HRZN

Horizon Technology Finance Corporation (HRZN)

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Horizon Technology Finance (HRZN)

Q3 2013 Earnings Conference Call

November 6, 2013 09:00 ET

Executives

Michael Cimini - IR, IGB Group

Rob Pomeroy - Chairman & CEO

Jerry Michaud - President

Chris Mathieu - CFO

Analysts

Fin O'Shea - Raymond James

Merrill Ross - Wunderlich Securities

Matthew Howlett – UBS

Casey Alexander - Gilford Securities

Presentation

Operator

Good morning and welcome to Horizon Technology Finances’ Third Quarter 2013 Conference Call. (Operator Instructions). I would now like to turn the call over Michael Cimini of the IGB Group for introductions of the readings of the Safe Harbor statement. Please go ahead sir.

Michael Cimini

Thank you, and welcome to the Horizon Technology Finance third quarter 2013 conference call representing the Company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Chris Mathieu, Chief Financial Officer. Before we begin, I would like to point out that Q3 press release is available on the Company's website at www.horizontechnologyfinancecorp.com.

Now, I'll read the following Safe Harbor statement. During this conference call, Horizon Technology Finance will make certain forward-looking statements including statements with regard to the future performance of the Company. Words such as believe, expect, anticipate, intend, or similar expressions are used to identify forward-looking statements. These statements are subject to the inherent uncertainties and predicting future results and conditions. Certain factors could cause actual results to differ on material basis from those projected in these forward-looking statements, and some of these factors are detailed in the Risk Factor discussion in the Company's filings with the SEC including Form 10-K for the year ended December 31, 2012. The Company undertakes no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Rob?

At this time, I would like to turn the call over to Rob Pomeroy.

Rob Pomeroy

Thank you Mike. Good morning and thank you all for joining us. During the third quarter Horizon delivered strong financial results for shareholders generating high current pay interest income and earning attractive fees. We’re pleased to once again capitalize on the inherent earnings power of our dynamic venture loan portfolio. For the third quarter we earned net investment income of $3.5 million or $0.36 per share which exceeded our previously declared monthly dividends. Since implementing our current dividend strategy one year ago our NII has exceeded our dividend in three out of four quarters and in the aggregate fully covered our dividends. We remain focused on taking advantage of the inherent earnings power within our existing investment portfolio and utilizing our disciplined approach to capitalize on select new opportunities. I would like to spend a few months to discuss in more detail some of the main business drivers that contributed to our success in the quarter. First is the return that we generated on our investments, Horizon has consistently earned high yields on it's loan investments between 11% and 15% which take into account the coupon interest, amendment fees, end-of-term payments or ETPs and prepayment fees.

As a reminder loan prepayments are regular feature of the venture lending model providing capital that can be redeployed into high yielding assets. For the third quarter all of these factors combined for a solid weighted average yield of 14.6%. Next is the effective use of leverage. During the third quarter we benefited from the use of cost effective leverage to increase earnings. By recently completing our first investment grade term securitization and reducing the interest rate on our revolving credit facility we have enhanced our ability to leverage new and existing investments at more favorable rates. As we take proactive measures to enhance future performance management remains dedicated to reducing risk. By locking the 92% of our total borrowings at fixed rates we have moved to substantial portion of our floating rate borrowings to fixed rate, match term financing. In addition as our portfolio amortizes we expect to naturally delever our balance sheet and return to our previously stated target leverage of approximately 0.8 to 1 over the next 6 to 12 months. As we announced yesterday evening we have amended and extended our revolving credit facility. Chris will provide more color on the major aspects of this news shortly.

As we reduce our leverage we remain committed to acting in a manner that best serves the long term interest of our shareholders and we have no intention of raising equity capital at current levels. With the increase in our NAV combined with the potential for additional NAV upside we will continue to be patient while actively managing our existing portfolio of quality high yielding assets. Regarding credit, our overall asset quality remains relatively stable.

As of September 30th our loan portfolio had a weighted average credit rating of 3.1 were 3 is a standard credit on a 4.0 scale with over 90% of the portfolio performing at or above expectations. During the third quarter we put the Satcon bankruptcy from over a year ago behind us as we took to realize loss. Because we had previously written a loan down to zero and place it on non-accrual there was no impact from this realized loss on either NII or NAV in the third quarter.

During the quarter we placed one new loan on non-accrual. It is early in our efforts to work out this problem account and assess the amount and likelihood for recovery. Workouts and problem accounts are to be expected in the venture lending business and aggressive management of these accounts is a core competency of the Horizon’s management team. To that end after an auction process one of our other portfolio companies who have loaned us on non-accrual entered into a Memorandum of Understanding to sell it's assets. This dramatically improved our prospects for recovery during the third quarter. If closed as anticipated the sale proceeds and future contingent payments have the potential for a full recovery of our investment. We increased the fair value of this asset to reflect the improved prospects tempered [ph] for that fact that the acquisition is not yet closed.

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