Trinity Capital Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Trinity Capital is an internally managed business development company (BDC) that primarily provides loans and equipment financing to growth-stage businesses.
Financial performance and position
- Investment income: Q2 was $46.0 million, up from $33.5 million in Q2 2022. Net investment income was $22.1 million, or $0.61 per basic share ($0.58 diluted), versus $15.7 million, or $0.51 ($0.48 diluted), a year earlier. The reported effective yield on average investments was 16.2%, compared with 13.8%.
- Operating results: Q2 net increase in net assets from operations was $19.9 million ($0.55 per basic share; $0.52 diluted), versus a $7.7 million decrease in Q2 2022. The result included $24.4 million of unrealized investment appreciation and $26.6 million of realized investment losses. For the first six months, net investment income was $41.4 million versus $31.3 million; net increase in assets from operations was $42.4 million versus a $16.8 million decrease.
- Expenses: Q2 expenses were $23.3 million before $0.7 million of excise tax, compared with $17.1 million and $0.7 million, respectively, in Q2 2022. Interest and debt financing costs rose to $12.0 million from $7.8 million, primarily reflecting higher borrowings and floating rates.
- Portfolio and NAV: Investments at fair value totaled $1.148 billion, up from $1.094 billion at December 31, 2022. The portfolio comprised $856.0 million of secured loans, $244.1 million of equipment financings, and $47.9 million of equity and warrants. NAV was $13.15 per share, unchanged from year-end.
- Debt and liquidity: Debt outstanding was $664.5 million at quarter-end, including $232.0 million under the KeyBank facility and $432.5 million of notes at principal value. Cash and equivalents were $12.3 million; reported availability under the KeyBank facility was $118.0 million, down from $162.5 million at year-end. Asset coverage was 172.5% versus 174.1% at year-end.
- Cash flow and distributions: For the first six months, operating activities used $15.4 million, reflecting investment deployment; financing activities provided $18.5 million. Cash increased $1.7 million to $12.3 million. The company declared a Q2 quarterly distribution of $0.48 per share plus a $0.05 supplemental distribution, paid July 14, 2023.
Material changes and notable items
- Investment income growth reflected a larger income-producing debt portfolio and higher stated interest rates. Interest expense and other debt financing costs increased to $23.1 million for the first half from $14.6 million in 2022.
- Investment fair value increased while NAV per share remained flat. First-half share issuance under the at-the-market program generated $13.7 million net proceeds; 1.02 million shares were issued. The convertible notes’ conversion rate increased to 74.6205 shares per $1,000 principal, equivalent to approximately $13.40 per share, following a cash dividend adjustment.
- One portfolio-company loan and equipment financings to two companies were on non-accrual at June 30, with $34.5 million cost and $22.5 million fair value, or 2.0% of debt investments’ fair value. At year-end, four portfolio companies were on non-accrual, with $49.2 million cost and $17.8 million fair value.
- The company recorded a $26.3 million realized loss on affiliate investments in Q2; the filing’s affiliate schedule attributes the first-half realized loss to FemTec Health. Unrealized appreciation partly offset realized losses.
- Most investments are illiquid and valued using Level 3 inputs: 99.5% of investments by fair value. The ten largest portfolio companies represented 29.8% of investment fair value, down from 31.7% at year-end.
Outlook, risks, and contingencies
- Management said cash and available KeyBank borrowings were expected to be sufficient for near- and long-term investment activity and operations. No specific earnings, portfolio growth, or distribution guidance was provided.
- Key risks include borrower defaults and uncertain fair values; growth-stage company and industry risks; leverage and rising borrowing costs; inflation’s impact on portfolio-company margins; and limited liquidity in private investments. Approximately 72.1% of debt investments by principal were floating rate, while the KeyBank facility also bears floating-rate interest.
- The filing identifies banking-sector disruption as a potential indirect risk to portfolio-company repayment. It also highlights regulation and other industry-specific risks for life-sciences investments, which were 10.1% of the portfolio.
- The company had a $12.7 million unfunded commitment to its joint venture, with no other outstanding unfunded portfolio-company commitments reported. Management reported no material pending legal proceedings, no material subsequent events, and compliance with debt covenants at quarter-end.
Important facts for investors to verify
- How realized losses, non-accrual exposures, and borrower performance affect future income and portfolio valuations.
- Whether Level 3 valuation assumptions and portfolio-company credit quality support reported investment fair values.
- Whether available credit-facility capacity and cash remain adequate as borrowings, interest costs, and investments change.
- The sustainability of distributions relative to net investment income, taxable income, and cash generation.
- Potential dilution from ATM share issuance and conversion of the $50 million convertible notes due 2025.