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Hercules Technology Growth Capital, Inc.’s (HTGC - Analyst Report) third-quarter 2013 distributable net operating income (DNOI) came in at 38 cents per share, outpacing the Zacks Consensus Estimate of 29 cents. This also compares favorably with the year-ago DNOI of 26 cents.

Better-than-expected results were mainly driven by growth in total investment income, partly offset by higher expenses. Overall, Hercules ended the quarter with an impressive performance, comprising a higher level of liquidity.

DNOI grew 85.6% year over year to $23.2 million.

Performance in Detail

Hercules’ total investment income was $41.0 million, up 71.6% from $23.9 million in the prior-year quarter. The rise reflected increase in interest income and fee income. This was ahead of the Zacks Consensus Estimate of $35.0 million.

Total operating expenses (excluding interest expense and loan fees) were $10.8 million, rising 66.9% from $6.5 million in the year-ago period. This was due to higher employee compensation costs, partially offset by a fall in general and administrative expenses.

On a year-over-year basis, interest expense and loan fees increased 42.52% to $8.7 million.

As of Sep 30, 2013, the weighted average cost of debt comprising interest and fees, was 6.0% versus 6.7% as of Sep 30, 2012.

Net investment income (before investment gains and losses) for the quarter came in at $21.6 million, up 90.0% year over year.

Business Highlights

The fair value of Hercules’ total investment portfolio was $983.4 million as of Sep 30, 2013, down 5.5% from $1,041.1 million as of Jun 30, 2013. In the quarter, the company provided approximately $102.0 million in debt commitment to new and existing portfolio companies.

As of Sep 30, 2013, Hercules’ net asset value was $10.42 per share compared with $9.42 as of Sep 30, 2012.


Along with the earning release, Hercules declared a quarterly cash dividend of 31 cents. The dividend will be paid on Nov 25 to shareholders of record as of Nov 18. The new payout marks a 10.7% hike in the dividend from the previous amount.

Other Firms in the Same Industry

Ares Capital Corporation’s (ARCC - Snapshot Report) third-quarter core earnings beat the Zacks Consensus Estimate. Better-than-expected results were primarily driven by an improvement in total investment income, partially offset by higher expenses.

American Capital Ltd.’s (ACAS - Analyst Report) operating income lagged the Zacks Consensus Estimate. A fall in the top line was responsible for lower-than-expected results.

Another firm, Capitala Finance Corp. (CPTA - Snapshot Report) will announce third-quarter results on Nov 13, 2013.

Our Viewpoint

Given its solid liquidity position, Hercules is well poised to expand its portfolio. The company’s strong capital position is expected to boost investors’ confidence in the stock. However, the uncertain economic environment might increase the cost of funding as well as limit the company’s growth going forward.

Currently, Hercules carries a Zacks Rank #4 (Sell).

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