Q2 2026 Hercules Capital Inc Earnings Call Transcript
Key Points
- Record Q2 2026 total investment income of $149.1 million and net investment income of $92.9 million, with NII covering the base distribution by 125%.
- Record first-half 2026 originations of $2.74 billion, up 35.6% year-over-year, and fundings of $1.35 billion, up 8.5%.
- Strong portfolio credit quality with non-accruals at just 0.3% of portfolio cost and 100% of accruing loans current on payments.
- Robust capital raising by portfolio companies, with $9.3 billion raised year-to-date, surpassing all of 2025, indicating portfolio health.
- Successful resolution of a non-accrual loan post-quarter-end, resulting in a cash recovery exceeding fair value and a positive realized IRR.
- Continued growth of Hercules Adviser, providing $13.7 million in direct benefits to the BDC in H1 2026, enhancing income diversification.
- Conservative balance sheet with reduced leverage (GAAP leverage down to 103.9%) and strong liquidity of $652.9 million in the BDC.
- High first-lien exposure at 87% and diversified portfolio across 136 companies, with no sub-sector exceeding 25% of assets.
- PIK income declined to 8.3% of revenue, with 93% from loans rated 1-3, and $39.9 million in cash PIK collections year-to-date.
- NAV per share increased 2.1% quarter-over-quarter to $12.15, driven by net unrealized appreciation of $29.6 million.
- Weighted average internal credit rating slightly worsened to 2.17 from 2.11 in Q1, with grade 1 and 2 credits declining to 65.4%.
- Rated 4 credits increased to 1.8% of portfolio from 0.8% in Q1, and the number of non-accrual loans rose by one to two.
- Elevated prepayments of $572.1 million in Q2 exceeded guidance, leading to a higher-than-expected core yield decline to 12%.
- Core yields are expected to further moderate to 11.8%-12% in Q3 due to portfolio churn and the impact of rate cuts.
- Increased competition from banks and non-bank lenders is leading to aggressive deal structures, requiring disciplined underwriting.
- Q3 originations are expected to be seasonally lower and back-end weighted, potentially slowing deployment momentum.
- M&A valuations and process timing remain uncertain in certain market segments, posing risks to exit activity.
- Operating expenses rose to $61.1 million in Q2, driven by higher variable compensation and excise tax reserves.
- The company faces potential headwinds from market volatility, which could impact portfolio performance and valuations.
- Prepayment activity is expected to normalize to $200-$300 million in Q3, potentially reducing prepayment-related revenue.
Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital second-quarter 2026 financial results conference call. (Operator Instructions) Please be advised that todayâs conference may be recorded. (Operator Instructions)
I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead.
Thank you, Leo. Good afternoon, everyone, and welcome to the Hercules conference call for the second quarter of 2026. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; Seth Meyer, President; and Andrew Olson, CFO.
Hercules financial results were released just after todayâs market close and can be accessed from the Hercules Investor Relations section at investor.htgc.com. An archive webcast replay will be available on the investor relations webpage following the conference call.
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