Horizon Technology Finance's Q3 2025: Contradictions Emerge on Portfolio Yields, Credit Quality, and Dividend Coverage

Date of Call: October 29, 2025

Financials Results

• Revenue: $26.0M investment income, compared to $25.0M in the prior-year period
• EPS: $0.32 per share, flat YOY; up from $0.28 in Q2 2025

Guidance:

• Q4 portfolio expected to grow driven by an expanding pipeline; October funded $10M and awarded $50M in commitments.
• Expect originations to exceed prepayments and leverage to return to ~1.2–1.3x (net of cash) within 1–2 quarters.
• Board declared monthly distributions of $0.11 per share through March 2026; aim to deliver NII at or above declared distributions over time.
• Onboarding yields expected ~12–12.5%; normalized portfolio yield expected nearer historical ~14.5–15%.

Business Commentary:

* Portfolio Growth and Merger: - Horizon Technology Finance reported net investment income of $0.32 per share for Q3 and an increase in NAV per share to $7.12, up 5% from the previous quarter. - The growth in portfolio value and income was driven by the accretive acquisition of a venture debt portfolio and favorable outcomes with challenged portfolio companies, as well as the anticipated merger with MRCC.

• Onboarding and Portfolio Yields:
• The company's onboarding debt investment yield was 12.2%, consistent with its historical levels, and the overall portfolio yield was 18.6%.

• These high yields are attributed to Horizon's venture lending strategy and its ability to execute effectively across various market cycles.

• Liquidity and Balance Sheet Strength:

• Horizon maintained $151 million in available liquidity, with $130 million in cash and $21 million in funds available under credit facilities, and a net leverage ratio of 0.94:1.

• The company's strong liquidity position was reinforced by successful equity and debt capital raising, including the issuance of 5.5% convertible notes due 2030.

• Venture Capital Market Activity:

• According to PitchBook, approximately $81 billion was invested in VC-backed companies in Q3, driven primarily by AI investments, and there was $75 billion in exit value, reflecting an active market.
• This market activity, coupled with the anticipated merger with MRCC, positions Horizon to originate larger venture loans to fast-growing public and private companies.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted NAV per share rising 5% to $7.12, NII of $0.32 per share, raising $40M of convertible notes and $10M via ATM, and a growing pipeline through Monroe partnership: “I could not be more excited for Horizon's future,” and noted the merger and scale benefits driving larger venture loan opportunities.

Q&A:

• Question from Cory Johnson (UBS Investment Bank): The VC market is heating up and early payoffs were strong the last two quarters; you mentioned 4Q payoffs might be more limited — what do you expect going into 2026 and is this related to the government shutdown?
  Response: Shutdown unlikely to affect prepayments; this quarter's early payoffs were elevated but should revert to historical norms despite improving exit markets.

• Question from Cory Johnson (UBS Investment Bank): Net leverage came down—now that you see more deals, what's the credit quality and when might you reach target leverage?
  Response: Target net leverage is ~1.2–1.3x; currently 0.94x and expected to return to target within one to two quarters as originations outpace prepayments.

• Question from Paul Johnson (Keefe, Bruyette, & Woods): The portfolio yield is high (18.6%/18.9%)—is that sustainable or what is the longer-term normalized target?
  Response: Normalized portfolio yield is ~14.5–15% after prepayments/one-time items; onboarding yields should remain ~12–12.5% going forward.

• Question from Paul Johnson (Keefe, Bruyette, & Woods): Can you describe the debt portfolio acquired during the quarter and pricing/color?
  Response: Acquired a runoff venture debt portfolio from a co-lender exiting the market at a negotiated price; a natural, complementary purchase given existing shared names.

• Question from Paul Johnson (Keefe, Bruyette, & Woods): On spillover income ($0.93) and distributions—will you work that down further before evaluating the distribution?
  Response: Distribution amounts are decided quarterly based on current income, outlook and spillover; no specific plan to further target spillover reduction was provided.

• Question from Christopher Nolan (Ladenburg Thalmann): If the MRCC merger closes, will you focus on larger credits and what happens to yield?
  Response: Larger balance sheet permits bigger hold sizes while maintaining diversification; yields are not expected to change materially.

• Question from Christopher Nolan (Ladenburg Thalmann): Stock trades below book—what's the plan for using the ATM?
  Response: ATM will be used opportunistically based on pipeline and liquidity; they will not utilize the ATM while trading below book.

• Question from Christopher Nolan (Ladenburg Thalmann): Will you revisit base management fees after the Monroe/MRCC transaction?
  Response: Fees are reviewed annually via the 15(c) process versus peers; no fee change announced today.

• Question from Christopher Nolan (Ladenburg Thalmann): Is there a target ROE for new capital coming from the Monroe deal?
  Response: No specific ROE target disclosed; will remain focused on the venture debt model to drive high-yield returns.

Contradiction Point 1

Portfolio Yield Expectations

It involves expectations regarding the company's portfolio yield, which is a critical metric for investors to understand the financial performance and stability of the firm.

What is the outlook for the 18.9% portfolio yield, and what is the long-term target? - Paul Johnson (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: Our historical portfolio yield averaged around 14.5% to 15%. The 18.9% yield includes prepayments and onetime events. The onboarding yield has been around 12%, which we expect to continue. - Daniel Trolio(CFO)

What is the current yield on your balance sheet? How does the pipeline look for the next quarter? - Paul Johnson (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q2: We do have a very fragmented portfolio, and we don't expect to see, I would say, any significant deterioration in credit quality going forward. I would probably say there's some opportunity for us to increase yield, but not in any meaningful way. - Paul Seitz(CIO)

Contradiction Point 2

Credit Quality and Prepayments

It involves the company's expectations regarding credit quality and prepayments, which are essential for understanding the financial health and risk profile of the company.

What is the credit quality of the recent deals? When do you expect to reach your target leverage again? - Cory Johnson (UBS Investment Bank, Research Division)

2025Q3: Our target leverage is around 1.2 to 1.3x net of cash. We expect to reach this level as originations exceed prepayments in the coming quarters. - Daniel Trolio(CFO)

Are there concerns about your portfolio's credit quality, and what steps have you taken to address them? - Paul Johnson (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q2: We don't expect to see any significant deterioration in credit quality. I would say that we have a well-diversified portfolio, but the reality is it's fragmented. You heard we have over 400 different issuers in the portfolio right now. - Paul Seitz(CIO)

Contradiction Point 3

Prepayment Trends

This contradiction involves differing expectations regarding the trend and impact of prepayments, which are crucial for financial forecasting and loan portfolio management.

What's the expected prepayment trend through 2026, and is it linked to the government shutdown? - Cory Johnson(UBS Investment Bank, Research Division)

2025Q3: Prepayments this quarter were higher than usual, but they are expected to revert to historical standards. The government shutdown should not impact prepayments. - Paul Seitz(CIO)

How are you managing spillover earnings amid current market conditions, and what is your strategy for maintaining dividend coverage? - Cory Johnson(UBS)

2025Q1: The prepayments were $28.8 million, which is at the high end of recent trends, but not excessive. We expect prepayments to normalize in future quarters. - Dan Trolio(CFO)

Contradiction Point 4

Portfolio Yields

The contradiction lies in the differing expectations and historical performance of portfolio yields, which are key metrics for investment returns and financial forecasting.

What's the outlook for the 18.9% portfolio yield and its sustainability, and what's the long-term target? - Paul Johnson(Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: Our historical portfolio yield averaged around 14.5% to 15%. The 18.9% yield includes prepayments and onetime events. The onboarding yield has been around 12%, which we expect to continue. - Daniel Trolio(CFO)

How have core debt portfolio yields performed over the past year, and what are your expectations for spreads this year? - Paul Johnson(Keefe, Bruyette, & Woods, Inc., Research Division)

2024Q4: Overall yields remain within normalized ranges for venture debt portfolios, with some spread compression due to competitive factors. Onboarding yields are consistent, and portfolio yields are expected to remain healthy, given prepayment visibility. - Daniel Devorsetz(CIO)

Contradiction Point 5

Dividend Coverage

The contradiction involves differing expectations for the path and timeline to resume dividend coverage, which is crucial for investor expectations and financial stability.

What is the credit quality of the recent deals? When do you expect to reach your target leverage again? - Cory Johnson(UBS Investment Bank, Research Division)

2025Q3: The path back to covering the dividend involves two key drivers: growing the balance sheet through portfolio growth and harvesting prepayments with associated fee income. - Daniel Trolio(CFO)

What are the key drivers to increase NII from $0.27 to above $0.33? How do you plan to achieve dividend coverage? - Douglas Harter(UBS)

2024Q4: The path back to covering the dividend involves two key drivers: growing the balance sheet through portfolio growth and harvesting prepayments with associated fee income. - Daniel Trolio(CFO)