Horizon Technology Finance Stock: A High Quality, 10.4% Yielding Tech-Focused BDC (HRZN)

Clara D. Flaherty


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Horizon Engineering Finance Company (NASDAQ:HRZN) experienced a 24% valuation slice in 2022, and the enterprise progress firm is now worth purchasing at guide benefit.

Horizon Know-how Finance is a substantial-yielding, technologies-centered BDC with a produce that just lately surpassed 10%. To guidance its development, the small business development enterprise has a secured, financial debt-oriented financial commitment portfolio.

Horizon Technological innovation Finance’s credit score portfolio is carrying out nicely, and the inventory could inevitably trade at a higher e book value many.

Another Gem In the BDC Sector

Company development businesses have endured considerable valuation losses in 2022, owing to investors’ expectation that economic downturn things will have an impression on the sector’s prospective customers for guide worth development.

All through recessions, it is additional complicated for business improvement companies to generate positive development in critical metrics this kind of as web investment revenue (owing to portfolio revenue stress) and guide worth (because of to tension on credit score high quality which tends to enhance throughout recessions).

With that stated, I think it is time for dividend buyers to target BDCs that, owing to their credit functionality and floating rate publicity, have the probable to outperform the sector.

Horizon Technology Finance is a regular monthly-shelling out specialty finance corporation with a rapidly growing investment decision portfolio. The portfolio had 50 financial debt investments and 81 warrant positions as of March 31, 2022.

Debt investments created by the BDC are commonly Senior Phrase Financial loans that deliver the BDC with a superior stage of money protection. In March, the company’s financial debt, warrant, and equity positions ended up valued at $515 million, and the BDC was invested at a 12.4% annualized common portfolio generate.

Portfolio Composition

Portfolio Composition (Horizon Know-how Finance)

Horizon Engineering Finance is an exciting dividend expense simply because it mainly invests in advancement-phase providers in the know-how, life science, health care facts, and providers industries, and it participates in the upside of these providers by way of fairness and warrant positions.

Horizon Engineering Finance is comparable in many methods to Hercules Cash, yet another BDC that seeks to capitalize on equity upside in certain technological innovation niches.

Horizon Technology Finance has formulated and nurtured a technological know-how-aim in enterprise cash, which is where by the BDC sees the finest prospect for superior returns. The BDC is nicely-diversified and steers distinct of cyclical industries that pose earnings and funds stream pitfalls. Biotechnology as an market accounts for 22% of the BDC’s complete industry publicity.

Investments Overview

Investments Overview (Horizon Technological innovation Finance)

NII Exceeds Distributions

Horizon Technological know-how Finance’s portfolio created $1.41 for every share in internet investment earnings in 2021, even though BDC paid out $1.25 per share, implying an 89% pay-out ratio. The dividend shell out-out ratio was 90% from 2019 to 2021, so investors can fairly suppose that the $.10 per share month-to-month dividend is sustainable.

Sail Via The Up coming Desire Fee Mountaineering Cycle With Horizon Technological innovation Finance

The central lender is aggressively boosting fees, producing now an exceptional time to pick out BDCs with the biggest quantity of floating charge exposure.

Horizon Know-how Finance buildings its finance promotions cautiously to ensure 100% floating amount exposure, which implies HRZN has more floating price publicity than the ordinary company growth firm in the sector.

This indicates that a sizeable maximize in interest costs will benefit Horizon Engineering Finance additional than other BDCs. Based on the BDC’s interest sensitivity table, a 200-foundation-issue maximize in fascination costs is predicted to final result in a $8.26 million boost in Horizon Technological know-how Finance’s net assets.

Interest Sensitivity

Fascination Sensitivity (Horizon Technological innovation Finance)

Trading At Ebook Benefit

Mainly because of their similarities in targeted industries and deal constructions, I believe that Hercules Funds is the finest equivalent for Horizon Technological innovation Finance. Hercules Funds has a P/B ratio of 1.3x, owing to the BDC’s big achievements with its tech-focused financial investment strategy that brings together desire payments with fairness upside.

Because the marketplace benefits HTGC for the consistency of its portfolio final results, the BDC trades at a premium to book price. Horizon Technology Finance now has a P/B ratio of 1.0x, implying that HRZN may perhaps be a better buy than Hercules Capital primarily based exclusively on e book benefit.

Facts by YCharts

Are There Any Asset High quality Challenges?

Appropriate now, I will not see any key concerns. Horizon Technological innovation Finance experienced 1 bank loan that was earlier owing as of March 31, 2022. The cost of this expenditure was $11.9 million, and the honest worth was $5.5 million. On a fair value basis, the non-accrual ratio was about 1%, based on the overall portfolio value of $515 million.

Why Horizon Technological innovation Finance Could See A Decrease Inventory Selling price

To receive up-to-day information about Horizon Technological innovation Finance’s portfolio overall performance, traders should really closely keep an eye on the BDC’s book value pattern and non-accrual ratio. With only one particular non-accrual financial commitment, I might say portfolio top quality is strong, but things can generally improve for the worse, primarily if the BDC sector is destabilized by a economic downturn.

My Conclusion

Now that Horizon Technology Finance is buying and selling at e-book value, the proposition results in being more desirable.

HRZN is a single of the best bets in the BDC sector for soaring interest charges for the reason that it is 100% uncovered to floating prices.

The dividend is protected and fairly protected, while non-accruals are retained to a bare minimum.

Horizon Technologies Finance is distinguished by its technological focus, and fairness appreciation outcomes in the payment of specific dividends.


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