Trinity Capital Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Trinity Capital is an internally managed business development company (BDC) that primarily provides loans and equipment financing to growth-stage companies.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $46.4 million | $38.7 million | $134.0 million | $104.0 million |
| Net investment income | $23.4 million | $18.6 million | $64.8 million | $50.0 million |
| Net realized investment gain/(loss) | ($1.9 million) | ($0.6 million) | ($28.8 million) | $42.4 million |
| Net unrealized appreciation/(depreciation) | ($4.7 million) | ($30.0 million) | $23.2 million | ($121.2 million) |
| Net increase/(decrease) in net assets from operations | $16.8 million | ($12.0 million) | $59.2 million | ($28.8 million) |
- Q3 net investment income per share was $0.58 basic and $0.55 diluted; nine-month amounts were $1.75 and $1.66. Q3 net increase from operations was $0.42 basic and $0.40 diluted per share.
- Net investment income was about 50.4% of investment income in Q3, versus 48.2% a year earlier; for nine months, about 48.4% versus 48.0%.
- At September 30, investments were valued at $1.117 billion, compared with $1.094 billion at December 31, 2022. Net asset value was $569.5 million, or $13.17 per share, versus $459.6 million and $13.15 per share at year-end 2022.
- Cash and cash equivalents were $7.2 million. Debt outstanding was $532.5 million: $100.0 million under the KeyBank facility and $432.5 million in notes at principal value. KeyBank borrowing availability was approximately $250 million. Asset coverage was 206.9%.
- Nine-month operating cash flow was $40.1 million, versus cash used of $185.0 million in 2022. Cash declined $3.4 million over the first nine months, after $55.9 million of cash distributions and net repayments of credit-facility borrowings.
- Q3 interest expense and other debt financing costs were $10.8 million, up from $9.3 million; the weighted-average effective borrowing rate was 7.3%, versus 6.3%. The filing reports no conventional operating margin; net investment income is the relevant earnings measure for this BDC.
Material changes versus comparable periods
- Investment income increased 20.0% year over year in Q3 and about 28.9% for the nine-month period. Management attributed the increase primarily to higher stated interest rates and a larger principal balance of income-producing debt investments.
- Q3 operations returned to a gain from a loss a year earlier, helped by substantially lower unrealized depreciation. Nine-month results also improved from a loss to a gain, despite a $28.8 million net realized loss compared with a $42.4 million gain in 2022.
- Interest and other debt financing costs rose as borrowing costs increased. The company repaid $87.5 million more on its KeyBank facility than it borrowed during the first nine months; facility borrowings were $100 million at quarter-end, down from $187.5 million at 2022 year-end.
- Portfolio company count increased to 121 from 116 at year-end. Secured loans rose to 75.3% of portfolio fair value, while equipment financings declined to 20.0% from 22.5%.
- Common shares outstanding increased to 43.25 million from 34.96 million at year-end 2022, reflecting equity issuance, including an August public offering and ATM sales. Nine-month net proceeds from ATM sales were $26.0 million.
Outlook, risks and unusual items
- Management said cash and available KeyBank borrowings were expected to be sufficient for investment activity and operations in the near and long term. The filing provides no specific earnings, origination, or distribution guidance.
- The Board declared Q3 distributions of $0.49 per share quarterly and $0.05 supplemental. Distributions remain subject to Board discretion, earnings, liquidity, regulatory requirements, and RIC tax status.
- Four portfolio companies—two loan borrowers and two equipment-financing borrowers—were on non-accrual at quarter-end. Their investments had $42.5 million cost and $28.0 million fair value, equal to 2.6% of debt-investment fair value; at year-end 2022, the comparable fair value was $17.8 million, or 1.7%.
- Nine-month realized losses included a $26.3 million loss in affiliate investments, principally associated with FemTec Health. The investment schedule also identifies Core Scientific, Molekule, Bowery Farming, and GoFor Industries investments as non-accrual. The portfolio had $17.5 million of debt investments rated default/workout and $38.6 million rated watch.
- Valuation is a key uncertainty: 99.5% of investments by fair value were Level 3, using significant unobservable inputs. The company warns that reported fair values may differ materially from realizable values.
- Other stated risks include borrower credit and liquidity conditions, leverage, higher interest rates and inflation, bank failures affecting portfolio companies, and exposure to the life sciences sector (13.3% of portfolio fair value). The company reported no material legal proceedings, no debt covenant defaults, and effective disclosure controls.
Important facts for investors to verify
- Performance and collectability of the four non-accrual exposures, including the movement in their fair values and status of any workouts.
- Credit quality and valuation assumptions for the predominantly Level 3 portfolio, particularly the $17.5 million default/workout category and significant portfolio concentrations.
- Whether rising debt costs, variable-rate exposures, or rate declines materially change net investment income; Q3 borrowing cost increased to 7.3%.
- Capacity to sustain distributions relative to net investment income, cash generation, capital needs, and RIC distribution requirements.
- Refinancing and repayment plans for the $182.5 million 2025 Notes and other debt maturities, alongside the terms and availability of the KeyBank facility.
- Effects of share issuance and potential dilution, including the convertible notes, on NAV and per-share earnings.