Horizon Technology Finance Corporation (NASDAQ:HRZN) suffered a 24% valuation decline in 2022, and the business development company is now worth buying at book value.
Horizon Technology Finance is a high-yield, technology-focused BDC with a yield that recently exceeded 10%. To support its growth, the business development company has a secured, debt-linked investment portfolio.
Horizon Technology Finance’s loan portfolio is performing well, and the stock could eventually trade at higher book value.
Another Gem In the BDC Sector
Economic development agencies have suffered significant valuation losses in 2022 as investors expect recessionary factors to impact the sector’s prospects for book value growth. On the same subject : High-tech companies announce layoffs, stop freezing.
During recessions, corporate development firms have a harder time generating positive growth in key metrics such as net investment income (due to pressures on portfolio earnings) and book value (due to pressures on credit quality, which tend to increase during recessions).
With that in mind, I believe it’s time for income investors to target BDCs that have the potential to outperform the sector given their credit performance and floating rate exposure.
Horizon Technology Finance is a monthly paying specialty finance company with a rapidly growing portfolio of investments. The portfolio had 50 debt and 81 warrant positions as of March 31, 2022.
External investments made by BDC are typically senior debt, which provides BDC with a high degree of capital protection. As of March, the company’s debt, warrants and equity positions were valued at $515 million and the BDC was invested with an annual average portfolio return of 12.4%.
Portfolio Composition (Horizon Technology Finance)
Horizon Technology Finance is an attractive dividend investment as it invests primarily in development-stage companies in the technology, life sciences, healthcare information and services industries and participates in the upside of these companies through equity and warrant positions.
In many ways, Horizon Technology Finance is similar to Hercules Capital, another BDC trying to leverage capital in specific technology niches.
Horizon Technology Finance has developed and nurtured a technology focus in venture capital where BDC sees the greatest opportunity for high returns. The BDC is well diversified and stays away from cyclical industries that pose earnings and cash flow risks. Biotechnology as an industry accounts for 22% of BDC’s total industry exposure.
Investment Overview (Horizon Technology Finance)
NII Exceeds Distributions
Horizon Technology Finance’s portfolio produced $1.41 per share of net investment income in 2021, while BDC paid out $1.25 per share for a payout ratio of 89%. The dividend payout ratio has been 90% from 2019 to 2021, so investors can reasonably assume that the monthly dividend of $0.10 per share is sustainable.
Sail Through The Next Interest Rate Hiking Cycle With Horizon Technology Finance
The central bank is raising rates aggressively, making now an excellent time to select BDCs with the largest exposure to floating rates. On the same subject : Invest as a Lifetime Option.
Horizon Technology Finance carefully structures its financing deals to ensure 100% exposure to variable interest rates, which means HRZN has more exposure to variable interest rates than the average business development firm in the industry.
This means that Horizon Technology Finance will benefit more than other BDCs from a significant hike in interest rates. Based on BDC’s interest rate sensitivity table, a 200 basis point increase in interest rates is expected to result in an $8.26 million increase in Horizon Technology Finance’s net assets.
Interest Rate Sensitivity (Horizon Technology Finance)
Trading At Book Value
In my view, Hercules Capital is most comparable to Horizon Technology Finance given their similarities in target industries and deal structures. Hercules Capital has a P/B ratio of 1. On the same subject : United States Provides Emergency Humanitarian Aid in Response to Floods and Disasters in Bangladesh | Advertising | US Agency for International Development.3x, reflecting BDC’s great success with its tech-focused investment strategy that combines interest payments with equity gains.
As the market rewards HTGC for the consistency of its portfolio results, BDC is trading at a premium to book value. Horizon Technology Finance currently has a P/B ratio of 1.0x, which means HRZN could be a better buy than Hercules Capital based on book value alone.
Are There Any Asset Quality Problems?
I don’t see any major problems at the moment. Horizon Technology Finance had a loan that was past due as of March 31, 2022. The cost of this investment was $11.9 million and the fair value was $5.5 million. On a fair value basis, the deferral rate was approximately 1% based on the total portfolio value of $515 million.
Why Horizon Technology Finance Could See A Lower Stock Price
Investors should closely monitor the book value development and non-accrual rate of BDC for current information on Horizon Technology Finance’s portfolio performance. I’d say portfolio quality is high with just one unreserved investment, but things can always take a turn for the worse, especially if a recession destabilizes the BDC sector.
My Conclusion
Now that Horizon Technology Finance is trading at book value, the offer becomes more attractive.
HRZN is one of the best bets in the BDC sector for rising rates because of its 100% floating rate exposure.
The dividend is covered and reasonably safe while non-accruals are kept to a minimum.
Horizon Technology Finance is characterized by its technology focus and the appreciation of equity results in the payment of special dividends.
A financial researcher and avid investor with a keen eye for innovation and disruption, growth buyouts and value stocks. Keeping an eye on the pace of high-tech and early growth companies, I write about current events and the biggest news surrounding the industry, and strive to provide readers with comprehensive research and investment opportunities.
Disclosure: I/We have an advantageous long position in HRZN stock, either through equity ownership, options or other derivatives. I wrote this article myself and it expresses my own opinion. I get no compensation for this (except from Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
