Horizon Technology Finance Q3 Earnings Call Highlights

Key Points

• Credit challenges drove a sharp decline in net asset value: NAV fell to $5.56 per share from $6.23 in the prior quarter and $7.12 a year earlier, largely due to write-downs on stressed investments, most of which were in non-accrual status.
• The investment pipeline grew: Horizon’s committed, approved and awarded backlog increased to $351 million from $309 million, alongside a $650 million portfolio. The company funded nine debt investments totaling $98 million during the quarter.
• Income covered regular distributions, but was lower year over year: Net investment income was $0.19 per share, versus $0.32 a year earlier, while debt portfolio yield declined to 14.7% from 18.6%. The board declared monthly distributions of $0.06 per share for January through March 2027.

Horizon Technology Finance NASDAQ: HRZN reported third-quarter net investment income of $0.19 per share, enough to cover its regular distributions, as a growing investment backlog contrasted with write-downs that reduced net asset value.

Net asset value fell to $5.56 per share as of September 30 from $6.23 at the end of June, primarily because of write-downs on certain stressed investments. It stood at $7.12 per share a year earlier.

Chief Executive Officer Mike Balkin said the company had made progress addressing credit challenges, although he expects that progress to become more apparent in 2027. Horizon ended the quarter with a $650 million investment portfolio and a $351 million committed, approved and awarded backlog, up from $309 million three months earlier.

Credit pressures weigh on NAV

Chief Investment Officer Paul Seitz said Horizon was working through several stressed credits and seeking to recover as much capital as possible. Asked about the timeline for stabilizing those investments, he declined to give a forecast, citing the sensitivity of private processes and uncertainty around their outcomes.

“We had run up against a few shortfalls in the terms of the outcomes we were expecting,” Seitz said. “Definitely unfortunate, but we are working diligently and very hard to recover as much capital as possible.”

Chief Financial Officer Dan Trolio said the majority, if not all, of the stressed investments being managed through those processes were in the non-accrual category.

Under Horizon’s one-to-five credit scale, 88% of the fair value of its debt portfolio was rated one, two or three at quarter end, while 12% was rated four or five, Seitz said.

Originations and backlog grow

Horizon funded nine debt investments totaling $98 million during the quarter. That activity was offset by $3 million in scheduled principal payments and $81 million in loan prepayments and partial paydowns.

Seitz said the prepayments generated accelerated income and freed capital for new investments. He expects a lower level of prepayment activity in the fourth quarter, although Trolio noted during the question-and-answer session that the company had received one smaller prepayment that day.

Trolio said the portfolio had grown by an average of about $30 million over the prior three quarters and that he expected fourth-quarter growth to be somewhat higher, but not significantly so. Seitz said the investment pipeline typically operates on a rolling six-month basis, though individual deals can be delayed or accelerated.

Most funding commitments in the backlog are subject to portfolio companies reaching certain milestones, Seitz said. At September 30, Horizon’s portfolio included debt investments in 42 companies with a fair value of $621 million, alongside warrant, equity and other investments valued at $29 million.

Income and distributions

Third-quarter investment income declined to $24.1 million from $26.3 million a year earlier, primarily because of lower interest income on the debt portfolio. Net investment income of $0.19 per share rose from $0.11 in the second quarter but fell from $0.32 a year earlier.

Horizon’s debt portfolio yield was 14.7%, compared with 18.6% in the year-earlier quarter. The yield on newly added debt investments was 12.6%, above the second-quarter level, which Seitz attributed in part to a rising-rate environment.

Net expenses totaled $11.5 million after Horizon’s adviser waived $1 million of its base management fee. Trolio said the adviser had agreed, in connection with a merger earlier in the year, to waive up to $4 million in fees, at a rate of up to $1 million per quarter beginning in the third quarter.

The board declared monthly distributions of $0.06 per share for January, February and March 2027. Undistributed spillover income was $0.24 per share at September 30. Balkin said the company’s goal is to generate net investment income at or above its declared distributions over time.

Liquidity, buybacks and leadership

Horizon had $211 million of available liquidity at quarter end, including $108 million in cash and $103 million in available borrowing-base capacity. Its net leverage, after subtracting cash, was 0.82 times equity, below management’s target, Trolio said.

The company repurchased just over 2 million shares during the quarter at an average price of $4.90 under its $20 million buyback program. Trolio said Horizon expects to remain opportunistic with repurchases.

Horizon also announced the appointment of Manuel Henriquez as chief growth and strategy officer at its adviser. Balkin said Henriquez, who had been working with the adviser since June, was helping with originations and bringing experience and relationships to the business.

About Horizon Technology Finance (NASDAQ:HRZN)

Horizon Technology Finance Corporation NASDAQ: HRZN is a specialty finance company that has elected to be regulated as a business development company. It provides secured venture loans to development-stage companies backed by venture capital or private equity investors.

The company primarily finances businesses in the technology, life sciences, healthcare information and sustainability sectors. Its lending solutions are designed to support needs such as product development, commercialization, acquisitions, working capital and other corporate purposes.

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