Prepayments hit Hercules core yields

The firm reported that $100m in unscheduled prepayments in addition to one loan placed on non-accrual status hurt core yields in the first quarter.

US lender Hercules Capital saw core yields drop in the first quarter compared with the previous period due to a high number of unscheduled prepayments as well as the placing of one portfolio company on non-accrual status, executives said on the company’s recent earnings call.

Core yields were 12.2 percent, a 0.7 percent drop, but the firm said that is expected to rise again in the subsequent quarters as one loan that was made to Sungevity which was placed on non-accrual status will be converted into equity following its bankruptcy proceeding.

Overall, across the quarter unscheduled early payments amounted to $100.3 million in the first quarter, while planned amortisation payments were $37.5 million.

Hercules originated $190 million of loans across a total of 13 companies, eight of which were new clients.

Because of the volume of early prepayments, founder Manuel Henriquez revised net portfolio growth to between $50 million and $75 million in the first half of the year. But Henriquez said he was confident that Hercules will complete between $350 million and $375 million of total new commitments in the first half of 2017.

Total assets under management increased by 19 percent in the first quarter, reaching $1.59 billion. The firm reported a total of $343 million of dry powder available to put to work – $148 million in cash and a $195 million in credit facilities made available by both Wells Fargo and Union Bank.

During the call, Henriquez reaffirmed his support for the firm’s move to an externalised management structure ahead of a shareholder vote on the change due to take place at the end of next month. For Henriquez, the firm will remain at a disadvantage to its competitors if it does not undertake the new structure.

“The market has evolved where these larger externally managed business development companies’ funds have access to ample tools of capital that we do not have. This puts us at a disadvantage on the ability to originate different loans with different yields and different product categories, that would be a detriment in doing so at the existing fund,” he said on the earnings call.

Looking forward, Henriquez said that the US venture capital market is in robust shape with $8 billion so far this year being invested in the market, but uncertainty in the political scene is a cause for concern, especially on healthcare, an industry the firm is particularly active in.

“We still do not have directional clarity as to where we are going as a US economy. We do not have directional clarity on tax reform. I am happy that to say that Congress finally passed a reform of the Affordable Care Act and put forward a programme that goes before the Senate to evaluate.

“However, with all the many uncertainties associated with a repeal and replace of the ACA, our own outlook of investing in life sciences companies remains a bit opaque, but we continue to make investments where we think it’s prudent,” he said.