Thursday, March 13, 2014

HTGC: March 2014 Report

Hercules Technology Growth Capital (HTGC) is a component in both of my suggestedtotal return’ BDC portfolios due to its higher than average historical and projected total returns.  After putting this report together I have upgraded its risk profile which has a direct impact on implied pricing.  The price has fallen over 10% in less than two weeks and I now consider it a ‘Buy’.  Personally I will be looking for resistance and buying momentum (that could be this morning) and then start a position for my personal BDC portfolio.

The reason for upgrading its risk profile is the willingness of management to make long-term decisions in the best interest of the shareholders instead of trying to temporarily cover dividends by quickly growing the portfolio and potentially sacrificing credit quality and/or portfolio yields.  This means that over the next two quarters I anticipate a lack of dividend coverage from net investment income (“NII”).  Management has stated this is not the immediate concern and will continue to selectively grow the portfolio as well as sell marginalized assets in this ‘frothy’ lending environment in an effort to improve credit quality and maintain higher than average yields.

HTGC is an internally managed BDC with a lower operating cost than most BDCs that allows it to sit on cash without paying a base management fee and no incentive fees to potentially drive decisions that are not in the best interest of shareholders.  HTGC has a large amount of growth capital with future debt and equity at a lower cost than most and is potentially the most well positioned BDC for rising interest rates with over 99% of debt investments at variable rates (and low floors) and 100% of borrowings at fixed rates.

Its net asset value (“NAV”) growth over the last 12 months is the second highest in the industry and a result of its investment approach with currently 113 warrant holdings and 37 equity positions.  HTGC focuses on venture capital backed growth oriented companies in the technology and life sciences sectors that are pre-IPO or M&A.  In the first two months of 2014, HTGC has already completed four IPOs with another five companies in IPO registration today.

This article discusses the pros and cons of investing in HTGC along with earnings projections, dividend sustainability and growth potential over the coming quarters including best and worst case scenarios as well as key risk considerations, updated rankings/pricing compared to the other 25 BDCs that I follow.
Also included:
  • Interest rate sensitivity analysis
  • Timing for future share issuances
  • Projected total returns compared to the other BDCs
  • Price target based on expected total returns
  • Pricing based on multiples of NAV and projected earnings
  • Overall rankings and recommendations

This report is not publicly available, will not be published on Seeking Alpha. If you would like to become a premium subscriber please visit “Premium Subscriber”.

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(reports are usually 15 to 20 pages)

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