May 23, 2008
Executives
Jason Gold - Investor Relations Counsel Manuel Henriquez - Chairman and Chief Executive Officer David Lund - Chief Financial Officer
Analysts
John Hecht - JMP Securities Douglas Harter - Credit Suisse Robert Napoli - Piper Jaffray Jon Arfstrom - RBC Capital Markets Henry Coffey - Ferris, Baker Watts Troy Ward - Stifel Nicolaus Greg Mason - Stifel Nicolaus
Operator
Good day everyone and welcome to today’s Hercules Technology Growth Capital Q1 ’08 Conference Call. As a reminder, we are recording today’s call.
I would now like to turn today’s call over to Mr. Jason Gold.
Please go ahead sir.
Jason Gold - Investor Relations Counsel
Thank you, Andria. Good afternoon everyone.
On the call today are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO; and David Lund, the company’s CFO. Our first quarter 2008 financial results were released just after today’s market close.
They can be accessed from the company’s website at www.herculestech.com or htgc.com. We have arranged for a taped replay of today’s call, which will be available through our website or by using the telephone numbers and passcode provided in today’s earnings release.
I would now like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Today’s conference call may include forward-looking statements and projections.
We ask that you refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from those projections. We do not take any obligations to update our forward-looking statements unless required by law.
To obtain copies of our latest SEC filings, please visit sec.gov or visit our website at herculestech.com. I would now like to turn the call over to Manuel, the Co-Founder, Chairman and CEO.
Manuel?
Manuel Henriquez - Chairman and Chief Executive Officer
Thank you, Jason, and good afternoon and thank you everyone for joining on the call today. I am going to start by reminding everyone that Hercules is a highly specialized business development company, which focuses on high growth venture capital backed technology and life sciences companies.
This focus has allowed us to pursue a dramatic investment strategy, which allows us to focus and target investment opportunities in the sectors that we have a bias towards or better understanding of. For those who may have attended our New York and Boston Investor Day conference, we stand upon that dramatic investment strategy and how we expect to pursue that investment strategy throughout calendar ’08.
I also like to remind you that we have no exposure to subprime, real state, consumer debt or highly leveraged middle market buyout type investments. On today’s call, I would like to discuss the following.
Our first quarter results and highlights, our current liquidity position, our credit performance and credit quality of our portfolio, an update on the competitive landscape, an update on the current venture capital environment and investment activities by venture capitals, including EKOS and a summary of the Hercules platform. I would then turn the call over to David Lund, our CFO who will discuss our financial results in more details.
After that, we will be happy to answer questions from our investors and our research analyst community. First, our quarterly results and investment highlights.
To summarize the results for the quarter, we reported revenues of $15.6 million and EPS of $0.28 per share. We achieved these results in spite of the current economic conditions due to the combined credit and capital markets turmoil that currently exists in the marketplace today.
The venture capital activity during the quarter remained strong where new capital being invested through venture capital backed companies providing us a pipeline of new investment opportunities. Our team continue to work very diligent during the quarter in identifying and closing new investment activities.
We also realized net gains of the quarter of $3 million from our warrants with the sale of liquidity of three portfolio companies. And I am also happy to report that as of last night, another one of our portfolio companies Gomez has filed for Initial Public Offering.
I am also happy to announce that our Board of Directors declared and increased the dividends to our shareholders by 30% to $0.34 per share, which we expect to payout from net investment income and our 2007 earnings spillover. We also achieved a solid level of commitments in funding during the quarter while maintaining our historical solid credit performance.
We continue to build upon a diversity and strength of our invested portfolio despite the current economic environment. We finished the quarter with approximately $531 million in investments on our balance sheet and we completed the quarter with $128 million of unfunded commitments giving us future visibility for fundings for the next one to two quarters in the future.
David will expand upon that further during his presentation. We achieved this while maintaining a weighted average yield of approximately 12.6% this despite short-term LIBOR rates and prime rates declining during the same period of time.
We continue to focus our portfolio growth and diversifying our portfolio holdings within a technology and life sciences companies and sectors with a shift in interest more towards later stage investment opportunities. We are also on our way to achieving our liquidity of 8 to 10 portfolio companies realizations which we talked about back in the fourth quarter of 2007, and I am happy to report that thus far in 2008 we have had three liquidity events and we now had a fourth liquidity event that occurred close the end of the first quarter with Sirtris being acquired by Glaxo.
The expected realized gain on our investment in the Sirtris transaction assuming it's completed will generate approximately 2 to $2.2 million in additional realized gains above and beyond the $3 million gain that we disclosed for our holdings in the first quarter of gains. As I said just a moment ago, I am happy to report that even as of last evening, Gomez, another one of our portfolio companies, has filed for Initial Public Offering.
Now, let's turn to liquidity. We are confident that our current liquidity position will allow us to continue to grow our portfolio.
I would like to remind our investors that we are only 36% leveraged as of the end of the first quarter. We continue to manage our liquidity position very diligently and as well as continue to expand upon we’ll manage our investment activities very closely as well.
I am very happy to report that we have successfully and recently amended and renewed our recent credit facilities with both Citibank and Deutsche Bank, which David will expand upon during his section. Given the continued venture capital marketplace activity with investments into technology and life sciences sectors, we believe it is important that we maintain flexibility in our capital structure in order to capitalize on the opportunities, our organization team has identified as we continue to see very attractive investment opportunities in this current market today.
Now turning to credit quality. I am happy to report that since inception to-date, Hercules has now originated approximately $1.1 billion in new investment activities through technology life sciences companies.
We continue to maintain a high standard of credit, underwriting and credit quality and monitoring in our portfolio and we have maintained a very disciplined approach of selecting the appropriate and proper investments despite the current economic environment we find ourselves. Credit quality remains very strong and we continue to identify, track and quickly identify problems in our portfolio and address those problems expeditiously to ensure that we maintain the highest credit quality in our portfolio.
To that end, we finished the first quarter on a weighted average loan grade of approximately 2.2 or even to that of the fourth quarter of 2007. Turning to the competitive landscape.
Our unique position has one of, if not below highly specialized BDC focus exclusively on the technology and life sciences sectors, our venture capital backed companies has afforded us the continued growth in our brand and awareness within the venture capital community. That has afforded us to continue to see a stronger source of deal flow and our broader source of deal flow with the investment opportunities for Hercules to pursue.
We have also expanded into later stage venture capital backed companies as well as lower middle market technology companies during the fourth quarter and now pursuing it further in the first quarter of 2008. Within our sectors, we are seeing lesser or fewer I should say competitors, and we are one of only a handful that have the bench strength that we have within our organization team, the broadest of Hercules footprint throughout the United States with offices in the major venture capital centers such as Boston, Southern California, Palo Alto, Chicago, and Boulder, Colorado.
We believe that by having a presence in these key venture capital marketplace affords us the ability to source better investment opportunities and so we are being the fastest provider of capital to venture backed companies. Given the current environment, we have become increasingly more selective in our investment.
This means we’ve made a strategic decision to de-emphasize early stage investments and turn our attention more towards later stage, expansion stage venture capital and private equity backed technology life sciences companies. In addition, we have also moderated our pace of funding in new investment originations during the quarter and we have adopted a much more control of LIBOR what we call internally our slow and steady pace of origination, our investment activities throughout 2008.
We have adopted this policy of slow and steady to allow the market to catch up to the current yield spread that we’re seeing in the underlying cost of capital that we briefly experienced with our renewal in the credit line, I am happy to report that as we’ve done this, we’ve implemented numerous different strategies to help mitigate the increase in our spreads from the cost of financing by implementing during the first quarter. Interest rate force and all new investments originated in the first quarter of 2008 and we’ve now moved towards all (inaudible) loans in the first quarter of 2008 as we further mitigate to the increase of spreads that we’ve seen as we renew our credit facilities.
This has allowed us to maintain or more importantly to pass through the increasing amount of spread that we see on the cost of leverage to our underlying companies. However, we believe it will take us one to two quarters to fully successfully pass through a significant portion of those increase in spreads that we’ve experienced in our credit line renewals to underlying companies.
Moving along, we continue to see very attractive investment opportunities. However, I want to caution that although we see a very robust pipeline of new investment opportunities, it does not mean that all of those investment opportunities necessarily fit our new underlying criteria’s of terms and conditions that which we would underwrite.
Bringing altogether, Hercules has chosen to shift strategies in the first quarter to moving away from early stage investment activities to more later stage investment activities targeting more mature venture capital and private equity backed technology and life sciences companies. We have moderated purposely our pace in investments to allow the market to catch up to the new yield spreads that we are seeing in the marketplace today in order to mitigate any yield compressions that we may have been experiencing in the marketplace, which as Dave will discuss during his section, we have managed quite effectively so far in the first quarter.
I would like to emphasize that venture capitals are long-term investors and have deep experience working through many economic cycles and they invest for the long-term horizon, not for the near-term economic cycle that we may be experiencing today. It is certainly true that venture backed companies definitely are averaging approximately 8 years from initial investment for the venture capital to achieve a liquidity event.
This is why the prevailing market in M&A and IPOs are somewhat lesser of an impact of Hercules since we invest in covering through our all phases of life cycles and our portfolio has companies in various stages of life cycles, which allows us to harvest realized gains in different economical cycles such as the one we are in right now. Again, during the first quarter, we had three liquidity events being achieved in our portfolio, generating realized gains of $3 million.
Sirtris, which was acquired during the second quarter or announced to be acquired in the second quarter, will produce when the transaction ultimately closes, approximately $2.2 million gain. And as I said earlier, again Gomez filing an S1, all despite the current economic environment that we are in.
While Hercules is down, we set a time that takes to achieve liquidity event for a venture backed company is now approaching where I have never seen in my experience over eight years from the level of maturities. This elongated time to liquidity affords us a very attractive investment opportunity for Hercules by offering these maturing pre-IPO companies and alternative source of growth capital such as debt that is minimally dilutive as a way to achieve a liquidity event from an M&A or an IPO activity.
Now I have to address our warrant portfolio in future potential liquidity opportunities from this portfolio for the benefit of our shareholders. Today we have approximately 83 portfolio companies or I should say 83 warrant positions in our portfolio companies, representing in aggregate share value of approximately $24 million and an exercised value having exercised a full face value of these warrants of approximately $52 million.
As we have indicated in numerous calls in the past, you should not extrapolate from that comment that all of these warrant divisions will ever monetize. We have indicated that you should model anywhere between a 50% monetization that warrant position and never assume that 100% of the warrant position will monetize.
That said, the increase in warrant portfolio year-over-year represents 131% increase over the same period last year. This is significantly important because this warrant portfolio represents future opportunities to generate long-term capital gains for our shareholders or provide investment vehicle by which Hercules will retain those capital gains and become self-funding as we continue to grow our portfolio.
Lastly and turning to our platform, I would like to reaffirm our investment focus and elaborate on why I am so enthusiastic about our platform. Hercules is focused and primarily invest in the activities of the venture capital marketplace.
It is not subject to broader economic impact from lower middle market to the middle market companies that are much more prone to recessionary impact that are somewhat [delving] in the venture capital marketplace. The venture capital marketplace investment activity continues.
We see $7 billion investment in the first quarter and we estimate that number to be similar in the second quarter. The increased time to liquidity on achieving liquidity for the venture backed companies represents opportunity for Hercules to offer an alternative source of growth capital into these pre-IPO or pre-M&A companies as an alternative source.
We believe that Hercules brand is quite significant and a very growing brand within the venture capital marketplace and that brand has been achieved by our growing field and team of investment originators that currently stands at 50 investor professionals targeting the venture capital community, giving us normally access the deal flow in the marketplace. In conclusion, I believe that we are well positioned to deliver a long-term value to our shareholders and that our business model and strategy will allow us to sustain growth throughout this economic cycle.
Overall I am extremely pleased with the continued performance of our individuals, our investment professionals, our portfolio and the organization as a whole given the current economic environment that we are in. We remain very focused on credit quality and capital preservation as well as maintaining adequate liquidity positions to continue to grow and fuel our portfolio.
To that end, I turn the call over to David Lund, our CFO. David?
David Lund - Chief Financial Officer
Thank you, Manuel. Today I will provide more details on our commitments and fundings, income statement, key portfolio metrics and balance sheet.
Commitments totaled $65.3 million in the quarter, comprised of $55 million in debt commitment and $300,000 of equity commitments. Fundings for the quarter totaled approximately $49.8 million.
This brings our commitments since inception to over $1 billion and our fundings to over $800 million. As I point out that the average funding level during the quarter was $25 million and the average outstanding balance of our loan portfolio was $480 million.
Turning to the income statement. Total investment income, which comprised of interest and fee income, was $15.6 million, which was an increase of 51% over the first quarter of 2007 investment income of $9.7 million.
As we have stated in the past, the level of our one-time fees is hard to forget quarter-to-quarter. As an example, one time fees were lower during the current quarter by approximately $0.01 per share as compared to the fourth quarter.
The effective yield on our debt investment during the quarter was 12.6%. The decrease in the effective yield in the current quarter as compared to the previous quarter of 13.9% was attributable to lower LIBOR and prime rates and lower fees related to early repayments.
Interest expense and loan fees on borrowings were $2.2 million for the first quarter of 2008 as compared to $952,000 in the first quarter of 2007. The change was attributed to higher average loan balances outstanding and fees related to the SBA dry down.
During the quarter, our average loan balance outstanding was $139.3 million, of which $77.3 million was attributed to our credit facility and $62 million was attributed to our SBA facility. The effective cost of debt during the quarter was approximately 6.4%.
During March 2008, Hercules secured its borrowing rate on $58 million of borrowings under the SBA program at a rate of 6.377%, which is comprised of the interest rate of 5.471% and an annual fee of 0.906%. SBA borrowings will bear interest as an inner rate of LIBOR plus its spread of approximately 30 basis points until fixed at the semi-annual meeting of the SBA.
As a reminder, the rate become fixed at the time of the SBA pooling, which generally occurs in September and March each year and assess the 10 year treasure rate at that time plus the spread and an annual SBA charge. Operating expenses for the quarter excluding interest expense and loan fees were $4.4 million as compared to $3.5 million during the same period last year.
The increase as compared to the first quarter of 2007 was primarily attributable to the expansion of our office location and an increase in the number of employees to 45 from 29 in the same quarter a year ago. Net investment income for the quarter was $9 million or $0.28 per share based on 32.6 million basic shares outstanding.
This is compared to $5.2 million or $0.23 per share in the first quarter of 2007 based on 22.9 million shares outstanding representing an increase of 22% on a per share basis. Taxable income for the quarter was $0.29 per share excluding realized gains.
During the first quarter, we also recognized net realized gains of $3 million. These gains were primarily attributed to the gain on sale of our warrant and real-prime technology and again on our warrant through the sale of Compete.
Net unrealized appreciation on investments in the first quarter was $921,000 compared to an unrealized gain of $816,000 in the first quarter of 2007. I would like now to briefly discuss credit quality.
We continued our high credit quality standard and discipline of loan monitoring through the quarter, the weighted average loan rating of our portfolio was 2.2, as a reminder most of our portfolio companies are dependent on future events of venture capital investments and we downgrade our portfolio companies as they approach a period in which they will need to close additional rounds of financing. I would like to note that the makeup of the companies in the various screening categories will change period-to-period based on operating results and funding activities.
Also as we had identified in our earnings release today, we continue to diversify our investment portfolio, which mitigates investment risks in any single industry subsector. Turning to our liquidity.
As I just mentioned we ended the quarter with $13.8 million in cash. As we disclosed in our press release, we amended and renewed our credit facility yesterday for $135 million.
Under the terms of the agreement, we will pay 1 percentage point renewal fee, our borrowing rate will be LIBOR plus 500 basis points and the unused fee will be 250 basis points. As also noted in the release, we had an excess capacity of $177 million on our $250 million line of credit as of March 31st.
As such, we made the decision to rightsize the amount of our credit facility to mitigate the adverse impact on EPS for the costs related to renewal and unused fees. We believe our relationships with our existing partners and other providers will allow us flexibility to expand our credit facilities as needed between now and year-end.
I would like to point out that based on our existing stockholders equity and our SEC exemptive release for borrowings available under the SBA expansion program, the company has the potential to leverage its balance sheet. Now turning to balance sheet.
The leveraged balance sheet in excess of $500 million. The company had $143 million in debt outstanding as of March 31, 2008, representing a leverage ratio of approximately 36%, or 29% taking into account the exemptive release for the SBA.
Now turning to the balance sheet. As of March 31, 2008, we ended the quarter with $548.9 million in total assets, of which 13.8 million was in cash and cash equivalents.
Effective January 1, 2008, the company adopted FAS 157. There was no material effect on the investment valuation as a result of the adoption of this accounting principle.
We have retained (inaudible) as valuation consultant and during the quarter we reviewed our valuation policy and procedures with them and based on their review they have incurred valuation procedures we are applying are reasonable for our investments. During March, we placed one of our loans on non-accrual as the company was placed in receivership and is currently being sold.
The company was fully performing on its debt obligation through March 1 of this year. During the quarter, we paid down $6.3 million under our warehouse credit facility, the debt balance and the facility was $72.9 million at March 31, 2008.
We also drew down an additional $15 million from the SBA, bringing the SBA debenture total to $17.1 million at the end of the quarter. Finally, our Board of Directors has declared a dividend of $0.34 per share.
The dividend will be payable on June 16, 2008 to shareholders of record as of May 16, 2008. This is our eleventh consecutive quarterly dividend declaration since our Initial Public Offering and will bring the total cumulative dividend declared to $3.07 per share.
Operator, we are now ready to open the call for questions.
Operator
(Operator Instructions). We will now take our first question from John Hecht with JMP Securities.
John Hecht
Good afternoon guys. Thanks for taking my questions.
Just focusing on spreads a little bit. Can you give us the current mix, I guess as of March 31, mix of fixed versus floating rates assets in your portfolio?
David Lund
Approximately 54% is floating rates at the end of the quarter and the balance being fixed rate, about 46%.
John Hecht
At that point, were any of them due to floors or is it floor content new layer of the term in a loan?
Manuel Henriquez
Hi John, it’s Manuel. Good afternoon.
The content of the floors, we had -- I would describe that as peppered through the portfolio in the last half of ’07. It is now become a policy of ours on a go-forward basis of calendar ’08 to have a industry floor placed on deals.
Meaning we will always have a minimum return despite what happens to the index rates and the LIBOR or prime and then it will float upward, those rates will increase, but we maintain our spreads.
John Hecht
And I mean, given more LIBOR, the floor is pretty close to where LIBOR is right now, or the relative effects?
Manuel Henriquez
No, the floors are very tight. The floors can range anywhere between 25 basis decline to a maximum of 50 basis decline but, after that no more than that.
John Hecht
And then last question is, you guys have clearly been focused on more late stage and even into public companies in larger deals, can you force any yield of those or are you able to given where credit spreads have got in the country in the, you know, lately a year when the pass then on that the increasing credit spreads out to even later stage companies?
Manuel Henriquez
No, we are -- we have purposely targeted and moved upstream towards the maturity of stage of companies because we are able to see and garner much more attractive yield spreads in that area, primarily gives a lot of competition again in that favor in the market right now. So, that’s consciously our effort to maintain yields rather than try to maintain yields and going down the cash structure.
We’re maintaining yields remaining at the field level of cash structure by going to more mature companies.
John Hecht
Okay. Now moving on to liquidity, you guys still have close to 30 million remaining in your SBA, correct?
David Lund
We actually had more than that. At the end of the quarter, we had $58 million that was available to us.
John Hecht
That’s what I meant, 58. And given the -- did you say your spread level went up to LIBOR plus 500 in your renewal warehouse facility?
Manuel Henriquez
Unfortunately that was not a -- again, and unfortunately I had joined to that height, which is why we have taken the slow and steady approach of origination that until we had greater visibility of what that new spread would be, we didn’t want to risk underwriting new transactions that may have been below that spread increase. So, by taking the slow and steady approach that we have taken, we now have that spread increase that we now fully know and we are passing as much of that we can to our underlying portfolio companies, expect to expand upon that and then proceed next two quarter.
But, you absolutely correct. It is a rate spread that was frankly supplied into us and primarily precipitated by the now infamous Bear Stearns weekend.
John Hecht
Yeah. So with that I mean, would you focus on using the SBA more on the short-term?
I mean, I think that’s lower cost in permanent financing relative to your borrowing line – the renewed borrowing line, is that correct?
Manuel Henriquez
Absolutely correct. We are actively managing our cost of capital and currently looking at the multiple sources of financing or capital that we have.
Just to remind you and everybody else that as we showed in the first quarter results, we have approximately $48 million of amortization both of prepayment and no amortization that came back to us. This makes Hercules a very unique BDC because unlike most other BDCs, since we do not invest in or primarily invest in a large percent of portfolio in five year or seven year term loans, the vast majority if not significantly the entire portfolio, is rapidly amortizing that instrument, which means that Hercules receives anywhere between 25 to $35 million in a normal course of principal repayment every quarter and then of course and it is augmented by early prepayments that are realized or liquidity gains realized either from warrants or repayment of loans in our portfolio.
So, that’s all very accretive us, which is why we have not fully tapped into the Citibank and Deutsche Bank credit facilities of 250 because we have this recycling of capital that’s very efficient for us to use and mitigate our costs.
John Hecht
Okay. The last question, I appreciate you guys taking my long, long views of questions.
Are you looking at other sources of capital, other bank deals to either augment or replace just a certain agreement here in the future?
David Lund
Yeah, we are in discussions right now with a couple of very large national and international banks. So yes, we are expanding on that area.
Manuel Henriquez
John, our credit before has not gone unnoticed and someone would be other larger banks. I mean, I want to make sure we understand it.
Citibank and Deutsche Bank continue to be very good partners, it’s unfortunate that any guidance of their own little fickle they got into -- unfortunately their cost of capital was shut off and we were unfortunately the beneficiaries of that increased cost to capital in their marketplace. But we are also targeting or I should say in discussions with other nationally recognized and internationally recognized financial institutions as well.
John Hecht
All right. I appreciate.
Thanks very much guys.
David Lund
Thanks John.
Operator
And we will take our next question from Douglas Harter with Credit Suisse.
Douglas Harter
Thanks. If you could just remind me what the cost of funds on the credit facility was prior?
David Lund
It was previously LIBOR plus 120.
Douglas Harter
Great. And then just back on the liquidity side, how should we think about it, right now we are with the smaller liquidity in Deutsche Bank facility, your unfunded commitments and term sheets, pretty materially exceed your available liquidity right now?
Sort of how do you get comfortable with that and help us get comfortable with that?
Manuel Henriquez
Sure. As we said, since the inception of Hercules and this numeric data is the focus to our earnings calls is we never ever expect that all unfunded commitments will ever fund.
That is the virtue of it, in fact the range that we have provided historically has been anywhere between 70 and 75% of the unfunded commitments will actually draw on capital or the proceeding two quarters. And it is also the case that a lot of those unfunded commitments are starting to performance milestones of the underlying company.
So definitely they must qualify for certain events and no one would be able to get access to that capital as well. As to the signed term sheets, the waterfall of the outside term sheet works as follows.
Of the $90 million that we disclosed, generally speaking, 75 to 80% of those will actually convert into closed permanent committed capital and now to us. Of that 75 to 80% that closes, I know that 75% of that will actually find over the proceeding next three quarters.
So, there is now this torrent of capital being displaced right away to the marketplace. So, as David just said, we have $15million available capital under our SBA line.
We have ample capacity under the $125 million Deutsche Bank and Citibank line, and we are experiencing above-normal repayment of principal and amortization in the higher end of the scale of 35 to $40 million run rate per quarter giving us very good visibility to funding activity. That said, we are also very much in discussions with these other banks as well as Deutsche Bank and Citibank that come sometime in the third quarter when we start needing additional capital, we can increase those lines accordingly with either them or other providers that we are speaking to right now.
But it's very important to know that the reason why and we couldn't renew a higher credit line, we had chosen not to do that because of the unused fees are so exorbitant right now and the unused fees just to use a perspective, went from 25 basis points historically to 250 basis points for the unused portion. Meaning that unused capital from our commercial banks today is very very precious capital for them and in their defense their whole philosophy is we want to see our capital deployed and working for us as soon as possible and since we do not need to tap into that much excess capital, we have told that the cost of carrying that for next, either one or one and half quarters was much more expensive than what our shareholders should be burdened with.
Douglas Harter
Thanks for that answer, Manuel. Just sort of a follow up.
Can you talk about the profitability of the loans that will be funded off of the previously unfunded commitments given the higher cost of funds especially on the floating rate piece?
Manuel Henriquez
Sure. We anticipated a higher spread on renewals of our credit lines back in the fourth quarter and certainly in the beginning of the first quarter.
Unfortunately, the Bear Stearns' phenomena in watching the exacerbation or dislocation in the credit markets and fully seeing our credit spreads increase so wildly. So, we have been so far originating new investment activities.
I will give you range of these competitors in this case. Anywhere between 11.5% to 12.5% originations on new deals.
To say it differently, we have been so far have been maintaining, despite the decline in LIBOR and prime, we have been thus far been able to preserve better than I expected and pass through more of that higher cost to our companies by maintaining 11.5 to 12.5 underwriting yields to begin with. And I think that’s going to be creeping up ever since slightly in the first and certainly in the second quarter as we migrate to more mature stage companies.
Douglas Harter
Great. And I guess just one other follow up.
Is it a one year maturity on this new facility?
David Lund
It right now has on October 31 date and then it rolls out, so it’s a one year for a final payout.
Douglas Harter
Great, thank you.
Operator
And we will take our next question from Robert Napoli with Piper Jaffray.
Robert Napoli
Thank you. Pretty crazy pricing there, pretty wild time, not only you guys obviously on the – like I have seen with the low, extremely low leverage that you have, which is it does seem out of line, the pricing seems out of line with the risk?
Manuel Henriquez
Well Bob, as a recipient of that I can assure you it does seem out of line.
Robert Napoli
And so you said you are able to hold your pricing at 11.5 to 12.5, shouldn’t you be able to bring that up to like 15% yields? And I mean what’s going on with -- I mean your competitors has passed the funds, at least many of them have to be going up and what are you seeing out of the competitive fund?
I mean it seems to me like you should be able to pass on all of that increase?
David Lund
Well, I think we kind of make sure we bifurcate in the competitive landscape into different tiers or stages, companies we are talking about. Despite that, for that view point, I will tell you that the early stage, Series A to Series C stage companies, it is ferociously competitive to a level I have never seen before in my history.
The venture banks are eventually killing themselves to provide prime based loans to early stage companies in order to garner the deposits. There is basically no margin in that business right now and some of the venture banks and the most recent earnings call also indicated that they are fighting out very aggressively to maintain any kind of market position there because of the competitive nature of early stage venture backed companies.
It is unprecedented the amount of thin margin business is being written in that stage of companies. Conversely, on a later stage side of the equation, we are certainly seeing abatement of competition that’s going on primarily due to lot of our competitors have either died, are dying, or are unable to garner additional liquidity or capital and our underlying businesses that we feel are ridiculous in price what they are doing in order to try to sustain any kind of presence in the portfolio to try and secure the next level of equity capital to try to capitalize themselves.
We have decided to let that competitive environment somewhat past and preserve a capital and do selective underwriting, so when a lot of that competitions instead of going away even further, we should be able to see higher underwriting yields. But I don’t believe we will see 15% yield, I think that that is accepted.
I think that we will probably see stabilization somewhere in the neighborhood of 13 or 13.5 but even that is probably on a high side. Venture backed companies are still very well sort out investment opportunities because many providers are more interested in getting their hands on the equity and the warrant and to a lesser extent on the current cash yield.
We are much more focused on credit quality and current cash yield and to some extent lesser on the warrants themselves because we care about the preservation of capital first.
Robert Napoli
Okay. Let then -- now let me ask a question about the dividend and may be the growth of the portfolio over the next couple of quarters as this environment shakes out.
And may be on the growth of the portfolio first, are you anticipating then kind of holding your leverage at below 0.5 to 1 and needing to do so over the next few quarters until you get some of these additional bank deals done or I mean is that a reasonable expectation?
Manuel Henriquez
Well, I think that on a leveraged basis, I think that that’s probably on the low-end of the range. I think that you will see leverage creep up probably into the high 70s to mid 80s over the course of calendar ’08.
Robert Napoli
Without getting additional -- without getting new funding deals done or would you…?
Manuel Henriquez
Well, I think that you will see that we have the SBA, we will fully draw down the $127 million of the SBA in calendar ’08 and I think that you will probably see our credit lines in this, this can change dramatically as we see the yields going up 50% whether we like or as you said you would like to see, obviously we will exploit that. So, I think you will see the credit lines finally creep up to the $125 million range with the outside providers.
Robert Napoli
Okay.
Manuel Henriquez
And that’s its efficiency. I think let's say you have the full extreme $200 million on the outside credit facility plus the SBA, you are looking at potential leverage at 327 over $400 million of equity capital.
Robert Napoli
Okay.
Manuel Henriquez
And that total is very helpful. You should not assume that we are not growing to portfolio and if I came across that way, I apologize, that’s not the case.
Robert Napoli
Sure.
Manuel Henriquez
It is certainly a slow and steady, but we will be growing the portfolio in ’08.
Robert Napoli
Okay. The dividend – I mean, the full year guidance with the dividend, if you divide it by (inaudible) this is because of the higher realized gains you kind of gave that this $0.34 dividend is not intended to be the ongoing dividend or is the -- I mean I am sorry if I missed that at the beginning of the call when you talked about that, but the dividend next quarter, what is your anticipation for a second quarter dividend?
Manuel Henriquez
I think that there is a lot of factors here that are very important to take into account. The Board of Directors took into account many, many positive factors in determining this recent dividend.
The first and foremost is our NII earnings throughout the year, that’s clearly a major factor in that decision. Secondly, it is the spillover of approximately 4.2 million or $0.12 from calendar ’07 earnings to calendar ’08.
Above and beyond that, we have two other events so far that are quite critical in that decision as well and that is this we have the one-time gain of approximately $3 million. That actually – that gain is in reality an ordinary income gain and it's not one year.
So that may be paid out in ’08 or may spillover to ’09 with 4% excise tax. That would be determined at the end of the year, but that earnings is fully ordinary income.
Above and beyond that, we then have another $2.2 million as of right now assuming no credit losses throughout ’08 that will become long-term gains for us, at which point the Board may determine to either increase the dividend further, do a special dividend and/or do an excise tax spillover or lastly do a corporate tax and retain those earnings. So, we feel pretty confident that all of this $1.32 dividend that we’ve discussed will come out of earnings, ordinary income earnings in calendar ’08.
Robert Napoli
Okay. And last question, (inaudible) what percentage of the portfolio do they look at?
David Lund
They actually went through in reviewing the policies and procedures with us. They had not done – they didn’t do any specific account valuations or investment valuations, but it was the policies and procedures that we are applying and looked at the underlying documentation we have.
Robert Napoli
Are they going to do valuation work, is that kind of a…?
David Lund
Yeah, that we were in discussions with them to actually do that. We will be meeting with them in the course of next couple of weeks about the go forward approach and looking at some of the specific companies.
Manuel Henriquez
You know, Bob I think that we will do a test, they will do a random family of portfolio continue to test it throughout the year, that few tend to will be expect to have with where we are.
Robert Napoli
Okay. Great, thank you.
Operator
And we will take our next question from Jon Arfstrom with RBC Capital Markets.
Jon Arfstrom
Hi guys.
Manuel Henriquez
Hi, Jon.
Jon Arfstrom
Few questions here. Manuel, you talked about industry deal flow at just under $7 billion for the quarter, where do you think that’s likely to go on a quarterly basis?
Do you feel like that’s achievable quarter to be paid?
Manuel Henriquez
If you look at the venture capital industry, there is 10-year data that I can kind of share with you that right now to an annualized rate of the $7 billion will give you a run rate of $28 billion for calendar ’08. That is down slightly from $30 billion in 2007 and certainly up from 2006.
If you want my -- this as my last hope forecast, I believe the venture industry will probably will do between 26 billion to $28 billion in calendar ’08. I don’t see any real structural changes in the venture marketplace investment activities.
In fact I will tell you that we are seeing a very bullish investment activities by the venture capital into the IT, information technology, area, a more specifically information services, which ironically is where we have been bolstering our portfolio as part of our thematic investment strategy. And what the information services sector means is for example Glam Media, it is RockYou, it is Blurb.
These are really exciting companies in our portfolio that are performing quite quite well that we have exposure to. We are seeing a very strong keen interest by the venture capital community into the information services sector, which received approximately 41% of the capital being invested during the -- I am sorry, say it differently.
Of the $7 billion that we invested, 60% went to IT, other 62% of that 41% went to information services. So, a very, very strong growth sectors with venture capital community, of which we have very good exposure to within our portfolio and again examples of those are Hi5, Blurb, Glam Media, Waterfront Media, and of course most recently RockYou are the examples of portfolio exposure that Hercules has in that segment of the market.
Jon Arfstrom
But in terms of your preference for your transition for later stage companies, does that change the financial model at all in terms of longer term expected gains. Does it result in potentially higher yield in the near term and less gains on the long term?
Manuel Henriquez
Well, clearly it's a combination of both. The really solid EBITDA performing companies generally tend to have no warrant associated with them, but very high current cash yield and may include a portion value of [spectators].
The later stage venture backed companies that may not be sustained EBITDA positive yet or may have lumpy EBITDA, but certainly approaching EBITDA positive in 12 months or so, those tend to have warrant coverage, warrants associated with them for long term capital appreciation. And so, we are still at a very strong bias towards later stage venture with warrants on them.
Jon Arfstrom
Okay. Couple of more questions.
This may seem like a crazy question, but I will ask it anyway. With the dividend decision made in connection or did you have full knowledge or did the Board have full knowledge of the fact that your spread would widen out so much under your cost of debt?
In other words, you mentioned that you signed it yesterday I believe, and I am just wondering if these two decisions are related, if you have that type of knowledge when you decided to take the dividend on?
Manuel Henriquez
No, in all periods, we have known about the spread, the potential spread expansion that will probably – I think, I wouldn’t tell you almost three or four weeks, this is not nothing new. It has been a very protracted long term discussions with our providers out there.
The Board is fully reminiscent of that information and knowledge of that. I think that the Board and the management is – we should derive as I commented, the confidence in our ability to generate NII income in calendar ’08 coupled with the spillover of the $0.12 from ’07 to ’08.
You may or may not recall the $0.12 spillover in earnings from ’07 and ’08 must be distributed or must be declared and distributed in calendar ’08 regardless. And BDC has a 90%, and certainly Jon, we would have to pay it out any ways.
Jon Arfstrom
Okay. And then just one more question.
The Grade 1 asset in terms of the portfolio, what is in Grade 1, is that a couple of credits or one credit?
Manuel Henriquez
Well, Grade 1 is in our scale, Hercules Grade 1 is the best.
Jon Arfstrom
Yes.
Manuel Henriquez
And so we have actually, if I remember correctly I think it’s six Grade 1 deals in our portfolio.
Jon Arfstrom
Yes.
Manuel Henriquez
You can -- here is a couple of color fills, when a company comes with Grade 1, it is all but certain that in the course of next 12 months or so, a liquidity of that will be achieved in that position resulting in the form of realized gain. Conversely, a Grade 5, you can actually still there will be some capital loss attributed to the Grade 5.
So, we are happy to report that we are heavily weighted in the right direction.
Jon Arfstrom
Yeah, I was just looking at the – it was down 10 million and I was just wondering if that was a specific credit that came out of there that resulted in a gain I guess?
Manuel Henriquez
No, it’s probably more attributed unfortunately from mark-to-market as it relates to some of our public securities such as Panacos, Memory, EpiCept, Wallop, Power and various other investments that we have had. It’s no secret to anybody that the public markets volatility has been somewhat volatile.
Jon Arfstrom
Okay. One more if can, David?
Just back of the envelope calculation, the increase in the unused fee and also the 380 basis points in incremental cost, I penciled out about 2 pennies a quarter aftertax, is that…?
David Lund
Yeah. The unused fee we were -- and again this is back of the envelope, we were looking at it being $0.025 to $0.03 on the year and so your $0.02 per quarter for the combined is probably a reasonable estimate.
Jon Arfstrom
Okay.
Manuel Henriquez
Yeah, Jon that – I don’t have any answer to that yet because that can get compressed by us as we continue to originate a higher spread. But I think as of right now, I would rather defer to our conservative position, which is I think that’s probably a fair comment.
But management and our team is certainly looking to make that up as much as we can.
Jon Arfstrom
Yeah. No sir, I am just looking at one side of it, that’s entirely fair.
Okay, thanks.
Operator
And we will take our next question from Henry Coffey with Ferris, Baker Watts.
Henry Coffey
Hi, good afternoon. Probably going to go over some of the stuff, once again I am sorry, but the sort of gains pool, you have got $3 million that you just talked, you have got $2.2 million coming tied to the potential sale of a company and what is the spillover on distributed income?
David Lund
It’s approximately 4.2 million from 2007.
Manuel Henriquez
Or $0.12, Henry.
Henry Coffey
So, it's 4.2, $3 million booked and 2 million maybe.
Manuel Henriquez
Correct.
Henry Coffey
And that’s all obviously being going into your dividend decision, so that this $0.34 that you put out there is obviously sustainable into the future?
Manuel Henriquez
Henry, you are absolutely right. I mean, if anything I learnt on running of a publicly traded BDC is don’t overshoot your dividend that you can’t earn.
Henry Coffey
And then, in terms of originations obviously things are going to slow down somewhat by choice out, which seems like a very smart move given where the market is. Can we look at the current quarter and use that as our going forward benchmark or should we expect to see more aggressive or less aggressive originations?
Manuel Henriquez
Well, I am not a big fan of the word aggressive, I think that…
Henry Coffey
More robust.
Manuel Henriquez
Thank you. I think that the first quarter is not indicative of what we expect the activities to be.
I think it's on the lower end of the scale and as I said at the beginning of my opening comment, we cautiously and purposefully are – put off the gas a little bit here to allow the market spread to catch up to what we anticipated in the yield or the spreads from our credit facilities. Now those credit spreads ended being broader than we anticipated, so we are going to go a little bit slow and steady, but start creeping up our spreads on our underlying of our new deals.
But I want to caution you and everybody else, remind everybody that the third quarter is historically our lowest period of time, by which only 15% of our assets are usually placed on the books at that point. So I think that you are looking at the typical Hercules current year that the fourth quarter is a very robust quarter, but we are having a very good second quarter so far.
Henry Coffey
And in terms of your usage of the SBA facility, can you sort of access that at will or does that have to come in chunks?
David Lund
No, we can access that. All we have to – we just put our leverage request and draw as we need to and we support our draws with the SBA, so we have pretty good accessibility to it.
Manuel Henriquez
And Henry, you should know it is an important feature of the SBA line that we should think probably known, we have of course, but we don’t talk about it as much as we should, which is how the SBA marketed in two periods of time, March and September. However, the internal borrowings between that period of time are only priced at LIBOR in a small spread ranging between 30 to say 45 basis points.
So, depending in order to continue you are in that interim period of time, you are actually garnering quite significant margin to your benefit be it six months, three months or four months period of time until the rates walk in.
Henry Coffey
That’s what I was asking because it seems like a very attractive facility to have right now.
Manuel Henriquez
This is why -- this is exactly why we chose to lower the Citibank, Deutsche Bank lines of 250 to 135 because we didn’t feel it made any sense for us to burden our balance sheet and P&L with the unused charges because we can't absorb that credit facility any ways.
Henry Coffey
And of course, your interest, I think I have read everything right, 12.64 this quarter?
Manuel Henriquez
That’s correct.
Henry Coffey
And should we look for that -- I know that there is some noise in there, but should we look for that to move higher or stay in the kind of low 12 range or…?
Manuel Henriquez
Certainly, we are looking to move it higher. I have $470 million loan base, so we kind of start moving that up meaningfully.
It will take some quarters to do that. So, we have 50% of our portfolio as fixed rate loans, 50% of it is floating rate loans.
Of that existing floating rate loans, a portion of those are one-year facilities that are coming off. And as those facilities come off, we are renewing those at a higher rate.
So I think you will see that ultimate spread increase or yield increase, but I think that you need to give us a couple of quarters to get there.
Henry Coffey
Pretty well. It all -- given what you’re doing with your balance sheet and where you’re going, all this looks surprisingly absorbable?
Manuel Henriquez
Well, we try to be as transparent out there and it really worked for our shareholders to make sure we manage all of our cost of capital effectively.
Henry Coffey
Great. Well, thanks again.
Good quarter.
Manuel Henriquez
Thank you.
David Lund
Thank you.
Operator
And we will take our last question from Greg Mason with Stifel Nicolaus.
Troy Ward
Hi, good afternoon guys. This is Troy Ward and then Greg will follow up here in a second.
Manuel Henriquez
Good morning.
Troy Ward
Quickly on the credit quality, you said you had one loan on non-accrual, can you tell us the size on that?
David Lund
Yeah, it was approximately $4 million. And it’s a company that’s going through receivership.
They are looking to sell the assets and NOLs and so on.
Manuel Henriquez
Troy, you should look at that transaction no dissimilar to how we handled the Diomed transaction, where we worked diligent with management to move the company into a receivership or Chapter 11 process and then we effectively offered the company debt financing on the Diomed transaction. We did the same thing on the Simpler transaction, which is the name of the company that we had to provide debt financing for that company and we are having a date turned auction on May 28.
This whole event will be reconciled and packaged up and completed by May 28.
Troy Ward
Any thoughts on recovery rates or something like that?
Manuel Henriquez
Right now, I will tell you that we have many many instant buyers on that [intellectual] property and we are receiving, you are going to be hearing from the other bidder, I don’t want to trap myself here. So far it is all higher than our guess by significant, by a good portion and there are others who (inaudible) of the company that may bid any higher than that.
Troy Ward
And is that why I am assuming that there is nothing in Grade 5. Is that the reason that’s not in Grade 5?
Are you not expecting a loss?
Manuel Henriquez
Well, in all fairness, under the FAS 157 rules that when we close the quarter, we did not have the visibility that we have today on the value of the asset and the prospective interested buyers of those assets. So, we actually impaired that loan by $1.5 million at the end of the first quarter primarily because we didn’t have the visibility and the confidence at that point from a fair value to believe that the loan was worth more than 2.5 million.
I will tell you that if things progress the way that seem to be going right now, I do not believe at this point given the interested buyers we have on those intangible assets that we may experience any loss in that transaction.
Troy Ward
I guess – at March 31, if you thought you have an impairment and you thought you are likely or potentially were going to take a loss, why wasn't that been included in the Grade 5 bucket where you have zero?
David Lund
We had written that down to what we believe was the market value of it and so as a Grade 4, it's when we had -- expected to have a loss, but not a total loss.
Manuel Henriquez
And let me expand it further. The Grade 5 is you will have a loss.
A Grade 4 is you may have a loss. So let's take the example I just gave you.
If May 29 comes and goes and we have bid materially less that loan will move into Grade 5 in Q2.
Troy Ward
Okay, I understand. I understand the gradation.
I and Greg have some follow-up here.
Manuel Henriquez
Okay.
Greg Mason
Can you talk about with your slow and steady, what your thoughts are for kind of a range of origination volumes on a quarterly basis?
Manuel Henriquez
I can say in this market providing kind of quarterly visibility is something I don’t want to do. I got to tell you it’s much too difficult in this current environment to do that.
I feel that although we have never done this on an annual basis, I believe that on an annual basis, the numbers are probably more easier to talk about and that is that you probably see a range in the order of probably -- I will give you a broader range, $400 million to $500 million on a committed basis range. And again I don’t want to give guidance in this market, I think it leads with some context around us and our reserve to make those adjustments each quarter hereafter in ’08 at least, but certainly the 400 to $500 million range of gross originations and probably 350 to 375 in fundings is probably a wide range for you to look into 2008.
I will tell you that if you see a subsequent and dramatic improvement in lowering our credit spreads from the cost of leverage that number will go up quite dramatically.
Troy Ward
Alright. And then one last thing, the SEC proposal yesterday that would allow BDCs to hold public stock of companies that were previously qualified assets in those stocks will not -- will continue to count as qualified assets.
Does that impact you in any way and how you look at this business?
Manuel Henriquez
I think that the SEC and Congress are moving in the absolutely right direction to create a similar package for small market cap publicly traded companies. The answer is same, yes it will, because as you know the way the legislation was written it would actually affect Hercules adversely, because having companies that we made an investment in as a private entity gone public that classification at that point would have deemed those assets to be bad assets.
Under the new amendment, the Congress is or I should say the SEC is looking to do that asset looks back to the original data investment and doesn’t change the characteristic if anything goes public in the future. So, that will be very beneficial to us.
Troy Ward
And does it also allow you to provide debt to public small cap public companies. Am I understanding the proposal correctly there?
Manuel Henriquez
That’s correct. The intent, the ambiguity of the rules were primarily pursuant if the Fed changes in margin.
And what happened was in 1980 and throughout the 90s, marginal securities historically were securities that were over $5 of price per share and that will kind of change a little bit over time. But in essence, any security of $5 certainly was non-marginable.
That ruling was modified by the Fed to allow all securities to be marginable so at least brokers have somethings over the different house rules. And so what happened was the natural bar of using margin as the differentiation went away and we and the BDCs will lever this ambiguity as to what's (inaudible) in the public side.
I think the SEC deserves a lot of credit for moving diligently here to help clarify that in all traded seamless package for many publicly traded companies who don’t have access to capital.
Greg Mason
And so that will imply that you will have a whole new area that’s opened up to you to make origination?
Manuel Henriquez
Which is why you are extrapolating the right logic, which is why we are moving towards later stage publicly traded technology companies and we know well that we've started to now pursue an investment opportunity. That is correct, Greg.
Greg Mason
Have you heard anything about the timing of when Congress could actually approve this?
Manuel Henriquez
Troy, I will – Greg, I will tell you this in all honesty, our government is working very hard, but I don’t want to kind of handicap any timeframe when our government will be acting and how we act (inaudible).
Greg Mason
All right, thanks guys.
Operator
And with no further questions, I would like to turn the call back over to Mr. Manuel Henriquez for any closing remarks.
Manuel Henriquez
Thank you, operator, and thank you everyone for your continued interest and support of Hercules Technology Growth Capital. If you would like to arrange a meeting or have additional questions, please contact David Lund or myself at 650-289-3060.
Again, thank you very much for being our shareholder and thank you for being part of Hercules. Thank you, operator.
Operator
And this does conclude today’s conference. We thank you for your participation and hope that you have a wonderful day.