U.S.

Financial Institutions
BDC Surveillance Report

Hercules Technology
Growth Capital, Inc.

Analytical Contacts:
Marjan Riggi, Managing Director
mriggi@kbra.com, 646-731-2354
Christopher Whalen, Senior Managing Director
cwhalen@kbra.com, 646-731-2366
Isabelle Nana, Associate
inana@kbra.com, 240-394-4153

August 11, 2014

Table of Contents
Executive Summary ............................................................................................................................ 3
Key Rating Drivers ............................................................................................................................. 3
Recent Results ............................................................................................................................. 4
Key Business Factors Rating Determinants ......................................................................................... 5
Market Share, Branding and Viability .............................................................................................. 5
Business Risk Management ........................................................................................................... 6
Economic and Operational Risk ...................................................................................................... 7
Key Financial Factors Rating Determinants ......................................................................................... 8
Profitability .................................................................................................................................. 8
Liquidity & Funding....................................................................................................................... 9
Capital Adequacy ......................................................................................................................... 9
Asset Quality ............................................................................................................................. 10
Outlook ........................................................................................................................................... 10
Drivers of Rating Change ............................................................................................................ 11

Hercules Technology Growth Capital, Inc.

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August 11, 2014

Executive Summary
Kroll Bond Rating Agency (KBRA) has affirmed an issuer and senior unsecured debt rating of BBB+ with a
stable outlook for Hercules Technology Growth Capital, Inc. (NYSE: HTGC or Hercules), a business
development company (BDC) based in Palo Alto, California with additional offices across the United States.
Hercules was founded in December 2003 and had its Initial Public Offering (IPO) in June 2005.
The affirmed BBB+ rating of Hercules reflects the senior secured position of its underlying investments, asset
quality performance to date, and strong leverage metrics comfortably within BDC mandated regulatory limits.
The rating is also supported by HTGCs proven access to capital markets and their expertise in investing in
venture-backed companies with strong growth potential as well as the quality of their credit risk
management and monitoring.
The rating is assigned using KBRAs Finance Company Rating Methodology, published April 1, 2013.

Key Rating Drivers

The rating assigned to HTGC reflects a balance between the following credit positives and challenges:
Credit Positives

Investment portfolio primarily focused on secured senior debt

Low leverage in the underlying portfolio companies

Very low non-accruals to date

Good leverage metrics

Strong cash and liquidity position

Relatively good portfolio diversification

Good coverage of dividends from NII

Strong track record in both debt and equity issuance

Acceptable asset encumbrance

Expertise in venture-backed investments

Seasoned management team and origination team

Credit Challenges

High exposure to event risk

Relatively illiquid investments: most investments are in startups at different stage of pre-IPO

Potential Net Asset Value decline due to quarterly mark-to-market volatility of investments

Limitation to retain earnings as capital due to RIC status

Relatively low interest coverage metrics

Key man risk

Hercules Technology Growth Capital, Inc.

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August 11, 2014

Recent Results
Hercules reported total investment income of $34.0 million in the second quarter of 2014 and $69.8 million
for the first half of the year. This compares to a total invesment income of $34.5 million in the second
quarter of 2013 and $65.5 million for mid-year 2013. Net investment income (NII) for the quarter improved
from 5.7% to $18.6 million, (or $0.30 per share) up from $17.6 million (or $0.29 per share) in the year-ago
period. The continued strong performance of HTGC reflects the strength of its portfolio, its strong liquidity
position, and its disciplined underwriting standards.
Hercules total investments, on a fair value basis, increased to $991.3 million in the second quarter of 2014
versus $890.7 million in the first quarter and $910.3 million at year-end 2013. Total investments also
decreased by $36.2 million compared to the $1.02 billion reported in the second quarter of 2013. The net
portfolio growth of $107.9 million on a cost basis for the second quarter was primarily due to strong
originations and funding activities including $172.5 million in net new debt and equity investments ($4.0
million in net fee accretion). This was offset by $68.1 million of principal repayments,$0.5 million of fee
acceleration and proceeds due to the sale of investments. Additionally, Hercules recorded $7.3 million of net
unrealized depreciation from its loans, warrants, and equity investments during the second quarter. As of the
second quarter of 2014, 100% of Hercules debt investments portfolio was in senior secured first lien
position, providing HTGC with a less risky portfolio compared to most BDC peers. Approximately 98.1% of
Herculess debt investment portfolio was priced at floating interest rates with a Prime or LIBOR based interest
rate floor, positioning HTGC to benefit from changing market rates in either direction.
As of June 30, 2014, Hercules reported three non-accrual loans with a combined investment fair value of
approximately $7.4 million ($23.6 million at cost), which remained stable from the previous quarter. HTGCs
non-accrual loans ratios stood at 2.38% of total investment at cost and 3.58% of net assets in the second
quarter of 2014, compared to 2.69% of total investments and 3.67% of total net asset in the prior quarter.
Additionally, as of June 30, 2014, the cumulative net realized losses on investments totaled approximately
$24.8 million (on a GAAP basis) since HTGCs first origination, representing only 0.56% of the $4.4 billion
total commitment over the same period, an annualized loss rate of 6 basis points. Despite the increase in
non-accrual investments over the past year, KBRA considers Hercules asset quality to be strong given the
resilient historical performance and continued low levels of non-accruals; however, a notable continuation of
higher non-accruals would be credit negative in KBRAs view.
Hercules leverage ratio declined to 72.9% in the second quarter, down from 76.1% in the the previous
quarter and 92.9% in the year-ago quarter. To maintain the status of a Business Development Company
(BDC), Hercules must maintain a maximum BDC leverage ratio of 1 to 1. Hercules has an SEC exemptive
order to exclude all U.S. Small Business Administration (SBA) debentures from its regulatory leverage
calculations, resulting in a BDC regulatory leverage ratio of 44.01%, and thus, representing a cushion of
approximately $368.9 million potential additional debt. Excluding outstanding cash from HTGCs total debt of
$480.2 million, the net leverage ratio for Hercules stood at 55.3% for the latest reporting period. Liquidity
also remained strong for Hercules, with $116.0 million in available cash and $105.0 million senior secured
credit facility lines with Wells Fargo and Union Bank as of second quarter 2014.
KBRA maintains an issuer and senior unsecured debt rating of BBB+, with a stable outlook for Hercules and
notes that Hercules' recent quarterly performance is strong and its BDC regulatory leverage (excluding SBA
debt) remains noticeably lower than most of its BDC peers. Additionally, Hercules investment portfolio
continues to demonstrate growth and strengths with acceptable levels of non-accrual loans and marginal
losses on investments, which is reflective of HTGCs prudent underwriting practices as well as the strong
monitoring of the performance of its portfolio companies.

Hercules Technology Growth Capital, Inc.

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August 11, 2014

Hercules Technology Growth Capital, Inc.

2014-1Q

Selected Financial Data ($ in thousands, except per share data)

Balance sheet
Investments, at value
Cash and cash equivalents
Total assets
Portfolio Composition
Senior secured debt
Preferred stock
Common stock
Warrants
Earnings and Expenses
Total investment income
Total operating expenses
Net investment income
Net realized gain (loss) on investments
Net increase in unrealized appreciation on investments
Net realized and unrealized gain
Net increase in net assets from operations
Cash dividends declared per common share

2013

$ 890,662
224,538
1,159,399

$ 910,295
268,368
1,221,715

798,359
45,723
22,966
23,614

821,988
35,554
17,116
35,637

35,770
17,466
18,304
4,872
11,545
3,881
22,185
0.62

139,713
66,648
73,065
14,836
(4,516)
26,381
99,446
$
1.11

2012
$

2011

2010

906,300
182,994
1,123,643

$ 652,870
64,474
747,394

$ 472,032
107,014
591,247

827,540
33,178
16,032
29,550

585,767
30,289
6,769
30,045

394,198
24,607
22,117
23,960

97,520
49,413
48,107
3,168
4,607
(1,348)
46,759
0.95

79,855
40,267
39,588
2,741
1,990
7,348
46,936
0.88

59,474
30,100
29,374
(26,382)
1,990
(24,392)
4,982
$
0.80

Source: Hercules Technology Growth Capital's Annual and Interim Reports

Key Business Factors Rating Determinants

Market Share, Branding and Viability
Hercules is a BDC focused on providing senior secured loans to private U.S. companies in technology related
markets including biotechnology, life science, and clean-technology industries. Hercules provides financing to
venture capital-backed companies at different stages of development, ranging from emerging growth and
expansion stage to established companies. As a BDC, HTGC is structured as an internally managed, nondiversified, closed-ended investment company with approximately $1.16 billion of committed assets under
management as of March 31, 2014.
Hercules invests primarily in structured debt with warrants, which gives the institution the ability to realize
equity-like returns on a portion of their investments. As of March 31, 2014, senior secured debts with
warrants represented 56.24% of the total investment, while those without warrants represented 36.05%.
The remaining 7.71% of HTGCs investment portfolio consisted of equity investments.
In terms of asset size, Hercules ranks behind some of its BDC peers as well as banks active in the sector by a
meaningful margin. However, given HTGCs proven expertise in lending to venture-backed growth oriented
companies in technology and life sciences, Hercules has a good brand recognition nationwide, and is active in
considering such transactions.
As a BDC, Hercules must keep its leverage ratio (debt/equity) equal to or less than 1, insulating creditors to
some extent against the inherent volatile credit performance of the underlying loans. Additionally, Hercules
must distribute at least 90% of its taxable income to shareholders and is required to apply fair value
accounting to its investment portfolio on a quarterly basis, which could bring high volatility to HTGCs net
income.
Due to these limitations on leverage and income distribution, Hercules, in common with all BDCs, is very
reliant on the equity and debt markets to finance operations. Furthermore, given quarterly marking of
portfolio investments, Hercules net asset value levels could be subject to severe pressure during market
downturns, which can limit their access to capital markets and/or lead to breaches of regulatory triggers.

Hercules Technology Growth Capital, Inc.

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August 11, 2014

As such, BDCs have significant exposure to liquidity risk, even though much of this risk is alleviated by SEC
restrictions on the use of leverage.

BDC

Total Investment Total Market Debt/

Total
Weighted
KBRA Debt/
Assets Portfolio, FV Equity
Cap
Equity Investments/ Equity/ Avg Yield on Dividend
Issuer
Symbol ($M)
($M)
($M)
($M)
(x)
Assets
Assets Investments
Yield
Structure
Ratings

American Capital Ltd.

ACAS

6,134

5,020

5,078

3,980

0.16

82%

83%

9%

N/A

Internal

NR

Apollo Investment Corporation

AINV

3,642

3,479

2,052

1,960

0.67

96%

56%

11%

10%

External

NR

Ares Capital Corporation

ARCC

8,200

7,800

4,899

5,100

0.62

95%

60%

9%

9%

External

NR

BlackRock Kelso Capital Corporation

BKCC

1,237

1,106

714

660

0.64

89%

58%

12%

12%

External

NR

FSC

2,792

2,684

1,365

1,320

0.97

96%

49%

11%

11%

External

NR

Golub Capital BDC, Inc.

GBDC

1,322

1,254

722

800

0.79

95%

55%

9%

8%

External

NR

Hercules Technology Growth Capital, Inc.*

HTGC

1,159

891

632

972

0.79

77%

55%

13%

8%

Internal

BBB+/BBB+

Horizon Technology Finance Corporation

HRZN

262

221

138

136

0.87

84%

53%

14%

10%

External

NR

KCAP Financial, Inc.

KCAP

456

429

254

274

0.76

94%

56%

8%

13%

Internal

NR

Main Street Capital Corporation

MAIN

1,377

1,309

804

1,410

0.67

95%

58%

12%

8%

Internal

NR

Medley Capital Corporation

MCC

1,005

959

587

657

0.69

95%

58%

14%

12%

External

NR

PennantPark Investment Corporation

PNNT

1,331

1,257

741

736

0.72

94%

56%

13%

10%

External

NR

Prospect Capital Corporation*

PSEC

6,353

6,006

3,561

3,570

0.76

95%

56%

13%

13%

External

BBB+/BBB+

Solar Capital Ltd.

SLRC

1,710

1,028

972

870

0.23

60%

57%

11%

9%

External

NR

TICC Capital Corp.

TICC

1,094

960

589

571

0.77

88%

54%

8%

12%

External

NR

Triangle Capital Corporation

TCAP

799

690

439

749

0.81

86%

55%

12%

8%

Internal

NR

Fifth Street Finance Corp.

* Rated by Kroll Bond Rating Agency

Financial data as of 3/31/14; market cap and dividend yield are as of 6/24/14
Source: C ompany filings, Bloomberg

Business Risk Management

Hercules business model, which focuses on providing capital to high growth pre-IPO venture capital-backed
companies, involves a high degree of credit risk and could result in capital losses. Nonetheless, HTGCs
investment portfolio is less risky when compared to other BDC peers. This is because of Hercules primary
focus on senior secured debt securities, which are more stable in stress scenarios than subordinated
securities and equities due to their higher ranking in the capital structure.
Furthermore, in KBRAs view, HTGC has relatively stringent and transparent lending procedures, which allow
the company to minimize its credit risk exposures. Hercules investment approval process requires the input
of four different elements. The first key factor is the origination process under which Hercules screens
investment opportunities and performs preliminary due diligence. Notably, 85% of reviewed companies are
rejected during the origination process. Next, as part of the underwriting process, the Hercules team
performs formal due diligence and is responsible for approving the investment in the portfolio company. The
Hercules team then prepares a detailed Investment Committee Memorandum which is presented to the
Hercules Investment Committee. Given the earlier stage profile of most companies in their portfolio, Hercules
requires that at the time of the investment they have sufficient capital to support operations and debt service
for at least nine to eighteen months. All loans that are approved by the Hercules Investment Committee are
then passed on to the in-house legal team which, with the assistance of external law firms, drafts and
negotiates the loan documentation. The final component of the process is loan and portfolio administration
which includes funding, servicing and monitoring the investment.
Hercules lending model focuses on senior secured loans with rapid amortization schedules (generally 36-42
months), allowing a relatively quick return on investment and a reduced length of risk exposure.
Furthermore, the majority of Hercules loans (56% of the total investment as of 2014-1Q) include warrants
and more than 98% of the loans are priced at floating interest rates or floating interest rates with a Prime-or
LIBOR-based interest rate floor. The warrants provide a potential upside and further cushion for risk, while,
to some extent, interest rate floors mitigate exposure to interest rate risk. KBRA notes, that since its
inception, Hercules has reported very minimal write downs due to non-accrual loans.
Nevertheless, Hercules focus on technology and life science companies is reason for some concern regarding
diversification and event risks associated with these sectors. However, in KBRAs view, HTGCs investments
are well diversified within these sectors as evidenced by their varying business models and product focus.

Hercules Technology Growth Capital, Inc.

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August 11, 2014

As of March 31, 2014, investments in Drug Discovery (23.2%), Energy Technology (18.7%), Internet &
Consumer Services (11.9%), and Medical Devices & Equipment (11.1%) comprised
64.9% of the total
investment at fair value..

KBRA further notes that despite some volatility in Hercules quarterly net income, as can be expected for a
BDC, HTGC has reported positive year-end net income for the past eight years. This record is due in part to
HTGCs expertise in investing in high growth pre-IPO or M&A venture-backed companies with strong potential
to build enterprise value, as well as the quality and strength of its originations and credit monitoring
systems.
Since its IPO in 2005, Hercules has been effective in balancing shareholder concerns against a more
conservative balance sheet and has successfully accessed the equity and debt markets every year. HTGC has
a diversified wholesale funding profile and has raised funds in both securitized and various forms of
unsecured debt markets. In addition, Hercules has two SBIC licenses for up to $225 million of SBC
debentures which helps further diversify and lowers the overall cost of its funding.

Economic and Operational Risk

As a BDC, Hercules is regulated by the Securities and Exchange Commission (SEC) and is subject to several
provisions of the Investment Company Act of 1940. These provisions include: a limit on the level of debt, a
code of ethics, a comprehensive compliance program, a requirement that they file quarterly, and annual
reports as well as proxy statements with the SEC. One of the main operational risks for Hercules is its
dependency upon key management personnel, particularly Manuel A. Henriquez, who is the founder of the
company. HTGCs ability to function and remain competitive could be significantly impaired if it loses any key
member of its senior management team. Additionally, Hercules investments in the life science and
technology sectors are subject to many risks, including extensive government regulation, changing
healthcare laws, intense competition, unproven technologies, periodic downturns and litigation risk. Economic
recessions or downturns in these sectors could affect the ability of portfolio companies to repay loans.
Subsequently, Hercules could incur an increase in nonperforming assets, a decrease the value of its portfolio,
and potential reduction in the amount of new loans. Illiquidity in the corporate debt markets and the
possibility of price declines could also increase net realized and unrealized losses and therefore, could
adversely affect the fair value of Hercules portfolio investments and possibly lead to breaches of regulatory

Hercules Technology Growth Capital, Inc.

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August 11, 2014

triggers. Nonetheless, KBRA notes that Hercules has adequately weathered the financial turmoil and
subsequent economic downturn that began in 2007, and as mentioned above was able to cover its net
realized losses fully from its NII during this period.
A bill that is currently under consideration in Congress is expected to modernize the regulatory requirements
for BDCs. The legislative proposal H.R. 1800, the Small Business Credit Availability Act, first introduced in
April 2013. When amended, it proposed that: 1) the BDC asset coverage ratio be reduced to 150% from
200% of assets (i.e. increasing the debt-to-equity ratio to 2:1 from 1:1); 2) preferred stock be excluded
from asset coverage tests; and, 3) BDCs be permitted to invest in securities issued by registered investment
advisers. If adopted, KBRA believes that the proposed regulatory changes would result in higher leverage for
BDCs, eroding the asset protection that investors enjoy with the current coverage requirements. KBRA also
believes that BDC underwriting standards may become less rigorous, given potentially increased levels of
capital that will need to be usefully deployed. Easing underwriting may weigh on credit performance and this
would also be viewed as a credit negative. However, a number of BDCs have stated that if the leverage
threshold is increased, other mitigating actions may be taken to reduce risk, such as increased asset
diversification. KBRA will evaluate the use of higher leverage and investment diversification on a case-bycase basis (for more information see, Business Development Company Overview Report, July 18, 2014).

Key Financial Factors Rating Determinants

Hercules Technology Growth Capital, Inc.
Key Statistics ($ in thousands, except ratios)

2014-1Q

2013

2012

2011

2010

Profitability
Operating Earnings/ Managed Assets

12.34%

11.44%

8.68%

10.68%

10.06%

Net income/Total Managed Assets

7.65%

8.14%

4.16%

6.28%

0.84%

Non-Interest Expense/Total Managed Assets

3.56%

2.97%

2.63%

3.61%

3.64%

3.6x

3.4x

3.4x

4.0x

4.4x

5.2x

4.2x

2.2x

18.1x

n.a

Secured Secured Debt/Total Assets

68.86%

67.28%

73.65%

78.37%

66.67%

Senior Secured Debt/Total Investments-fair value

89.64%

90.30%

91.31%

89.72%

83.51%

Debt/Equity
Debt/EBIT(x)

76.10%
4.9x

85.76%
5.4x

115.53%
8.8x

52.20%
4.3x

41.21%
4.5x

BDC Debt/Equity

46.98%

51.14%

71.92%

0.00%

0.00%

12.1x

3.2x

5.5x

0.0x

0.0x

Non-accruals/Total Investments (fair value)

2.69%

2.56%

0.04%

1.18%

2.42%

Non-accruals/Equity

3.67%

3.58%

0.07%

1.79%

2.76%

Non-accruals/Total Assets

2.07%

1.91%

0.03%

1.03%

1.93%

EBIT/Interest Expense
Liquidity
Available Cash & Credit Lines/ Debt maturing within 3YR (x)

Leverage and Capital Adequacy

BDC Debt/EBIT(x)
Asset Quality

Source: Hercules Technology Growth C apital's Annual and Interim Reports

Profitability
HTGC has had a history of covering its dividend payments with NII. NII is essentially net operating income
for a BDC without the impact of realized and unrealized income/loss and is a good indicator of a BDCs
recurring net income. On an annual basis, NII has been increasing over the past four years and has kept
pace with the growth of its investment portfolio. Importantly, NII for Hercules fully covered relatively high
net realized losses related to the impact of the downturn during the financial crisis of 2009 and 2010.
As mentioned above, Hercules accesses the capital markets frequently to grow its investment portfolio, which
remained relatively stable at year-end 2013 when compared to the year-ago period. At the end of the first

Hercules Technology Growth Capital, Inc.

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August 11, 2014

quarter of 2014, Hercules total investments at value declined marginally to $890.7 million versus $910.3
million at year-end 2013 and decreased by $77.3 million compared to the $968.0 million reported in the first
quarter of 2013.
Hercules expense ratio (non-interest expenses as a percentage of total managed assets) has increased
nominally to 3.56% as of March 31, 2014, compared to 2.97% at the end of 2013. However, the ratio
remains lower than the 3.63% and 3.61% reported in 2012 and 2011, respectively. Hercules is an internally
managed BDC which means its investment professionals compensation is covered by its G&A. This gives
Hercules more flexibility in operational leverage and should decrease its overall expenses even more as the
company grows its balance sheet and gains more scale.
Hercules has increased dividends over the last three years, although its dividend yield of 7.5% is still below
the industry average of 9.5%.

Liquidity & Funding

Hercules liquidity position remained strong over the most recent quarter year as it ended the quarter with
$288.0 million in available liquidity, $224.54 million of which was cash invested in interest bearing deposit
accounts and $105 million in bank credit lines. In addition to the credit facility, Hercules sources of funding
include unsecured notes and asset-backed notes. As of March 31, 2014, Hercules outstanding debt included
$170.4 million of unsecured 2019 Notes, $63.8 million of Asset-Backed Notes, and $75.0 million of
convertible senior notes. In addition, HTGC reported $190.2 million of outstanding borrowings of under the
U.S. Small Business Administration.
On July 9, 2014, HTGC issued senior unsecured notes of $100 million, maturing on July 30, 2024, with a
coupon of 6.25%. Hercules plans to invest the net proceeds of this public offering to fund investments in
debt and equity securities in accordance with its investment objective and for other general corporate
purposes.
Hercules Technology Growth Capital, Inc: Diversified Funding Sources
Wells Fargo Credit
Facility

Senior Notes
DATE ENTERED

August, 2008

February, 2010

April, 2012

Senior Notes
September,
2012

FACILITY SIZE
($ in millions)

$75.00

$30.00

$84.50

$85.90

INTEREST RATE

Libor + 350bps with

floor of 4.25%

Libor + 225bps
with floor of
4.00%

7.00% senior
unsecured

7.00% senior
unsecured

August, 2015

May, 2015

April, 2019

(Expandable up to
$300.0)

(Expandable up to
$95.0)

NYSE traded:
HTGZ

September,
2019
NYSE traded:
HTGY

$0.00

$0.00

$84.50

$85.90

MATURITY
ADDITIONAL
INFO
OUTSTANDING
($ in millions)

SBA Debentures
Total debt of $190.2 million

Baby Bonds

Union Bank
Facility

License 1 - HTII
September, 2006

Convertible Debt

Securitization

License 2- HTIII
May, 2010

April, 2011

December, 2012

$41.20

$149.00

$75.00

$129.30

(range* from 3.2% to

4.6%)

(range* from
2.2% to 4.1%)

6.00%

3.32%

Mature in ten years after being borrowed

April, 2016

December, 2017

Set in March and September (range from

2.2% to 5.5%)

Conversion price of
$11.56***

Rated A2 (sf) by
Moodys

$72.8**

$63.80

$41.20

$149.00

* Interest rate range for the SBA debentures does not include annual fees. **Balance is net of the convertible debt issuance discount.
***Conversion price adjust as dividends increase.

Source: Hercules' 2014-1Q Investor Presentation

Capital Adequacy
As a BDC with a Small Business Investment Company (SBIC) license, Hercules has access to low interest rate
SBA debentures. As of March 31, 2014, HTGC had two SBIC licenses and has reported $190.2 million in SBA
debentures, the maximum amount allowed for Hercules. Hercules' borrowings under its SBIC licenses are
exempt from its 200% asset coverage requirement as required by the SEC. Because of its existing exemptive
order granted by the SEC, Hercules is able to leverage its balance sheet up to 1.29 to 1 (this includes the
SBIC debentures) versus the traditional BDC limit of 1 to 1. This grants Hercules an additional borrowing
capacity of approximately $346.4 million if the company were to go to the maximum allowed leverage of

Hercules Technology Growth Capital, Inc.

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August 11, 2014

1.29 to 1. However, management has noted publicly that Hercules goal is to not exceed a total leverage
level of 1.25 to 1. On a GAAP basis, HTGCs leverage ratio stood at 0.76 as of March 31, 2014 versus its
allowed maximum of 1.29. Notably, the BDC regulatory leverage (excluding SBIC debt) stood at 0.47 as of
March 31, 2014 which was well below the maximum ratio of 1 to 1.

Hercules' Capital and Leverage as of March 31, 2014

SBIC Debenture - $190.2 million

Potential Debt of
$843.5 million

Additional Debt Capacity - $346.4 million

Senior Unsecured Notes - $170.4 million
BDC Regulatory
Limitation of 1:1
debt to equity ratio

Asset-Backed Notes - $63.8 million

Convertible Debt - $72.8 million

Potential Max
Debt to Equity
Ratio of 1.29:1

Equity - $653.3 million

Source: Hercules' 2014-1Q Investor Presentation

Hercules Debt-to-EBIT ratio has declined in the past few quarters, reflecting the reduced level of debt. The
Debt-to-EBIT ratio declined to 4.9x in the first quarter of 2014, from 5.4x in 2013 and 8.8x in 2012.
Overall, considering its primary focus on senior securities, the strong performance of its assets as well as
HTGCs publicly stated leverage limits, which stand well below regulatory limits, KBRA views Hercules
leverage metrics as well positioned and reflective of its balance sheet risks.

Asset Quality
Hercules originated new debt and equity commitments of $155.7 million and funded $111.9 million of debt
and equity investments in the first quarter of 2014. As of the first quarter of 2014, Hercules reported three
non-accrual loans with a combined investment fair value of approximately $24.0 million ($7.7 million at
cost). Comparatively, Hercules had two debt investments in non-accrual status, with a cumulative fair value
and cost of $23.3 million and $12.6 million, respectively, representing approximately 2.56% of total
investments and 3.58% of total net asset value at year-end 2013. Consequently, Hercules non-accrual loans
ratios increased to 2.69% of total investment at cost and 3.67% of net assets in the first quarter of 2014.
Additionally, as of the first quarter 2014, the cumulative net realized losses on investments totaled
approximately $27.2 million (on a GAAP basis) since HTGCs first origination, representing only 0.65% of the
$4.2 billion total commitment over the same period, an annualized loss rate of 7 basis points. Despite the
increase in non-accrual investments over the past year, KBRA considers Hercules asset quality to be strong
given the resilient historical performance and continued low levels of non-accruals; however, a notable
continuation of higher non-accruals would be credit negative in KBRAs view.

Outlook
The outlook for the rating of Hercules is stable. The stable outlook is supported by HTGCs leverage metrics
which have a comfortable cushion below regulatory maximums and should provide good coverage in case of
higher net realized losses in a forward economic stress scenario.

Hercules Technology Growth Capital, Inc.

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August 11, 2014

Drivers of Rating Change

Rating Upgrade
The rating of Hercules Technology Growth Capital has a stable outlook and therefore in the near future a
rating upgrade is not expected.

Rating Downgrade
In KBRAs view, the following factors may contribute to a downgrade of the rating:

A significant downturn in the economy with impact on the portfolio performance of Hercules and/or
continued increase in non-accruals may put downward pressure on the rating.
A notable increase in asset encumbrance as well as continued pressure on fixed charge coverage may
also trigger a downgrade.
A significant change in the current management structure coupled with a negative change in strategy
and/or credit monitoring as well as originations may also indicate a reason for a rating downgrade.
Changes in regulatory framework which may lead to higher leverage may also lead to a rating
downgrade.

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Hercules Technology Growth Capital, Inc.

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August 11, 2014