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Note 7 - Borrowings
 6 Months Ended
Jun. 30, 2023
Notes to Financial Statements  
Debt Disclosure [Text Block]

Note 7. Borrowings

 

The following table shows the Company’s borrowings as of June 30, 2023 and  December 31, 2022:

 

  

June 30, 2023

  

December 31, 2022

 
  

Total

  

Balance

  

Unused

  

Total

  

Balance

  

Unused

 
  

Commitment

  

Outstanding

  

Commitment

  

Commitment

  

Outstanding

  

Commitment

 
  

(In thousands)

 

Key Facility

 $150,000  $—  $150,000  $125,000  $5,000  $120,000 

NYL Facility

  250,000   176,750   73,250   200,000   176,750   23,250 

2019 Asset-Backed Notes

  30,807   30,807   —   42,573   42,573   — 

2022 Asset-Backed Notes

  100,000   100,000   —   100,000   100,000   — 

2027 Notes

  57,500   57,500   —   57,500   57,500   — 

2026 Notes

  57,500   57,500   —   57,500   57,500   — 

Total before debt issuance costs

  645,807   422,557   223,250   582,573   439,323   143,250 

Unamortized debt issuance costs attributable to term borrowings

  —   (4,541)  —   —   (5,245)  — 

Total borrowings outstanding, net

 $645,807  $418,016  $223,250  $582,573  $434,078  $143,250 

 

As of June 30, 2023, with certain limited exceptions, the Company, as a BDC, is only allowed to borrow amounts such that the Company’s asset coverage, as defined in the 1940 Act, is at least 150% after such borrowings. As of June 30, 2023, the asset coverage for borrowed amounts was 184%.

 

Credit Facilities

 

Key Facility

 

The Company entered into the Key Facility with Key effective November 4, 2013. On June 29, 2023, the Company amended the Key Facility, among other things, to increase the commitment amount to $150 million and to increase the amount of the accordion feature which now allows for the potential increase in the total commitment amount to $300 million. The Key Facility is collateralized by all debt investments and warrants held by Credit II and permits an advance rate of up to 60% of eligible debt investments held by Credit II. The Key Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the debt investments securing the Key Facility to certain criteria for qualified debt investments and includes portfolio company concentration limits as defined in the related loan agreement. The Company may request advances under the Key Facility through June 22, 2024 and the Key Facility is scheduled to mature on June 22, 2026. The interest rate on the Key Facility is based on the rate of interest published in The Wall Street Journal as the prime rate in the United States plus 0.25%, with a prime rate floor of 4.25%. The prime rate was 8.25% and 7.50% on June 30, 2023 and  December 31, 2022, respectively. The average interest rate on the Key Facility for the three months ended June 30, 2023 and 2022 was 8.41% and 4.25%, respectively. The average interest rate on the Key Facility for the six months ended June 30, 2023 and 2022 was 8.17% and 4.25%, respectively. The Key Facility requires the payment of an unused line fee in an amount up to 0.50% on an annualized basis of any unborrowed amount available under the facility. As of June 30, 2023 and  December 31, 2022, the Company had borrowing capacity under the Key Facility of $150.0 million and $120.0 million, respectively. At June 30, 2023 and  December 31, 2022, $61.4 million and $40.2 million, respectively, was available for borrowing, subject to existing terms and advance rates.

 

NYL Facility

 

On April 21, 2020, the Company purchased all of the limited liability company interests in HSLFI. HFI entered into the NYL Facility with the NYL Noteholders for an aggregate purchase price of up to $100.0 million, with an accordion feature of up to $200.0 million at the mutual discretion and agreement of HSLFI and the NYL Noteholders. On June 1, 2018, HSLFI sold or contributed to HFI certain secured loans made to certain portfolio companies pursuant to the Sale and Servicing Agreement. Any notes issued by HFI are collateralized by all investments held by HFI and permit an advance rate of up to 67% of the aggregate principal amount of eligible debt investments. The notes were issued pursuant to the Indenture. The interest rate on the notes issued under the NYL Facility was based on the three year USD mid-market swap rate plus a margin of between 3.55% and 5.15% with an interest rate floor, depending on the rating of such notes at the time of issuance.

 

On February 25, 2022, the Company amended its NYL Facility to, among other things, reduce the applicable margin used to calculate the credit facility’s interest rate on the Company’s borrowings above $100.0 million. Such borrowings were priced at the three-year USD mid-market swap rate plus 3.00%.

 

On May 24, 2023, the Company amended its NYL Facility to, among other things, increase the commitment by $50.0 million to enable its wholly-owned subsidiary to issue up to $250.0 million of secured notes. The amendment to the NYL Facility extends the investment period to June 2024 and the maturity date of all advances to June 2029. In addition, the amendment amended the interest rate for advances made after May 24, 2023, fixing the interest rate at the greater of (i) 4.60% and (ii) the Three Year I Curve plus 3.50%, with the interest rate to be reset on any advance date. 

 

There were $176.8 million in advances made by the NYL Noteholders as of June 30, 2023 and  December 31, 2022. The interest rate as of June 30, 2023 and  December 31, 2022 was 5.62% and 5.57%, respectively. As of June 30, 2023 and  December 31, 2022, the Company had borrowing capacity under the NYL Facility of $73.2 million and $23.2 million, respectively. At June 30, 2023 and  December 31, 2022, $3.0 million and $23.2 million, respectively, was available for borrowing, subject to existing terms and advance rates.

 

Under the terms of the NYL Facility, the Company is required to maintain a reserve cash balance, which may be used to pay monthly interest and principal payments on the NYL Facility. The Company has segregated these funds and classified them as restricted investments in money market funds. At  June 30, 2023 and December 31, 2022, there were approximately $1.3 million and $1.0 million, respectively, of restricted investments.

 

Securitizations

 

2019 Asset-Backed Notes

 

On August 13, 2019, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of the 2019 Asset-Backed Notes. The 2019 Asset-Backed Notes were rated A+(sf) by Morningstar Credit Ratings, LLC. There has been no change in the rating since August 13, 2019.

 

The 2019 Asset-Backed Notes were issued by the 2019‑1 Trust pursuant to a note purchase agreement, dated as of August 13, 2019, by and among the Company and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2019 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 4.21% per annum. The reinvestment period of the 2019 Asset-Backed Notes ended July 15, 2021 and the maturity date is September 15, 2027.

 

As of June 30, 2023 and  December 31, 2022, the 2019 Asset-Backed Notes had an outstanding principal balance of $30.8 million and $42.6 million, respectively.

 

Under the terms of the 2019 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the 2019 Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2019 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds. At June 30, 2023 and  December 31, 2022, there were approximately $0.5 million and $0.6 million of restricted investments, respectively.

 

2022 Asset-Backed Notes

 

On November 9, 2022, the Company completed a term debt securitization in connection with which an affiliate of the Company made an offering of the 2022 Asset-Backed Notes. The 2022 Asset-Backed Notes were rated A by DBRS, Inc. There has been no change in the rating since November 9, 2022.

 

The 2022 Asset-Backed Notes were issued by the 2022‑1 Trust pursuant to a note purchase agreement, dated as of November 9, 2022, by and among the Company and Keybanc Capital Markets Inc. as Initial Purchaser, and are backed by a pool of loans made to certain portfolio companies of the Company and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the 2022 Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 7.56% per annum. The reinvestment period of the 2022 Asset-Backed Notes ends November 15, 2024 and the maturity date is November 15, 2030.

 

As of  June 30, 2023 and  December 31, 2022, the 2022 Asset-Backed Notes had an outstanding principal balance of $100.0 million.

 

Under the terms of the 2022 Asset-Backed Notes, the Company is required to maintain a reserve cash balance, funded through proceeds from the sale of the 2022 Asset-Backed Notes, which may be used to pay monthly interest and principal payments on the 2022 Asset-Backed Notes. The Company has segregated these funds and classified them as restricted investments in money market funds. At  June 30, 2023 and  December 31, 2022, there were approximately $1.1 million and $1.2 million of restricted investments, respectively.

 

Unsecured Notes

 

2026 Notes

 

On March 30, 2021, the Company issued and sold an aggregate principal amount of $57.5 million of 4.875% notes due in 2026 (the “2026 Notes”). The amount of 2026 Notes issued and sold included the full exercise by the underwriters of their option to purchase $7.5 million in aggregate principal of additional notes. The 2026 Notes have a stated maturity of March 30, 2026 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after March 30, 2023 at a redemption price of $25 per security plus accrued and unpaid interest. The 2026 Notes bear interest at a rate of 4.875% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year. The 2026 Notes are the Company’s direct unsecured obligations and (i) rank equally in right of payment with the Company’s current and future unsecured indebtedness; (ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2026 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of June 30, 2023, the Company was in material compliance with the terms of the 2026 Notes. The 2026 Notes are listed on the New York Stock Exchange under the symbol “HTFB”.

 

2027 Notes

 

On June 15, 2022, the Company issued and sold an aggregate principal amount of $50.0 million of 6.25% notes due in 2027 and on July 11, 2022, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $7.5 million of such notes (collectively, the “2027 Notes”). The 2027 Notes have a stated maturity of June 15, 2027 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after June 15, 2024 at a redemption price of $25 per security plus accrued and unpaid interest. The 2027 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on September 30, 2022. The 2027 Notes are the Company’s direct unsecured obligations and (i) rank equally in right of payment with the Company’s current and future unsecured indebtedness; (ii) are senior in right of payment to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2027 Notes; (iii) are effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, and (iv) are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. As of June 30, 2023, the Company was in material compliance with the terms of the 2027 Notes. The 2027 Notes are listed on the New York Stock Exchange under the symbol “HTFC”.