KBRA Assigns Rating to Hercules Capital, Inc.'s $250 Million Convertible Unsecured Notes Due 2028

KBRA assigns a rating of BBB+ to Hercules Capital, Inc.'s (NYSE: HTGC or “the company”) $250 million 4.75% convertible unsecured notes due September 2028. The rating Outlook is Stable.

Key Credit Considerations

The rating reflects the company’s diversified $3.66 billion investment portfolio consisting of 118 portfolio companies (debt investments) with a focus on senior secured first lien venture debt investments (86.9%) in the technology and life sciences sectors, solid 20-year operating history, including during the global financial crisis, and appropriate leverage metrics. The company’s solid credit quality has benefited from the company’s robust risk management and solid investment team with years of experience in the venture capital space. Furthermore, the rating is supported by HTGC’s proven access to capital markets, diversified funding mix, and high proportion of unsecured debt to total debt outstanding of 70.9% as of December 31, 2024, allowing for solid protection for noteholders.

As of December 31, 2024, the company’s portfolio included a high percentage of first lien senior secured floating rate debt to mostly venture capital-backed portfolio companies in the expansion and/or established phase concentrated in the sectors of Software (29.5%), Drug Discovery & Development (29.5%), Healthcare Services, Other (16.7%), and Consumer & Business Services (10.2%). The portfolio is characterized by low LTVs and relatively high balance sheet liquidity. The company’s historic credit performance remains solid with an annualized loss rate of only 1.9 bps since inception and a non-accrual rate as a percentage of total investments at cost and fair value of 1.7% and 0.5%, respectively, as of December 31, 2024. Furthermore, the company’s asset coverage, excluding SBA, was 231.7%, well in excess of the regulatory minimum of 150%. HTGC’s leverage was 0.76x, with a target leverage ratio range of 1.0x to 1.25x. The company intends to maintain a cushion comfortably below the upper bound of its target range to absorb asset volatility in weaker market conditions. Funding sources are well diversified, and liquidity is appropriate with $475.2 million in available bank credit lines and $113 million of cash with ~$545 million of debt maturing in 2025 (excludes the February 2025 maturity) and 2026. The company had $448.5 million of unfunded commitments with the majority not expected to be drawn.

The strengths are counterbalanced by the potential risk related to HTGC’s illiquid investments, the susceptibility to event risk related to industry concentrations in drug discovery and development and technology, and uncertainty around the economic environment and geopolitical risks.

Incorporated as a Maryland Corporation in December 2003, HTGC is a non-diversified publicly traded closed-end internally managed investment management company regulated as a business development company (BDC) under the Investment Company Act of 1940. The company has also elected to be regulated as a regulated investment company for tax purposes. The company is headquartered in San Mateo, CA with offices in Boston, MA, New York, NY, Bethesda, MD, San Diego, CA, Denver, CO, and London.

Rating Sensitivities

Given the Stable Outlook, a rating upgrade is not expected in the near to medium term. Negative rating pressure could occur if a prolonged downturn in the U.S. economy has material impacts on performance and non-accruals that significantly affect capital, leverage, and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring, and/or originations could also pressure ratings.

To access ratings and relevant documents, click here.

Methodologies

• Financial Institutions: Finance Company Global Rating Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.

Doc ID: 1008457

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