Quarterly report pursuant to Section 13 or 15(d)

Debt

v3.23.3
Debt
 9 Months Ended
Sep. 30, 2023
Debt Disclosure [Abstract]  
Debt Debt
As of September 30, 2023 and December 31, 2022, the Company had the following available and outstanding debt:
(in thousands) September 30, 2023 December 31, 2022
  Total Available Principal
Carrying Value (1)
Total Available Principal
Carrying Value (1)
SBA Debentures (2)
$ 175,000  $ 175,000  $ 170,175  $ 175,000  $ 175,000  $ 169,738 
July 2024 Notes 105,000  105,000  104,754  105,000  105,000  104,533 
February 2025 Notes 50,000  50,000  49,837  50,000  50,000  49,751 
June 2025 Notes 70,000  70,000  69,717  70,000  70,000  69,595 
June 2025 3-Year Notes 50,000  50,000  49,732  50,000  50,000  49,616 
March 2026 A Notes 50,000  50,000  49,771  50,000  50,000  49,700 
March 2026 B Notes 50,000  50,000  49,751  50,000  50,000  49,673 
September 2026 Notes 325,000  325,000  322,094  325,000  325,000  321,358 
January 2027 Notes 350,000  350,000  345,602  350,000  350,000  344,604 
2031 Asset-Backed Notes 150,000  150,000  148,397  150,000  150,000  147,957 
2033 Notes 40,000  40,000  38,908  40,000  40,000  38,826 
MUFG Bank Facility (2)(3)
400,000  61,000  61,000  545,000  107,000  107,000 
SMBC Facility (2)(4)
400,000  173,000  173,000  225,000  72,000  72,000 
Total $ 2,215,000  $ 1,649,000  $ 1,632,738  $ 2,185,000  $ 1,594,000  $ 1,574,351 
(1)Except for the SMBC Facility and MUFG Bank Facility (f.k.a. Union Bank Facility), all carrying values represent the principal amount outstanding less the remaining unamortized debt issuance costs and unaccreted premium or discount, if any, associated with the debt as of the balance sheet date.
(2)Availability subject to the Company meeting the borrowing base requirements.
(3)In June 2022 the MUFG Bank Facility replaced the Union Bank Facility via an amendment which changed the lead lender.
(4)Includes $175.0 million of available commitment through the letter of credit facility as of September 30, 2023.
Debt issuance costs, net of accumulated amortization, were as follows as of September 30, 2023 and December 31, 2022:
(in thousands) September 30, 2023 December 31, 2022
SBA Debentures $ 4,825  $ 5,262 
July 2024 Notes 246  467 
February 2025 Notes 163  249 
June 2025 Notes 283  405 
June 2025 3-Year Notes 268  384 
March 2026 A Notes 229  300 
March 2026 B Notes 249  327 
September 2026 Notes 2,906  3,642 
January 2027 Notes 4,398  5,396 
2031 Asset-Backed Notes 1,603  2,043 
2033 Notes 1,092  1,174 
MUFG Bank Facility(1)
3,982  1,292 
SMBC Facility (1)
1,955  1,701 
Total $ 22,199  $ 22,642 
(1)The MUFG Bank Facility (f.k.a. Union Bank Facility) and SMBC Facility, are line-of-credit arrangements, the debt issuance costs associated with these instruments are included within Other assets on the Consolidated Statements of Assets and Liabilities in accordance with ASC Subtopic 835-30.
For the three and nine months ended September 30, 2023, the components of interest expense, related fees, losses on debt extinguishment and cash paid for interest expense for debt were as follows:
(in thousands) Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023
Description
Interest expense(1)
Amortization of debt issuance cost (loan fees) Unused facility and other fees (loan fees) Total interest expense and fees Cash paid for interest expense
Interest expense(1)
Amortization of debt issuance cost (loan fees) Unused facility and other fees (loan fees) Total interest expense and fees Cash paid for interest expense
SBA Debentures $ 1,150  $ 146  $ —  $ 1,296  $ 2,300  $ 3,412  $ 436  $ —  $ 3,848  $ 4,562 
July 2024 Notes 1,252  74  —  1,326  2,505  3,756  222  —  3,978  5,009 
February 2025 Notes 535  29  —  564  1,070  1,605  86  —  1,691  2,140 
June 2025 Notes 754  40  —  794  —  2,263  121  —  2,384  1,509 
June 2025 3-Year Notes 750  39  —  789  —  2,250  117  —  2,367  1,500 
March 2026 A Notes 563  24  —  587  1,125  1,688  71  —  1,759  2,250 
March 2026 B Notes 569  26  —  595  1,138  1,706  78  —  1,784  2,275 
September 2026 Notes 2,174  203  —  2,377  4,266  6,523  611  —  7,134  8,532 
January 2027 Notes 3,079  207  —  3,286  5,906  9,236  621  —  9,857  11,812 
2031 Asset-Backed Notes 1,902  101  —  2,003  1,857  5,709  301  —  6,010  5,570 
2033 Notes 625  27  —  652  625  1,875  81  —  1,956  1,875 
MUFG Bank Facility(2)
1,247  443  709  2,399  1,240  4,323  1,327  2,017  7,667  4,673 
SMBC Facility 1,828  180  276  2,284  1,715  5,891  513  715  7,119  5,703 
Total $ 16,428  $ 1,539  $ 985  $ 18,952  $ 23,747  $ 50,237  $ 4,585  $ 2,732  $ 57,554  $ 57,410 

(1)Interest expense includes amortization of original issue discounts for the three months ended September 30, 2023 of $42 thousand, $126 thousand, and $47 thousand related to the September 2026 Notes, January 2027 Notes, and 2031 Asset-Backed Notes, respectively. For the nine months ended September 30, 2023, $125 thousand, $377 thousand, and $141 thousand, related to the September 2026 Notes, January 2027 Notes, and 2031 Asset-Backed Notes, respectively.
(2)The June 2022 amendment of the MUFG Bank Facility replaced the Union Bank Facility via an amendment which changed the lead lender.
For the three and nine months ended September 30, 2022, the components of interest expense and related fees and cash paid for interest expense for debt were as follows:
(in thousands) Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Description
Interest expense(1)
Amortization of debt issuance cost (loan fees) Unused facility and other fees (loan fees) Total interest expense and fees Cash paid for interest expense
Interest expense(1)
Amortization of debt issuance cost (loan fees) Unused facility and other fees (loan fees) Total interest expense and fees Cash paid for interest expense
SBA Debentures $ 1,160  $ 148  $ —  $ 1,308  $ 2,086  $ 2,848  $ 434  $ —  $ 3,282  $ 2,835 
2022 Notes(2)
—  —  —  —  —  1,011  50  —  1,061  2,293 
July 2024 Notes 1,252  74  —  1,326  2,504  3,756  222  —  3,978  5,008 
February 2025 Notes 535  29  —  564  1,070  1,605  86  —  1,691  2,140 
June 2025 Notes 754  40  —  794  —  2,263  121  —  2,384  1,509 
June 2025 3-Year Notes 750  38  —  788  —  817  42  —  859  — 
March 2026 A Notes 563  24  —  587  1,125  1,688  72  —  1,760  2,250 
March 2026 B Notes 569  26  —  595  1,137  1,706  78  —  1,784  2,275 
September 2026 Notes 2,174  204  —  2,378  4,266  6,523  612  —  7,135  8,532 
January 2027 Notes 3,079  207  —  3,286  5,906  8,552  575  —  9,127  5,906 
2031 Asset-Backed Notes 1,903  100  —  2,003  1,815  2,072  109  —  2,181  1,815 
2033 Notes 625  27  —  652  625  1,875  81  —  1,956  1,875 
2022 Convertible Notes(2)
—  —  —  —  —  923  149  —  1,072  5,004 
MUFG Bank Facility(3)
1,000  253  720  1,973  1,025  2,483  665  1,682  4,830  2,240 
SMBC Facility 135  98  195  428  181  722  211  328  1,261  700 
Total $ 14,499  $ 1,268  $ 915  $ 16,682  $ 21,740  $ 38,844  $ 3,507  $ 2,010  $ 44,361  $ 44,382 

(1)Interest expense includes amortization of original issue discounts for the three months ended September 30, 2022 of $42 thousand, $126 thousand, and $47 thousand related to the September 2026 Notes, January 2027 Notes, and 2031 Asset-Backed Notes, respectively. For the nine months ended September 30, 2022, $23 thousand, $112 thousand, $125 thousand, $349 thousand, and $51 thousand, related to the 2022 Notes, 2022 Convertible Notes, September 2026 Notes, January 2027 Notes, and 2031 Asset-Backed Notes, respectively.
(2)In February 2022, the Company has fully repaid the aggregate outstanding principal balances and retired 2022 Notes and 2022 Convertible Notes.
(3)The June 2022 amendment of the MUFG Bank Facility replaced the Union Bank Facility via an amendment which changed the lead lender.
As of September 30, 2023 and December 31, 2022, the Company was in compliance with the terms of all borrowing arrangements. There are no sinking fund requirements for any of the Company’s debt.
SBA Debentures
The Company held the following SBA debentures outstanding principal balances as of September 30, 2023 and December 31, 2022:
(in thousands)
 
Issuance/Pooling Date		 Maturity Date
Interest Rate (1)
September 30, 2023 December 31, 2022
March 26, 2021 September 1, 2031 1.58% $ 37,500  $ 37,500 
June 25, 2021 September 1, 2031 1.58% 16,200  16,200 
July 28, 2021 September 1, 2031 1.58% 5,400  5,400 
August 20, 2021 September 1, 2031 1.58% 5,400  5,400 
October 21, 2021 March 1, 2032 3.21% 14,000  14,000 
November 1, 2021 March 1, 2032 3.21% 21,000  21,000 
November 15, 2021 March 1, 2032 3.21% 5,200  5,200 
November 30, 2021 March 1, 2032 3.21% 20,800  20,800 
December 20, 2021 March 1, 2032 3.21% 10,000  10,000 
December 23, 2021 March 1, 2032 3.21% 10,000  10,000 
December 28, 2021 March 1, 2032 3.21% 5,000  5,000 
January 14, 2022 March 1, 2032 3.21% 4,500  4,500 
January 21, 2022 March 1, 2032 3.21% 20,000  20,000 
Total SBA Debentures     $ 175,000  $ 175,000 
(1)Interest rates are determined initially at issuance and reset to a fixed rate at the debentures pooling date. The rates are inclusive of annual SBA charges.
SBICs are subject to a variety of regulations and oversight by the SBA concerning the size and nature of the companies in which they may invest as well as the structures of those investments. The SBA as part of its oversight periodically examines and audits to determine SBICs compliance with SBA regulations. Our SBIC was in compliance with all SBIC terms, including those pertaining to the SBA Debentures as of September 30, 2023 and December 31, 2022.
HC IV received its license to operate as a SBIC on October 27, 2020. The license has a 10-year term. Through the license, HC IV has access to $175.0 million of capital through the SBA debenture program, that is in addition to the Company’s regulatory capital commitment of $87.5 million to HC IV. As of September 30, 2023 and December 31, 2022, HC IV has issued a total of $175.0 million in SBA guaranteed debentures.
As of September 30, 2023, the Company held investments in HC IV in 24 companies with a fair value of approximately $329.0 million, accounting for approximately 10.1% of the Company’s total investment portfolio. Further, HC IV held approximately $333.6 million in tangible assets which accounted for approximately 10.0% of the Company’s total assets as of September 30, 2023.
As of December 31, 2022, the Company held investments in HC IV in 21 companies with a fair value of approximately $343.7 million, accounting for approximately 11.6% of the Company’s total investment portfolio. Further, HC IV held approximately $348.6 million in tangible assets which accounted for approximately 11.5% of the Company’s total assets as of December 31, 2022.
July 2024 Notes
On July 16, 2019, the Company issued $105.0 million in aggregate principal amount of 4.77% interest-bearing unsecured notes due on July 16, 2024 (the “July 2024 Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the July 2024 Notes is due semiannually. The July 2024 Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
February 2025 Notes
On February 5, 2020, the Company issued $50.0 million in aggregate principal amount of 4.28% interest-bearing unsecured notes due February 5, 2025 (the “February 2025 Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the February 2025 Notes is due
semiannually. The February 2025 Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
June 2025 Notes
On June 3, 2020, the Company issued $70.0 million in aggregate principal amount of 4.31% interest-bearing unsecured notes due June 3, 2025 (the “June 2025 Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the June 2025 Notes is due semiannually. The June 2025 Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
June 2025 3-Year Notes
On June 23, 2022, the Company issued $50.0 million in aggregate principal amount of 6.00% interest-bearing unsecured notes due June 23, 2025 (the “June 2025 3-Year Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the June 2025 3-Year Notes is due semiannually. The June 2025 3-Year Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
March 2026 A Notes
On November 4, 2020, the Company issued $50.0 million in aggregate principal amount of 4.50% interest-bearing unsecured notes due March 4, 2026 (the “March 2026 A Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement notes offering. Interest on the March 2026 A Notes is due semiannually. The March 2026 A Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
March 2026 B Notes
On March 4, 2021, the Company issued $50.0 million in aggregate principal amount of 4.55% interest-bearing unsecured notes due March 4, 2026 (the “March 2026 B Notes”), unless repurchased in accordance with their terms, to qualified institutional investors in a private placement pursuant note offering. Interest on the March 2026 B Notes is due semiannually. The March 2026 B Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
September 2026 Notes
On September 16, 2021, the Company issued $325.0 million in aggregate principal amount of 2.625% interest-bearing unsecured notes due September 16, 2026 (the “September 2026 Notes”), unless repurchased in accordance with the terms of the Seventh Supplemental Indenture, dated September 16, 2021. Interest on the September 2026 Notes is payable semi-annually in arrears on March 16 and September 16 of each year, commencing on March 16, 2022. The September 2026 Notes are general unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. The Company may redeem some or all of the September 2026 Notes at any time, or from time to time, at the redemption price set forth under the terms of the September 2026 Notes Indenture.
January 2027 Notes
On January 20, 2022, the Company issued $350.0 million in aggregate principal amount of 3.375% interest-bearing unsecured notes due January 20, 2027 (the “January 2027 Notes”), unless repurchased in accordance with the terms of the Eight Supplemental Indenture, dated January 20, 2022. Interest on the January 2027 Notes is payable semi-annually in arrears on January 20 and July 20 of each year, commencing on July 20, 2022. The January 2027 Notes are general unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. The Company may redeem some or all of the January 2027 Notes at any time, or from time to time, at the redemption price set forth under the terms of the January 2027 Notes Indenture.
2031 Asset-Backed Notes
On June 22, 2022, the Company completed a term debt securitization in connection with which an affiliate of the Company issued $150.0 million in aggregate principal amount of 4.95% interest-bearing asset-backed notes due on July 20, 2031 (the “2031 Asset-Backed Notes”). The 2031 Asset-Backed Notes were issued by Hercules Capital Funding Trust 2022-1 LLC (the “2022 Securitization Issuer”) pursuant to a note purchase agreement, dated as of June 22, 2022, by and among the Company, Hercules Capital Funding 2022-1 LLC, as trust depositor, the 2022 Securitization Issuer, and U.S. Bank Trust Company, N. A., as trustee, and are backed by a pool of senior loans made to certain portfolio companies of the
Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2031 Asset-Backed Notes will be paid, to the extent of funds available.
Under the terms of the 2031 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the 2031 Asset-Backed Notes and through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the 2031 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted cash. As of September 30, 2023 and December 31, 2022, there was approximately $5.3 million and $10.1 million, respectively, of funds segregated as restricted cash related to the 2031 Asset-Backed Notes.
2033 Notes
On September 24, 2018, the Company issued $40.0 million in aggregate principal amount of 6.25% interest-bearing unsecured notes due October 30, 2033 (the “2033 Notes”), unless repurchased in accordance with the terms of the Sixth Supplemental Indenture to the Base Indenture, dated September 24, 2018. Interest on the 2033 Notes is payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year. The 2033 Notes trade on the NYSE under the symbol “HCXY.” The 2033 Notes are general unsecured obligations and rank pari passu, or equally in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by the Company. The Company may redeem some or all of the 2033 Notes at any time, or from time to time, at the redemption price set forth under the terms of the 2033 Notes indenture after October 30, 2023.
Credit Facilities
As of September 30, 2023 and December 31, 2022, the Company has two available credit facilities, the MUFG Bank Facility and the SMBC Facility (together, the “Credit Facilities”). For the nine months ended September 30, 2023 and year ended December 31, 2022, the weighted average interest rate was 7.30% and 4.51%, respectively, and the average debt outstanding under the Credit Facilities was $186.6 million and $127.7 million, respectively.
MUFG Bank Facility
On January 13, 2023, the Company entered into a third amended credit facility agreement, which amends the agreement dated as of June 10, 2022. The Company, through a special purpose wholly owned subsidiary, Hercules Funding IV LLC (“Hercules Funding IV”), as borrower, entered into the credit facility (the “MUFG Bank Facility”) with MUFG Bank Ltd. (formerly MUFG Union Bank and known as the “Union Bank Facility”) as the arranger and administrative agent, and the lenders party to the MUFG Bank Facility from time to time.
Under the MUFG Bank Facility, the lenders have made commitments of $400.0 million, which may be further increased via an accordion feature up to an aggregate $600.0 million, funded by existing or additional lenders and with the agreement of MUFG Bank and subject to other customary conditions. There can be no assurances that additional lenders will join the MUFG Bank Facility to increase available borrowings. Debt under the MUFG Bank Facility generally bears interest at a rate per annum equal to SOFR plus 2.75% for SOFR loans. The MUFG Bank Facility matures on January 13, 2026, plus a 12-month amortization period, unless sooner terminated in accordance with its terms. The MUFG Bank Facility is secured by all of the assets of Hercules Funding IV. The MUFG Bank Facility requires payment of a non-use fee during the revolving credit availability period.
The MUFG Bank Facility also includes financial and other covenants applicable to the Company and the Company’s subsidiaries, in addition to those applicable to Hercules Funding IV, including covenants relating to certain changes of control of Hercules Funding IV. Among other things, these covenants require the Company to maintain certain financial ratios, including a minimum interest coverage ratio and a minimum tangible net worth with respect to Hercules Funding IV. The MUFG Bank Facility provides for customary events of default, including with respect to payment defaults, breach of representations and covenants, servicer defaults, certain key person provisions, cross default provisions to certain other debt, lien and judgment limitations, and bankruptcy.
SMBC Facility
On June 14, 2022, the Company entered into a second amendment to a revolving credit agreement, which amends the revolving credit agreement, dated as of November 9, 2021, with Sumitomo Mitsui Banking Corporation (the “SMBC Facility”), as administrative agent, and the lenders and issuing banks to the SMBC Facility. As of September 30, 2023, the SMBC Facility provides for borrowings in U.S. dollars and certain agreed upon foreign currencies of up to $225.0 million, from which the Company may access subject to certain conditions. The SMBC Facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $500.0 million, funded by existing or additional lenders and with the agreement of SMBC Bank and subject to other customary conditions. Availability under the SMBC Facility will terminate on November 7, 2025, and the outstanding loans under the SMBC Facility will mature on November 9, 2026. Borrowings under the SMBC Facility are subject to compliance with a borrowing base and an
aggregate portfolio balance. The Company’s obligations under the SMBC Facility may in the future be guaranteed by certain of the Company’s subsidiaries and primarily secured by a first priority security interest (subject to certain exceptions) in only certain specified property and assets of the Company and the subsidiary guarantors thereunder.
Additionally in January 2023, the Company entered into a Letter of Credit Facility Agreement (the “SMBC LC Facility”) with Sumitomo Mitsui Banking Corporation that provides for a letter of credit facility with a final maturity date ending on January 13, 2026 and a commitment amount of $175.0 million as amended. Further, the SMBC LC Facility includes an accordion provision to increase the commitment up to $400 million, subject to certain conditions. The Company’s obligations under the SMBC LC Facility may in the future be guaranteed by certain of the Company’s subsidiaries and is primarily secured by a first priority security interest (subject to certain exceptions) in only certain specified property and assets of the Company and any subsidiary guarantors thereunder.
Interest under the SMBC Facility is determined by the nature and denomination of the borrowing. Interest rates are determined by the appropriate benchmark rate (SOFR, EURIBOR, Prime, CDOR, or TIBOR) as applicable for the type of borrowing plus an applicable margin adjustment which can range from 0.875% to 2.0% per annum subject to certain conditions. In addition to interest, the SMBC Facility is subject to a non-usage fee of 0.375% per annum (based on the immediately preceding period’s average usage) on the unused portion of the commitment under the SMBC Facility during the revolving period. The Company is required to pay letter of credit participation fees and a fronting fee on the average daily amount of any lender’s exposure with respect to any letters of credit issued under the SMBC Facility.
The SMBC Facility contains customary events of default with customary cure and notice provisions, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default and cross-acceleration to other indebtedness and bankruptcy. The SMBC Facility also includes financial and other covenants applicable to the Company and the Company’s subsidiaries, including covenants relating to minimum stockholders' equity, asset coverage ratios, and our status as a RIC.