HTGC raises leverage to act as cushion for current strategy

The vehicle had a successful shareholder vote to increase its debt-to-equity leverage from 1:1 to 2:1.

Hercules Capital (HTGC) now has the option to lever its balance sheet at up to a 2:1 debt-to-equity ratio, following a successful shareholder vote last week.

The Palo Alto, California-based business development company’s shareholders voted on Thursday to pass the increase in borrowing capacity, the firm announced the same day. The decision garnered widespread support, with over 91 percent of HTGC shareholders voting in favour.

The firm began to consider increasing its leverage shortly after the legislation passed on 23 March allowing BDCs to increase their leverage.

The vehicle consulted multiple sell-side analysts over the summer and the board voted in favour on 4 September, Michael Hara, the senior director of investor relations and corporate communication at HTGC, told Private Debt Investor.

“After months and months of meetings, we knew heading into the vote that we had pretty much received unanimous approval from our top stock and bondholders,” he said.

The firm doesn’t plan to use the leverage increase to change its strategy, but rather, use it as a cushion to allow more flexibility regarding when and how they fundraise, Hara explained.

“Without a doubt we will not change our strategy,” he said. “It’s our expertise. We will not stray from our current mandate.”

Prior to the vote, the vehicle tried to stay within a leverage level of 0.75x-0.95x to ensure it didn’t go over the previous 1:1 limit, Hara noted, adding that now the vehicle will likely aim for 0.95x– 1.25x. Hara said he doesn’t envision trying to get too close to the new higher limit, noting that the vehicle previously almost exceeded the old leverage limit.

“We were just trying to keep up with loan demand, and intra-quarter our debt-to-equity ratio spiked to 1:1, which put us above our limit,” Hara said. “We had to do an overnight equity capital raise to bring it back down below 1:1.”

However, Hara said in the long term the BDC may increase leverage to the 1.2x-1.5x range to open up possibilities in a wider variety of higher-yielding loans.

For shareholders, Hara sees this increased leverage as advantageous. The vehicle currently sees yields within the 12 percent range. But with the gradual shift up the leverage spectrum, he predicts returns could reach into the “higher teens” and result in higher dividends and returns for HTGC’s investors.

Hercules Capital is an internally managed BDC focused on lending to venture capital-backed high-growth companies. Since the firm was formed in 2003, it has committed over $8.2 billion of capital.