Dan Trolio, executive svp and cfo of Horizon Technology Finance Corporation, answers SCI's questions

Q: Horizon recently completed a US$158m ABS - Horizon Funding Trust 2022-1 - backed by non-investment grade performing loans advanced to venture capital-backed companies in the technology, life science, healthcare information and sustainability industries. DBRS Morningstar assigned a single-A rating to the US$100m class A notes, which bear interest at a fixed interest rate of 7.56% per annum and have a stated maturity date of 15 November 2030. What was the motivation to return to the market with a new securitisation?
A: Our overall strategy is to diversify our debt stack by obtaining different sources and types of debt, which add positive aspects to the leverage on our balance sheet. In 2019, we closed a securitisation with a similar structure, which has worked out well for both Horizon and the noteholders. Accordingly, as we significantly grew the asset side of our balance sheet with new loans utilising debt capital from our revolving credit facility with a variable rate of interest, an additional securitisation with a fixed interest rate was an attractive debt source.

In addition to fixing the cost of a portion of our debt capital, the new securitisation increased our capacity to continue to grow the asset side of our balance sheet with additional leverage and freed up capacity on our revolving credit facility to make new loans. Like our 2019 securitisation, the new securitisation allows us a maximum 2:1 leverage, which allows us to increase the overall leverage on our portfolio.

Q: Has the industry changed much since your previous securitisation issuance?
A: From our perspective, the industry did not change much, nor did the structure of the securitisation. But obviously the rates have significantly changed since 2019. Thanks to our strong and long-standing relationships with our debt investors, Horizon was able to access its family of investors, including several from the 2019 securitisation, and not have to market the transaction. 

Q: What are the prospects for the venture debt ABS market?
A: Just like everyone else, we are living in interesting times, especially with all of the macroeconomic issues. The venture debt market looks different than it did a couple of years ago when there was more competition from equity capital. With the recent slowdown in equity investment, the demand for debt has increased, but so has the need for venture lenders to be more selective.

The feature of venture debt that has been most attractive to investors in emerging companies is that debt capital is less dilutive to their ownership interests than equity capital. During the past several years, valuations significantly increased and equity sponsors had plenty of capital to deploy, thus it was more attractive for some private companies to take additional equity over debt.

Today equity sponsors still have access to historically high levels of equity capital, but they are being more cautious and asking their portfolio companies to cut expenses and be more efficient with their cash. Investors still want growth, but are willing to accept lower growth in exchange for reducing their equity capital needs.

With that in mind, we believe sponsors and their companies are more likely to consider and choose venture debt to complement new equity investment. We believe these dynamics continue to increase the demand for venture debt. But, as Horizon has always done, venture lenders need to carefully navigate through the current macroeconomic environment. 

Vincent Nadeau