HRZN - Horizon Technology: Don't Miss This 12.3% BDC Yield On The Drop

2023-03-22 16:00:00 ET

Summary

• Horizon Technology Finance and other VC-focused BDCs have suffered valuation pressure after Silicon Valley Bank’s failure more than a week ago.
• The BDC’s portfolio is well-performing and HRZN covered its dividend pay-out with net investment income in 2022.
• HRZN is now available at a 6% discount to net asset value.

Horizon Technology Finance Corporation (HRZN) , like other venture capital-focused business development companies, has taken a beating in the last week. The failure of Silicon Valley Bank, which also had a venture capital focus, was the catalyst for the selloff in these niche BDCs.

Horizon Technology Finance, I believe, provides investors with an appealing entry point to secure a 12.3% dividend yield, especially because the business development company covers its dividend with net investment income.

Horizon Technology Finance also has interest rate upside due to its floating rate loan positioning, which adds to the BDC's attractiveness as an investment.

Furthermore, HRZN is now trading at a discount to net asset value, and I believe that passive income investors should take advantage of the drop.

Horizon Technology Finance Has A Diversified And Well-Performing Portfolio With A Venture Bent

Because they are primarily focused on technology, life sciences, health care, and sustainability companies, venture capital-focused business development companies occupy a unique niche in the BDC market. These startups require investment capital to grow their businesses, but they frequently face lending restrictions from banks that see them as too risky.

Horizon Technology Finance, as shown below, has a heavy technology and life sciences focus, with both sectors accounting for approximately 83% of the BDC's investments.

Venture capital firms, which are primarily focused on equity, and VC-focused BDCs, such as Horizon Technology Finance, which provide mostly secured loans, provide financing solutions to the startup scene. As a deal sweetener, specialty finance BDCs frequently obtain small equity and warrant positions in the companies to which they provide debt capital.

According to Horizon Technology Finance's most recent 10-K filing , the BDC kept a strict debt focus in 4Q-22, with all debt investments accounting for 95.3% of the company's investment portfolio.

The BDC held 60 debt investments totaling $686.5 million, an increase from $437.3 million in 4Q-21. Horizon Technology Finance also held 90 warrant positions and 8 equity positions worth $32.3 million in total. The BDC's total investments were worth $720.0 million, representing a 57% increase YoY. This increase was primarily due to new debt originations.

Horizon Technology Finance Has Consistent Dividend Coverage, Stable Net Asset Value

Horizon Technology Finance generated net investment income of $1.46 per share in 2022 while paying out distributions of $1.28 per share. As a result, Horizon Technology Finance had an 88% dividend pay-out ratio in 2022 based on net investment income, down slightly from 89% in 2021. The BDC increased its dividend payout by 10% in the fourth quarter due to strong portfolio growth and NII results.

Monthly Dividends

Horizon Technology Finance differs from other VC-focused BDCs in that it pays a monthly dividend of $0.11 per share, as opposed to the industry standard of quarterly dividend payments.

Horizon Technology Finance currently pays an annual dividend of $1.32 per share ($0.11 per share monthly), for a forward dividend yield of 12.3% based on a stock price of $10.76.

The following table shows the payment dates for the upcoming monthly dividends.

Horizon Technology Finance Is Trading At A 5% Discount To NAV

Horizon Technology Finance, like its two larger cousins in the VC-focused BDC market, Hercules Capital Inc. ( HTGC ) and TriplePoint Venture Growth BDC Corp. ( TPVG ) , has taken a significant valuation hit in the last 6-7 days.

Since SVB's bank run and subsequent failure made headlines more than a week ago, VC-focused business development firms have been selling off, which, in my opinion, creates an investment opportunity for passive income investors.

Horizon Technology Finance's stock is currently trading at a 6% discount to its net asset value, which was $11.47 at the end of 2022.

TriplePoint Venture Growth BDC is also trading at a discount to NAV, whereas Hercules Capital is trading at a significantly lower premium than the BDC has been used to in recent years.

Why Horizon Technology Finance Could See A Lower Valuation

I don't believe the VC market is having a problem or is riskier than it was a month ago. Silicon Valley Bank had a VC focus simply because it was headquartered in Silicon Valley, which is where many startups backed by venture capitalists can be found.

With that said, an escalating banking crisis in the United States could affect banks' willingness to lend and cause additional short-term pain for BDCs.

My Conclusion

Selling pressure has increased in the VC-focused BDC sector, but I believe passive income investors should not be concerned.

Horizon Technology Finance, TriplePoint Venture Growth BDC, and Hercules Capitals, in my opinion, provide appealing entry points for investors with a long time horizon and a high risk tolerance.

Horizon Technology Finance, as well as the other two business development companies mentioned here, cover their dividends with net investment income and maintain diversified portfolios.

Horizon Technology Finance is now on sale, but only for a limited time. Purchase the drop.

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