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Hercules Capital Reports First Quarter 2021 Financial Results

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Hercules Capital, Inc. (NYSE: HTGC) (“Hercules” or the “Company”), the largest and leading specialty financing provider to innovative venture, growth and established stage companies backed by some of the leading and top-tier venture capital and select private equity firms, today announced its financial results for the first quarter ended March 31, 2021.

“We are off to a terrific start to 2021 with record levels of new commitments and fundings for the first quarter,” stated Scott Bluestein, chief executive officer and chief investment officer of Hercules. “Notably, we closed nearly $531 million in new debt and equity commitments, while improving and maintaining strong credit quality with the highest internal credit rating on our debt investment portfolio in 10 years.”

Bluestein added, “In addition to our base shareholder distribution this quarter, we are establishing a supplemental distribution program for fiscal year 2021 of $0.28, which will be distributed equally over four quarters beginning with the first quarter distribution, which is payable in May 2021. Our equity and warrant portfolio has continued to mirror the vibrancy in our venture ecosystem and gives us the confidence to provide the additional distributions to our shareholders.”

Bluestein concluded, “We are very pleased to have also raised and closed our first institutional private credit fund during the quarter. Having the fund in place gives us the opportunity to expand and diversify our investment platform while enhancing our level of service and capabilities we can provide to our current and future venture and growth stage portfolio companies.”

Q1 2021 Review and Operating Results

Debt Investment Portfolio

Hercules delivered new debt and equity commitments totaling $530.9 million and fundings totaling $355.3 million.

During the first quarter, Hercules realized early loan repayments of $191.5 million, which along with normal scheduled amortization of $18.3 million, resulted in total debt repayments of $209.8 million.

The new debt investment origination and funding activities lead to a net debt investment portfolio increase of $82.5 million during the first quarter, on a cost basis.

The Company’s total investment portfolio, (at cost and fair value) by category, quarter-over-quarter is highlighted below:

Total Investment Portfolio: Q1 2021 to Q4 2020

 

Equity & Inv.

(in millions) Debt Funds Warrants Total Portfolio
Balances at Cost at 12/31/20

$

2,099.5

 

$

190.2

 

$

25.7

 

$

2,315.4

 

New fundings(a)

 

348.7

 

 

6.1

 

 

1.1

 

 

355.9

 

Fundings assigned to External Funds

 

(47.4

)

 

(0.8

)

 

(0.2

)

 

(48.4

)

Principal payments received on investments

 

(18.3

)

 

—

 

 

—

 

 

(18.3

)

Early payoffs(b)

 

(191.5

)

 

—

 

 

—

 

 

(191.5

)

Net changes attributed to conversions, liquidations, and fees

 

(9.0

)

 

1.0

 

 

(1.3

)

 

(9.3

)

Net activity during Q1 2021

 

82.5

 

 

6.3

 

 

(0.4

)

 

88.4

 

Balances at Cost at 3/31/21

$

2,182.0

 

$

196.5

 

$

25.3

 

$

2,403.8

 

 
 
Balances at Value at 12/31/20

$

2,094.5

 

$

225.0

 

$

34.6

 

$

2,354.1

 

Net activity during Q1 2021

 

82.5

 

 

6.3

 

 

(0.4

)

 

88.4

 

Net change in unrealized appreciation (depreciation)

 

8.1

 

 

6.0

 

 

7.8

 

 

21.9

 

Total net activity during Q1 2021

 

90.6

 

 

12.3

 

 

7.4

 

 

110.3

 

Balances at Value at 3/31/21

$

2,185.1

 

$

237.3

 

$

42.0

 

$

2,464.4

 

(a)

New funding amount includes $1.7 million associated with revolver loans during Q1 2021.

(b)

Early payoffs includes $1.2 million of paydowns on revolvers during Q1 2021.

Debt Investment Portfolio Balances by Quarter

 
(in millions) Q1 2021 Q4 2020 Q3 2020 Q2 2020 Q1 2020
 
Ending Balance at Cost

$2,182.0

 

$2,099.5

 

$2,283.7

 

$2,278.9

 

$2,242.9

 

 

 

 

 

 

 

 

 

Weighted Average Balance

$2,119.0

 

$2,246.0

 

$2,217.0

 

$2,248.0

 

$2,178.0

 
 

Debt Investment Portfolio Composition by Quarter

 
(% of debt investment portfolio) Q1 2021 Q4 2020 Q3 2020 Q2 2020 Q1 2020
 
First Lien Senior Secured

82.7%

 

84.2%

 

85.5%

 

83.5%

 

83.0%

 

 

 

 

 

 

 

 

 

Floating Rate w/Floors

96.8%

 

96.9%

 

97.9%

 

97.9%

 

97.8%

 
 

Effective Portfolio Yield and Core Portfolio Yield (“Core Yield”)

The effective yield on Hercules’ debt investment portfolio was 13.2% during Q1 2021, as compared to 13.3% for Q4 2020. The Company realized $191.5 million of early loan repayments in Q1 2021 compared to $282.3 million in Q4 2020, or a decrease of 32.2%. Effective yields generally include the effects of fees and income accelerations attributed to early loan repayments, and other one-time events. Effective yields are materially impacted by the elevated or reduced levels of early loan repayments and derived by dividing total investment income by the weighted average earning investment portfolio assets outstanding during the quarter, which excludes non-interest earning assets such as warrants and equity investments.

Core yield, a non-GAAP measure, was 11.6% during Q1 2021, within the Company’s expected range of 11.0% to 12.0%, and decreased slightly compared to 11.8% in Q4 2020. Hercules defines core yield as yields that generally exclude any benefit from income related to early repayments attributed to the acceleration of unamortized income and prepayment fees and includes income from expired commitments.

Income Statement

Total investment income decreased to $68.8 million for Q1 2021, compared to $73.6 million in Q1 2020. The decrease is primarily attributable to a lower weighted average debt investment balance and a decrease in total fee income between periods.

Non-interest and fee expenses were $17.6 million in Q1 2021 versus $16.7 million for Q1 2020. The increase was due to higher employee compensation and tax expenses, offset by lower general and administrative expenses.

Interest expense and fees were $17.6 million in Q1 2021, compared to $16.3 million in Q1 2020. The increase was due to higher weighted-average borrowings between periods.

The Company had a weighted average cost of borrowings comprised of interest and fees, of 5.5% in Q1 2021, as compared to 5.2% for Q1 2020.

NII – Net Investment Income

NII for Q1 2021 was $34.6 million, or $0.30 per share, based on 114.3 million basic weighted average shares outstanding, compared to $40.6 million, or $0.37 per share, based on 109.0 million basic weighted average shares outstanding in Q1 2020. The decrease is primarily attributable to a lower weighted average debt investment balance, the impact of the federal funds target rate cut in March 2020, a decrease in total fee income between periods and an increase in total net operating expenses between periods.

Continued Credit Discipline and Strong Credit Performance

Hercules’ net cumulative realized gain/(loss) position, since its first origination activities in October 2004 through March 31, 2021, (including net loan, warrant and equity activity) on investments, totaled ($71.9) million, on a GAAP basis, spanning over 16 years of investment activities.

When compared to total new debt investment commitments during the same period of over $11.6 billion, the total realized gain/(loss) since inception of ($71.9) million represents approximately 62 basis points “bps,” or 0.62%, of cumulative debt commitments, or an effective annualized loss rate of 3.8 bps, or 0.04%.

Realized Gains/(Losses)

During Q1 2021, Hercules had net realized gains of $7.8 million primarily from gross realized gains of $9.5 million due to the sale of equity and warrant investments. These gross realized gains were offset by gross realized losses due to the write-off or termination of equity, warrant and loan investments of ($1.7) million.

Unrealized Appreciation/(Depreciation)

During Q1 2021, Hercules recorded $21.9 million of net unrealized appreciation, all of which was net unrealized appreciation from our debt, equity and warrant investments.

Portfolio Asset Quality

As of March 31, 2021, the weighted average grade of the debt investment portfolio, at fair value, improved to 2.01, compared to 2.16 as of December 31, 2020, based on a scale of 1 to 5, with 1 being the highest quality. Hercules’ policy is to generally adjust the credit grading down on its portfolio companies as they approach their expected need for additional growth equity capital to fund their respective operations for the next 9-14 months. Various companies in the Company’s portfolio will require additional rounds of funding from time to time to maintain their operations.

Additionally, Hercules may selectively downgrade portfolio companies, from time to time, if they are not meeting the Company’s financing criteria, or underperforming relative to their respective business plans.

As of March 31, 2021, grading of the debt investment portfolio at fair value, excluding warrants and equity investments, was as follows:

Credit Grading at Fair Value, Q1 2021 - Q1 2020 ($ in millions)

Q1 2021

Q4 2020

 

Q3 2020

 

Q2 2020

 

Q1 2020

Grade 1 - High

$

497.5

22.8

%

$

411.0

19.6

%

$

406.5

17.9

%

$

443.6

20.1

%

$

390.4

17.7

%

Grade 2

$

1,240.7

56.8

%

$

1,027.9

49.1

%

$

1,053.1

46.5

%

$

877.9

39.6

%

$

818.1

37.3

%

Grade 3

$

426.2

19.5

%

$

621.3

29.7

%

$

772.3

34.1

%

$

849.7

38.3

%

$

917.2

41.8

%

Grade 4

$

20.4

0.9

%

$

25.3

1.2

%

$

26.7

1.2

%

$

25.0

1.1

%

$

54.3

2.5

%

Grade 5 - Low

$

0.2

0.0

%

$

8.9

0.4

%

$

5.9

0.3

%

$

20.1

0.9

%

$

15.5

0.7

%

 
Weighted Avg.

 

2.01

 

2.16

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