Hercules Capital(US:HTGC)2026-02-12 21:17Financial Obligations and Debt - As of December 31, 2025, the company had $277.9 million and $168.0 million in borrowings under the SMBC Facility and MUFG Bank Facility, respectively, with approximately $1.52 billion in aggregate principal outstanding Notes[231]. - The company has $175.0 million in SBA debentures outstanding as of December 31, 2025, which adds to its overall debt obligations[231]. - The MUFG Bank Facility matures in June 2029, and the SMBC Facility matures in November 2029, with no assurance of favorable renewal or replacement terms[237]. - The company may need to refinance or restructure its debt if operating performance declines, which could lead to defaults if not managed properly[236]. - The company’s leverage magnifies the potential for loss on investments, increasing risks associated with its securities[226]. - The company has $175.0 million of SBIC debentures outstanding through its wholly owned subsidiaries HC IV and SBIC V, with no additional debentures available[286]. - The SBIC debentures require semiannual interest payments, and the company must generate sufficient cash flow to meet these obligations[287]. - The Unsecured Notes are effectively subordinated to any secured indebtedness, which may impact recovery in liquidation scenarios[271]. - The Unsecured Notes are structurally subordinated to the indebtedness of subsidiaries, limiting claims against subsidiary assets[272]. - The indentures for certain notes provide limited protections for holders, allowing the company to engage in various corporate transactions that could adversely affect investments[276]. - The company may incur additional debt with more protections for lenders, potentially affecting the market for existing notes[279]. Asset Coverage and Investment Strategy - The company’s actual asset coverage ratio was 212.1% as of December 31, 2025, which significantly impacts returns on common stockholder investments[233]. - The company must maintain a minimum asset coverage of 150% for issuing senior securities, and failure to do so could restrict capital raising and dividend payments[255]. - The company is required to invest at least 70% of total assets in qualifying assets, which may limit investment opportunities and flexibility[251]. - A decline in asset value could lead to a sharper decline in net asset value (NAV) and net investment income, affecting dividend payments[230]. - The company’s ability to sell investments is restricted under the MUFG Bank Facility, potentially limiting strategic financial actions[241]. - The company may need to raise additional capital to meet unfunded commitments, which could impact its market reputation and lending activity[225]. Regulatory and Compliance Risks - If the company fails to comply with financial covenants, it may face defaults that could accelerate repayment obligations, negatively affecting its financial condition[229]. - Changes in laws and regulations could necessitate alterations in the company's investment strategy, potentially affecting operational results[249]. - The company must satisfy distribution requirements by distributing at least 90% of its net ordinary taxable income annually[295]. - Failure to maintain RIC status could lead to significant tax liabilities, reducing net assets and available income for distribution[291]. - Compliance with SBIC regulations may limit the ability of the company's subsidiaries to make distributions necessary for maintaining RIC status, potentially resulting in entity-level taxes[289]. - Legislative or regulatory tax changes could adversely affect the taxation of the company and its stockholders, impacting investment value[298]. Market and Economic Conditions - The U.S. capital markets have experienced significant volatility due to factors such as the COVID-19 pandemic, regional bank failures, and inflation, which may adversely affect business operations and financial conditions[300]. - Future disruptions in capital markets could lead to a lack of liquidity, increased funding costs, and limited access to capital, negatively impacting investment originations and growth potential[301]. - Economic downturns and trade wars may create extreme volatility in financial markets, affecting the ability of nations to service sovereign debt obligations and potentially leading to a global economic crisis[302]. - Changes in U.S. government policies following elections could significantly impact fiscal, tax, and regulatory environments, affecting investment opportunities and overall market conditions[303]. - The potential for increased tariffs and changes in international trade policies may adversely affect portfolio companies, leading to reduced revenues and profitability[306]. - Economic deterioration could impair the financial positions of portfolio companies, particularly small to mid-sized firms, increasing the risk of defaults and negatively impacting future results[307]. Investment Performance and Risks - The market price of the company's securities may be volatile, influenced by factors beyond operational performance, including regulatory changes and economic trends[258]. - Shares of closed-end investment companies, including BDCs, may trade at a discount to NAV, affecting the ability to issue additional common stock[257]. - The company may face dilution if shares are sold below NAV, impacting existing stockholders' interests and voting power[261][262]. - The integration of acquired businesses may not be successful, posing risks to profitability and sustainability[253]. - Investing in the company's securities may involve a high degree of risk, potentially resulting in higher volatility or loss of principal[256]. - The company may face risks related to maintaining required asset coverage ratios, which could impact dividend payments on preferred stock or interest on debt securities[269]. Cybersecurity and Operational Risks - Cybersecurity risks and system failures could disrupt business operations, potentially harming financial conditions and market prices[314][315]. - The company is highly dependent on information systems, and any failure could significantly disrupt business operations and negatively affect stock prices and dividend payments[314]. - Cybersecurity threats are increasing in frequency and severity, which could lead to operational disruptions and adversely impact financial condition[315]. - The company relies heavily on computer systems for business functions, and any cyber-attacks or unauthorized access could result in financial losses and reputational damage[317]. - Third-party service providers may also pose cybersecurity risks, which could lead to unauthorized access or data loss[318]. - Changes in privacy and information security laws may increase costs and divert management's attention, potentially resulting in fines or penalties[319]. Conflicts of Interest and Management Risks - The company may face conflicts of interest when allocating investment opportunities between itself and the Adviser Funds managed by its Adviser Subsidiary[245]. - The Adviser Subsidiary derives revenues primarily from dividend income, which is contingent on net profits from advisory fees charged to the Adviser Funds[248]. - The Adviser Funds may have varying fee structures, including management fees and performance fees, which can be adversely affected by market factors and the Adviser Subsidiary's performance[248]. - Termination of management agreements with Adviser Funds could adversely affect revenue streams and overall operating results[248].