Hercules Capital, Inc. ( HTGC Quick Quote HTGC - Free Report) , with nearly $2.4 billion in total investments, has been assigned ratings for the first time by Moody's Investors Service. This business development company’s (BDC) long-term issuer rating is Baa3, which is based on its baa3 standalone assessment. Meanwhile, the rating agency has assigned a stable rating outlook to the company. Reasons Behind the Ratings
Per Moody’s, Hercules Capital boasts a robust track record of making first-lien senior secured debt investments in venture-backed technology companies, drug discovery and other life science firms. Founded in 2003, the company has a longer operating history than other rated BDCs.
The rating agency believes that Hercules Capital has been witnessing solid profitability, with relatively low loan losses. The company recorded return on assets of 8.7% as of Dec 31, 2020, which compared favorably with other rated peers. Further, Moody’s is of the opinion that the Hercules Capital’s investment portfolio has proven to be less sensitive to the challenges of the coronavirus pandemic. Additionally, Hercules Capital has sufficient liquidity cushion, which is above the statutory minimum 150% asset coverage ratio (ACR). With regard to the ACR, the company operates with a target debt-to-equity ratio of 0.90-1.25. As of Dec 31, 2020, it reported a debt-to-equity ratio of 0.93, which corresponds to a strong ACR cushion of roughly 39%. As of the same date, the company had $673.3 million in available liquidity and $180 million in unfunded commitments, while debt maturities are nearly $377 million in 2022. Moody’s has also taken into consideration some of the credit challenges faced by BDCs while assigning the ratings for Hercules Capital. These include inherent illiquidity of investments, covenant compliance, high dividend payouts and liquidity risks in relation to the requirement that investments should be marked to fair value. Further, although the company mainly invests in negative cash flow generating firms that rely on fund raising for meeting debt obligations, Hercules Capital’s solid “underwriting expertise and credit culture, very low loan-to-enterprise values of portfolio investments”, and a helpful venture capital fundraising as well as deployment backdrop offset the negatives. Also, Moody’s didn’t find any concern related to Hercules Capital’s governance. Moody’s assigned a stable outlook to the ratings because it expects a favorable operating backdrop from BDCs. This is likely to result in improvement/stability in Hercules Capital’s credit quality, profitability and leverage metrics over the next 12-18 months. Why Ratings Could be Upgraded/Downgraded?
Per Moody’s, Hercules Capital's rating could be upgraded if it maintains a debt-to-equity ratio of lower than 1, and strengthens liquidity and funding position by reducing dependence on secured debt, as well as improves debt maturity laddering.
The rating could be lowered if asset quality worsens significantly, leverage increases beyond Hercules Capital's stated target of 1.25x debt to equity, or if it witnesses a material operational failure. Zacks Rank & Price Performance
Currently, Hercules Capital carries a Zacks Rank #3 (Hold). You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Over the past six months, shares of Hercules Capital have rallied 36.4%, outperforming the industry’s gain of 29.7%. Rating Actions by Moody’s on Other Finance Stocks
Since the beginning of 2021, Moody’s has affirmed the ratings for many finance companies. Some of these include
KeyCorp ( KEY Quick Quote KEY - Free Report) , Texas Capital Bancshares, Inc. ( TCBI Quick Quote TCBI - Free Report) and Fulton Financial Corporation ( FULT Quick Quote FULT - Free Report) . While the outlook for Texas Capital has been upgraded to stable from negative, the same for KeyCorp and Fulton Financial has been affirmed at stable. Zacks Names “Single Best Pick to Double”
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