Trinity Capital Inc. — Form 10-Q Summary
Business context and reporting period
Trinity Capital Inc. is an internally managed, non-diversified business development company and specialty lender focused primarily on secured loans and equipment financings for growth-stage and venture-backed companies. It commenced operations on January 16, 2020 after completing formation transactions that acquired legacy funds and Trinity Capital Holdings. This unaudited quarterly report covers the three and nine months ended September 30, 2020, with limited prior-period comparability because the company was formed on August 12, 2019 and had no substantive operations before January 16, 2020.
Financial condition and key metrics
| Metric | Three months ended September 30, 2020 | Nine months ended September 30, 2020 |
|---|---|---|
| Total investment income | $13.5 million | $39.6 million |
| Total expenses | $8.0 million | $21.7 million |
| Net investment income | $5.5 million | $18.0 million |
| Net realized loss on investments | $1.5 million | $4.4 million |
| Net unrealized appreciation/(depreciation) | $8.3 million | $(13.8) million |
| Net increase/(decrease) in net assets from operations | $12.3 million | $(15.8) million |
| Net investment income per share | $0.31 | $1.00 |
| Net increase/(decrease) in net assets per share | $0.68 | $(0.88) |
- Investment income yield was approximately 14.1% for the quarter and 14.6% for the nine-month period, based on investments during those periods.
- Annualized expense and net investment income ratios were 13.39% and 11.10%, respectively. The weighted average cost of debt, including interest and financing fees, was approximately 5.4% for both periods.
- Net asset value was $237.3 million, or $13.01 per share, at September 30, 2020, compared with negative net assets at December 31, 2019 before the company commenced substantive operations.
- The investment portfolio had a fair value of $425.5 million across 81 portfolio companies, consisting of $273.6 million of secured loans, $107.7 million of equipment financings, and $44.2 million of equity and equity-related investments.
- All portfolio investments were classified as Level 3 fair value measurements and were valued using significant unobservable inputs. Portfolio cost was $439.3 million, implying aggregate unrealized depreciation of $13.8 million.
- Cash and cash equivalents were $36.3 million; restricted cash was $16.3 million. Total cash, cash equivalents and restricted cash were $52.7 million.
- Cash flow used in operating activities was $3.9 million, cash flow used in investing activities was $91.8 million, and cash flow provided by financing activities was $148.3 million. Ending cash, cash equivalents and restricted cash increased by $52.7 million.
Debt, liquidity and distributions
- The Credit Facility had approximately $115.0 million outstanding at September 30, 2020, with approximately $56.8 million of borrowing availability. It matures January 8, 2022 unless extended and generally bears interest at three-month LIBOR plus 3.25%.
- The company had $125.0 million of 7.00% unsecured Notes due January 16, 2025. Carrying values, net of unamortized financing costs, were $112.4 million for the Credit Facility and $120.2 million for the Notes.
- Total outstanding debt for asset-coverage purposes was $240.0 million. Asset coverage was 198.64%, above the applicable 150% minimum, and management stated a target leverage range of 1.15x to 1.35x.
- Available liquidity was approximately $93.1 million, including cash and cash equivalents and available Credit Facility capacity. The Credit Facility requires, among other items, a minimum $15.0 million cash balance and a 60-day interest reserve.
- The company declared quarterly distributions of $0.22 per share and $0.27 per share during the nine months. On November 9, 2020, the board declared an additional $0.27 per share distribution payable December 4, 2020.
Material changes versus the prior comparable period
- Meaningful year-over-year comparisons are unavailable because the company was newly formed and had no substantive operations before January 16, 2020; the prior comparison period largely reflects formation expenses.
- The nine-month net loss was driven primarily by $15.6 million of formation and acquisition costs, including approximately $13.5 million related to Trinity Capital Holdings and $2.1 million related to the legacy funds.
- The company raised $125.0 million through common stock offerings and $125.0 million through the 7.00% Notes offering in January 2020, issued 9.2 million shares in the formation transactions, and substantially expanded its investment portfolio.
- Net unrealized depreciation of $13.8 million and net realized losses of $4.4 million reduced nine-month results. Management attributed unrealized depreciation primarily to COVID-19-related uncertainty, market yields and portfolio company performance.
- During the nine months, the company invested approximately $138.0 million in 12 new and 13 existing portfolio companies and received $118.6 million from investment repayments, sales and exits.
Guidance, outlook, risks and unusual items
- The filing provides no formal earnings or investment-originations guidance. Management expects COVID-19 to continue affecting portfolio companies and operating results but states that the duration and magnitude are uncertain.
- Four portfolio companies were on non-accrual status at September 30, 2020. Their aggregate cost was approximately $9.0 million and fair value was approximately $4.1 million, or 1.0% of the investment portfolio.
- Approximately $21.3 million of unfunded commitments to three portfolio companies were available and unencumbered by milestones. The company funded $19.7 million of its DailyPay commitment on October 1, 2020.
- COVID-19 may cause additional defaults, non-accruals, valuation reductions, reduced interest payments, lower distributions and weaker liquidity. Manufacturing and retail exposures were identified as particularly affected industries.
- Key structural risks include concentration in private growth-stage companies, Level 3 valuation uncertainty, illiquidity, covenant-lite loans, leverage, floating-rate borrowing costs, dependence on LIBOR, cybersecurity and regulatory risks.
- Approximately 84.8% of debt investments at fair value were fixed-rate and 15.2% were floating-rate. Management’s sensitivity analysis indicated that a 100-basis-point increase in rates would reduce annualized net income by approximately $1.0 million, while a 100-basis-point decrease would increase it by approximately $0.3 million under the stated assumptions.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings were pending or threatened to the company’s knowledge.
Most important facts for investors to verify
- Reconcile portfolio fair value, cost basis and the concentration of exposure by industry, geography and individual borrower.
- Review the four non-accrual investments, including Vidsys, STS Media, Edeniq and Utility Associates, and assess potential further write-downs or recoveries.
- Evaluate the sustainability of net investment income and distributions after excluding one-time fees, accelerated OID and end-of-term fee income.
- Confirm Credit Facility covenants, borrowing-base capacity, maturity and refinancing risk, particularly as the facility matures in January 2022.
- Assess the impact of COVID-19 on borrower liquidity, defaults, collateral values, investment repayments and future originations.
- Review the assumptions supporting Level 3 valuations, including market yields, revenue multiples, volatility and estimated exit periods.
- Consider the $21.3 million of unfunded commitments, including the $19.7 million DailyPay funding made after quarter-end.
- Review related-party formation transactions, management ownership interests and the company’s ability to maintain BDC and regulated investment company tax status.