KBRA Affirms Ratings for Hercules Capital, Inc. and Converts Additional Securities to Published Ratings
30 Aug 2023 | New York
KBRA affirms the BBB+ issuer and senior unsecured debt ratings for Hercules Capital, Inc. (NYSE: HTGC or “the company”). Furthermore, KBRA affirms and publishes the following senior unsecured debt ratings for HTGC that were initially unpublished on the date specified following the CUSIP: CUSIP 427096A#9 on January 27, 2020; CUSIP 427096B@0 on February 22, 2021 ; CUSIP 427096A*3 on July 11, 2019, CUSIP 427096B*2 on February 22, 2021, and CUSIP 427096A@1 on January 27, 2020. All of the listed CUSIPs above were rated BBB+ with a Stable Outlook at issuance.
Key Credit Considerations
The ratings reflect the company’s diversified $3.1 billion investment portfolio with a focus on senior secured first lien venture debt investments (78.4%) in the technology and life sciences sectors, minimal historical non-accruals, including during the great financial crisis, as well as appropriate leverage metrics. The company’s solid credit quality has benefited from the company’s focus on the more non-cyclical sectors of technology and life sciences sectors as well as its long operating history within the venture capital space. Furthermore, the ratings are supported by HTGC’s proven access to capital markets, solid earnings record over its 19-year operating history, robust risk management, and high proportion of unsecured debt to total debt outstanding of 79% as of June 30, 2023, allowing for solid protection for noteholders. The strengths are counterbalanced by the potential risk related to HTGC’s illiquid investments as well as susceptibility to event risk related to industry concentrations.
As of June 30, 2023, the company’s asset coverage ratio was 211%, well in excess of the regulatory limit of 150%. HTGC’s leverage was 0.90x, 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.
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 Palo Alto, CA with offices in Boston, MA, New York, NY, Bethesda, MD, San Diego, CA, Denver, CO and London, United Kingdom.
Given the Stable Outlook, a rating upgrade is not expected in the near term. However, stable asset quality and earnings metrics combined with the maintenance of leverage within the company’s target range of 1.0x to 1.25x with ample asset coverage could lead to positive rating momentum over time. Negative rating pressure could occur if a prolonged downturn in the U.S. economy has material impacts on performance and nonaccruals 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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