Feb 11, 2010
Executives
Jason Gold - IR Manuel Henriquez - Chairman and CEO David Lund - CFO
Analysts
Jason Deleeuw - Piper Jaffray Vernon Plack - BB&T Capital Markets Troy Ward - Stifel Nicolaus Jason Deleeuw - Piper Jaffray
Operator
Good day and welcome to the Fourth Quarter 2009 Hercules Technology Growth Capital Conference call. Today's call is being recorded.
At this time, I would like to turn the call over to Mr. Jason Gold.
Please go ahead.
Jason Gold
Thank you Anthony, and good afternoon everyone. Presenting on the call today are Manuel Henriquez, Hercules Co-Founder, Chairman and CEO, and David Lund, CFO.
Our fourth quarter 2009 financial results were released just after today's market close. They can be accessed from the company's web site at www.herculestech.com or htgc.com.
We have arranged for a taped replay of today's call, which will be available through our web site or by using the telephone numbers and pass code provided in today's earnings release. I would 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 these 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 web site.
I would now like to turn the call over to Manuel Henriquez, Hercules Co-Founder, Chairman and CEO. Manuel?
Manuel Henriquez
Thank you Jason and good afternoon everybody and thanks for joining us today on our fourth quarter and 2009, earnings call. Most of you have now received and prior review the pre-releases we issued after the market close includes our stock dividends or stock repurchase and of course our Q4 and 2009 earnings call press release.
All of this we will be discussing during this call and certainly during the Q&A session. Let me first start of by saying that we completed another terrific quarter.
We worked through what’s considered one of the most difficult periods in time in American history as we continue to perform and excel in a very difficult time and the Hercules team once again delivered solid results by continuing to protect the balance sheet and increase all liquidity as evidence in our ending liquidity balance and our upstanding credit performance in this very difficult time. Let me now take an opportunity to talk to you about some of the quarterly high level result which David Lund will expand during his section to some achievements.
Net interest income or net investment income more referred to as NII of $9.4 million during the quarter for GAAP earnings of $0.27 per share and cash flow earnings of $0.20 a share which David again will discuss further in his section. Our net interest margin remains quite solid, our net interest margin was at 12.82% or effected yield was over 13% further showing you the earning capabilities of our portfolio as most people here, would see that we have continued to cautiously manage down our investment portfolio as we bolster up our liquidity resources and therefore you will see that as the portfolio continues to decline we made the cautious decision to also adjust our dividend to reflect our current portfolio earnings power.
That portfolio we anticipate to once again start to rebuild during 2010 and of course using a variable dividend you will see a dividend be adjusted on a quarter by quarter basis up as we see the earnings assets continue to build. Because of that I am happy to report that in 2009 our board of directors declared and paid a dividend or $1.26 per share.
Of which $0.04 was a special dividend paid to our shareholders at year end. This by the way is a reminder that Hercules maintained a continued paid dividend throughout 2009 while many of our publically traded BBC peers were either cutting or fully limiting the dividends during 2009 as they suffered through the tough credit environment that they encountered.
On that let me take a moment to speak about asset quality in credit. Again credit and credit performance is a core area of focus in competency here for Hercules.
We take credit very, very seriously. That credit performance has translated into a very high performing portfolio that I would like to remind everybody that during the course or should I say symptom session we have originated over $1.6 billion of new investment commitments to technology life sciences companies and we have suffered an aggregated total principal loss of less than 1.8% of the entire portfolio or said differently about 30 base points per year on a realized credit loss.
That is not last quarter last year that is entire life span since we started this company. That is an important part on how we view the market place and make new investment decisions as they continue to build on portfolio.
Now let me give you some examples of how we mitigate this credit performance and how we manage to avoid loosing capital. We take a very active and very proactive approach with our portfolio companies and their financial sponsors.
If and when its mandated we will take on a more active position with the company such as we have done with companies in the past called Concuity and most recently companies such as E-Band, InfoLogix and currently working on a transaction like Spa Chakra. In the example of Concuity most of you may recall that when we took on the board seats of that company we successfully were able to protect our down side and turn around and show the transaction of the company in the future for full recovery of our debt investment and a small gain.
E-Band is another example of that, E-Band is a wireless microwave antenna manufacturer where it is now handling and the leader in the 70 to 80 megawatts band of backhauling traffic on to our communications companies. E-Band is a fantastic testament to Hercules working with management, restructuring the company and its now a poster child of an incredibly well performing company that we see very good long term cap appreciation potential from that investment.
InfoLogix is a very similar situation where we have recently restructured our credit facility we currently have three of the board seats of the seven at the company and we are actively engaged in the company. However InfoLogix select what you expect to see happen is currently working through a lot of its ongoing operational issues and we are continuing to work diligently with the company and although we are very optimistic about the outcome of the company we still have some near term changes that we are working with management in order to ensure a long term vibrant survivability of the company.
Now continuing to move along on our credit portfolio. We are currently involved also in a company called Spa Chakra which is currently engaged in a 363 bankruptcy process.
Although we are one of the bidders and interested bidder for that asset we are not at all assured that we may be the winning bidder and so we will be elaborating further on the Spa Chakra situation as the bankruptcy process continues and we feel very optimistic that in the event that we are outbid that means the recovered billing over debt is almost assured to be 100%. If we are not outbid and we take control of the company we believe that the company represents a potential interesting opportunity to recoup all of our investments and is not also a capital gain somewhere down the road but it will require a quite significant amount of time on our behalf to ensure that success will turn around in that situation.
Again these are what our Hercules core competency both in underlining and manage our downside credit risk it is a key differentiation between us and the rest of the BDC industry. With that said our overall credit core remains quite strong and in fact the weighted average credit rating for the portfolio this quarter was 2.7 slightly up from the previous quarter but nothing significant and of that 2.7 weighted rating I am happy to report that three companies that have been recently downgraded on the midst of closing new equity rounds of financing that we anticipate occurring as early as next week or within next two weeks that are in process or closing as we speak.
Enclosing on this section the real story is Hercules ability to successfully manage through one of the worst credit crises in the history of this country I am very proud of the achieved hard work and dedication of the entire Hercules team that has successfully allowed us to navigate these most difficult times by managing a credit loss to less than 1.8% of the entire committed investment portfolio. That in itself is not a small feat it is clearly something that should be recognized of the talent of the investment professionals and individuals we have in this organization.
Without them we would not have a Hercules. I would like to emphasize that Hercules credit performance is also due to our expectations in managing of the broader venture capital market place activities and our expectations of what that venture capital market activity was going in direction.
Meaning that back in 2003 in the third quarter you may recall that we had at that point had forecasted a shrinking of the venture capital investment community. We had indicated that point back in 2003 that we expected a venture capital community to shrink from a $31 billion investment activity for 2008 and to somewhere we already have $24 and $26 billion.
Upon the closing of 2008 when the venture capital results came out we then came back and adjusted our expectations for a venture capital industry to about $20 to $22 billion which I am happy to report the number for 2009 came in around $21.4 billion right where we expected but that is important because we actually took steps to start modifying our business processes and start managing credit and started enhancing our liquidity position in anticipation of this contraction in the venture capital industry that end up happening. Now let me speak to some of the venture capital activities and what is going on in transpiring both in 2009 and the fourth quarter 2009 and what eventually is going in our view.
As I indicated 2008 represented $31 billion of venture capital activity. 2009 finished at $21.4 billion on venture invested activities this data of course is from Dow Jones Venture source.
The contraction was expected. The contraction represented about 30% of the investment dollars.
I would like to remind everybody that I have been in this business for over 25 years, I went through the S&L crisis in 1980s as well as the early 90s S&L crisis followed by .com buff in 2000 and 2001. This team including myself is well adapt into managing through difficult environment as you see translated in our performance.
Now the venture capital industry despite a lot of the media is alive in well. It is smaller but certainly quite vibrant.
$21 billion of investment activity is nothing to ignore. Not only it is not anything we should ignore, it is also beneficial to us because although its $21 billion our competitors are also significantly reduced if that gone.
We are not seen a lot of competition that is at all threatening from a lot of our private fund type structured venture investors that are out there, excuse me venture debt investors that are out there. The venture capital activity had a fairly robust deploying $6.3 billion of investment capital as compared to $5.4 billion in the prior quarter to 743 different companies.
Our life sciences group is benefiting from that investment activities while the venture capital has made significant investments in the life sciences sector and we're seeing that translated into our pipeline of new investment activities or potential investments in the life sciences sector. I'm proud to say that I consider us having one of the best venture life science investors in the industry Parag Shah who heads up our life sciences and who has exceptional talent and a great, great ability to manage through very difficult times in life sciences portfolio.
We're looking to Parag in the first quarter to continue to lead our investment origination efforts with our life sciences team and we're seeing a very robust and a very attractive pipeline in life sciences investments. Another key takeaway is the stage of venture capital activity.
This is quite important because it falls in to Hercules core focus. Today we are overly weighted in to later stage venture capital investments.
We still haven’t received 37% of the venture capital dollars in the fourth quarter. Conversely we have been historically [under] invested in early stage venture capital which many of you may recall for the last four years we have made a conscious effort to deemphasize or not make material investments in early stage venture capital companies.
I'm happy to report that that prohibition is now lifted. We will be actively and aggressively pursuing early stage venture activities and pursuing early stage venture companies because we think the valuations are quite attractive and a lack of competition makes it a very interesting area for us to continue to build our portfolio.
So you'll see us over the next four to eight quarters start making a conscious effort to also build out our early stage venture focus. Conversely many of you have seen that we've also been hiring private equity or should say lower middle market experience individuals.
We have been bolstering our ranks in the lower middle market feasibly with a focus towards healthcare related investment and technology related investment in lower middle market. And we'll be speaking to that more in details in the first quarter as those investment activities start coming online.
Now moving toward my attention to the venture capital liquidity, a very important health of the business. Despite much of the media M&A activities in 2008 were quite good as $17 billion of M&A activities.
Conversely the IPO market all be it anemic in nature in all and truth to be t old 8 companies has not something to get excited about. But when you have a [don’t] or lack of IPOs having 8 companies complete IPOs in 2009 is quite important.
One of which by the way I'm happy to report was one of our companies Ancestry.com. Now to get some perspective on that number, in a more healthy venture capital market you typically see 75 to 100 IPOs being completed per year with a peak being in 2009 saying 250 IPOs been completed.
We are why no means delusional that we're far from being in a very robust IPO market but we are none the less encouraged by this IPO market. And we're encouraged by that because as insurance of the first quarter Hercules has two companies currently in IPO registration.
Everyday Health formerly known as Waterfront Media which is far from $100 million IPO and we have AVEO Pharmaceutical filing its first IPO in late December and (inaudible) to raise approximately $80 million its in [curly] and registration. These are very good signs and further indication that we have selected and picked the right companies.
By no such imagination can I give you any assurances that those companies will be declared effective and start training but we're certainly encouraged by those signs. Conversely we also saw some very good M&A activity in our portfolio.
We saw during the first quarter and at the end of the fourth quarter we saw governments acquired by (inaudible) and in the first quarter we saw Savvion our portfolio company being acquired by Progress Software further indications that we are selecting the right companies and seeing the transactions on our M&A portfolio. Now let me turn my attention to t he overall marketplace and our expectations for 2010.
I'm happy to report that our judicious slower and steady strategy of 2009 has worked well. It's served its purpose of protecting your balance sheet, bolstering up on liquidity and we did this while deleveraging our balance sheet a 100%.
We clearly have no leverage in our balance sheet when you exclude the SBIC leverage. This gives us and has afford us a very strong balance sheet for new originations as a [eternal] change in to 2010.
That said so when you realize we have a very proprietary and sophisticated secret database system that tracks over 21,000 companies around the world that are ventured backed or providently supported. We currently have a pipeline and not just a mere pipeline as many other BCs have reported we have a qualified pipeline where we now have confirmation at the underlying company is looking for capital and we paid our initial screen.
I'm happy to report to debt pipeline as of today represents an aggregate value of over $850 million of potential invested opportunities into 127 companies. However in our nature I want to caution everybody that we do not expect, nor should you expect us to see a huge conversion of that.
We are only expecting to see of 15% to 25% conversion of that $850 million pipeline into potential deal that we expect close over the next two quarters. We are not at all looking to merely originate assets to simply pay a dividend.
We are looking to originate high quality assets that don’t place our balance sheet risk that become long-term value accretive to our shareholders to have a nice study dividend in a very strong solid balance sheet. That is tantamount to how and how we look at the business.
Now, turning my attention to our growth expectations for 2010. Clearly we look to 2010 by building up our origination ranks, we hired four individuals during the fourth quarter and the first quarter of 2010 to start going after the new origination activities, we have a very strong and solid balance sheet over $200 million of liquidity, no leverage in our balance sheet and David Lund will expand upon that.
We will also look to growth our portfolio. We look to start growing our dividend in 2010 and we prefer to refer to a dividend as a variable that as tassel earnings begin to increase or dividend will increase in time as well.
We have also bolstered executive ranks. We have hired Scott Gable as our COO to continue to focus in building and deploying our infrastructure in order to ensure that we have a foundation to continue to grow our organization in our portfolio as we expect to do in 2010 and beyond.
With that I will turn the call over to David Lund who will provide a financial overview and discuss our current liquidity. David?
David Lund
Thank you, Manuel. We believe our thesis of building liquidity and managing credit has placed us in a uniquely strong position going into 2010.
Our results from operations for the quarter also prove out the conservative investment strategy that we have taken over the last several quarters has been an appropriate given the adverse market conditions. Today, I would like to focus on a couple of key areas.
Summary of Q4 '09 and full year results, liquidity and capital resources and finally an overview of our dividend. During Q&A, Manuel and I will be more than happy to respond to questions you have on our operating results that I do not specifically address during my discussion.
First, I will touch on the fourth quarter and full year operating results. We achieved approximately $16.7 million of investment income for the quarter and maintained a strong net interest margin at 12.82% for the quarter while managing our portfolio credit.
For the full year of 2009, total investment income was $74.3 million compared to $75.8 million. This slight decrease was due to the smaller average debt portfolio as we were deleveraging our balance sheet in the first quarter of 2009 to pay off the $135 million of Citibank and Deutsche Bank credit facility in just five months and building liquidity in the second half of 2009.
We continue to generate a solid net interest margin on our debt investments during the quarter at 12.8% compared to 11.4% in the fourth quarter of 2008. This increase is primarily attributed the lower cost of borrowings.
Our fee income during the fourth quarter was down slightly from the third quarter and was largely made up of one time event driven and we anticipate that our Q1 2010 fee income will not be as high as Q4 2009. Compared to the same quarter last year we were able to reduce our cost of debt from $5.5 million to $2.4 million by decreasing our average debt balance outstanding from $245 million to $130.6 million primarily due to repayment of the Citibank credit facility in March of last year.
Operating expenses for the quarter excluding interest expense and loan fees were $4.9 million as compared to $5.4 million during the same period last year. This decrease was primarily attributable to lower compensation expenses offset by slightly higher workout related expenses and consulting fees.
All of these factors maintaining of strong net interest margin reducing our cost of debt and managing operating expenses contributed to our Q4 net investment income of $9.4 million or $0.27 per share and distributable taxable income of $7.1 million or $0.20 per share. Our net investment income for 2009 was $43.1 million, an increase of $3.1 million or 7.8% as compared to $40 million in 2008.
The net realized losses of $11.3 million recognized during the fourth quarter were primarily attributed net losses on loans and warrants in two portfolio companies which were disclosed during our third quarter earnings call. Our unrealized gains are $10.4 million during the quarter are primarily due to reversing the unrealized losses on these two companies to realized losses.
And this inception, net realize losses totaled approximately $26.5 million which represents less than 1.7% of total commitments since inception of greater than $1.6 billion. As we have indicated for liquidity remains, one of our top priorities on that note, I’d like to discuss Hercules liquidity and capital recourses.
With our cash position credit availability, low leverage and steady cash flows from loan repayment we believe we are in a strong position to increase the pace of our investing as our market continue to improve and investment opportunities increase. As of December 31, we had approximately $194 million of liquidity comprised there are $125 million in cash access to $50 million of borrowings under the facility with Wells Fargo subject to advance rates and approximately $20 million of borrowing capacity under the SBIC program subject to regulatory limitations.
In addition our only debt outstanding was $130 on our SBA loan. I’m pleased to announce two recent significant Hercules achievements in this tight credit market.
In February 2010 we entered into $20 million one year revolving credit facilities with the Union Bank. Cost to debt under facility is a Libor plus 2.25% but up 4% and advance rate up 50% against eligible loans and secured by loans end of our own base.
Secondly we extended the Wells Fargo foothill facility maturity to August of 2011 from the current maturity of August 2010 under the same terms and conditions of the existing agreement. In addition we have recently commenced discussions on renewing our credit facility that we expect to report progress on in Q2.
Access to these two credit facilities with these highly respected financial institutions, is a reflection of the performance of Hercules in one of the most adverse credit markets in recent decades. In addition I would like to remind our investors that our application for a second SBIC license for additional $75 million of borrowings is under review by the SBA.
We anticipate that the license will be approved during the first half of 2010 however there can be no assurance that the SBA will grant Hercules a second license or when the license will be approved. The combination of existing liquidity the $20 million new credit facility with Union Bank provides us with $215 million of liquidity today and the expected increase in our borrowing capacity with the SBA will provide us with $289 million of liquidity in 2010.
I would like to remind the investors we have no leverage on our balance sheet at this time. Finally we distributed a dividend of $0.30 during the fourth quarter and we paid an additional or special 5th dividend of $0.04 per share to our share holders in December 2009, in order to distribute approximately 98% to 100% of our annual taxable income in the year in which it was earned.
As a result we distributed a total of a $1.26 of taxable earnings to our shareholders in 2009. In conclusion we have laid a solid foundation for growth in 2010.
We have an unenviable liquidity positioned which we will continue to leverage as a competitive advantage and we will be ready to increase the pace of our commitments in 2010. Operator we are now ready to open the call for questions.
Operator
Thank you. (Operator Instructions).
Our first question will come from John Hecht with JMP Securities.
John Hecht - JMP Securities
Good afternoon, guys thanks for taking for my questions. With respect to the large potential pipeline Manuel referred to and you guys refer to a $180 million of (inaudible) out there, how fast you can convert these opportunities and what industries and regions are they in?
Manuel Henriquez
Well, the pipeline as we indicated unlike many BCs, we're happy to get in more specifics. We actually have anywhere between or rounding about $50 million already in house as science term sheet, we probably have another $160 million.
They were in active terms of negotiations and balance that we are currently meeting with and qualifying the companies further. So, I expect to see the first quarter will start of probably a little more lighter and you start seeing that there was an (inaudible) really start to ramping up in the second, third and fourth quarter.
We have purposely and consciously unlike others out there are rather waiting until water slowly than more aggressively. It doesn’t take any effort to put a $200 million in the book.
So, we could have done that quite easily. It’s a long hard to ensure that you are picking the right companies and looking at the quality or balance sheet and your earnings as oppose to just looking at asset generation which we could have done quite easily.
So, we expect to see starting of in the first quarter somewhere without giving guidance usually we don’t necessarily give guidance somewhere in the, I would say $30 million to $50 million level starting off and building from there.
John Hecht - JMP Securities
Okay so growing from Q4 levels in the year end and growing as the year occurs.
Manuel Henriquez
There is no question that the originations in Q1 will be higher than that of Q4.
John Hecht - JMP Securities
And then what is the margin on the pipeline as you see it?
Manuel Henriquez
There's a lot of being stated and a lot of earnings call that I've been listening recently there is been a lot hyperbole out there a lot of which I think is just lot of noise. The truth of matter is that we were seeing certainly in quality deals and this is where I think that the differentiation become some of the hyperbole that we are hearing and what we are seeing is quality deals are seeing tighter yield spreads, there is no question about that.
More marginal deals are seeing continuously widening yield spreads that are out there and so its indicative of what is going on in the market place in a fairly we are seem to be fishing in the high quality bucket which why we are seeing a low tighter yield spread. So I still think that the yields that we are seeing are going to hold in what we have been kind of I guess forecasting in a the 12.5% to 14% range I think is a pretty good area that we are still working at I think that we're pretty comfortable in a short-term looking at that but I do expect that throughout 2010 that those yields spread were tightening a little bit to probably in '11 to 30% range as calendar 2010 continues to mature.
John Hecht - JMP Securities
Okay, great thanks very much and David, have to get your answer but can you just quickly describe that the primary differences between operating income and the taxable income just to get a sense for the modeling in the next few quarters.
David Lund
The difference is attributable to for instance acceleration of OID and timing matter. So for tax income where we might have something on the top line such as OID when we have an acceleration the IRS considers this to be capital gains.
So that’s why you will see the difference between our GAAP income and the taxable income.
John Hecht - JMP Securities
Okay and is this kind of different than OID and times are different going to be consistent for that couple of quarters or going to be about a volatile difference as well?
David Lund
It depends quarter to quarter about what’s happening but certainly this quarter I think we saw more of it happening with some of the restructuring and so on, so I think you’ll see a more normalized difference similar to what you have seen in prior quarters and this last quarter.
Operator
Thank you. We’ll take our next question from Jason Deleeuw with Piper Jaffray.
Jason Deleeuw - Piper Jaffray
Thank you. Just the $30 to $50 million in originations is that, that’s not net of pay downs that’s just true originations that you guys have impacted to this quarter?
Manuel Henriques
That’s gross originations.
Jason Deleeuw - Piper Jaffray
Okay and then you ramp up the workforce. Do you think there is anything more you need to do there to build out the platform to reach to growth objectives that you want to achieve this year?
Manuel Henriques
Let me go and talk about that a little bit. We usually still have our two to three open hires that we are looking for just like our new investment activities for perspective portfolio companies we are seeing also seeing an abundance of talent of hiring we can do out there but just like our potential pipeline of deals not all that talent is what we are looking for meaning it doesn’t match our screen, there is an ordinary amount of this is a Belmont town out there with very little credit rating and skills set out that which doesn’t quite meet our screen.
So, I would always like the same analog to what’s going on our pipeline, there is a lot of noise out there, doesn’t mean its all good in terms of looking at deal flow. So we are looking at probably higher 1 to 3 additional people assuming that we find their profile when we are looking for in the next quarter or two and I would remind everybody that it typically takes about 6 months to get a new hire, condition 2 in understanding the Hercules underwriting processes and criteria that we look for before we become productive generating assets if you will.
Jason Deleeuw - Piper Jaffray
Okay and then just lastly with the share repurchases you hit that authorization was increased can you tell us your philosophy with the share repurchases specially with the share to your below book value?
Manuel Henriques
Sure there is no question that as we are sitting on this level of liquidity and we are seeing or expect to see anywhere between $15 to $20 million in normal principle amortization, coming at a quarterly basis that we cannot prudently and I would not feel comfortable simply going out and originating $200 million of assets in one quarter simply to do that because of that and because of the current yields on cash or a whopping 50 and a 25 basis points it is probably better served for our share holders that we opportunistically go into the market when the stock is trading below book value to actually buy back stock that has a good return for our share holders and certainly sense where you are trading at below book value as a discipline that we will look to do in calendar 2010 as of whether now we fully fulfill the $35 million allocation is to return by the market place but we certainly believe and expect to be active and are looking at buying our stock when the under certain prices below book.
Operator
(Operator Instructions) We will hear next from Troy Ward with Stifel Nicolaus.
Troy Ward - Stifel Nicolaus
Can you go back real quickly to the liquidity discussion you talked about extending wells and the terms were the same. What about the upfront fees or did you pay upfront fees and is that the same that’s being amortized from the last facility?
Manuel Henriques
Yeah, there was a $375,000 fee that we pay with the extension that will be amortized over the main incurred alone.
Troy Ward - Stifel Nicolaus
And do you recall last year, what was the upfront fee the last time you did it?
Manuel Henriques
Yeah, it was 750 but it was over a two year period. So it’s the same 75 basis point charge.
Troy Ward - Stifel Nicolaus
Okay, great. Thanks.
And then at the end of your liquidity David you said something about 2010 in the next quarter you are going to be renewing credit facilities. What were talking about with that?
David Lund
Well, we are in discussions right now with Wells Fargo to renew or put a new facility in place. We just extended this one at this point in time.
So what we would like to do is get into discussions with them on a new facility.
Manuel Henriques
I have a little more color on that. What happened was the current facility has a natural window where it can be extended.
Rather let that one to expire we want to exercise that window to give us a runway in assurances that we maintained liquidity for next 15, 18 months this why the extension. We are now have engaged with the discussion Wells Fargo to both increase as well as it can renew the credit facilities for another two or three year term.
We don’t know it yet until we engage them in discussions right now that we are doing. But the whole reason why we pay the extension fee is to ensure that we have that runway out there.
Troy Ward - Stifel Nicolaus
Incapability so as of the 2011 date is actually become due?
David Lund
I guess in 2011, yeah, that’s what we come to.
Manuel Henriques
Assuming that is not renewed by that.
David Lund
We now got 18 months to obviously sit down and discuss with Wells Fargo.
Troy Ward - Stifel Nicolaus
Right. Okay, that’s good.
And then turning to the dividend and the taxable income Manuel if you could just put little more color I mean obviously this quarter you had $0.20 taxable income $0.20 dividend as you look to that is that going to be a quarterly look or is it going to manage the dividend more towards an annual taxable income.
Manuel Henriques
I think that as originations start kicking in, the shift will start moving towards an annual I guess visibility of the dividend but I have to be honest as much as we have a good pipeline I am still on the sense as to the direction of economy and I was fully out of the reads yet remain may be on just hold over of being overly conservative what would I just want through in 2009. But I don’t want to use up all of my liquidity immediately right now in the investment and I certainly don’t want to find myself using up all our liquidity and then having raise capital that’s diluted to our share holders as many BDCs have done recently we are really pretty much against issuing shares below net asset value unless is an immediate intangible purpose that creates value for our share holders I think that the market right now is beginning to see the dramatic differentiation between an internal managed BDC and external managed BDC.
And internal managed BDCs really care about dilution.
Troy Ward - Stifel Nicolaus
Can you expand a little bit more on the fee topic just in obviously origination fees get involved in the taxable income on the quarter of origination and as you ramped up the portfolio little bit here that’s probably going to cause some lumpiness in the taxable earnings. How are you going to look at that versus the dividend?
David Lund
As we collect fees obviously over the as we do new origination that gets amortized both for tax and book purposes over the term of the agreement so there is you don’t see a lot of difference in terms of tax and book income for that. But what you do see is when you get accelerations when a loan pays of fairly.
OID being accelerated for instance is considered the capital gain whereas for GAAP purposes it’s an interesting line item. So the only time you really see differences is when you get a lot of the accelerations and pay off, mandates here on originations.
Manuel Henriques
Let me remind everybody that the Hercules business model is a bit unique to that of the other BDC is because we are working in a venture capital industry focus and focus on the venture capital there are technically four and that goes argue five different types of fees that need to be understood and the each have different implications both from a GAAP accounting and the tax accounting point of view. Fees for example include a work out fee, a restructuring or amendment fee, origination fee, also known as facility fee, you can have a back end fee, you can also have something called the commitment fee.
All four, five of those fees are uniquely different and have different treatments because of what they imply. Further more when said in those fees if a loan pays off early you then find yourself with a prepayment fee that can also get triggered.
And as David just eluted to an acceleration of a prior differed back end fee and or an acceleration of unrecognized or un-urge original origination fees. So, unfortunately it’s a much more complex issue when it comes to the fee income which is even why we have struggled with trying to forecast what that number can be because of early pay offs to accelerations that can occur.
Troy Ward - Stifel Nicolaus
Owing to the, what we call the origination fee or facility fee with like you said no you are not similar in other ways to the BDCs but do you have an upfront 3% origination fee?
Manuel Henriques
3% is more tend to lower middle market, middle market in the venture industry the fees range from 75 basis points to the high end of way with 2.5 on the venture side on the lower middle market side you are probably seeing on an aggressive fee of 1.5 and you cant float with 3% fee in a lower-middle market so they are bit different but that’s correct
Troy Ward - Stifel Nicolaus
And as I understand that those origination fees due to hit taxable income in the quarter that they originated, David are you saying you amortized those?
David Lund
Yeah they are amortized under the effective interest method.
Troy Ward - Stifel Nicolaus
Moving back to SBIC. How long do you believe once the second facility would be how long so you could draw that 75 and you have to fund that 37.5 for the equity upfront?
Manuel Henriques
Well there is two things on the SBIC front, first of all I continue to remain very grateful to the SBA staff they continue to be very diligent and working with us we have a very good calendar and rapport with the SBA staff I feel very comfortable and confident that we probably will be the first or one of the first or few to get the second license in place I feel very, very optimistic about that. As to your question we really have a $20 million tail or stub on the regional first license that remained but I think that the SBA will look to have its first drawback down fully before we actually start consuming or using the second facility.
As to the other question as our application stated it is our intent to first fund the equity, the so called regulatory equity capital contribution of $37.5 million into the SBIC before drawing the first dollar leverage. So I don’t expect as you really start drawing down the first capital on to the SBIC license until probably considerably end of the second quarter sometime in the third quarter.
And I will remind everybody that HR 3654 which is now infamous SBA bill which has been approved by the House of Representatives is still sitting idly at the Senate when you get approved and I am a strong advocate that if we want to get middle America funded, the SBA program is the best way of getting capital to the hands of the companies that needed. And the SBA product is the best vehicle in doing that and we are more than able and willing to continue to fund lower middle market and venture stage companies are looking for capital.
Troy Ward - Stifel Nicolaus
Modeling question, based on the new hires what do you expect comp benefit is going to go in the expense line?
Manuel Henriques
I think that the comp line is not going to materially move that much and the reason why I say that is that although comp lead originations if the market does not end up jelling the way we expect to continue see 2009 jell, we will make the commensurate adjustments to our operating expenses if that is in fact the case. As I said earlier I expect compensation cost to lead originations by six months, you have four individuals you are looking at it on an annual run rate of probably adding $1 million to SG&A but one of those hired was a slop out for headcounts, you will probably see the SG&A cost creep up by probably see the SG&A cost creep up by probably $500 million over the next 12 months.
Operator
We will take our next question from Vernon Plack with BB&T Capital Markets.
Vernon Plack - BB&T Capital Markets
Thanks very much David what was taxable income for all of 2009?
David Lund
Its 37.1
Vernon Plack - BB&T Capital Markets
37.1? Okay, non accruals I believe the last quarter you reported four loans that were on non accrual but what is that number now?
David Lund
We have 5 loans on non accrual at the end of the fourth quarter.
Vernon Plack - BB&T Capital Markets
Okay, and do you have the cost based share volume?
David Lund
The cost basis on that was $25.5 million and the fair value for a moment for you. I would say that the cost base is on that only represents 7.7% of the outstanding loan value as well just to point that out to you.
Vernon Plack - BB&T Capital Markets
Okay, and net portfolio growth at least for us for the first quarter and then talk about new investments probably in the $30 to $50 million range should we to expect that portfolio growth in the first quarter?
Manuel Henriques
I think you will see small net portfolio growth in the first quarter on a net based new pricing anywhere between $10 to possibly $20 million net portfolio growth in the first quarter but that will start dramatically accelerating in Q2 and beyond. The reason why I say that is that we are getting some kind of radio noise that one of our company’s is partially engaged at an MNA activity that end up creating a exit for us in value opportunity for us.
But as we all know MNA at time is obviously closed.
David Lund
And to follow-up at the carrying value of those loans about $11.3 million at the end of the quarter.
Operator
(Operator Instructions). Okay, we’ll take our next question (inaudible) with UBS.
Unidentified Analyst
Gentlemen I’m having a little difficulty reconciling the answer you gave to the gentlemen Stifel Nicolaus regarding the dividend policy. I understand that we are paying the dividend at of the net taxable income as opposed to the net investment income and you mention with the origination fees that they are being amortized over the life of the loan.
Now the origination fees is taxable income. You mentioned that at the loan is prepaid the amortization amount which hasn’t some times been taken to income now because of the capital gain and it is non-taxable income.
Is that correct?
David Lund
That’s correct, it gets treated as capital again.
Unidentified Analyst
Okay. Let say then you make a loan over a 2 or 3 year period and you've advertised the origination of that 2 or 3 period and now the loan is paid back within a year so that two years of that origination fee pose it to non-taxable income, based on the current dividend policy that’s not available for dividend payers and that being that origination fee is revered a loss as a purpose of basis for dividend income.
David Lund
The two years that is amortized is actually in taxable income it's in the net investment income and so that actually gets distributed and then if we have capital gains for instance that we have an acceleration, we have capital and gains to distribute it… [Multiple Speakers]
Unidentified Analyst
So to be paid it into the year when you even out the taxable income versus the investment income?
Manuel Henriquez
The use of the word evening up between taxable and GAAP is not correct. The GAAP income versus taxable income can and often times are very separate so there is a not a point we true up to get superiority between the GAAP number and the taxable number.
Unidentified Analyst
So at the end of the year you will still wind up paying out the taxable income as opposed to GAAP income?
Manuel Henriquez
That’s correct. Now not the complicate it further for you, there is another twist that half the times people have misunderstood and that is that there was a bit of a confusion in early 2009 where there is some misunderstanding in the market place by other BDCs that we have a capital loss for example you can offset that against your taxable ordinary income if you are recognizing.
And in fact the truth of the matter is that we have a capital loss you then have what's called the capital loss carry forward that you use to then offset when you have capital gains in the future but you cannot take a capital loss to offset against your taxable ordinary income.
Unidentified Analyst
Okay. That what I understand but getting back to the original part of my question is that when we do have a capital gain on origination income, it becomes non-taxable because of the capital gain that means that you don’t intend to pay out that portion of the origination fee as the form of a dividend?
Manuel Henriquez
In that case that will be usually applied towards any capital loss that we have first. That’s correct.
In the event now that for example, we have no capital losses we have in the option which is traditionally available to BDCs to decide whether or not you want to pay your corporate tax on that, meaning your corporate colors of 38%, 35% effective corporate tax and then we change then to earnings or option two, you pay your excise tax if you have distributing your 98% and still over to the next calendar year which then requires BDC by September of the following year. Or thirdly, you simply make a dividend distribution to your shareholders as you would normally as either a special or something simple than your ordinary dividend by that distribution and that part would be probably considered to be (inaudible) we call the adjusted lower taxable dividend income charge.
Unidentified Analyst
Yeah, it would be considered capital gains.
David Lund
That’s the one I was looking for.
Unidentified Analyst
Okay, could I assume then that the company doesn’t intend to follow the first policy whereby you pay the 38% corporate rate or any origination fees that are carried forward?
Manuel Henriquez
I think that you are quite assured that that exactly is the case.
Operator
And we have time for one last question. We will have a follow-up from Jason Deleeuw with Piper Jaffray.
Jason Deleeuw - Piper Jaffray
Thanks. Just was hoping to get some more color on the competitive environment and with the market healing up here and growth resuming I mean what are your expectations for the competitive environment as we move through the year?
Manuel Henriquez
So, I think starting in Q1 2010 I am going to start to answer that question by both the venture capital market place segment and as well as the lower middle market private equity segment because they are different and I think they were at stage of maturation now that giving a one blanket answer is no longer applicable. On the venture capital stage, the environment only continues to get better and better for us in that area many of the legacy players that existed that were more fund type structure or more importantly those back by hedge funds or having difficulties raising capital and securing additional financings and they are basically not in the market place right now and in fact we are seeing a lot of their adjusted portfolio companies and frankly a lot of their own employees coming to us giving us further assurances that they are in fact in trouble.
So we are seeing a complete contraction and lack of real tangible day to day competitors that we would have seen a year and half ago, two years ago. So the venture capital market place is improving.
That is not to say that the commercial banks in particular for example are not being a bit more aggressive on the really early stage companies that in fact remains as fairly robust and very tight yield spread in market on early stage side. On the more mature side of the venture capital industry we are not seeing much competition what so ever.
When I turn my attention to the private equity world lower middle market and now I will make sure people understand when we call lower middle market we are calling that and defining that as companies that have $1 million to $15 million in EBITDA or either healthcare or technology related in focus or you have some element of consumer focus as part of your product offering. But you have to be $1 million to $15 million EBITDA positive and we prefer you to be back by a select group of finance sponsors for us and get engaged and consider you a potential candidate for Hercules Capital.
That market place is quite dislocated. We are seeing pricing levels all over the map.
To the point that makes us a big nervous of what we are seeing on some of the tightening yield spreads and some of the asks for what we consider to be excess leverage. When we look at the legacy EBITDA, trailing EBITDA so there is little bit of market companies, we remain quite concern that EBITDA may not yet have stabilized or hit the bottom yet and so there is still some room to drift down on EBITDA which means that you maybe underwriting a deal or 3.5, 4 times a leverage going in only to find yourself two quarters later looking at 5.5, 6 times EBITDA leverage these are companies still suffering through some shrinkage of their customer base.
So, we are trading quite likely in that area I think that there is a lot of miss communications in the lower middle market area as to the use of the words senior lending which we find it a little bit interesting and bit disingenuous where the reason why you're seeing somebody is wining yield spreads on the so called senior strips or some of the other BDCs are they are really doing last out seniors secondly in lending senior they are really behind a commercial bank or to take more junior collateral position on the senior credit facilities and we think frankly not getting paid for it, which is why we are not necessarily huge fans of (inaudible) lending right now.
Operator
I'd like to turn the conference back over to today's speakers for any additional or closing remarks.
Manuel Henriquez
Thank you, operator and thank you everyone for your continued interest and support for Hercules Technology Growth Capital. As usual Dave and myself will be making ourselves available to investors over the next 30 days as we continue to do our non-deal road show and we will be meeting with investors throughout the U.S.
as we do our traveling schedule in next 30days or so. We look forward to meeting with you, if you have an interest please contact to David Lund our CFO or myself at 650-289-3060.
And again thank you very much for being our shareholder and being part of the Hercules story. Thank you.
Operator
Once again ladies and gentlemen this does conclude today's conference call. We thank you for your participation.