Q4 2023 Horizon Technology Finance Corp Earnings Call
Participants
Megan Bacon; Director of IR and Marketing; Horizon Technology Finance Corp
Robert Pomeroy; Chairman of the Board, Chief Executive Officer; Horizon Technology Finance Corp
Dan Devorsetz; EVP, COO, and Chief Investment Officer; Horizon Technology Finance Corp
Gerald Michaud; President, Director; Horizon Technology Finance Corp
Dan Trolio; EVP, and CFO; Horizon Technology Finance Corp
Bryce Rowe; Analyst; B. Riley Securities, Inc.
Paul Johnson; Analyst; Keefe, Bruyette & Woods, Inc.
Christopher Nolan; Analyst; Ladenburg Thalmann & Co.
Presentation
Operator
Greetings, and welcome to the Horizon Technology Finance Corporation Fourth Quarter 2023 earnings call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Megan Bacon, Director of IR.
Megan Bacon
Thank you and welcome to Horizon Technology Finance Corporation Fourth Quarter 2023 conference call. Representing the Company today are Rob Pomeroy, Chairman and Chief Executive Officer, Gary Michel, President stands of Orthex Chief Operating Officer, and Chief Investment Officer, and Dan Foleo, Chief Financial Officer. I would like to point out that the Q4 earnings press release and Form 10-K are available on the Company's website at Verizon's at finance.com.
Before we begin our formal remarks, I need to remind everyone that during this conference call, the Company will make certain forward-looking statements, including statements with regard to the future performance of the Company. Words such as believe, expect, we anticipate, intend or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements and some of these factors are detailed in the risk factor discussion in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31st, 2023. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
At this time, I would like to turn the call over to Rob Pomeroy.
Robert Pomeroy
So welcome, everyone, and thank you for your interest in Horizon today, I will update you on our performance and our current overall operating environment. Dan divorces, our Chief Operating Officer and Chief Investment Investment Officer, will then take us through recent business and portfolio developments. We welcome Dan to the call, and he will now be a regular participant on our future calls. Gerry will then discuss the overall venture lending market, and Dan Trulia will detail our operating performance and financial condition. We will then take some questions 2023 was a challenging year for participants in the venture debt market, including horizon. While we were able to finish the quarter and year with our net investment income again, exceeding our quarterly and annual distributions as well as achieving record NII for the year, our net asset value declined due to the underperformance of certain stressed investments in our portfolio. The stressed in the venture capital ecosystem, including the collapse of Silicon Valley Bank, the tightening of capital availability, the closed IPO markets and the decline in valuations contributed to the unfavorable performance by some of our portfolio companies resulting in the reduction of the fair values of our investments in such portfolio companies. You'll hear this theme throughout our call, but we continue to work diligently to maximize the value of all of our investments, including where necessary from the sale of our portfolio companies or our collateral.
Recapping our full year 2023 results we generated net investment income of $1.98 per share, well in excess of our declared distribution level for the year due largely to higher interest rates on our floating rate debt investment portfolio and lower incentive fees earned by our adviser.
Based on our strong NII performance and the confidence in our outlook in 2023, we paid regular distributions of [$1.32] per share and a $0.05 per share special distribution. Our December special distribution marked the fourth consecutive year we paid such a distribution. We achieved a portfolio yield of more than 16% on our debt investments for the full year, once again at or near the top of the BDC industry, we finished the year with a committed and approved backlog of $218 million. We ended the year with a net asset value of $9.71 per share, primarily as a result of fair value mark downs of our investments.
We supported our balance sheet during the year, raising equity from an overnight equity offering in June, raising over $26 million of equity at a premium to NAV from our at-the-market program. We also expanded the capacity of our credit facilities with New York Life and key Bank, and importantly, our advisor Horizon Technology Finance Management completed its sale to Monroe Capital, now providing our advisor with access to Monro's platform and resources, which we expect to benefit horizon through increasing access and capability to originate quality venture debt investments. We were pleased to complete our first co-investment with Monroe in December with the origination of a loan to viral biotech.
Finally, based on our outlook and our undistributed spillover income of $1.25 per share as of year end last week, our Board declared monthly distributions of $0.11 per share payable through June of 2024, together with a special distribution of $0.05 per share payable in April. Entering 2024, we continue to actively manage all of our investments while we support our borrowers and seek to maximize capital recovery in a difficult venture market.
Looking ahead, we will remain prudent with respect to growing Horizon's portfolio of debt investments while we work to maximize our NAV. With that I will now turn the call over to Dan diversity to give you more details and color on our performance data.
Dan Devorsetz
Thanks, Rob, and good morning to everyone. I'm happy to join today's call and look forward to speaking to you all in the quarters to come.
Our portfolio size is slightly down the fourth quarter from the prior quarter at $709 million as new originations in the quarter were offset by prepayments and normal portfolio amortization as well as portfolio markdowns. In the fourth quarter, we funded six investments totaling $63 million, including debt investments to three new portfolio companies and three existing portfolio companies. This combination is a reflection of our long-term portfolio strategy of blending high-quality venture loans to new borrowers with additional financing to existing borrowers that achieve important operational and financial milestones. While we maintain a healthy pipeline of new opportunities, we expect to remain selective in new originations for the near term, and we expect the potential growth in the portfolio to occur towards the middle and back half of the year.
During the quarter, we experienced three loan prepayments and one partial paydown totaling $48 million in prepaid principle. Similar to past years, we expect modest prepayments in the first quarter of 2024 with a normal seasonal trend compounded by the weak IPO and M&A markets at the end of 2023, continuing in the 1st month of 2024, our onboarding yield of 13.8% during the fourth quarter remain near our historic highs, reflecting the ability of our team to source and structure new quality venture loans. Even in this challenging environment, we expect our discipline in structuring and pricing transactions to continue to produce strong net investment income. Our debt portfolio yield of 16.8% for the quarter and 16.6% for the full year with again, one of the highest yielding debt portfolios in the BDC industry. This further validates the profitability of our venture lending strategy and our execution of that strategy in an elevated interest rate environment. As of December 31st, we held warrant and equity positions in 99 portfolio companies with a fair value of $32 million. As a reminder, in addition, to the high net investment yield I just spoke about structuring investments with warrants and equity rights is a key component of our venture debt strategy and a potential generator of shareholder value. In the fourth quarter, we closed $124 million in new loan commitments and approvals and ended the quarter with a committed and approved backlog of $218 million compared to $202 million at the end of the third quarter. We believe our committed backlog with most of our funding commitments subject to our portfolio companies achieving certain key milestones provide a solid base as we look forward to prudently grow our portfolio during the course of the year.
As of year end, 90% of the fair value of our debt portfolio consisted of three and four rated debt investments compared to 87% as of September 30th, and 10% of the fair value of our portfolio was rated [201] compared to 13% as of September 30th. For our stressed investments, we are continuing to diligently work for innovative solutions that can enable us to achieve additional recoveries.
As Rob noted earlier, we continue to work closely and collaboratively with all of our current portfolio companies, their management teams, investors and stakeholders to navigate the continued uncertain venture macro environment while doing so, we remain just as focused on sourcing and originating new debt investments in order to take advantage of market opportunities to make venture loans to companies whose investors have increased their support at attractive valuations while we also benefit from the current interest rate environment.
With that, I'll turn it over to Jerry for a look at that overall venture industry and current environment.
Gerald Michaud
Thank you very much, Dan. Turning now to the venture capital environment. According to PitchBook, approximately $171 billion was invested in VC-backed companies in 2023, lowest total in four years, reflecting the ongoing market issues related to valuations and investors being inwardly focused on managing their existing portfolio investments, VC investment activity levels remain depressed in Q4 as venture capital investments from 2021 in the first half of 2022, continued to face devaluation issues and stress liquidity levels during 2023 VC funds that did raise capital during that time have maintained significant dry powder commitments, and we expect there will be pressure and opportunities in 2024 for VC funds to invest their LPs cap committed capital. We have witnessed many private company valuations drop steadily over the last six quarters. And there are some evidence that private company valuations are becoming more attractive again to both VC investors as well as strategic buyers. While we expect VC activity to gradually and steadily improve in 2024 certain market segments, such as AI solutions driven companies and life science companies should see significant investor interest in 2024. Of course, any improvement in the venture capital environment in 2024 will require the macro economic environment to continue to improve, including a reduction in overall inflation and interest rates during 2024.
In terms of VC fundraising, only $67 billion was raised in 2023, the lowest in six years as the avenue to Public Access remained largely closed in 2023. Vcs committed capital from their LPs remained high at record highs as a result of amounts raised during 2021 and 2022. VCs will remain reluctant to make new investments in the current market until exit markets improve and the significant correction in private company valuations subsides. We expect VC fundraising to lag VC investment in 2024 as the LP community remains largely on the sidelines until they begin to see attractive VC portfolio exits become more frequent. VCs will have high hurdles for raising new funds based on recent returns, quality of portfolios, organization, size and investment strategies.
Meanwhile, VC-backed exit activity at a decade low in 2023 as a modest market rally in the fourth quarter was not enough to fully open up the IPO market. The M&A market for venture-backed companies remained at historic lows as a combination of unrealistic valuations and higher interest rates, combined with regulatory scrutiny continued to keep acquirers on the sidelines. We believe 2024 valuations will begin to become more attractive as six quarters of because of six quarters of declining values. We believe industries such as energy, technology and healthcare are best positioned to resume M&A activity given historically high earning results, public stock prices posting strong gains and the elevated level of cash and liquidity on the balance sheets of technology, big pharma and energy companies.
In terms of market conditions for new venture loan investments, we expect the challenging environment of 2023 to moderate in the first half of 2024 so we should see a gradual increase in demand for venture debt during 2024. We hope to see, as Dan indicated, an increase in our originations as the year progresses Accordingly, we will stay on current course. I've thoughtfully adding select top quality investment opportunities to our portfolio during this period, while focusing on preserving and improving our current portfolio's value and credit quality. As market conditions improve over time, we continue to believe Horizon's solid reputation and long-term market presence will allow us to prudently accelerate portfolio growth. A key baseline for future prudent portfolio growth is our committed, approved and awarded backlog, which exit as of today and at $188 million. And our advisors' pipeline of new opportunities, which as of today stands at $743 million. To sum it up, it was a challenging 2023 for venture lending and venture investing. And we look forward to improving conditions for both our industry and our portfolio.
As we move through 2024, we will remain laser focused on credit quality and providing all of our portfolio companies with Ford to ensure optimal outcomes where we find attractive companies seeking venture debt solutions will add to our pipeline and backlog as we look to begin to prudently accelerate portfolio growth during 2024. Based on our current portfolio size and attractive yield, we believe we remain well positioned to continue to generate solid NII for our shareholders and build additional long-term shareholder value.
With that, I will now turn the call over to Antonio.
Dan Trolio
Thanks, Jerry, and good morning, everyone. We had a strong year from an NII standpoint, once again, generating NII more than covered our distributions are actively strengthening our balance sheet throughout the year. In addition, we continue to diligently work with all of our companies in order to optimize outcomes for our portfolio, further enhanced our credit quality through recape 2023, our portfolio stood at $709 million. In May, we expanded the capacity of our New York Life credit facility by $50 million to $250 million. In June, we successfully raised nearly [$39 million] in net proceeds from our common stock offering. Further strengthen our balance sheet in June by increasing the commitment amount on our KeyBank facility to $150 million and by expanding its accordion feature to $300 million at the end of the year, we fully paid off our 2019 securitization.
Finally, we successfully and accretively sold over 2.2 million shares through our ATM program during the year. Raising over $26 million, further demonstrating our continued ability to opportunistically access the equity markets. As a result, we believe we remain well-positioned to add quality investments to our portfolio and create additional value for shareholders in 2024. As of December 31st, we had $104 million in available liquidity, consisting of $73 million in cash and $31 million in funds available to be drawn under our existing credit facility. We currently have $70 million outstanding under our $150 million KeyBank credit facility and $181 million outstanding on our $250 million New York Life credit facility, giving us with ample capacity to grow the portfolio.
Our debt to equity equity ratio stood at [1.4:1] as of December 31st. And netting out cash and our balance sheet, our leverage was 1.2:1, which was within our target leverage based on our cash position and our board borrowing capacity on our credit facilities, our potential new investment capacity at December 31st was $222 million. For the fourth quarter, we earned investment income of $28 million, an increase of 22% compared to the prior year period.
Interest income on investments increased primarily as a result of the higher average size of our debt investment portfolio and increases in the variable interest rates on our debt investments. Portfolio investments on a net cost basis stood at $721 million as of December 31st, a 1% increase from September 30th, 2023. For the fourth quarter of '23, we achieved onboarding yields of 13.8% compared to 13.9% achieved in the third quarter. Our loan portfolio yield was 16.8% for the fourth quarter compared to 14.5% for last year's fourth quarter.
Total expenses for the quarter were $12.2 million compared to $12 million in the fourth quarter of '22. Our interest expense increased to $7.6 million from $6.2 million in last year's fourth quarter due to an increase in the average borrowings and higher interest rates on our borrowings. Base management fee was $3.2 million, up from $3 million in last year's fourth quarter due to an increase in the average size of our portfolio.
We had no performance-based incentive fee in the fourth quarter compared to an incentive fee of $1.4 million for last year's fourth quarter. This was due to the deferral of incentive fees otherwise earned by our advisor in the quarter under our incentive fee cap and deferral mechanism. for deferral was driven by unrealized and realized losses on the portfolio as 2024 progresses, we would expect deferral to end once again pay our adviser incentive fee.
Net investment income for the fourth quarter of 2023 was $0.45 per share compared to $0.53 per share in the third quarter of 2023, [$0.40] per share for the fourth quarter of '22. For the full year 2023, we generated NII of $1.98 per share more than covering our total distributions during 2023, $1.37 per share. Companies undistributed spillover income as of December 31st was $1.25 per share. We anticipate that the size of our portfolio, along with the portfolio's elevated interest rates and our predictive pricing strategy will enable us to continue generating NII that covers our distribution over time.
As a reminder, first quarter is typically the lightest in terms of prepayment activity and we expect the first quarter of 2024 to be in line with the lower historic norm summarize our portfolio activities for the fourth quarter, the [improved] resignations totaled [$63 million] which were offset by $13 million in scheduled principal payments and $48 million in principal prepayments and partial paydowns. We ended the year with a total investment portfolio of $709 million. Given the macro environment, we expect to remain selective in the near term with respect to originations. at December 31st, the portfolio consisted of debt investments in 56 companies with an aggregate fair value of $670 million and a portfolio of warrant, equity, and other investments in 102 companies with an aggregate fair value of $39 million.
Based upon our outlook, our Board declared monthly distributions of $0.11 per share for April, May and June 2024. Given our amount of spillover income. Our Board also declared a special distribution of $0.05 per share payable in April. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time. Our NAV as of December 31st was $9.71 per share compared to $10.41 as of September 30th, 2023 and $11.47 as of December 31st, 2022.
The [$0.70] reduction on NAV on a quarterly basis was primarily due to pay distributions, including the $0.05 per share special distribution, realized losses and adjustments to fair value, partially offset by net investment income. As we've consistently noted, nearly 100% of our outstanding principal amount of our debt investments, bear interest at floating rates with coupons that are structured to increase if interest rates rise with interest rate floors.
This concludes our opening remarks, and we'll be happy to take questions you may have.
Question and Answer Session
Operator
And ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad and the confirmation tone will indicate your line is in the question queue, you may press star two. If you would like to remove your question from the queue of participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
And our first question comes from the line of Bryce Rowe with B. Riley Securities. Please proceed.
Bryce Rowe
And I think a lot of.
Good morning, Monday.
Morning the morning thought I'm wondering, wanted to maybe start with getting some updates on a couple of portfolio companies. I mean those that you've kind of mentioned in recent releases here, the Nexi building on what looks like the maturity on that one was shifted a little bit early or earlier to the end of March and and then also wanted to understand kind of the dynamics of the recent sale of HIMV. and kind of what that means relative to where you where you have that marked on the schedule of investments right now?
Dan Devorsetz
Thanks. Sure. Hey, Bryce, this is Dan diversity. Thanks. So it's good to talk to you. So your next CO. is a during the during the quarter, it became inevitable that the Company needed to find a new home. And so the best way to do that was to run it through a process so it's been publicly announced. So this is not news that it's in the CCW process to the equivalent of Chapter 11 here in the States. So we did adjust our our maturity and some of the terms of our deal to align with what's going on in that process. The company continues to operate and deliver on its contracts. In fact, it's doing pretty well. It's it's signed some new contracts and is doing well. So we expected to find a home in the next couple of quarters. And we adjusted our terms as you suggested to to accommodate that.
In terms of IMV. Also, this is public news or not not not of urban breaking anything, but BiovaxID, which is a small-cap company and also in Canada acquired the assets of A. and B out of the HIMBC. entity that we created to to acquire the IP. The plan is to develop those assets internally as well as find other partners in the market to to own, to develop above really a strong platform of biotech IP. And so we received cash and stock as part of that as part of that transaction as well as future payment schedules based upon performance and milestones that could potentially repay all of our initial investment in that in the original and the asset. So our mark values that entire contract and the potential we see in the in the future payments as well as what we receive different.
Bryce Rowe
Okay. That's helpful, Dan. Good color. And let's say just maybe a couple of questions from, I guess, balance sheet perspective. I'm kind of surprised to see kind of lack of ATM use in the quarter, just given the track record of tapping that ATM quite actively. I'm just kind of curious, maybe maybe a question for Dan Giulio, what -- why the lack of ATM use in the quarter?
Dan Trolio
So every quarter, when we go into the quarter, we look at our capital needs and look at our different levers to pull in each one each quarter and determine the best use to raise whatever equity or debt capital.
In addition to that, we look at the portfolio and we look at the activity that's going into the quarter and the amount of information that we may know at the time.
And so we felt it was prudent to be out of the market in the quarter
Bryce Rowe
Okay, that's helpful.
And then in terms of cash on the balance sheet balance sheet leverage, I mean, it sounds like the first half of the year will be slower than the back half? Are you are you thinking you'll you'll continue to maybe be less active on the ATM and use use cash and available on availability within the credit facilities to fund? Or is it just really just dependent on how the how the pipeline and the activity level starts to shape up as we get into the year?
Dan Trolio
Yes, it'll will definitely be dependent on how the the activity shapes up for the year we did and 2023 with a large cash balance. And that's because we see that very late prepayment on. And you can see in the first quarter from our recent developments, there hasn't been a lot of activity in the quarter to date. But as we look forward, we'll do the same thing that I mentioned earlier and looked at what we see coming down the pipeline, our capital needs, we will definitely look to consider any equity raise that way.
Makes sense or, you know, borrow like you said on the facilities. So it'll definitely be dependent on what we say.
Bryce Rowe
Okay.
Last one for me. Another one for you, Dan. I'm just thinking about the the mechanics of the deferred income incentive fee, let's assume that kind of comes back into play. How does the deferred portion work? Does it does it run through the income statement in future quarters? Or would it just what it was just reduced the I guess, the liability that's held on the balance sheet fixed?
Dan Trolio
Yes. So you'll have to work through that and the under the calculation, Alex, back on three years and on with the amount that's deferred right now, we do not have it on the balance sheet as a liability per se. And if it is earns going forward, it will run through the income statement.
Bryce Rowe
Okay.
And I think for me appreciate it.
Operator
(Operator Instructions) Paul Johnson with KBW.
Paul Johnson
Yes, good morning, thanks for taking my question. And part of this was answered kind of in your commentary on mix, but I'm just kind of wondering your thoughts, you know, in general for the stressed assets, you know, and really the DC market in general, what is kind of like the overlying?
Yes, stress that's been the issue for the last several quarters. I mean, is it just been simply that sponsors held off for potentially too long, trying to avoid kind of the pain of obviously lower lower valuation rounds? Or are these more idiosyncratic, you're sort of that you're kind of seeing within the portfolio? Any any comments there would be?
Gerald Michaud
Yes, Paul, this is Jerry. You kind of hit on both sides of that. I mean the fact of the matter is that through the whole 2023, even even companies in our portfolio that have been performing well and have been able to raise capital the amount of capital we've been able to raise and the valuations at which they've been able to raise. It has been really painful for the companies for the VCs based on their carrying value of those companies. And so that has that, that has led to literally every time a portfolio company gets to a point where they're getting a little on liquidity and they have to raise money. It's not just a matter of, you know, and looking at the valuation and figuring out what's appropriate, whether you do a down round or bridge financing or whatever it's you know, with venture capital firms are struggling with their own portfolio valuations and it's difficult for a lot of VCs to put money into companies, put new capital into companies when the capital, they already have it in his way underwater. And you know, they are the LPs are basically saying don't continue to throw good money after bad, and that's kind of a common theme we have seen throughout the year. And obviously valuations have taken, you know, a huge hit over the last six quarters. I think Nexi was valued at $2 billion at one point in 2022, significant idea. And so that's been, you know, definitely a big part of the problem. I would like to say that the only from the fact of the matter is it in some of these instances, there are some idiosyncratic issues relative relative to how these companies have been managed on who their investors are the ability of those investors under any circumstances to put in more capital. And so we really have really, for the whole year had to roll up our sleeves and get I'm really heavily more heavily involved in and kind of figuring out what the what the best strategy is to exit some of these transactions. And we've touched on some of Nexi was Nexi is one, obviously at what we saw what we did with INVM. And so those are those are real issues that are more as much idiosyncratic. I would say as they are just the overall markets. So it's been it's been difficult, I would say, and I don't want to sound too confident here at all, but we are seeing some what I call green shoots relative to overall market conditions. For instance, there were seven public life science IPOs in the first two months of this year last year during the same period of only two. And so we are seeing starting to see and there's been some M&A activity in the marketplace as well. Again, I wouldn't say we're out of the woods by any stretch. I think this is going to be a really interesting year, especially the first half of it. But I do think that valuations have gotten to a point now where they are becoming a little bit more attractive to M&A buyers on. And as I mentioned, even the even the IPO market seems to be showing some signs of life anyway. So that's where we are.
Paul Johnson
Thanks for that. Very helpful. A lot of color in there. I mean, it sounds like there may be some testing of the waters, but I mean has the young more recent kind of I mean, the prime rates [8.5%], I believe, I mean, does it hold the higher for longer? You know, commentary, I guess that's out there.
Gerald Michaud
I mean just that push that out any further on this year, do you thinking more recently, I guess the recovery in that market, as you know, I wish I I read I read probably the same things you read and I wish I had a So all I can all we can do really is at the ground level at this point, just look at how all of this impacts our portfolio companies as well as the new transactions we're looking at and know like it's definitely going to be an interesting. Like I said, the first half of 2020 was going to be very interesting and it could go it could go either way because I mentioned higher interest rates and lowering lowering inflation has been macroeconomic issues, but there's also two wars and a in an election coming up. So we were just trying to predict through all that relative to looking out to the future in 2024. It's really it's really difficult. But so we've got our head down. We're looking at every one of our portfolio companies. We're staying extremely close to the management teams to their investors that really all the stakeholders. And yes, we're going to manage our way through this. I'm not trying to maximize the value of all of our assets, including those that are distressed right now.
Paul Johnson
Appreciate it. Thanks for that. And last one, I'd just ask, I mean, do you think that there's any kind of potential for just some incremental G&A cost savings from the acquisition of the and Monroe?
Robert Pomeroy
Yes.I'll take that one, Paul. It's Rob. I think on the margin, absolutely. But the investment management agreement between HTFM. and the public company, establish the admin fees and costs that are important. But we have we have seen some And as it relates to and things at cost borne by the public company, D&O insurance and other things that I'm sure is helpful.
So we have already seen a few of those, but not big enough, but helpful backdrop.
Paul Johnson
Great. That's helpful.
Operator
Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed.
Christopher Nolan
I apologies. I joined the conference late on back to the ATM use question unless the outlook for the leverage ratio going forward.
Dan Trolio
So as we mentioned, our target leverage is net of cash, 1.2 times. And so with that, at that level again at the target. What we report is always a point in time. So if we're a little above that, then we feel comfortable because there's significant amount of cushion between the 1.2 and the 2 times our regulatory cap. So I would say the outlook is to be within that range.
Christopher Nolan
got you on the dividend, I know that you guys announced a supplemental dividend for the first quarter, given the rise in nonaccruals from but also giving your high levels of spillover income by some thoughts on further on dividend supplements through the year?
Dan Trolio
Yes. So each quarter, we have a on the distribution discussion with our Board and determining the level of not only the quarterly distribution, the monthly distributions each quarter, but also the need for supplemental distribution. And based on exactly what you said, the elevated spillover that we have coming out of 2023, our outlook for 2024, we felt it was prudent along with the Board to provide a special distribution at this time, and then we will continue to do the same each quarter.
Christopher Nolan
And a final question related to a spillover from do you guys compare what the excise tax would be not distributing in terms or I mean, how does the excise tax consideration fall into your spillover consideration your ex-pit of a marketed (multiple speakers) --?
Dan Trolio
Yes, it's part of the consideration, but at 4% it isn't a significant expense to the balance sheet. I know some would say it's a lower cost way to see capital on the balance sheet. And so with the spillover, we look at the level of where it is at the current point in time and be able to distribute the spillover in the required period to stay within the work and BDC. requirements.
Christopher Nolan
Great. separately, if I can limit.
Dan Trolio
Thank you.
Operator
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Rob Pomeroy for closing remarks.
Robert Pomeroy
Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon, and we look forward to speaking with you again soon. This will conclude our call.
Operator
This concludes today's conference. You may now disconnect. Have a great day.
