KBRA Affirms Ratings for Hercules Capital, Inc.

KBRA affirms the BBB+ issuer and senior unsecured debt ratings for Hercules Capital, Inc. (NYSE: HTGC or "the company"). The rating Outlook is Stable.

Key Credit Considerations

The ratings reflect the company’s diversified $3.57 billion investment portfolio with a focus on senior secured first lien venture debt investments (85.6%) in the technology and life sciences sectors, solid 20-year operating record, including during the global financial crisis, and appropriate leverage metrics. The company’s solid credit quality has benefited from the company’s robust risk management and solid investment team with years of experience in the venture capital space. Furthermore, the ratings are supported by HTGC’s proven access to capital markets, diversified funding mix, and high proportion of unsecured debt to total debt outstanding of 72% as of June 30, 2024, allowing for solid protection for noteholders. The strengths are counterbalanced by the potential risk related to HTGC’s illiquid investments, the susceptibility to event risk related to industry concentrations in drug discovery and development and technology, and the uncertain economic environment with high base rates, inflation, and geopolitical risk.

As of June 30, 2024, the company's portfolio included a high percentage of first lien senior secured floating rate debt to mostly portfolio companies in the Drug Discovery & Development (34.9%), Software (26.6%), and Healthcare Services (15.9%). The portfolio is characterized by low LTV and relatively high balance sheet liquidity. While non-accruals as a percentage of total investments at cost and FV increased to 2.5% and 0.9% from 1.0% and 0.0% at YE2023, respectively, they are in line with peers and are largely the result of an additional non-accrual in portfolio company Khoros (a/k/a Lithium Technologies) with a cost of $60.8 million during 2Q24. The company's historical credit performance remains solid with its 1.2 bp of annual net realized losses or just $42.1 million since inception. The company has been able to grow its portfolio of investments despite the slowdown in the venture capital markets through its solid reputation, small overall market share along with a decline in bank participation, a long operating history and a larger venture debt lending platform through $1.0 billion of capital raises for three private debt funds. Furthermore, as of June 30, 2024, the company’s asset coverage ratio was 217%, well in excess of the regulatory limit of 150%. HTGC’s leverage was 0.85x, with a target leverage ratio range of 1.0x to 1.25x. The company intends to maintain a cushion comfortably below the upper bound of its target range to absorb asset volatility in less favorable market conditions. Funding sources are well diversified and liquidity is appropriate with $454 million of available bank credit lines and $28 million of cash with $275 million of debt maturing in 2024 and 2025 and about $480 million of unfunded commitments. The majority of unfunded commitments are tied to transactions and are not expected to be drawn. Post quarter-end, the company repaid the $105 million July notes by drawing down on its secured bank line.

Incorporated as a Maryland Corporation in December 2003, HTGC is a non-diversified publicly traded closed-end internally managed investment management company regulated as a business development company (BDC) under the Investment Company Act of 1940. The company has also elected to be regulated as an RIC (Regulated Investment Company) for tax purposes. The company is headquartered in San Mateo, CA with offices in Boston, MA, New York, NY, Bethesda, MD, San Diego, CA, Denver, CO, and London, United Kingdom.

Rating Sensitivities

Given the Stable Outlook, a rating upgrade is not expected in the near to medium term. Negative rating pressure could occur if a prolonged downturn in the U.S. economy has material impacts on performance and non-accruals that significantly affect capital, leverage, and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring, and/or originations could also pressure ratings.

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