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Hercules Capital Inc
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Ladies and gentlemen, thank you for standing by and welcome to the Hercules Capital Q1 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions].
I would now like to hand the conference over to your speaker today, Mr. Michael Hara. Please go ahead, sir.
Thank you Cathy. Good afternoon, everyone and welcome to Hercules conference call for the first quarter of 2020. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer and Seth Meyer, CFO.
Hercules' first 2020 financial results were released just after today's market close and can be accessed from Hercules's Investor Relations section at htgc.com. We have arranged for a replay of the call at Hercules' webpage or by using the telephone number and passcodes provided in today's earnings release.
During this call, we may make forward-looking statements based on current expectations. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation of the final audit results.
In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including and without limitation the risk and uncertainties, including the uncertainties surrounding the current market turbulence caused by the COVID-19 pandemic and other factors we identify from time-to-time in our filings with the SEC.
Although we believe that the assumptions on which these forward-looking statements are reasonable, any of those assumptions can prove to be inaccurate and as a result the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance upon these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit our website.
With that, I will turn this call over to Scott.
Thank you Michael and thank you all for joining us today. We hope that everyone is staying safe and healthy.
I would like to begin my prepared remarks by expressing gratitude and appreciation to our employees, management teams and financial partners who have demonstrated tremendous resiliency and commitment to our company and our ecosystem during these difficult times. I would also like to acknowledge and recognize our family members, friends and neighbors who are healthcare workers, first responders and essential workers who are performing selfless and extraordinary acts to keep us all safe.
As a result of the COVID 19 pandemic, the context of our call today will be different. I am going to provide a brief overview of our performance in Q1 and then discuss areas of the business that we believe require more focus and attention at this time. Let me briefly recap some of the key highlights of our strong performance for Q1.
We originated nearly $257 million of new debt and equity commitments and we delivered gross fundings of $234 million. We had $168 million of early loan repayments and amortization, which resulted in debt investment growth of $73 million at cost. In Q1, we generated record total investment income of $73.6 million and record net investment income of $40.6 million or $0.37 per share, resulting in 116% coverage of the base cash distribution.
Credit quality on the debt investment portfolio decreased in Q1 with a weighted average internal credit rating of 2.34, as compared to 2.15, in Q4. Overall, we changed credit ratings on 47 of our portfolio companies with the biggest shift coming between our rated two and three credits, primarily due to the deteriorating economic conditions driven by the pandemic. Our rated four and rated five credits continue to make up less than 3.2% of the entire debt portfolio.
Non-accruals remained low with four debt investments on non-accruals with a cumulative investment cost and fair value of approximately $20.4 million and $0.4 million, respectively, or 0.8% and 0% as a percentage of the company's total investment portfolio at cost and fair value, respectively. Quarter-to-date, as of May 1, we have not added any new companies on non-accrual.
Our overall performance in Q1 was strong. Our results were partially impacted by the two March fed funds rate cuts and the extensive shelter in place orders that began in March and are continuing. Seth will provide more guidance with respect to anticipated impact going forward. The COVID-19 pandemic and the resulting shutdown of much of the global and domestic economy has created an unprecedented situation for all companies. The situation is evolving and changing frequently and the duration and long term impacts to the economy and ecosystem remains unknown at this point.
I want to provide an update on three specific areas of our business that we believe are for our shareholders and stakeholders in this environment and detail specific things that we are doing to best position the company. First, employee well-being and the continuity of our business. One of our primary obligation is to do what we can to keep our employees safe and healthy while ensuring the continuity of our business. Effective March 12, we made the early decision to transition our entire workforce across six states to work from home.
We had prepared for this with a series of internal tests that were performed in late February and early March across the organization. We have implemented a series of items designed to keep our employees at home, productive and engaged and as of today, we have not experienced any material interruptions to our business or our ability to operate in the ordinary course. Although, we do not expect a return to normal for some time, we have begun to plan for a return to a new normal with an emphasis on the well-being of our employees and the continuity of our business operations while the pandemic is still with us.
Second, liquidity and balance sheet strength. We believe that liquidity is of the utmost importance in this environment. During Q1, we completed a series of transactions that significantly enhanced our liquidity position. We ended Q1 with $438.2 million of liquidity, which provides us with substantial coverage of our available unfunded commitments of $135 million and the ability to fund our ongoing anticipated business activity.
Our liquidity will be further supplemented in June by the $70 million that we expect to receive from our delayed drop private placement executed in February. Early payoffs and ordinary course principal payments have always been a source of liquidity for our business and was again the case in Q1 where we received $168 million of early payoffs and amortization. Of the $150 million of early payoffs, $45 million was received in the month of March alone.
At this time, we expect early payoffs to continue to be healthy, although likely at a lower level relative to what we experienced last year. For Q2 based on what we know today, we expect early payoffs to be between $50 million and $100 million, although this number could change materially. Our balance sheet was strong heading into this crisis and it remains strong today with no near-term material maturities due until 2022. As of Q1, over 50% of our debt stack is comprised of unsecured obligations which provides us with additional operating flexibility in terms of capital. Seth will provide greater detail in his remarks.
Finally, portfolio and credit quality. Since inception, Hercules has emphasized diversification as the key cornerstone of our investment philosophy. We believe that it will take time to ascertain the true impact of this crisis, given that virtually all companies are likely to be impacted by the pandemic and the resulting economic shutdowns that have occurred and are continuing. We also believe that our diversified and defensive positioning should serve us well. Although liquidity does not guarantee a company's ability to succeed in the future, for our portfolio companies having ample liquidity will be one important factor in determining which companies are best positioned to weather this crisis.
Let's first address liquidity. When looking at our entire outstanding debt investment portfolio, we estimate that approximately 75% of the portfolio currently has 12-plus months of liquidity with another 19% with six to 12 months of current liquidity on balance sheet. Loans which have three months or less of liquidity make up less than 3% of our outstanding debt portfolio. Of the loans with 12-plus months of liquidity, over 70% or approximately 51% of our entire debt portfolio currently has 18-plus months of liquidity on balance sheet.
Specifically, within our life sciences portfolio, we have 12 debt investments with a cost basis in excess of $25 million. 10 of these 12 companies currently have cash on hand to fund their businesses for at least 18-plus month based on the most recent data that we have available. The other two are public companies with current market capitalization greater than $1 billion. In our technology portfolio, nine of our 10 largest investments at cost have current cash on balance sheet for at least the next 12 months while all have current liquidity through year-end, again based on the most recent reporting that we have available.
Many of our debt portfolio companies have continued to raise new capital and execute on strategic transactions. Since our last earnings call in late February, as COVID-19 was expanding throughout the country and the economic impact was beginning, 21 of our debt portfolio companies have raised new equity or subordinated capital totaling over $1.6 billion raised. In addition, we have had two new M&A events, both of which have closed and several of our companies are currently working on either new capital raises or strategic transactions.
Our top 10 debt investments make up less than 30% of our debt portfolio at cost. While each of these companies will likely be impacted to a varying degree by the current situation, all but one currently have at least 12 months of liquidity on balance sheet as of the most recent reporting and all of them have current liquidity on balance sheet through at least fiscal year-end 2020. Three of our top 10 investment in terms of cost have raised substantial rounds of new equity capital in excess of $200 million each since our last earnings call on February 20.
Let's now continue to focus on diversification and some additional information on our largest sector exposures. Currently, our debt portfolio is split approximately 55%, 45% between companies in our two core verticals, technology and life sciences, respectively. We would expect these two verticals to behave differently during this period of uncertainty and volatility. Approximately 62% of our debt portfolio at cost is invested in drug discovery, drug delivery and software companies, three sectors that we expect to perform better on a relative basis during this period and again based on what we know as of today.
Sectors within our portfolio that we are watching more consciously are medical devices, certain parts of consumer and business services, media and advertising. We do not have any direct debt investments in companies in the oil and gas, real estate, retail, hospitality or restaurants, although certainly portfolio companies may sell into or rely in part on these end markets in some capacity. We are monitoring those companies closely.
Approximately 85% of our life sciences debt investments at cost are in publicly traded companies. These public companies had a weighted average public market capitalization of approximately $1 billion as of March 31. Based on the public market capitalization for these companies, the weighted average ratio of public equity value to our debt at cost equals 25.7 times as of March 31.
In our technology portfolio, approximately 50% of our companies are classified as software or have a software-driven contractual recurring revenue model. Of these companies, our estimated weighted average debt to annual recurring revenue attachment point as of the most recent reporting period is 0.98 times, which we believe is conservative.
The spreading COVID-19 pandemic has hurt tech and tech-enabled startups and growth stage companies overall, forcing many to shed thousands of jobs, including some in our own portfolio. But so far, the venture capitalists that fund them appear to be doing okay. in the first quarter of this year, 62 venture capital funds raised a total of $21 billion in the U.S., according to data gathered by PitchBook and the NVCA. That cash puts them in a strong position as the economy weakens. In 2019, venture capital firms raised $51 billion for the full year.
As a result of the current environment, we have redoubled our already stringent credit monitoring procedures and engagement with our portfolio companies and their capital providers. Our focus over the near term will be on maintaining an appropriate level of liquidity, actively managing our credit book and working with our companies and financial partners proactively as we manage through this situation. We will continue to look at and evaluate new investment opportunity but portfolio growth will not be our near term focus. We expect the quality and profile of the new investment opportunities to get better once we see some stabilization and we want to be positioned to take advantage of that opportunity when it arises as we believe it will.
Finally, I would like to spend a few minutes discussing our shareholder distribution. With our debt investment portfolio at $2.24 billion at cost, our NII per share in Q1 generated 116% coverage above our quarterly base distribution of $0.32 per share. Despite the current economic uncertainty, we are not making any changes to our current base distribution and we have declared our fourth consecutive quarterly cash distribution of $0.32 per share for Q1. In addition to our quarterly net investment income in Q1 exceeding our base distribution, we are also fortunate to have been able to grow our undistributed earnings spillover to an estimated $73 million or $0.66 per share, subject to final tax filing. This provides us with additional flexibility with respect to our variable base distribution going forward and the ability to continue to invest in our team and in our platform.
In closing, these are certainly stressful and challenging times for everyone. I would like to acknowledge and thank each of our dedicated and talented employees for maintaining their spirit, effort and focus. And equally as important, our families for their tremendous support in helping us perform up to our high standards and high expectations. We send our most sincere wishes to all of those whoa re being affected by this unprecedented pandemic and we hope for the well-being and safety for all.
Thank you very much. And I will now turn the call over to Seth.
Thank you Scott and good afternoon ladies and gentlemen. This was another solid quarter for Hercules and considering the challenges introduced with the COVID virus, I am grateful we entered the period with the strongest balance sheet and one of the most diversified portfolios since our inception.
In the first quarter, we successfully raised $35 million of equity, $120 million in unsecured debt, $50 million of which was funded at close and increased the size of our Union Bank led credit facility from $200 million to $400 million, further deepening and expanding our institutional investor base. As mentioned by Scott, we will draw the additional $70 million of unsecured debt in June. These steps were well-timed, given the current market conditions.
Although this is a very uncertain time for all of us, both professionally and personally, we believe that the steps we have taken to strengthen our balance sheet and broaden our portfolio diversification will serve us well. Over the course of the last year, we have been further diversifying our portfolio by sector, stage, geography and sponsor, enhancing our underwriting standards, streamlining communications with our portfolio companies and their financial partners, all while building up our deal, credit, legal, operations and finance teams in the dimensions necessary to manage through a difficult time just like this.
Similar to Scott, due to the circumstances, I will change my focus a bit with certain added material. I will cover the normal topics of income statement performance and highlights, NAV unrealized and realized activity, leverage and liquidity followed by a bit more depth on the outlook.
With that, let's turn our attention to the income statement performance and highlights. Net investment income was a record $40.6 million or $0.37 per share in Q1, a quarter-over-quarter increase from $40.1 million in Q4. Total investment income increased by 4.3% to a record level of $73.6 million compared to the prior quarter, supported by a small increase in total interest income due to portfolio growth in the quarter. Fee income increased in the quarter despite lower payoffs, largely due to the vintage and size of the one-time and unamortized fees associated with the loans that paid off.
Our effective and core yields in the first quarter were 13.6% and 11.8%, respectively, compared to 13% and 12.3% in the fourth quarter. The primary driver for the increase in the effective yields was again related to the size of the one-time and unamortized fees associated with the loans that paid off. The core yield reduced due to the full impact of the February cut in the prior quarter and the partial impact of the Fed rate cuts in the current quarter.
Net investment income margin decreased to 55.1% in the quarter compared to 56.8% in the prior quarter. The reason for the decrease was primarily due to the decrease of core income due to the Prime rate decreases and an increase in the operating expenses, compared to the prior quarter.
Turning to expenses. Our total operating expenses for the quarter increased to $33 million compared to $30.5 million in the prior quarter consistent with my guidance in February. Interest expense and fees increased slightly to $16.3 million from $16 million flat in the prior quarter, commensurate with the increased fundings and greater use of the credit facility. SG&A expenses increased to $16.7 million from $14.5 million in the prior quarter. The increase was consistent with guidance and reflected a return to normal levels for G&A expenses as well as the first quarter seasonal impact of higher payroll taxes and January issuance of stock compensation grants. Our weighted average cost of debt was 5.2%, a small increase compared to the prior quarter.
Now let's' focus on NAV, unrealized and realized activity. During the quarter, our NAV decreased $0.63 per share to $9.92 per share. This represented an NAV per share declined of 7% excluding the impact of our ATM issuance done at a premium to NAV. The main driver for the decrease was the net change in unrealized depreciation of $76.3 million, offset by $35.2 million of new equity raised. Our $76.3 million of unrealized depreciation was driven by the mark-to-market of our equity and warrant portfolio as well as the yield adjustments on our debt portfolio. The key drivers for the unrealized depreciation were approximately $45.8 million of mark-to-market depreciation on the equity and warrant portfolio as well as $26.5 million of depreciation on the loan portfolio, only $5.4 million of which was related to collateral-based impairments. The remaining difference of $4 million related to reversals of mark-to-market net appreciation due to sales and or write-off.
I would like to provide a few more detail points with respect to the NAV this quarter. First, the 75 decline excluding the impact of the ATM equity raise was largely driven by mark-to-market adjustments. Collateral-based impairments were $5.4 million or just 7% of the depreciation for the quarter. The rest was attributable to mark-to-market adjustments on our equity, warrants and loan portfolio.
Second, we experienced $21.1 million of depreciation on the loan portfolio attributable to hypothetical market yield adjustments. Given the volatility in yields that was seen in March, we believe that it is important to identify the differences between our debt portfolio and the broader syndicated loan market. The Hercules debt portfolio is primarily made of first lien senior secured loans to companies with low leverage and significant paid-in capital from multiple institutional investors. In addition, Hercules loans are typically much shorter in duration with a typical contractual maturity between 36 to 48 months and an actual duration of 15 to 20 months based on experience over the past 15 years.
Lastly, many of our borrowers have substantial cash positions on balance sheet which can provide significant protection in periods of extreme volatility. Finally, during the first quarter through March we did not see any material correlation between our actual new funding yields and the dramatic spike in implied yields reflected in the indices such as Reuters secondary market index or SMI, which spiked 476 basis points in the first quarter and has since decreased 202 basis points as of Friday. For the equity and warrant portfolio, we have seen a significant rebound in the S&P Biotech and S&P Tech indices since March 31 of 17% and 10.4%, respectively. To close off this section, we had $7 million of net realized gains in Q1, which were comprised of $12 million of gains from the disposal of equity positions, offset by $5.2 million of losses from the write-off of certain legacy equity and warrants.
Next, I would like to discuss our leverage. At the end of the quarter, our GAAP and regulatory leverage was 116.8% and 106.7%, respectively which increased slightly compared to the prior quarter due to funding the growth in the quarter, partially with the credit facilities, Netting out the cash on the balance sheet, our GAAP and regulatory leverage was 113.7% and 103.6%, respectively. We continue to manage the business with a targeted leverage of approximately 125%.
Consistent with this, we raised an additional $35.2 million of new equity capital under the ATM program in the first quarter. As a proactive measure and as a result of the extreme market volatility, we are seeking approval of our shareholders to be able to issue equity below NAV, subject to Board approval. The approval request is consistent with our approach in previous turbulent markets. Although we have no current need or plans to raise equity capital below NAV, we see this as a necessary precaution, should BDC share prices be severely impacted again during this crisis and the opportunity or need for additional capital presents itself.
Our liquidity is strong ending the quarter with more than $430 million of available liquidity supported by the increased credit facility capacity $475 million and a $50 million private placement, both announced in February. At the same time, we announced the commitment to draw an additional $70 million for a total of $120 million in June. Our liquidity continues to be enhanced by our normal course monthly principal and interest collections. In the months of April and May, principal and interest collections have come in as expected. As a reminder, our early payoffs and normal amortization provide us with significant monthly inflows that we can use to delever when and as needed.
Finally, let's address our expectations on outlook points. As a result of the multiple rate reductions by the Fed, we are updating our core yield guidance to 11% to 12% for the remainder of 2020. In Q1, our net investment income reflected the full impact of the Q4 Fed rate cut, but only partially reflected the 150 basis point cuts in March. We expect a negative impact to quarterly earnings from the rate cuts to be approximately $0.01 to $0.02 per share relative to what we delivered in Q1. As of the end of the quarter, 100% of our Prime base loans and 86% of our variable rate loans are at their floor. As a result, we do not expect further rate increases to have a material impact on our quarterly net investment income.
For the second quarter, we expect SG&A expenses of $15.5 million to $16.5 million, consistent with my prior quarter guidance. We expect borrowing cost to increase slightly due to increased activity in the quarter and greater use of our credit facilities. Finally, although very difficult to predict, as Scott mentioned, we expect $50 million to $100 million in prepayment activity in the second quarter.
In closing, as we put a solid quarter behind us, we believe Hercules Capital is well positioned to address the challenges we are all faced with in 2020.
I will now turn the call over to Cathy to begin the Q&A session of our call. Cathy, over you.
[Operator Instructions].
Operator, is there somebody in the queue?
Yes. We do have Tim Hayes.
Hi guys. Can you hear me all right?
Yes. We do, Tim.
Yes.
Okay. Great. Well, good afternoon and thanks for taking my question. Can you just touch on how conversations with your portfolio companies has been over the past couple months and what percentage of your portfolio so far is at for some type of loan modification or extension or forbearance?
Sure. Thanks Tim. So I will take the second part of that first. As of the current period, so as of May 1, we have actually had very few company request payment deferrals or forbearance agreement. We have had less than a handful of situations where that has arisen. The conversation I think have been sort of as you would expect. The first couple of weeks, everyone was sort of in a position of uncertainty and trying to figure out what the duration of the pandemic would be and how it would impact their businesses.
We saw most of our management teams and the Boards of our portfolio companies act fairly decisively and aggressively as you would expect them to do in terms of getting the company to transition to work from home environments, cutting costs out of the business, focusing on maximization of current liquidity, runway extension. As I mentioned in the prepared remarks, we were also very pleased to have seen 21 of our companies, so that's a fifth of our entire portfolio, raise new equity or subordinated capital since February 20. That was certainly a positive sign.
Right now, I think we are in sort of the second part of the pandemic where you have got companies starting to begin to think about a return to sort of what the new normal would look like. But what we have seen so far is decisiveness and action to preserve to balance sheet, extend runway and ensure that the companies have enough balance sheet liquidity to survive an extended period of uncertainty and volatility.
That's helpful Scott. I appreciate that. [Indiscernible] arisen at this point where borrowers are asking for some type of forbearance. How have you addressed that? Have you granted some type of interest or principal deferral? Have you removed any covenants or done anything else to the structure of the loans to support those companies? Or have they been met with maybe a follow-on from you guys alongside some investments from the sponsor?
Yes. So as I mentioned, so there have been very few instances to-dare where we have had to make modifications to any of our loans with respect to payments. It's less than a handful. It's an immaterial part of what we have seen so far. We are having constructive discussion with all of our portfolio companies. Our view is that we have an important role to play in doing what we can to help our companies weather the storm. As we mentioned and this is why we sort of focused on the liquidity piece in are prepared remarks, the vast majority of our portfolio companies are sitting in a very strong liquidity position.
And so we certainly don't expect them to come to us to ask for payment relief given how much liquidity is on balance sheet. There are certainly some other companies in the portfolio. it's not a significant amount where liquidity is much thinner. We have had a very small number of amendments that we have processed where we have done something to be helpful and supportive there. But again, it's less than a handful of our 100 portfolio companies.
Okay. Got it. And then switching back over to kind of liquidity here, would you mind just clarifying your comments or putting some more context around your comments on growth not being a priority right now? It looks like so far, quarter-to-date, you are still putting capital to work. So do you think your pipeline is strong enough to replace runoff going forward? I know that there's a lot of uncertainty out there. But just wondering, if you expect maybe net contraction in the portfolio? Or if you still think you can kind of maintain the balance?
Yes. I think, the comment is more geared towards, we view ourselves as fiduciaries of credit, right. We are a credit platform. Credit has always been the thing that I think has separated Hercules in our asset class. It is difficult to underwrite credit in an environment where you don't know what the duration of this pandemic is going to be. So the bar for us in terms of new deal activity is incredibly hot.
Now I will offset that by stating that we have had a tremendous increase in demand across the ecosystem. Our team has been actively looking at exploring, evaluating new deal opportunities. As you pointed out right now, our pipeline actually remains strong. We have closed approximately $60 million of new commitments quarter-to-date. We have another 4100 million of commitments that are signed up and the team is actively engaged in continuing to screen and evaluate new deals, some of which I would expect will get signed up over the next few weeks.
I think the point that we are trying to make is, growth is not going to be the focus over the next quarter or two. We want the focus to be on the portfolio, on credit, making sure platform is sustainable and that we can work through an extended duration period of economic uncertainty.
Yes. That absolutely makes sense. Okay. I appreciate the clarification there. And then what percentage of the unfunded commitments would you say are achievement or milestone based? And if you had to guess or if you do know, how much could potentially be unlocked in fiscal year 2020?
Sure. So right now we have about $135 million of available unfunded commitments. That number is essentially flat from where it was as of 12/31. I think there's a couple of reasons for that. Number one, we did not have sort of the expected run on the bank where every company that had available unfunded commitments called up and asked to draw. I think the companies that have chosen to partner with Hercules understand that we have a strong balance sheet, understand that we have a very strong liquidity position.
And so to the extent that there are available unfunded commitments, some decided to draw those unfunded commitments in March, but the vast majority of them kept them available and they will use them over the course of the next few quarters as they see a need or not. We have a fair degree of line of sight into the majority of that $135 million of available unfunded commitments. And there is a significant amount of that that we do not expect to be drawn.
I don't have the exact number in terms of what other milestone based unfunded commitments could unlock over the next short period of time but we are managing the business to ensure that we have absolute liquidity on balance sheet to be able to fund 100% of our available unfunded commitments.
Okay. Thanks, Scott, especially for the incremental detail this quarter. It was very helpful. So I hope you are all doing well and congrats on a good quarter.
Thanks Tim.
Your next question is from Chris York of JMP Securities.
Hi guys. Thanks for taking my questions. As you are well aware, you are one of the BDCs to begin operations before the credit crisis. Now I recognize the venture capital ecosystem in your portfolio are very different than 2007 and 2008. I am curious, Scott, whether you think the environment or outcomes experienced in the credit crisis for your venture capital backed companies can serve as a relative proxy to how the future may hold for your current portfolio?
Sure. Thanks Chris. I hope you are well. So a couple of things there. So first, there is certainly some things that I would highlight that are very different about Hercules today relative to Hercules pre-2008 global financial crisis. Number one, our portfolio mix has changed substantially. If you would have looked at our investment book in 2007, 2008, 2009, we had a third exposure to early stage companies, a third exposure to expansion stage companies and a third of our exposure was in what we considered to be established stage companies.
Today and we have highlighted this over the last several years, we really completely exited the early stage part of the market. So right now, about 50% of our business is in what we classify as expansion stage and 50% of our business is in what we classify as established stage. If you look back at the 2008, 2009 global financial crisis as it relates to venture debt, the majority of the losses that you saw were in the earlier stage bucket. So we think that's something that will, on a relative basis, position us better than we were in that period of uncertainty, 2008 and 2009.
I would also point out that there is significantly more liquidity in the ecosystem today than there was during that 2008, 2009 financial crisis. If you look back historically at periods of recession or extreme volatility, in most cases there's sort of a slowing of the economy that takes place gradually. This was not the case in this situation. This was a very abrupt and intentional stoppage of economic activity and there is substantial liquidity sitting on the sidelines that we believe will allow companies to outperform relative to the last financial crisis.
Now, having said that, the key unknown for us continues to be duration, right. The question will be answered differently if things start to clear up over the next several months versus if everybody is still in a work from home environment as we get into Q3 and Q4.
That's great color. Very, very helpful. Now I am going to switch gears. I know you have been a historical operator of an SBIC and a long term partner with SBA. Curious whether any of your portfolio companies are eligible to receive funds from the Payroll Protection Program?
So we have had several companies apply, get approved and receive funding under the PPP program.
Can you quantify that, by chance?
So it's a moving target and some companies are still sort of discussing the ones that have received it, whether they are going to keep it or not. So I don't have the exact numbers for you. But I would sort of ballpark it at somewhere between about 10 to 15 companies.
Okay. Last question. You are one of the few BDCs to not have an active buyback program. Historically, you have had one in place. So in light of the extreme volatility in your stock and BDC stocks in the first quarter and the potential future price volatility, has there been any discussion internally about having that tool available to you?
Yes. So we have had at that tool available to us historically. We did not have a buyback program in place during Q1 of 2020. It is something that we are going to look at and evaluate on a go-forward basis. The focus for us in Q1 was really on making sure that we maintain as much liquidity as possible because we believe that will be a key differentiator for us relative to a number of other players in the space.
Agreed. I am going to leave it there and give others a chance to ask. But I wanted to say that the disclosure you gave on the runway and liquidity for your portfolio companies is very, very helpful. So thanks and be well.
Thanks Chris. Stay well.
Your next question is from John Hecht of Jefferies.
Good afternoon guys. I appreciates all the color and the details on the portfolio. It's very helpful. First question I have is, just thinking about the origination platform, is time to close deals respected by the fact that your people have to do more diligence, distance diligence, I guess I would say? Or are you able to kind of complete deals at the same pace? And similarly on that, the behavior of venture capitalists in terms of deployment in this kind of environment?
Sure. So too early to tell in terms of the time frame. I will tell you that we are being very methodical and deliberate with respect to diligence in the current environment. Obviously, our team is not flying out to meet companies in person. So we are all sort of transitioning to a little bit of a different way of doing due diligence. And so I would expect the time to close to be extended. If you look at our business historically, from signed term sheet to close deal, typically somewhere between three and four weeks.
Current expectations is that that will now look like four to six weeks. And the messaging that I have given the team and that we as a management team have given the team is, make sure we are focused on doing as much due diligence as we need to. If things take longer things take longer. We want to make sure that we get things right, rather than just getting fundings on the board. And so that's something that I think you might see a little bit of an extension from a time to close perspective, but nothing that I think would be material.
In terms of VC activity, we can only go off of what we have seen to-date. And what we have seen to date is continued support from our VC partners in the ecosystem. We mentioned that statistic in our prepared remarks and I think it is pretty telling. Our last earnings call was February 20. The pandemic really started to escalate subsequent to February 20. The shelter in place restrictions were largely put in place in early and mid-March. Since February 20, 21 of our portfolio companies have raised in excess of $1.6 billion of new capital.
Now I am not going to suggest that every company that needs the money is going to get financed because that is not going to happen. But we are certainly pleased by what we have seen so far from our VC partners. And I can tell you that we have had very active, productive discussions, not just with our management teams but also with the key VC partners that support these companies.
Okay. That's helpful. And then second question was, over the history you have had some chances to buy some competitors. Are you seeing any of those opportunities in adjacent markets that were eyeing any potential opportunities as sort of the impact of this shakeout with your competition?
Yes. I thin it's too early to address that. John. There will certainly be opportunities. I think those opportunities, to the extent that they are there now, will be there next quarter and probably the quarter after. Our primary focus right now is on our portfolio, our business, making sure that we are best positioned to be able to support our existing portfolio companies and to continue to grow and expand our platform.
Great. Thanks very much for the update guys.
Sure. Thanks John.
Your next question is from Finian O'Shea of West Fargo.
Hi guys. Good afternoon. Thanks for having me on. Congratulations on the quarter. First question to follow from Chris earlier. For the companies to access the PPP, recent developments are showing that those companies with access to capital and the ability to survive are seeing criticism, including from the treasury and SBA. So are those companies that access the PPP, are they seeing critical challenges?
So that's why we didn't give an exact number because it's a fluid number and it's exchanging daily. The decision to take a PPP loan is obviously not a Hercules decision. That's a decision that the management team together with their Boards of make up. To the extent that we need to do something to be helpful to allow them to be eligible is something that we certainly have considered and will continue to consider. Some of our companies that are in slightly worse liquidity positions have received loans. It's been incredibly helpful for those companies in terms of allowing them to retain employees. And I think of those companies are very likely to keep the funds. We did have a small number of companies that initially applied were approved and received funds and those companies after receiving the updated guidance from treasury, in some cases make the decision to return the PPP funds. I think once we get to the next couple of weeks, I think we will have greater visibility as to exactly how many companies kept it but the ones that have kept it, it's been something that's been very helpful and valuable and certainly in the opinion of the companies, needed.
Thank you for the context there. And just a follow-on the portfolio company. So one of the larger tech names, Seatgeek, drew most or all of its $37 million unfunded and it looks like you marked that down from 100 to 97 of cost. So was this benchmark based or credit based? And if not credit based, what's your outlook here, given that for most reopening guidelines, concerts and sports and such are amongst the last things to reopen?
Sure. So every company is different. What I can tell you is that we are not going to provide any specific comments on any individual portfolio company. We never have in the past and we are not going to do them now. It would be a breach of the confidential information that we have.
Seatgeek, as you mentioned, is one of our larger positions. I provided some very specific commentary with respect to the liquidity positions of our largest positions and Seatgeek is obviously in that bucket. That is a company that does not have a collateral-based impairment. That is a market-based yield adjustment on that loan.
Okay. Thank you for the color. And one follow-on, if I may, for maybe Seth. Can you : give us an update on your plans to renew or extend your SBIC facilities? And that's all for me. Thank you.
Sure. And thanks for the question. So we continue to look at the SBIC and the SBA is a great partner in funding our portfolio companies. We will continue to evaluate whether applying for another license makes sense to us. We continue to use the facility that we have to the fullest extent. And so there is no update that we would give at this moment. But we continue to see it as a good opportunity.
Thank you.
Thanks Fin.
Your next question is from Ryan Lynch of KBW.
Hi. Good afternoon and thanks for taking my questions. Hope you guys are all well. My first question has to do with the write-downs that you guys took in your portfolio. I believe you said, most of those were kind of mark-to-market broad-based adjustments versus credit-related. Can you maybe just walk through the valuation process? And how you apply those broad-based mark-to-market adjustments? Just because there is not a lot of insight into venture lending spreads but when we look at other credit spreads for leveraged loans, middle market loans and such, the markdowns were much greater than the approximately 3% decline you guys took in your overall portfolio. So just a walk into that process would be helpful.
Absolutely. Ryan, this is Seth. So first of all, we made sure that we are very consistent with our past processes. So we have experienced volatile markets in the past and therefore our process is actually very sustainable as far as the steps that we go through and those steps are to look at each portfolio company and determine its performance against its own plan, so the original underwriting thesis. We call that are our portfolio company adjuster. And we make adjustments on how well it is performing against that original thesis. Is it meeting the growth objectives? Is it meeting its liquidity generation or just really sustaining the liquidity that they have? How it is performing against those benchmarks?
The second adjustment that we make as a consistent measure is, we do benchmark against the SMI, the portfolio. It's going in yield. Where the SMI was at that point? And we disclose all this in our 10-K actually. Our processes going to the valuation. So in answer to your question, the process is very consistent in this environment. We do consider the volatility. That's why I kind of spent a little bit of extra time emphasizing the differentiation between our portfolio and say, for instance, the portfolio, the highly liquid portfolio compared to ours that we benchmark against those movements and yield. And then in this quarter, we also took into consideration the cash runway that Scott was mentioning.
So, really paid attention to what is the COVID impact on this. how our company's liquidity positioned? The sponsors? What are the dimensions that would be important to get through this? Hopefully shorter versus longer term protracted environment? And how should we value our portfolio considering the current situation.
Is there anything else you would add to that, Scott?
Ryan, I would just add a few things, maybe one high-level and then a couple of specifics. I think the most important thing of any evaluation process is to make sure that you have a process, a set of procedures and that you apply them consistently across all quarters. And that's what we have always done and that's exactly what we did in Q1.
I also think just to maybe reiterate some of the things that Seth had in his prepared remarks because I think it's important context. Venture lending is not lower middle market or upper middle-market lending. We happen to use the SMI index as our benchmark hypothetical yield. The SMI has had periods of extreme volatility historically.
I think one quarter that maybe highlights that is in Q4 of 2018 where the SMI index that we use was down about 176 basis points. For context in Q4 of 2018, we had about $6.5 million of market-based yield hypothetical market adjustments in our portfolio. If you compare that to Q1 of this year, the SMI was down 476 basis points as of March 31. So that's about three times what it was down in Q4 of 2018 on a percentage basis or a multiple basis. And our $6.5 million of unrealized appreciation that we saw in Q4 of 2018 turned into about $21 million of market-based hypothetical yield adjustments in Q1 of this year.
So that mark, for us, was actually very material relative to what we have seen historically using our process and procedures.
Okay. That makes sense. That's good background. You guys gave some really good statistics regarding the liquidity positions of your portfolio companies as well as the recent capital raises that 21 of your portfolio companies raised a significant amount of capital in February, March and in April. I am just curious, as we think about how venture capital firms are going to respond to this crisis? You guys have raised, your portfolio companies have raised a decent amount of capital over the last several months. But the environment and I would say, in February and in early March, is much different than the environment and I think the way people are thinking today. So while there has been a lot of capital raise in some of your top portfolio companies recently, I just wanted to get your thoughts on how the venture community ecosystem and those venture capital equity investors held this sort of capital deployment, do you think, has been trending since February through today? Have you started to see, whether it's your portfolio companies or portfolio just across, I guess, the market, have you started to see venture capital investors start to slow down their willingness to commit as the environment has gotten more and more uncertain?
Ryan, it's fluid, right. And this is only now about 45 or 60 days old. So we haven't had sort of an extended period of time to be able to evaluate and assess that fully. What I can tell you is what we have seen so far. And that's again 21 portfolio companies raised $1.6 billion. Some of that activity came in late February. I can tell you a lot of that activity also came in March. And some of that activity has come very recently, including in April.
So we have not seen any noticeable slowdown to-date in terms of the data that we have available across our portfolio companies. I would also point out that and I think this is one of the reasons why we give as much detail as we did on our portfolio, private backed technology companies are going to behave differently than publicly traded life sciences companies. And we have seen several of our publicly traded larger biotech or drug discovery, drug development companies continue to raise very large rounds of financing though the public markets, including some a couple weeks ago and including one late last week.
So too early to tell in terms of what the long term trajectory will be. I think the positive part for us is that the VC firms have a tremendous amount of liquidity that they have available to them to put to work. But as I think as you would expect them to do, they are going to go through their portfolio methodically, pick the companies that they want to continue to support. And not every company in this environment is going to get additional equity support. That's why we believe having a diversified portfolio is a key competitive differentiator.
Yes. That makes sense. And then you mentioned $50 million to $100 million of early prepayments you expect in Q2. I am just wondering, in this environment where liquidity is of upmost importance, who are the companies, like sort of positions and what's driving companies to repay their loans early? I would think everybody I would just be holding on capital as long as they can. So why are people repaying early in this environment?
Look, I think it's different in each case. Again, one of the reasons why we provided as much detail as we did in terms of our portfolio is because I think provides some helpful context, right. In some cases, if one of our companies is sitting on three years of runway and our loan matures in 12 or 18 months, it may make sense for them to refinance that early. And there is some of that that we expect to see in Q2 and Q3.
There is also a healthy ecosystem right now. So there are certain situations where there is some refinancings that are still getting done. We have never been a platform or company that's going to chase the market in terms of structure or yields. We have consistently said that since this firm was put together 15 years ago and that's our model now. So if one of our companies that's in a stronger position called us and asked us to do something on structure or on yield that we don't feel comfortable with and we don't think it's defensible, we are going to tell them to refinance us out.
And then just one last, kind of a housekeeping one. In your press release, you guys talk about around $400 million of capacity available on your credit facilities. I am just curious, with your portfolio as of March 31, with the write-downs and when leverage levels as well as the covenants and advance rates of these credit facilities, is that full $400 million available for you to borrow through today? Or is only a portion of that given advance rates, et cetera that are on these facilities.
No, given the environment, we have certainly made sure that the full amount is absolutely available. So you are correct in asking that sometimes we wouldn't necessarily prime the pump and get it ready. But in the current instance, we absolutely are. It's fully available.
Okay. Great. Those are all my questions. I appreciate the time today and hope you guys are all well and safe.
Thanks Ryan. Be well.
Your next question is from Christopher Nolan of Ladenburg Thalmann.
Hi guys. Scott, because you are not growing the portfolio and you have relatively strong prepayments, is the focus simply to build the cash position?
So two different things, right. We did not say that we were not growing the portfolio. We said that our short term focus would not be on growth. But that does not mean that we are not in a half growth in Q2. It does not mean that we are not going to have growth in Q3. Our focus short term is going to be on our current portfolio and on making sure that our portfolio companies holds up. We believe that is our fundamental responsibility as fiduciaries of our investors' capital. We were very clear that we are actively looking at, evaluating, screening, signing up and closing new deals. And we are confident that the pipeline is going to continue to be there. But our focus is not going to be on let's grow the portfolio by $500 million this year given that we believe we are still in for an extended period of uncertainty as it relates to the true impact of COVID-19.
Got you. And then assuming that the second quarter and the rest of the year you see continued elevated levels of unrealized depreciation charges which impacts equity, which in turn elevates your debt-to-equity ratio, what's going to be your primary mechanism to manage that ratio to keep it below the 1.25 level?
Sure. So a couple of things. Number one, as we mentioned, one source of historical liquidity for us has always been the early payoffs in the normal course amortization. If you look at this business going back 10-plus years now, we have had somewhere between $50 million on the low-end and $200 million on the high-end of quarterly inflows between non-normal course prepayments and normal course amortization.
Based on what we are currently seeing in our portfolio, based on activity Q2 quarter-to-date that we are aware of, we expect that trend to generally continue. That's why we gave the guidance that we did of $50 million to $100 million of early repayments in Q2. That provides us with the ability to delever very quickly should we get into a situation where we need to do so.
With respect to the impairments, Seth mentioned in his remarks, the 476 of SMI depreciation from a basis point perspective has already corrected itself back into the low 200s. So if the quarter were to end now, you would see some of that $21 million of hypothetical yield adjustments actually reverse themselves. It's too early in the quarter for us to speculate what collateral-based impairments could be. But that's obviously something that we will watch and we will monitor on go-forward basis. We obviously have the ATM program in place as well.
As Seth mentioned in his remarks, we have no current plans to raise equity outside of usage under the ATM. But as we have done historically in periods of extreme volatility, we are going to ask our shareholders for approval to issue stock below net asset value. But we have absolutely no current plans to do so. We just think it's appropriate and proper thing to do to make sure that should we ever get into that situation that we have that flexibility to be able to use it.
Great. That's it for me. Thank you.
Your next question is from Casey Alexander of Compass Point.
Hi. Good morning. Your single largest portfolio are is drug development and discovery. And while you were able to transfer a work at home environment, that's not a process that really transfers well to a work at home environment. It requires human capital to be in labs. To what extent are your portfolio companies having to increase cost and slow down development and thus may accelerate their time to get to a next funding round in that particular business line just because it doesn't transfer well to a work at home environment?
Yes. Hi Casey. Thanks for the question. So a couple of things there. So first, drug discovery, drug development, biotechnology companies are actually very scrappy companies. These are companies that many of them were started in remote environments. The employee bases in many cases are used to work from home environments. And so, from a management and overall perspective, we actually have not seen an impact at all. And a lot of those companies were already set up to either function and operate virtually or have the ability to switch to that on a pretty quick basis.
Certainly some of the ongoing of lab work has been and could continue to be impacted and we have had a couple of instances in the portfolio were we have seen some trials that have slowed down. I think the important thing to note with respect to those companies, some of the statistical information that we provided with respect to how those companies are capitalized. These are not early stage single asset companies. These are companies that have multiple assets in the clinic. These are companies that for the most part are incredibly well-capitalized with 12, 18, 24 months of liquidity on balance sheet that are positioned and built to weather a pretty long storm as you could potentially have in this case.
Okay. Thank you. Secondly, what percentage of your debt portfolio has maturities coming due in during the next 12 months?
Zero. So Casey, we are in a position where actually we had some that would be due in September but we already paid it off in February. That was a single SBIC debenture.
No, not yours, Seth. Your portfolio companies. What percentage of your loan portfolio is dues in the next 12 months? Not your liabilities.
Sorry. That's fair.
Yes. Casey, we don't have that on hand but we can get back to you on that.
Okay. Secondly, in many cases, more traditional BDCs are having some difficulty because private equity investors have invested in their portfolio companies in older funds and they are not permitted to cross invest with newer funds. Do VC investors run into that same type of limitation?
In some cases, yes.
Okay.
I think that's one of the things that we talked about historically. We certainly underwrite philosophically to the credit not to the syndicate. And when we do spend time and we do in every transaction looking at the syndicate, looking at the makeup of the investors, we don't just look at the name, right, because the names are important but it's not the only thing in terms of being able to assess whether or not there is additional funding down the road. So we actually spend a fair amount of time looking at which fund the VC firms funded out of and trying to understand if there is available liquidity and the ability to co-invest or cross-invest, should the need arise.
Okay. Lastly, in the past, you guys have taken a couple of opportunities as financial conditions and economic conditions have changed to kind of actively prune portions of the portfolio that you thought were not well advantaged for the next couple of years. How does the change in this environment impact your thoughts about particular areas of the portfolio that you may want to actively try to push some of your exposure out?
It's a great question. And I can tell you that from a credit management perspective, those actions and the decisions that we have made over the last several years to actively prune certain credits is one that I think is going to be very helpful for us in the current environment. Those efforts did not stop in Q1. I can tell you that north of 50% of the prepayments that we saw in Q1 were instances where we worked to get out of those credits to either have our principal amount reduced or paid off in full. And that same credit driven philosophy is what we are going to deploy on a go-forward basis. If we see an opportunity to get out of a credit that we are not comfortable with, we are going to do it, whether it hurts growth or not, again that's the comment about growth not being the short term focus here.
All right. Well, I hope everyone is well and again thank you for taking my questions.
Thanks Casey.
Operator?
There are no more questions in queue.
All right. Scott, go ahead.
Thank you operator and thanks to everyone for joining our call today. We look forward to reporting our progress on our Q2 2020 earnings call. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.