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Hercules Announces Strong Third Quarter Financial Results With $0.32 NII Per Share and a $0.31 Quarterly Dividend

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PALO ALTO, Calif.--(BUSINESS WIRE)--

Hercules Capital, Inc. (NYSE: HTGC) ("Hercules" or the "Company"), the leading specialty financing provider to innovative venture growth stage companies backed by leading venture capital firms, today announced its financial results for the third quarter ended September 30, 2016.

The Company also announced that its Board of Directors has declared a third quarter cash dividend of $0.31 per share, that will be payable on November 21, 2016, to shareholders of record as of November 14, 2016.

"Our strong third quarter financial results are a testament to our differentiated business model within the BDC industry," stated Manuel A. Henriquez, chairman and chief executive officer of Hercules. "This proven model culminated in generating our second consecutive quarter of 103.0% NII coverage, appreciation in our NAV, strong and above average seasonal pace of new origination activities and consistent high investment yields while maintaining our historical exceptional credit underwriting and quality. In addition to the strong quarterly income and NII growth, our debt investment portfolio is now approaching our critical targeted inflection point of $1.35 billion, which assuming effective yields in excess of 13.5% (currently at 14.6%) and maintaining NII margins of 52.0% or better (currently 52.7%), we expect to generate NII income at or in excess of our existing ‘dividend' distribution of $0.31 and find ourselves in a very advantageous position of having a substantial and growing war chest of undistributed earnings spillover rolling into 2017, assuming no unexpected credit events before year end."

Henriquez continued, "Our team of investment professionals continues to deliver outstanding performance and results, as we pursue our proven ‘slow and steady' march towards our desired target of a $1.30 to $1.35 billion debt investment portfolio, which we anticipate achieving by year-end or early January 2017, subject to market conditions and favorable market election outcomes. We ended Q3 with a debt investment portfolio of $1.28 billion, on a cost basis, slightly under our expected target for Q3 and impacted by higher than anticipated early repayments, however, given our existing pipeline of signed term sheets, coupled with our current pipeline of transactions being evaluated, we believe that we are within striking distance of our targeted debt investment portfolio goal which should allow us to achieve or maybe even exceed our target of $1.35 billion by year-end or early January 2017, subject to market conditions."

Henriquez concluded, "Hercules has ample liquidity and is well positioned with a strong and liquid balance sheet, with nearly $264.0 million, or ‘dry powder' for new investments. The company also has plenty of headroom to grow our regulatory leverage, which currently stands at 62.7%. Our ability to access multiple different sources of liquidity has afforded us a competitive advantage of maintaining a level of flexibility to grow our debt investment portfolio while many others find themselves unable to grow or gain access to either the debt or equity capital markets."

Q3 2016 Review and Operating Results

Growth of Debt Investment Portfolio

Hercules had a seasonally strong Q3 2016, having successfully entered debt and equity commitments to thirteen (13) companies, five (5) of which were to new companies, totaling $178.0 million, and gross fundings of $130.7 million.

During the quarter, Hercules realized higher-than-anticipated unscheduled early principal repayments of $84.2 million, along with normal scheduled amortization of $32.4 million, or $116.6 million in total debt repayments.

Net debt investment portfolio growth during the third quarter, on a cost basis, was $20.0 million, slightly lower than our desired target, driven by a higher volume of unscheduled early principal repayments.

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

(dollars in millions)     Debt     Equity     Warrants     Total Portfolio
Balances at Cost at 6/30/16 $ 1,255.9   $ 70.2   $ 43.3   $ 1,369.4  
New fundings(a) 129.9 - 0.8 130.7
Warrants not related to Q3 2016 fundings - - 0.1 0.1
Unscheduled paydowns(b) (84.2 ) - - (84.2 )
Principal reduction on investments (32.4 ) - - (32.4 )
Net changes attributed to conversions, liquidations, and fees   6.7     (1.1 )   (1.0 )   4.6  
Net activity during Q3 2016   20.0     (1.1 )   (0.1 )   18.8  
Balances at Cost at 9/30/16 $ 1,275.9   $ 69.1   $ 43.2   $ 1,388.2  
       
Balances at Value at 6/30/16 $ 1,211.8   $ 65.9   $ 25.1   $ 1,302.8  
Net activity during Q3 2016 20.0 (1.1 ) (0.1 ) 18.8
Net change in unrealized appreciation / (depreciation)   (7.7 )   4.0     2.7     (1.0 )
Balances at Value at 9/30/16 $ 1,224.1   $ 68.8   $ 27.7   $ 1,320.6  

(a)

 

New fundings amount includes $1.7 million total new fundings associated with revolver loans during Q3 2016.

(b)

Unscheduled paydowns include $6.4M paydown on revolvers during Q3 2016.

 

Weighted Average Debt Investment Portfolio Balance, at Cost

    Q3 2015     Q4 2015     Q1 2016     Q2 2016     Q3 2016
                 
Ending Balance at Cost $1,109.2 $1,152.3 $1,241.8 $1,255.9 $1,275.9
 
Weighted Average Balance   $1,152.9     $1,107.1     $1,180.1     $1,209.0     $1,236.0
 

As of September 30, 2016, 91.2% of the Company's debt investments were in a "true first-lien" senior secured position.

Effective Portfolio Yield and Stable Core Portfolio Yield ("Core Yield")

Effective Yields on our debt investment portfolio was 14.6% during Q3 2016, up slightly from the previous quarter of 14.4%, due to higher early pay-off activities. Our effective portfolio yields generally include the effects of fees and income accelerations attributed to early payoffs, as well as other activities, or one-time event fees. Our effective yields are materially impacted by elevated levels of unscheduled early principal repayments, and are 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 Yields were steady at 13.2% during Q3 2016, and well within our expected normalized levels of 12.5% to 13.5%. Hercules defines Core Yield as yields which generally exclude any benefits from income related to early debt repayments attributed to the acceleration of unamortized origination fees and income as well as prepayment fees, and includes income from expired commitments.

Income Statement

Total investment income for Q3 2016 was $45.1 million, compared to $47.1 million in Q3 2015. The decrease is primarily attributable to the decrease in unscheduled early debt repayment fees and accelerations.

Non-interest and fees expenses was down 23.8% to $11.2 million in Q3 2016 versus $14.7 million for Q3 2015. The decrease was primarily due to changes in variable compensation related to origination activities and stock-based compensation, and a slight decrease in general and administrative expenses.

Interest expense and financing fees were $10.1 million, compared to $8.9 million in Q3 2015. The increase was primarily due to the recent issuance of $141.9 million of our 6.25% 2024 Notes in Q2 2016, offset by the retirement of our Convertible Debt in Q2 2016.

Total operating expenses, which includes financing expenses, for Q3 2016, was $21.3 million, down 9.4%, compared to $23.5 million for Q3 2015.

The Company had a weighted average cost of borrowings comprised of interest and fees, of 6.0% in Q3 2016 versus 5.6% during Q3 2015. The increase was primarily driven by the issuances of our 6.25% 2024 Notes above, offset by the retirement of our Convertible Debt within 2016.

NII – Net Investment Income

NII for Q3 2016 was up slightly to $23.8 million, or $0.32 per share, based on 74.1 million basic weighted average shares outstanding, compared to $23.6 million, $0.33 per share, based on much lower shares of 71.5 million basic weighted average shares outstanding in Q3 2015, compared to 74.1 million shares in Q3 2016. The increase is primarily attributable to the increase in the weighted average loan balance and the decrease in total operating expenses offset by decrease in unscheduled early debt repayment fees and accelerations compared to the prior year period.

DNOI - Distributable Net Operating Income

DNOI, a non-GAAP measure, for Q3 2016 was $25.2 million or $0.34 per share, compared to $25.8 million, or $0.36 per share, in Q3 2015. The slight decrease is primarily attributable to the increase in the weighted average loan balance offset by decrease in unscheduled early debt repayment fees and accelerations, as well as a slightly lower amount of stock-based compensation, compared to the prior year period.

DNOI is a non-GAAP financial measure. The Company believes that DNOI provides useful information to investors and management because it measures Hercules' operating performanc

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