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Horizon Technology Finance Corporation Sells a Baby Bond Issue

By: ,

September 29, 2017

By Tim McPartland

Horizon Technology Finance Corporation (NASDAQ:HRZN) has announced the issuance of a new baby bond issue with a coupon of 6.25%.

Proceeds from this issue will be used to call the 7.375% (NYSE:HTF) baby bond issue, which is currently outstanding. We own HTF in the short/medium duration portfolio, so we continue to build cash faster than we can invest it.

HRZN is a business development company (BDC) with an emphasis on lending in the life sciences and technology arenas. The company is a small BDC with a portfolio of just $179 million on the books. Like income investors, HRZN has incurred a large inflow of early repayments on the loans they have made as portfolio companies have been able to borrow at lower rates to repay loans to the company.

Horizon makes loans that are almost entirely floating-rate notes at an average interest rate of over 14%, which is fairly typical of a business development company. As a BDC, it must carry a higher asset coverage ratio and, as of the end of the quarter on June 30, the company had an asset coverage ratio of 344%.

This gives investors in its debt securities an added level of safety. It should be noted that while the asset coverage ratio is high, most business development companies use their judgement to value assets and this means you need to trust management to value the assets correctly.

HRZN common shares trade for around $11.00 each and pay a monthly dividend of 10 cents for a current yield of over 10%. Net asset value of the common shares has fallen in the last year from $13.27 a year ago to $11.87 most recently. We prefer the net asset value to remain flat or rise a bit and the company should be monitored by holders of the debt.

The new baby bond has a coupon of 6.25% and has an early redemption date in 2019. Maturity is in 2022. Interest on these notes is not qualified for preferential tax treatment.

Because of the short duration of these notes, we intend to purchase some of these shares in our short duration portfolios where we have plenty of available cash. We will need to monitor the financials of HRZN in the coming quarter.

Details of the new issue can be found here.


Tim McPartland

Tim McPartland is a private investor with over 45 years of investment experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.

 

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