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Hercules Technology Growth Capital, Inc.’s (HTGC - Analyst Report) first quarter 2013 distributable net operating income (DNOI) came in at 30 cents per share, beating the Zacks Consensus Estimate of 25 cents. This also compares favorably with the year-ago DNOI of 26 cents.

Better-than-expected results were mainly driven by improvement in total investment income. However, higher interest expense and loan fees along with increased operating expenses marginally subdued the results. Overall, Hercules ended the quarter with a robust performance, comprising stronger credit quality and a higher level of liquidity.

Performance in Detail

Hercules’ total investment income reached $31.0 million, up 38.4% from $22.4 million in the prior-year quarter. The surge resulted from higher interest income. This also compares favorably with the Zacks Consensus Estimate of $29.0 million.

Total operating expenses (excluding interest expense and loan fees) for the reported quarter was $7.2 million, surging 20.0% from $6.0 million in the year-ago period. The rise reflects higher general and administrative expenditures and increased compensation costs.

On a year-over-year basis, interest expense and loan fees soared 75.2% year over year to $8.7 million.

As of Mar 31, 2013, the weighted average cost of debt, comprising interest and fees, was 5.9% compared with 6.8% as of Mar 31, 2012.

Net investment income (before investment gains and losses) for the quarter came in at $15.0 million, up 32.1% from $11.4 million in the year-ago quarter.

Business Highlights

The fair value of Hercules’ total investment portfolio was $977.7 million as of Mar 31, 2013, rising 6.9% from $914.3 million as of Dec 31, 2012. During the quarter, the company provided approximately $224.0 million in debt and equity funding to new and existing portfolio companies.

As of Mar 31, 2013, Hercules’ net asset value was $10.00 per share compared with $9.75 as of Dec 31, 2012.

Dividend and Repurchase Update

Concurrent with the earning release, the board of directors at Hercules declared a quarterly cash dividend of 27 cents. The dividend will be paid on May 21 to shareholders of record as of May 14. This represents a hike of about 8.0% from the previous dividend.

The company did not buyback any shares of its common stock during the reported quarter. Further, its share repurchase program expired in Feb 2013.

In the same industry, American Capital, Ltd. (ACAS - Analyst Report) reported first-quarter 2013 operating income of 14 cents per share, lagging the Zacks Consensus Estimate by 14 cents. Lower-than-expected results were primarily attributable to lower top line.

Our Viewpoint

Given its solid liquidity position, Hercules is well positioned to expand its portfolio. The company’s strong capital position is expected to boost investors’ confidence in the stock.

However, the sluggish economic recovery can impede Hercules’ growth going forward. Also, the bleak economic environment might elevate the cost of funding.

Currently, Hercules carries a Zacks Rank #3 (Hold). Stocks in the same sector worth considering include - KCAP Financial, Inc. (KCAP - Snapshot Report) with a Zacks Rank #1 (Strong Buy) and Gladstone Capital Corporation (GLAD - Snapshot Report) with a Zacks Rank #2 (Buy).

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