you've already underwritten?

That's part of it. I think we've been signaling this for a while, if the JV was originally concept of doing it. It was the genesis of it, it was back before there was even a two-to-one leverage vote. So it was originally thought to be a way to increase leverage on our off balance sheet for Horizon. The portfolio didn't grow as fast as we'd hope it would. As a result, we didn't meet certain requirements for a minimum number of our (inaudible) and the New York Life credit facility we had there went into a rapid amortization explained this last quarter. It then became a good opportunity for us to take control of the assets, buy them out. Now, those will be on our balance sheet and the JV had a small portion if you think about, it was a small percentage of each of the loans because the loans in the JV were shared with the Horizon. So now we control all of the assets and all of the loans and in this uncertain time we thought it was really a key thing for us to do.

Got you. That makes sense. And then lastly, I guess this is for Dan. I missed your comment, and I can look at your quantitative and qualitative disclosures and I can see that based off of where LIBOR is, you guys are kind of in a nice position with your floors. But what did you say was the weighted average floor in the percentage of debt assets that are already at that level?

The weighted average floor right now on the entire portfolio was 197 basis points and 90% of the current portfolio, at their [place].

(Operator Instructions). Our next question today is coming from Ryan Lynch from KBW.

I first had one regarding your guys' liquidity position today. In the Press Release you guys talk about $12.8 million funds available under existing credit facility commitments, but then I also know that you guys have capacity in your credit facility for up to $80 million of additional capacity. So can you just talk about, given the balance sheet construction today and the portfolio with the cash today, do you guys anticipate that you guys will be able to access that full additional $80 million of additional capacity or is the $12.8 million, what we should kind of think about as far as leverage capacity available to yourselves on your credit facility?

Yes, Ryan, this is Dan. The $12.8 million is a snapshot of what is available at the balance sheet dates on March 31 and capacity is our opportunity to borrow on the facility. To answer your question, as we forecast out through the year and as we find new investments that increases the availability with new investments that we put into the [SCV]. So as it's currently constructed and where we stand today, we do have the ability to reach that $80 million capacity.

Okay, so you think as you guys put new assets into that, you guys go to will withdraw down the full additional $80 million? Okay.

Correct.

Okay. And then regarding your unfunded commitments, about $44 million today, can you talk about what percentage of those are based on some sort of milestone?

So, I think generally, the commitments, I would say the majority of them have some sort of either performance equity event revenue milestone, clinical milestones, to draw. A very little of that is actually open available, the draw.

Okay. And then regarding your guys' valuation process, you guys only had about 1.6% markdown in your portfolio this quarter, which was well under what several other middle market BDCs -- have kind of pre-announced this quarter. As I look to your portfolio, it looks like there are some select investments that had some meaningful markdowns. I would assume that they're related to some under-performance or credit issues, just as we head into this very, very uncertain and unprecedented environment. But it looks like the vast majority of your portfolio is basically marked at 100% -- which was a little bit surprising. Was there not any sort of effective yield component as credit spreads [whined] out that you guys incorporated into pricing down events, well performing loans in your portfolio as of March 31?

That's a really good question and it was the essence of what we spent a lot of the last three or four weeks with both internally with our outside count valuation consultants and with our board on this topic. Unlike some of the middle market almost 0% of our portfolio has a market or syndicated loans, so there is no direct indication for that. I think we've talked about this in the past, we do this on a granular basis, on a loan-by-loan basis. We look at the risk ratings and the things that we think are important and then we do a discounted cash flow based on what we think the market rate for that risk would be. This tends to be much less volatile in the venture lending market, has been over a long period of time because the all-in yields that we're able to charge in this market, really not impacted by credit rates as much as they are by what the competition has and it stayed pretty stable between 10% and 13% for as long as I've been doing this, which is a long, long time. And the reason for that is there's a cost of funds that the players in this market have that protect the downside of this. You can't be profitable in the venture lending business if you're not charging certain range and on the high end, the alternative is for the venture capitalists put the money and if we charge too much.

So our valuation consultants understand this and agree with us. They use risk migration factors as they look at individual transactions and there was discussion about overall risk migration factors for the current environment. But in the end, our evaluations and theirs we're very solidly within the range. There was some up and down variations between our marks and theirs, but they intended to be both positive and negative. So that supported the ultimate valuations that we have in our queue.

Okay. Did you could console with a third-party valuation firm for all of your investments this quarter?

So we have two outside valuation firms; Sterling and Lincoln. They look at 100% of our portfolio on an annual basis and this particular quarter, we had more than usual because we wanted to look at them at all of the ones that we had issues with and been looked at in a while where we had meaningful movements. They looked at probably close to 40% of our portfolio in this particular quarter alone.

Okay.

Or have looked at it as recently as March for the year-end.

And then one question about IgnitionOne. That loan was placed on non-accrual that you guys still have that marked at 100% of cost. Can you just talk about what's going on and assuming that they stop paying interest income, but not sure if there was the outlook -- it's high for a repayment or something like that? Just why was the non-accrual corresponding with a stable and unchanged share value marked at cost?

Yes, so this one was on accrual at [12.31], it was a balance of $12 million. The company has basically been sold the assets of the company and its operations and through assignment for the benefit of creditors in the first quarter -- middle of first quarter -- we received a $5 million pay down on that loan that we used to offset some of the interest. That's why it was on accrual in the fourth quarter. Once we have that payment, what's left in a trust is we're the only lender and there is only a senior secured lender and there is multiples -- there is private stock from the sale of the company that secures our outstanding balance. Several times our outstanding balance our balance about $7.5 million, but because there are no operations and there is no cash flow at the company, we put the loan on non-accrual, but we're working through trying to monetize the collateral that supports our loan. Could take a couple of quarters. Certainly would be helped if the environment was a little better. But we do believe that we'll have a full recovery on that, Ryan. That's why we carried it at 100% on the remaining balance because there is private stock in an operating company that has value 3x or 4x that.

Our next question is from Tim Hayes from B. Riley FBR.

Just a couple of quick follow-ups. Can you remind me what needs to happen for assets to fall out of the borrowing base? For lower middle market companies, it could be a result of leverage multiples increasing to certain levels, but given most of your companies are EBITDA negative, just wondering if it's a function of investments moving to non-accrual or if there are any other multiple driving factors that can result in a decline in the borrowing base?

Sure, Tim. Yes, there is definitely something we are focused on right now. There is no overriding one covenant are not that, we'll kick it out there. Certain buckets and concentration based on performance in our rating system from four to a two, it's still eligible to be borrowed against on the line. When it becomes a one or becomes insolvent, then it starts getting kicked out of the eligibility requirement. One other item that has come into play or we are looking at closely is the loan to value percentage is an area that may cause an eligible loan becoming ineligible. With some of the public companies in the way the public market has been acting, there's a little pressure there, and we're watching that closely. But no overriding ones seen that we're running into.

Okay, got it. And then, I just want to make sure I'm thinking about your comments on the dividend correctly. I just -- so I'm going to paraphrase, and just let me know if I'm thinking about this the right or wrong way. But it sounds like you're setting the dividend at a level that you believe will be covered by NII plus the $0.38 of spillover you have right now. So it doesn't necessarily mean you're going to cover the dividend with NII over the course of the full year. But do you think that, given the cushion, you're able to spillover -- I guess you're expecting that the dividend could be -- or I guess quarter earnings could be $0.37 lower than NII hypothetically, but you'd still be able to cover it with spillover that way, and that's why you're maintaining it at the level it's at? Am I thinking about that correctly? Or if you could just provide some more context around that, that'd be helpful.

Yes, you've got it pretty much right. I mean I think we continue to believe that we can achieve NII that will cover the current $0.30 per share. We won't do it every quarter. In the third and fourth quarter last year, we had outsized earnings and about $0.40. This quarter, we were below for a combination of things that were a little missed. We need prepayment activity to achieve those large NII numbers. But over time, the sort of core earnings are close to or will cover the dividend.

Okay, and did that take into account both recent rate movements, any -- and I guess your outlook for slower repayment activity and the potential for increased credit losses in the book? Or is it a combination of all three that's factored into this analysis? Or is that kind of what you're...

Yes. I'm sure you'll have this answer on every call you have. But it's very, very hard to know exactly what's going to happen tomorrow, maybe even this afternoon. So it's very difficult to do modeling with high confidence in this environment. But we know how our business sort of works. The important levers or drivers for us to achieve that level of NII or to have a modest level of prepayments to get at or near our leverage, real leverage, meaning not too much cash on the balance sheet for liquidity purposes, but to have an invested portfolio that's levered one to one or better, and have performing loans. So those are the drivers for us. And as we look out from today, we were comfortable maintaining our dividend distribution through September, and our board concurred, based on the way we look at the future.

Got it. Okay. Thanks, Rob. And I guess just one last one. Just on target leverage, is the range still unchanged, and do you kind of expect to be at a certain part of that range? You've kind of been on the lower end of that for a while. Do you expect that to kind of reach the higher end, given potential headwinds to asset marks? Or are you going to attempt to stay at the lower end in anticipation of that?

So the function of being at the lower end of that was twofold. We were able to grow our portfolio very steadily now for eight quarters, but we were also able to raise quite a bit of capital last year on the equity side. So our ability to get towards our target of 1.2 was hurt, and we would say helped by the fact we were able to raise equity at a good value that was accretive to our shareholders. We don't actually have any expectation of raising capital in the near term. So we would expect that if we can continue to modestly grow our portfolio, as Gerry indicated, that we will move from the low end of the range towards the middle, maybe the high. We want to keep a lot of the liquidity available to support our companies. That's really critical to us, is to help this portfolio get through into 2021. So that's the offset. If we are at one to one and approaching our target leverage, which is 1.2 to 1, with the spreads that we get, the yields that we charge, we can be extremely profitable.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Rob for any further or closing comments.

So thank you all for joining us this morning. We appreciate your continued interest and support in Horizon. We hope you and your families continue to remain safe and healthy, and we look forward to speaking with you again soon. This will end our call.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.