S&P Assigns 'BBB-' Issuer Rating to Hercules Technology Growth Capital (HTGC)

Standard & Poor's Ratings Services said it assigned its 'BBB-' issuer credit rating on Hercules Technology Growth Capital Inc (NYSE: HTGC). The rating outlook is stable.

"Our rating on Hercules reflects the company's low financial leverage, concentration in first-lien senior secured debt investments, diversified funding profile, and track record of low loan losses since inception," said Standard & Poor's credit analyst Sebnem Caglayan. "Rating weaknesses include its concentrated lending to technology and life science companies and generally illiquid investments that may constrain financial flexibility in adverse markets."

Hercules is focused on providing senior secured loans to venture capital-backed companies in technology-related sectors, including technology, biotechnology, life science, and energy and renewables technology (also referred to as clean energy) industries at all stages of development. Of the total $991.3 million loan portfolio, 50% was in life sciences companies, 34% in technology companies, and 16% in energy and renewables technology companies as of June 30, 2014. Despite a focus on technology-related sectors, Hercules' investment portfolio is well-diversified with respect to number of portfolio companies, in our view. Of the total portfolio, $898 million was in debt investments (90 active portfolio companies), $70.3 million in equity investments, and $23 million in warrants (total of 153 current portfolio companies).

We believe Hercules' business development company (BDC) registration places healthy constraints on its structure and strategy, particularly the 1.0x cap on its regulatory debt-to-equity leverage. All of the company's debt investments were first-lien senior secured as of June 30, 2014. Due to its venture capital focus, which often results in lower cash generation at the portfolio companies, the primary metric the company tracks is loan to enterprise value (LTV), rather than debt to EBITDA. As of June 30, 2014, the company had 90 portfolio companies within its loan portfolio with a weighted average LTV of 20%-25%. The weighted average LTV for the loan portfolio was 15%-20% as of Dec. 31, 2013, and 2012. Although these investments are less liquid than those of most other BDCs we rate, and thus the LTV potentially is more volatile in times of stress, an LTV consistently below 25% is sufficiently low to support the rating.

In our view, Hercules' investment strategy is adequate and consistent. The company has a track record of approximately 10 years lending to venture capital-backed companies with minimal loan losses. Since inception, loan losses, net of realized gains on warrants and equity investments, were only $24.8 million on total loan and equity commitments made of $4.4 billion. Hercules is generally the only lender to its portfolio companies, substantially all the loans include warrants for potential upside return, and most of its loans amortize monthly with short maturities of approximately 36 months (average duration of the portfolio as of June 30, 2014 was 22 months).

Hercules, in our view, has one of the most diversified funding profiles among its rated peers, as well as adequate liquidity. As of Sept. 26, 2014, the company has two credit facilities (maturing in August 2017), with a total committed amount of $150 million, and three baby bond offerings: $84.5 million of notes due in April 2019, $85.9 million of notes due in September 2019, and the most recently raised $103 million of notes due in July 2024 (raised in July 2014). It also has Small Business Administration (SBA) debentures (first license of $41.2 million and second license of $149 million), which have maturity dates ranging from March 1, 2018, to March 1, 2023; five-year convertible debt with $41 million outstanding due in 2016; and $129 million of asset-backed notes with $46.5 million outstanding and maturing in December 2017.

The stable outlook reflects our expectation that Hercules will continue to grow its investment portfolio and stay focused on originating senior secured investments within its area of expertise in the technology and life science industries. We also expect the firm to maintain non-deal-dependent interest coverage of approximately 4.0x and debt to ATE of 0.75x-0.85x. We could raise the rating if Hercules continues to diversify its funding profile and increases its scale and market position within the venture lending niche, while maintaining a strong financial profile. We could lower the rating if debt to ATE exceeds 1.2x without a credible plan for improving it or if the company's non-deal-dependent coverage of interest falls below 3x and we expect it to sustain this depressed level. Moreover, if loan losses (realized or unrealized) were to escalate such that they could weaken equity or signal weakening underwriting standards, we could downgrade the firm.

You May Also Be Interested In

• Evercore ISI Downgrades SunPower (SPWR) to In Line
• Evercore ISI Upgrades First Solar (FSLR) to Outperform
• JPMorgan is worried about further S&P 500 sell-off potential