Hercules Capital Inc (HTGC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hercules Technology Growth Capital First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will a question and answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Miss Linda Wells. Ma'am, you may begin.

Thank you, Operator, and good afternoon everyone. On the call today are Manuel Henriquez, Hercules Co-founder, Chairman and CEO; and Jessica Baron, Vice President, Finance and Chief Financial Officer.

Hercules first quarter 2013 financial results were released just after today's market close. They can be accessed from the Company's website at www.htgc.com. We've arranged for a replay of the call at Hercules' web page, or by using the telephone number and pass code provided in today's earnings release.

I would also like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release, and in the information of final audit results.

In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance, and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including, without limitation, the results, the risks, and uncertainties, including the uncertainties surrounding the current market turbulence, and other factors we identified from time-to-time in our filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit sec.gov or visit the website www.htgc.com.

I would now like to turn the call to Manual Henriquez, Hercules' Co-founder, Chairman, and CEO. Manual.

Manuel Henriquez Thank you, Linda, and good afternoon everybody, and thank you for joining us on the call today. I'm here today to discuss our first quarter results, discussion many corporate activities that have been taking place, and also share with you some perspective the 2013 outlook that we have.

In our first quarter, we delivered a very strong quarterly performance, and outside execution, as we continued out controlled growth strategy, and purposely not pursuing a market share strategy. I will elaborate on that statement further in our call. Our preference is to remain steadfast and disciplined in undertaking a credit underwriting environment, and maintaining a strong credit outlook and strategy, as we look to convert our additional liquidity of over $30 million into earning assets over the course of 2013 in a very controlled fashion to lead to higher earnings, and eventual dividend growth for the benefit of our shareholders.

Our performance in Q1 2013 compared to Q1 2012 was very strong, earmarked many of our key metrics and variables up 20% to 30% year-over-year basis. As to the agenda today, I will cover a brief summary of operating performance and results for Q1. I'll discuss the current market conditions, including venture capital activities, our outlook for Q2, and outlook for the remainder of 2013, and then turn the call over to Jessica Baron, our CFO.

Let me first start by discussing our Q1 performance at a summary level. For Q1 we levered record high total investment income of $31 million, representing a 38% increase year-over-year. We also achieved a rate year-over-year growth of 32% net investment income of $15 million, or $0.27 per share in Q1.

We also increased DNOI by 32% to $16.2 million, or to $0.30 a share. Because of this strong performance, our Board of Directors increased the dividend by $0.02 to $0.27 per share, representing an 8% increase over our Q4 dividend, and our second consecutive dividend increase for the benefit of our shareholders. This has continued to show, as we convert our excess liquidity to earning assets, we will pass those benefits on to our shareholders.

On the IPO and M&A side, despite an otherwise dismal IPO and M&A market, Hercules achieved to pick the right winners. Having 2 realized exits so far in 2013, 1 completed IPO, Omthera, and 1 announced M&A event for our portfolio company, Althea, not to be left behind, we finished the quarter with 5 portfolio companies in IPO registration at the end of the quarter.

Now turning my attention to portfolio growth. Also, equally strong, on a year-to-year, we experienced a 121% increase, and new commitments over the same period in 2012, representing $224 million of new commitments. Fundings also were strong at $138 million of fundings during the quarter, which included $35 million of credit renewals from existing portfolio companies.

On a net basis, our portfolio grew by approximately $63 million in the quarter, basically in line with the guidance that we had shared with our shareholders during our Q4 earnings call.

We're also seeing a very interesting change in our funding to -- excuse me, in commitments to funding ratio, and we thought this important to share this with our investors, and the investors community out there. Because we're taking a much more controlled approach to our portfolio growth in 2013, we expect to see a modulation downward of the ratio of fundings to commitments. Historically, we were experiencing a 70% to 80% commitment to funding ratio, and now we're expecting that funding ratio to modulate much more in the 60% to 70% funding to commitment ratio itself.

That is partly driven by our own abilities, where we're actually now imposing, or requiring, much more operating milestones, or testimony of achievement and traction on the online portfolio companies before making significant capital available to those companies. We're doing this as an effort to set a high bar to continue to maintain a very strong credit disciplined portfolio.

As I turn my attention to Q2 and the remainder of 2013, we're guiding for portfolio growth on the conservative side for Q2 in the $30 million to $50 million level. As you will see, we have a very strong pipeline. We're doing this, however, because we want to see continued performance from the online companies as we approach the next round of financing, as also to have additional one or two months of additional performance under their belt as we make capital available to those companies.

We also are aware, and we also expect to see potentially 2 or 3 payoffs that take place during the quarter of Q2 that could, or may, represent $20 million to $45 million in payoffs, thereby, if they were to come to fruition would equate to a net neutral net portfolio growth, and we're doing that purposely for the time being, and we're happy to discuss that in the q and a session.

Again, repeating the numbers, we're expecting $30 million to $50 million net portfolio growth with the possibility of $20 million to $45 million of early payoffs to take place as well.

On the credit side, our credit performance remains stellar. We continue to track and monitor credit performance very tightly, and we continue to focus on credit as one of the tenets of our underlying processes. Because of that, you will see that controlled growth that I've been speaking of. We have seen evidence in the broader markets, and some evidence in our own portfolio of early signs of credit flare ups. As Hercules has done in the past, when we see such signs of early credit flare ups in the capital markets, and in the venture capital markets, we immediately adopt a more conservative stance in order to preserve and protect our balance sheet.

Although we have seen significant credit improvement in our Life Sciences portfolio, we continue to take a controlled growth in our Life Sciences portfolio as well. This has helped us navigate the labyrinth of credit related issues throughout our history, and remained an important part of our underwriting standards.

Because we've remained on the sidelines on early stage technology investing, we will continue to remain on the sidelines, especially in lieu of the venture capital community pullback in capital allocations from the fourth quarter to the first quarter. Although that capital allocation is something we've been expecting to minor shareholders we have purposely de-emphasize, or I should say, throttled back our investment activity in technology, especially early-stage companies, because we felt that the technology sector, in particular, was quite frothy, and many company's valuations were well ahead of their own business models.

As such, we have purposely taken the approach to allow others to fill that void and vacuum, while we'll wait for that correction to occur in the technology private sector, and then step back in and make new investment activities. We expect the technology fallout to take place over the next 12 to 15 months, at which point we will start gradually weighing back in to our technology activities.

We have taken a very -- a negative view on early-stage company investing right now, and will be remaining that same for a period of time. Valuations remain very, very frothy. We're seeing better investment opportunities investing in pubic technology companies than we're seeing investing in private technology companies today. We're also seeing stronger evidence of the public companies being able to secure additional rounds of financing in a much predictable fashion than some of the privately staged venture backed companies today.

As I've said in the past, and I want to reinforce again here now, we are not interested in simply originating to have actually growth for the growth -- for that we're simply growing assets and growing earnings. We remain very steadfast in our interest to grow our earnings for our shareholders, and thereby, growing dividends for our shareholders, but not without taking undue credit risk, or unnecessary credit risk to achieve those goals. If that means sacrificing a quarter or two with earnings, purposely, to maintain a very strong balance sheet, we will continue to adhere to that.

As a reminder to our shareholders, we are perfectly aligned with your interests. We are an internally managed VC, not an externally managed BDC, thereby, we have no real incentive to simply raise capital and build our assets solely for the purpose of management fees, or incentive fees.

Moving to the balance sheet. We continue to work diligently, and the framework that we laid out over 2 years ago is beginning to pay -- bear fruit. Our strategic initiative to diversify and expand our source of liquidity is now fully completed -- or near fully completed. To recap, back in April 2011, we issued our first convertible bond of $75 million. That instrument was unrated. During the course of 2012, we completed 3 senior secured -- excuse me, senior unsecured bond offerings, more commonly referred to as baby bonds, for a total of approximately $170 million.

We then in the fourth quarter executed our first securitization of $130 million, rated by Moodys A2. And now most recently culminating before our call today, we received a corporate rating from Kroll an investment grade grading for Hercules of triple B plus. This was all part of a strategy that we laid out 2 years ago, and it shows you the patience that we have, both in credit underwriting, managing our balance sheet, and the discipline to continue long-term strategies to benefit our shareholders.

By securing these various credit achievements, we were able to lower our cost of capital, and thereby increase our margins and spreads for our shareholders, and our respective portfolio companies benefit as well.

All this has culminated into a lower funding cost that offers greater possibility, and greater liquidity to continue to pursue investment strategies when we feel the market opportunity is worth pursuing, and filling those opportunities with our capital.

We also continue to diversity ourselves on the liquidity front by completing a recently $95 million equity capital raise. That equity capital raise was done purposely to ensure that we have optimal flexibility in our balance sheet and our ratios to continue to leverage the balance sheet, if and when needed, and offer us a greater degree of flexibility as we continue to pursue investment opportunities.

With that said, our debt to equity ratio was approximately 95% on a GAAP basis, and if you adjust out on a net cash basis, we had approximately 62% debt to equity ratio when you take out $270 million of cash. What this equates to is that we have approximately $250 million of available and new investment capital that we can borrow against for our balance sheet for additional growth if we wanted to.

As a reminder, and we are not moving away from this ratio, our anticipated optimal leverage debt to equity ratio with our SEC exemption is approximately 1.4 times. However, we have chosen to self-regulate ourselves to about a 1.2 to 1.25 debt to equity ratio, which give us an abundance of room to continue to grow the balance sheet on a leverage basis, if we were not -- we were choose to, as we continue to see good investment opportunities to capitalize on those investment opportunities.

Now turning my attention to the portfolios exits, and the current events for our warrant and equity portfolio. As I said in my opening remarks, we've had two liquid events in our portfolio so far this year, Althea being acquired by a Japanese pharmaceutical company, and subsequent to quarter end, Omthera, completing its IPO debut.

We also realized $3.6 million in realized gains during the quarter on 3 exits that we accomplished during the quarter as well. As a reminder, and you'll see in our press release, we completed the quarter with 5 portfolio companies are currently in IPO registration. As a comparison and based on Thomson Reuters report that came out for the same period of Q1 2013, of 25 venture staged companies in IPO registration, I am proud to say that 20% of those companies in IPO registration today are currently Hercules companies, a testimony to this team's ability to identify and pick the right companies.

Embedded and within all of Hercules balance sheet are 117 warrant position that we have in venture stage, properly backed, pre-IPO, pre-merger in acquisition companies. Those 117 companies had a value of approximately $33 million. To give you some context, historically, we realize exit multiples of 1x to 10x in that portfolio, and today I think we're averaging approximately 3.7 times multiple on those realized exits in our portfolio today.

Further as a reminder, and continuing our cautious statements, we believe that 50% of our existing warrant portfolio will never monetize into value, and you should factor into your equations as you look to model the Hercules performance based on the warrant folder we have today.

Let me take a few second now to give you an overview of the venture capital market place, and venture capital activities. Unlike other capital, I think that our investors deserve to have a true picture of the venture capital activity, and not some glossed over perspective of venture capital activities.

The venture capital community and the fund raising effort had a pretty tremendous first quarter. 65% of the amount raised -- they raised 65% greater amount raised in Q1 than they raised in Q4 2012. That represented a 16% in the number of funds. Although that fundraising effort continues to be highly concentrated, 43 funds made up $4.2 billion of that capital raise.

As to investments, here's where we saw the greatest pullback from the venture capital industry, and one that we've been expecting. In the first quarter, only $6.4 billion of investments took place to approximately 750 venture-backed companies, representing an 11% decrease over the same period of 2012. Not an alarming situation, but one that we want to track and monitor. Ironically, that 11% decrease represented the same decrease from Q4 2012 to Q1 2013. It represents one of the slowest quarters of investment activities by the venture capital community since Q3 2010.

Why is this important? Because if you're not -- if you don't have a history of lending to the venture capital community, you will seize that opportunity of lower capital being invested by the venture capitalists, and try to rush in and fill that void. That is where credit losses take place. Discipline is an important part of that process.

All sectors, in essence, saw a decline in venture capital activities. That said, healthcare and IT still each represented 30% of the venture capital investment dollars. Only 2 sectors experienced in investment activities during the period -- business and financial services, and consumer good and service were the only 2 sectors that saw an increase in allocation of capital.

Healthcare experienced a 15% decline in its capital received during the period of time to $1.9 billion on 160 companies. Information technology also saw -- experienced a decline of approximately 30%, which is why we remain very cautious in technology investing, especially that of early-stage companies. We think that early-stage companies estimates, especially experiencing a 30% decline in investment dollars, represents a very tumultuous area to be allocating capital to.

As I said, business services and financial services experienced a strong surge, 41% of increase in capital deployed to approximately $1.2 billion. This goes without saying, but it's simply true, Northern California continues to dominate the venture capital activities with 222 -- 229 receiving capital, making up $2.3 billion of the capital invested during the quarter.

Our most recently opened office in the Mid-Atlantic region, Virginia, also saw a very strong surge in capital deployment, seeing a 20% increase in capital deployment to $1.3 billion deployed into the Mid-Atlantic region. Our Boston area office continued to be third place, seeing approximately $0.8 billion of capital being deployed into that sector. Hercules has offices in all the major venture capital center, and is well-positioned to continue to have a local presence, while supporting our local companies in those markets.

Venture capital exits. Nothing to gloss over here. M&A activity declined 24%. Something we have to admit, we weren't encouraged by, but also still higher than zero. We saw 80 successes take place during the quarter for $4.3 billion of exit activity, one of which was Hercules' companies as I indicated earlier. It is a pretty weak showing, but not something we should extrapolate much from at this point.

On the IPO on the other hand, equally as dismal, we had 9 complete IPOs, raising $640 million, but again, it's a testimony to Hercules ability to pick companies. One of those companies was a mark up base as well. We're off to a slow start on the IPO market. I'm not discouraged by it, because it's still a slow start, but 9 IPOs nonetheless in the first quarter, it's still a good growth on a year-over-year basis.

As I said in the beginning of the call, we had 25 registered companies in IPO registration at the end of the quarter, 5 of those were Hercules companies, representing approximately 20%. In addition to that, we also had one of our portfolio companies file under the Jobs Act, which is an undisclosed filing, and we're aware of 2 or 3 others that are exploring filing under the Jobs Act as well.

Finally, turning my attention to the outlook of 2013, and the second quarter of 2012 (sic - 2013). As I said earlier, we expect the second quarter to be net up between $30 million and $50 million, and that assumes that the early payoffs do not necessarily manifest themselves, as we had indicated earlier. As a reminder, Hercules as the incumbent lender always has the option to mitigate any early portfolio run offs by matching any prices, or deciding whether or not it wants to adjust its credits in order to match any company that is looking to pay us off early. It is often the case that we choose not to do that in order to mitigate and balance our credit risk in our portfolio accordingly.

Our pipeline. Our pipeline remains very, very robust. With the venture capital pulling back by $2 billion on a quarter-over-quarter basis, demand for capital is unprecedented. These are exactly the times when you want to be cautious. You want to be in control, and you want to make sure that you keep a steady hand on the tiller as you're going through and navigating these choppy waters, and making sure that you're not cutting the corners on credit. We have a very robust pipeline.

We're very encouraged by it, but again, we will pursue a controlled growth strategy purposely in Q2, and the early part of Q3. We're looking to have a back end weighted year for 2013, purposely so. That said, we have over $179 million of signed term sheets in this quarter so far. They're expected to convert to signed term sheets.

For the outlook for the year, we're expecting to see a $500 million to $700 million of total gross commitments for the year. As I said, we will adjust that number as the year progresses, but right now the confidence of $500 million to $700 million is quite strong, as you'll see in the press release on the back tables. We're already at a $423 million commitment for the year just what we have in-house today.

In summary, we continue to execute across all business lines, and I'm very pleased with the performance of this organization, and this team, both on the credit front, origination front, and picking the right companies, right deal liquidity, and M&A events. We remain very cautious. I know that most of you have now been with us quite a long time, and will understand when I adopt a cautious and steady approach, it is one, because it is prudent, and one that has worked for us well in the past. I maybe be being a little bit over conservative, but I think it's the right strategy to do, and to continue in that portfolio growth as we've done.

We continue to look to the deploy our ample liquidity on our balance sheet. As a matter of an antidote, if you look at the conversion of our cash liquidity on the balance sheet today of $200 million, you would actually see an earnings acceleration anywhere between $0.15 and $0.20 in earnings just by deploying the excess liquidity we have on our balance sheet. I can assure you we are aligned in that interest, but only if it makes sense from a credit point of view. We expect to do that, and continue to convert our actual liquidity to earning assets, but only if it makes sense.

With that, I turn the call over to Jessica.

Thanks Manuel, and thanks everyone for listening today. I'd like to remind everyone that we filed our 10-Q, as well as our earnings press release after the market closed today. I'll briefly now discuss our financial results for the quarter ended March 31 of '13.

Turning to our operating results, we delivered a record total investment income of revenues of $31 million, an increase of 38% when compared to the first quarter of 2012. This year-over-year growth was driven by higher average outstanding balances of yielding assets.

As Manuel mentioned, the GAAP effective yields on our debt investment during the first quarter was $14.3%. Excluding the income acceleration impact from early payouts and one-time events, the effective yield for the quarter was 13.8%, up by approximately 20 basis rates relative to the previous quarter. On a quarter-by-quarter basis, barring any notable trends upwards or downwards in yields having a swing of 20 to 30 basis points in yields is reasonable and as expected.

Interest expense and loan fees were approximately $8.7 million during the quarter of '13, as compared to $5 million during the first quarter of 2012. The increase is primarily related to interest and fee expenses related to the $170 million of baby bonds issued in April and September, and $129.3 million in asset-backed notes issued in December, partially offset by a decrease in interest and fees related to a refinancing of approximately $6 million in SBA debentures that transpired over the course of the last year.

Our weighted average cost of debt, comprised of interest and fees was approximately 5.9% for the first quarter of 2013 versus 6.8% during the first quarter of '12. The lower weighted average of cost of debt is primarily attributable to, once again, refinancing of $50 million of debentures with interest rates ranging form 6.4% to 6.6%, with the same total of new debentures with an interest rate of 3% to 3.1%. In addition, the cost of debt of our Class A notes issued with our securitization in December was 4.2% bringing our total cost of debt down.

Operating expenses for the quarter total $7.2 million as compared to $6 million in the first quarter of '12. The increase is primarily due to increased headcount, variable compensation calls, and the amortization of stock based employee awards.

Q1 of '13 net investment income was $15 million compared to $11.4 million in the first quarter of '12, representing an increase of approximately 31.5 %. Net investment income per share was $0.27 for Q1 of '13, as compared to $0.24 for the same quarter ended 2012.

Our net unrealized depreciation from our loans, warrants, and equity investments for the first quarter was $1.7 million, driven by $5.7 million of depreciation from a collateral based impairment in one of our technology companies, partially offset by $4.8 million of appreciation, which was due to market yield adjustments in fair value determination.

Our net realized gains for the first quarter was approximately $2 million. We recorded realized gains of approximately $3.6 million from the sale of equity and warrant investments in 3 portfolio companies. This was partially offset by the liquidation of investment in 5 portfolios companies of approximately $1.6 million.

Our net asset value as of March 31 was $615.6 million, or $10 per share, compared to $9.75 per share as of December 31 of '12.

We've seen significant growth in our portfolio over the last year as a result of our debt investment origination activities. We ended Q1 of '13 with total investment assets, including warrants and equity at fair value of approximately $968 million, an increase of $273.5 million, or 39.4% from a year ago, reflecting continued growth in net new originations, and a recent ebbing of portfolio companies early repayments. We note again that early repayments are very hard to predict. As Manuel mentioned earlier, we could experience anywhere from $20 million to $45 million of total early repayments in the second quarter of 2013.

Our debt portfolio ended the first quarter at $881 million at fair value, an increase of 43% year-over-year. I remind everyone that amortization typically commences at the 9 to 12 month interest only period on our term loans, and is scheduled to occur over a 36 to 42 month time frame. Given the recent growth of our investment portfolio, apart from early repayments, we now model $30 million to $35 million for a normal principal amortization per quarter.

Moving onto credit quality. Our loan portfolio credit quality remains excellent. The weighted average loan rating on our portfolio was 2.03 as of March 31, reflecting a slight improvement from 2.06 recorded at the end of 2012.

We had 2 debt investments on non-accrual at the end of the quarter. One was a fair market value of approximately $5.6 million, and a cost basis of $10.4 million. And one loan with no fair value and a cost basis of approximately $350,000.

Now, onto liquidity. At the end of the first quarter, we had approximately $312 million of available liquidity, including $207 million in cash, and $105 million in credit facility availability. Our high cash balance was largely driven by the late quarter and March 13 timing of our $8.1 million share offering for proceeds of approximately $95.8 million.

As a result of this offering, we anticipate a 1 to 2 quarter diluted impacts to earnings of $0.02 per share, as we put this additional capital to work. We remain committed to our long-term growth objectives, and this capital raise is not only accretive to book value, but would also begin to pay dividends to our shareholders in the form of additional investment portfolio yields in the near future.

So in closing, the first quarter was a strong start to 2013. As Manuel mentioned, we continue to take a cautious and steady approach to the on boarding new assets in the second quarter, but remain optimistic about the venture debt market opportunity, and our ability to grow our investment portfolio, as well as earnings and dividends for our shareholders in 2013.

Operator, we're now ready to open the call for questions.

Thank you. (Operator Instructions). Our first question or comment comes from the Greg Mason. Your line is open.

Great. Good afternoon, everyone. Manuel could you talk about -- you talked about the market being pretty frothy. Are you seeing changes in terms, for example, interest-only periods, or milestones, covenant changes? What are you seeing embedded in the new debt market?

Well, certainly, we're seeing a bit of a frothiness, if not silliness going on, or at least staying steals in tech fields. And just to give some solace in that comment. Hercules early stage exposure is probably less than 1 or 2% overall portfolio. And we remain on the sidelines now for probably 24 months in that area. But the level of silliness going on in early stage deals, and to [guards] deals is to the point of being out of control.

We're seeing elongated interest-only periods. We're seeing loosening up of terms, all of which we decided not to participate in, and not play purposely in that area. And we're just going to wait it out. But, yes, it's getting to the point of being silly.

What about in the middle stage and later stages, are you seeing uneconomical terms, or interest-only periods?

No, not -- we've not seen that much, because just to remind some of the listeners here, the venture seem to divide on two very simple barbells. You have early safe deals, which are basically backing a venture capitalist, and I guess a cash balance, a cash deposit. And on the other side of that barbell, you have more of a lower market, kind of ABL lending activities.

The center part of that market, that center chasm is where we operate in. It's a very, very precarious situation to be in, because you have to have a team of underwriters, not just business development people, but a team of underwriters who actually understand technology trends, and life sciences trends in order to underwrite that credit risk.

And as is always been the case for many, many years, as new entrants weight into that segment of the market, they'll eventually end up losing a couple hundred million dollars pretty easily, and eventually pulling back. And so, that segment of the market is not yet that frothy yet, because very few people are willing to necessarily go into that area.

Okay, great. And then one more, and I'll hop back in the queue. It looks like that the one credit issue you had in the quarter, UPH Holdings. Can you talk about that, and what's the prospects there for any type of recovery, or potential future deterioration?

Sure. I think any future deterioration. Look it, our workouts are something that are -- assume a life on their own. The good news is it's not a big loan. It's total exposure is less than $10 million. It's been written down to a level that we feel very comfortable from a recoverability point of view. The company is an inter-exchange [lect] carrier. Sorry, I'll make it easy.

It's a telecommunications company, and they work in the telecommunications sector, and re-turfing is one of the issues that caused the margins to change in that company. So, it's going through a reassessment of its business model related to re-turfing inter-exchange related costs, as it hands off calls to one carrier to another carrier.

Okay. Great. Thanks. Manuel.

Thank you. Our next question or comment comes Kyle Joseph from Stephens. Your line is open.

Good afternoon, guys. Congrats on a good quarter.

Thanks, Kyle.

So, Manuel, you had a $0.03 of 2012 didn't spill over income. Since you out-earned, or since you earned, or yes roughly out-earned your dividend in this quarter, do you still have all of that, or was that a portion of this quarter's dividend?

No, I think that we still have that. Rather than reflect it on a per cents basis, I think that when you look at the capital raise that we just completed, that $0.03 on a weighted basis with the new 8 million shares that we just issued, ends up becoming about $0.22 spiller, if you will. So we still have that, and we've chosen to keep that in our back pocket until we see how the year progresses.

So, if the year progresses the way we think it will, it is highly likely that we could have additional spill over for the benefit of our shareholders, or our board could opt to further increase the dividend in Q2 and Q3, and beyond. So, that -- in essence, that reserve is still there.

All right, and then so, going back to competition, and we saw 20 bps of yield expansion this quarter, and I know Jessica mentioned 20 bps here or there may happen in a quarter. Did you see competition change at all, and has your kind of forecasted yield changed at all. Do you expect kind of yield compression going forward, stability, what are your thoughts there?

I'm not aware that many companies will talk about in the same breath of seeing increased competition, while at the same time seeing yields going up. I think it's a testimony to our continued focus on credit quality, disciplined underwriting, and a steadfast, disciplined approach to underwriting. So, we're less concerned about just originate to originate, and this is why you saw our yield actually go up during the quarter.

I think that what we're saying is, and I'll repeat it again, that for us to see yields go up or down 20 to 30 basis points is not untypical. And I -- we made that same forecast in Q4 to Q1 that we thought we'll see a 20% swing in our yield, by 20 bps, 20 basis points. I will say it again in Q2 that yields should go up by 20 basis points, or down by 20 basis points in the quarter as well.

Right now, by remaining disciplined in what we're doing, I don't think that will fully come to roost, that we'll see that 20 basis points swing in dividend yields. But it's something that could happen. But, at this point, we're being conservative.

Understood. Thanks. And then a few modeling questions. It looked like, despite -- it was a a very active quarter, but fee income came down q-on-q. Is this quarter a good run rate to use going forward or?

Yes, I think that's a fair estimate as a percentage of our total assets outstanding. There weren't any atypical events during the quarter.

Yes, Kyle, what makes this quarter for a forecasting point of view, as Jessica just said, more stable, it's probably one of the cleanest quarters that we've had in terms of minimizing early payoffs. So, it's a more pure reflector of our fee income on a sustained basis. But as I'm sure you're aware, early payoffs will cause that number to spike either way. And it will spike depending on the maturity of the credit. If the credits are older on our books, then the impact on fee spiking is a lot less. If a newer credit should pay off early, you'll see a higher percent of fee incomes.

Alright. And then for the asset-backed facility, can we kind of expect that to amortize on a straight line basis, or is that all going to just depend on the maturities of the loans backing that facility?

Yes, that is true. I mean I think your best guess, and best effort is to model a straight line amortization. But bear in mind if there happens to be a payoff of one of the assets in that collateral pool, it will result in a dollar-for-dollar reduction of the securitization balance, or at least at pretty advanced rate of 65%. So, but I think that it's prudent to model it as a straight line amortization.

Okay, great. Thanks. One more and I'll get out of your hair. You guys got your investment grade rating today. Have you thought about tapping the institutional debt markets? I know we saw one BDC do it recently. Have you guys looked at going down that path?

Well, look it. We got a call --

Not that you need that.

Well, no. There's a couple factors there. We get a quality [forty rind]. We're very honored and happy to see Kroll, who did an incredible amount of work of understanding the BDC model, in particular and more importantly, understanding the venture debt model, who took the time and effort to do that.

We're not -- we're not necessarily contemplating immediately going out and doing a deal. We just got this credit rating today. It was a surprise to us. We're happy by it. And I think we need to kind of digest it, and look at our capital planning. But certainly leveraging the balance sheet further is one of our goals, and one that we're continuing to pursue.

Okay. Thank you guys very much for answering all my questions.

Thank you. Our next question or comment comes from Mr. Robert Dodd from Raymond James. Our line is open.

Hi, everybody. Good afternoon. First one, a real simple one, just what to make -- get a [kick] because I think I wrote it down wrong. On the origination expectations for the quarter, did you say 30 to 50 net, or is it 30 to 50, and then net off 20 to 45 in repayments.

So, you didn't get anything wrong. And let me take this opportunity to remind people why we're saying that. For those who have been with us for a while, Hercules had historically amortization rate between $20 million to $25 million of normal amortization that was taking place. In the last half of 2012, that number had creeped up to about $25 million to $30 million of amortization that was taking place in the portfolio.

Now the portfolio is larger, and the portfolio is maturing. You now see that number on normal amortization be in the $30 million to $35 million range. So, just waking up in the morning, we have to originate $35 million to stay even with the normal amortization taking place. On top of that, it is often the case that sometimes we get a heads up that we may have early payoffs. When you have early payoff, for example, say $35 million, that means you have $70 million of net portfolio that's being paid off that you have to replace.

So the net $30 million to $50 million increase already absorbs that $35 million of increased amortization that's higher. If we were to see a $240 million payoff that would take place, that $30 million to $50 million number will in fact go down, but we expect that if it occurs, and again, it's a big if, if it occurs, it will most likely be at the end of June time period, if it does at all.

Okay. Got it. Thank you for the clarity. I'm held high. Going back to the fee question, obviously I mean there's the fee line, and then obviously there's embedded accelerated amortization from where you go next. Looking at the distinction between the 14.3 and the 13.8, am I right coming out, there's about $1 million ballpark of accelerated fees in the interesting income that won't occur -- unless you get the early repayment from this.

So, it's pretty easy to model by taking like the way that you should approach it by looking at the effective yield within without accelerations --

Yes, that's what I did. Yes.

Yes, that method is how you can back into what the decline was quarter-over-quarter in early payoffs. That's correct. But then, as Manual mentioned earlier, that then it's all a matter of where the deal may be in its life span with respect to the magnitude of the acceleration. And also a factor there is when we originate the investment, we will from time to time have a discussion about taking a tradeoff between fees and interest yield. So that all factors into the magnitude of the accelerations.

Like I said, it's really more a function of the specific investments that are paying us off, as it necessarily a function of the volume of payoffs, which occur quarter-to-quarter. That's why we are kind of a broken record about the difficulty in predicting what the acceleration impact may be.

And also, Robert, to your question. Because we don't -- we may have some idea of which credit may be paying us off. Sometimes we simply have an omnibus comment where it's $20 million or $30 million that may occur unexpectedly. If the credit is now on its 24 month of maturity, or outstanding with us, that fee acceleration would be de minimis, as compared to a company that may be on our books 46 months to pay us off earlier.

Understood. Understood. Two other questions. On sequestration, it looks like it's been a non-event for you, frankly, especially since you've got more companies filing IPOs, more with the Jobs Act as well, confidentially. Has there been any impact at all, and do you expect any in the future, or is it just -- it's blown over, and it's not going to effect you?

Well, I hate to say so. I think if Congress acts on something, but honestly it's been somewhat of a big yawn.

Well, that's good. Last question. Pricing [in violet] kind of following up, I mean one of our big bank competitors in this space is also talking up their, just the other day, their net interest margin expectations. So, I mean, you didn't sound too confident that you'd expect the expansion to maintain this year, but I mean, it's a theme we're hearing from some other players in this space. Just trying to -- fashion the new quarter a little bit more on how really how confident you are that you're going to be seeing expanding margins, expanding interest margins, it does seem to be --

Let me be very clear on this comment, because if the extrapolation was that I'm somehow concerned or fearful, that's sending the wrong message I wanted to broadcast. I am very confident in the market that we're seeing. We're seeing unprecedented demand for capital. Unprecedented. And with that is that our underwriting screens have to become tighter, because as you're getting more deal volume through, just because you have low hanging fruit does not mean you should execute or fill that order, or pick that fruit.

So, what we're doing is, we're being much more judicial. When we're seeing an increase in the demand of capital that we maintain the ratio, kind of skimming the upper cream of all the opportunity we're seeing out there. With that, and with that discipline, you'll see us to continue to have that 300 -- excuse me, that $500 million to $700 million growth, and gross commitments, which will be up from 2012.

If you look at the chart that we have in our earnings release today, you'll see here on page 8 of earnings release that, on a year-to-date basis where there's signed terms already, we're at $423 million of commitments. If I'm guiding to a $500 million to $700 million, and I still have approximately, call it 6 to 7 left of the year, that's a pretty bogey -- easy bogey for us to hit at the $500 million or $700 million level.

So, I'm not worried about hitting the growth numbers. I do worry about the credit quality, and I do worry about the mix, which will absolutely skew my effective yields that were on it. If I wanted to really capture market share, I could lower our yields by 150 basis points, and actually originate a lot more transactions. I don't think that's prudent, and I think that continue discipline in underwriting is the right strategy. And if I lose a $100 million of yields in a quarter, so be it.

Got it. Thanks.

Thank you. Our next question or comment comes from Aaron Deer from Sandler O'Neill. Your line is open.

Hi, good afternoon, everyone.

Hi, Aaron.

Manuel, just kind of following up on our general comments with respect to the lending market. I guess it sounds like there's still a lot of opportunities out there that you're just maybe pulling back some from, maybe you mentioned the private tech companies. Given that, are there other lending verticals where you're seeing increased opportunities, and where you're pushing a little harder into?

We all are, and for competitive reasons, I'm not sure I want to necessarily share that right now, because we're seeing some new white spaces that are available out there that others are not capitalizing on right now. And I tend to go where, all of a sudden the crowds are going, I go in the other direction. And I think the crowds are all flocking to early-stage tech, and we've been running away from early-stage tech for quite some time now, and we're continuing to wait it out in that category.

But I will tell you that this is why my confidence level in our $500 million to $700 million origination number, I'm not wavering on that whatsoever. So, you'll see it cycle out to different sectors, but I'm not at all concerned about origination activities. I just want to make sure that we don't overspend, or make sure we don't just be silly or sloppy at the last minute, simply to get assets on the books. But we are seeing some good, new white spaces to go after.

That's great. That sounds encouraging. And then, Jessica, I don't know if you have the number handy, but do you by chance have the weighted spot rate of your debt at March 31.

The aggregate? I will say it's, on a weighted base, I think we're at 5.20 or 4.75. Although we can get that for you. You don't have it right here. But [well justify it] I think the last time I looked at it, it's somewhere in the mid-5s, or -- I think we're in the mid-5s on a weighted basis with securitization and everything else.

Okay, terrific. Thanks for taking my questions.

Thank you. Our next question or comment comes from Mr. Chris York from JMP Securities. Your line is open.

Guys, congratulations on the quarter. My questions on the portfolio, and the market environment have been asked, so I'll turn to my second question, which includes two components. First, how many employees did you end the quarter with? You already referenced in your prepared remarks that you increased headcount. And then secondly, given that originations should remain healthy throughout the remainder of the year, do you need to add an investment officer or two, or can you utilize your current investment officers more?

All very good, insightful questions. We ended the quarter with approximately FT equivalent about 60. We are in fact actively, which gives you enforcement of my optimism, we are actively looking to add headcount. We actually have a total of approximately 3 to 5 open positions, all origination teams, which tells you the deal volume that we're seeing, and opportunities that we're seeing in the market place. So, we're actively doing that.

However, we hire like we invest. We take our time. We're very disciplined. We're very methodical about it, and we want to make sure we make the right hires, because a wrong hire could translate into $20 million of credit losses, and I hate losing money. So we will take a very controlled approach to hiring. So we are actively looking to hire more people.

Then I think previously you stated, if you brought on an investment officer, it would take them arguably maybe 6 to 9 months to get up to speed with Hercules platform. Is that somewhat reasonable of an expectation for new originations out of this investment officer?

That is absolutely correct. We tend to invest in our people that we will allocate a learning curve of a minimum of 6 months, and generally 9 months to have that individual become a productive individual, and understand our underwriting methodologies.

Again, we don't simply hire somebody to expect them to get out of the box and be originating actions right away. We would rather have them be knowledgeable on how we underwrite, and be controlled in how we underwrite. And that will remain the case. So yes, we're very methodical and very modulated in our expectations on that hire for at least 6 to 9 months.

And then lastly, so the potential investment officer that you might add, are they in a specific sector, and then are you looking for them to potentially bring on new relationships that you guys don't have? Is there an area there that you might want to explore?

Look it, the good in values is that this whole company is made up of a compilation of individuals from the venture capital industry, the commercial banking industry, private equity, and operation background. We don't really love sheer commercial bankers, and we don't necessarily purely love pure venture capitalists. You really want to have the background experience of both of those fields, and you want them to have a strong technology, whether it's life science or a technology background.

So, it takes a while to find that skill set in that individual that we're looking for, and the personality traits that we're looking for.

Got it. That's very helpful. Thanks a lot guys.

Thank you. Our next question or comment is a follow up from Mr. Greg Mason from KDW. Your line is open.

I have one follow up on the 2 exits post quarter. Althea, I believe is marked around $4.2 million fair value at quarter end. Is there any kind of material difference between that fair value, and what you exited? And number two, Omthera, I actually couldn't find that in your portfolio. Is that under a different name in your portfolio?

Yes, Althea is matched to the acquisition price. So that should represent the realized gain we'll see in Q2 once the proceeds come in. And with Omthera that investment closed for us, we signed our commitment with them at the end of the quarter. It just so happens though that the warrant agreement was executed at the beginning of April, and that's why you do not see that in our schedule of investments.

So, would it be the pricing of your warrants, would it be reasonably close to that $8 IPO price?

I don't know quite the specifics of the pricing of the warrants.

We can get that because it's public within the SEC filings.

Right.

I hope you don't this the wrong way. With the 117 portfolio companies, and 91 loan positions, my ability to have the specificity on each warrant is no longer there.

I understand. Just curious if it was to be any meaningful gain to be expected from that. But I appreciate it guys.

Okay. Thank you.

I'm showing no additional questions or comments in the queue at this time. I'll turn the conference back over to you.

Thank you, Operator. And thank everyone for your continued support and interest in Hercules Technology Growth Capital. I want to remind our investors in the investment community that we'll be presenting at three conferences in the coming weeks here. We have a JMP conference on May 13. We have the Wells Fargo conference in New York City on May 16, and we have [Stephens Spring] conference in New York City on June 4.

We will be meeting with investors throughout those conferences, as well as participating in non-deal road shows in respective city around the country. If you have an interest and schedule a meeting with us, I would encourage you to reach out and contact our shoulder relations, our investor relations department.

And I'd just say thank you everybody for your continued support, and belief in the Hercules team, and what we've been doing here at Hercules. Thank you very much, and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.