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Wall Street Quick to Cut Hercules Capital as College Scam Stings

Felice Maranz
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Wall Street Quick to Cut Hercules Capital as College Scam Stings

(Bloomberg) -- Analysts covering Hercules Capital Inc. were quick to cut their ratings and price targets after former Chief Executive Officer Manuel Henriquez was among those charged in an alleged college-admission cheating conspiracy.

Henriquez, who stepped aside as the scandal gained force, founded and had been seen as “the face” of the venture-debt company. Analysts worried that Hercules’s access to capital and origination growth may be hurt. Even so, Wells Fargo said there was likely “excessive selling in the stock,” and advised investors to “lean in as fears of catastrophe are overblown.”

Shares rose less than 1 percent in early Wednesday trading, after closing down 8.9 percent on Tuesday at the lowest since Jan. 15.

Here’s a sample of what analysts are saying:

KBW, Ryan Lynch

The FBI’s claims are “very damaging” to Hercules, with Henriquez as the organization’s founder, (former) CEO, and its “face,” Lynch wrote in a note.

Henriquez was “very instrumental to the company,” and built it into a BDC, or business development company, “with one of the best track-records” in the sector. Henriquez’s reputation had led shares to trade at a premium to book value and peers.

Now, risks include “higher-than-expected credit write-downs, access to capital, interest rate volatility, regulatory risks, execution risks, changes in the competitive landscape and any forced divestiture of illiquid assets.” Lynch also lowered KBW’s price target to $11.50.

Compass Point, Casey Alexander

Hercules “has an impressive lending team, but we believe Mr. Henriquez has his hand in virtually every loan,” Alexander wrote in a note cutting his rating to neutral. “Given current events there is the possibility that originations could slow.”

“We do believe the strong credit culture sits across the HTGC platform and would not likely change, but the ability to continue rapid origination growth could suffer.”

B. Riley FBR, Tim Hayes

Hayes cut his rating to neutral and slashed his price target to $11.50. He sees “uncertainty” weighing on shares, with a likelihood of “some disruption,” while Hercules will probably “have to do damage control with borrowers/counterparties.”

Even so, B. Riley FBR left estimates for 2019 and 2020 core net interest income per share unchanged, as the company isn’t involved in the scandal, and its fundamentals “should remain largely intact.” Hayes’s note also flagged B. Riley FBR’s involvement in public offering of securities and fees for investment banking services from Hercules Capital in the past 12 months.

Wells Fargo, Finian O’Shea

Tuesday’s “indictment of CEO Manuel Henriquez is generating excessive selling in the stock that will likely continue as investors digest the news,” O’Shea wrote in a note. “While we are lowering our price target to reflect idiosyncratic risk, we would advise investors to lean in as fears of catastrophe are overblown.”

O’Shea noted the company was “in no way involved,” which offers comfort “given the thoroughness of the investigation/affidavit.”

He sees “maintaining employees as critical, but certainly doable as they will now likely have expanded domain,” while other “liquidity risks like unfundeds ($139 million) appear manageable.” He adds that there may not be “material risk in attracting new loans as HTGC is not in the traditional sponsor business where sourcing depends on those relationships.”

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Sebastian Silva

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