Trinity Capital Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2020, filed August 12, 2020. Trinity Capital is an internally managed, closed-end business development company and specialty lender focused primarily on secured loans and equipment financings for growth-stage and venture-backed companies. The company commenced BDC operations on January 16, 2020, following formation transactions that acquired Trinity’s legacy funds and related management assets. Accordingly, the filing states that meaningful prior-period operating comparisons are not available.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Total investment income | $12.8 million | $23.7 million |
| Total expenses | $7.1 million | $13.7 million |
| Net investment income | $5.7 million | $10.0 million |
| Net realized gain/(loss) | $(1.0) million | $(0.5) million |
| Net unrealized appreciation/(depreciation) | $2.2 million | $(22.1) million |
| Net increase/(decrease) in net assets from operations | $6.9 million | $(28.2) million |
| Net investment income per share | $0.31 | $0.56 |
| Net increase/(decrease) per share | $0.38 | $(1.57) |
Total investment income represented an approximate yield on investments of 13.4% for the quarter and 13.5% for the six-month period. The weighted average cost of debt, including interest and fees, was approximately 5.5% for both periods. Annualized net investment income and total expense ratios were 9.66% and 13.25% of average net assets, respectively.
- Net assets were $228.6 million at June 30, 2020, compared with $(0.5) million at December 31, 2019, reflecting the January formation transactions and capital raises.
- Net asset value was $12.61 per share at June 30, 2020, versus an initial operating-period value of approximately $14.97 per share.
- The investment portfolio had a fair value of $418.8 million across 83 portfolio companies, consisting primarily of secured loans of $283.9 million and equipment financings of $95.8 million. Equity and equity-related investments totaled approximately $39.2 million.
- All portfolio investments were classified as Level 3 fair-value assets, requiring significant unobservable inputs and subjectivity in valuation.
- Cash, cash equivalents and restricted cash totaled $38.4 million, including $21.8 million of cash and cash equivalents and $16.6 million of restricted cash.
- Cash used in operating activities was $12.1 million; cash used in investing activities was $91.8 million; and cash provided by financing activities was $142.3 million. Net cash increased by $38.4 million during the six months.
Material changes versus the prior comparable period
No meaningful prior-period operating comparison is provided because Trinity Capital was formed in August 2019 and commenced operations on January 16, 2020. The principal changes during the six months were the completion of the formation transactions, acquisition of the legacy investment portfolio, and establishment of the company’s capital structure.
- Trinity issued 8.33 million common shares for approximately $125.0 million of gross proceeds and issued $125.0 million of 7.00% unsecured notes due 2025.
- The company assumed a $300 million Credit Facility. Approximately $105 million was outstanding at June 30, 2020, with approximately $70.2 million of remaining borrowing availability.
- Formation transactions resulted in $15.6 million of acquisition-related costs, including approximately $13.5 million related to Trinity Capital Holdings and approximately $2.1 million related to the legacy funds.
- The six-month net decrease in net assets was driven substantially by $22.1 million of net unrealized depreciation, which management attributed primarily to COVID-19-related market yields and deterioration in certain portfolio company fundamentals.
- During the six months, Trinity invested approximately $101.5 million, including $46.8 million in nine new portfolio companies and $54.7 million in 11 existing portfolio companies, while receiving $82.2 million from investment repayments and sales.
Guidance, outlook, risks and unusual items
- The company declared a quarterly distribution of $0.22 per share during the six-month period and, after quarter-end, declared a $0.27 per-share distribution payable September 4, 2020.
- Management expects COVID-19 to adversely affect portfolio company operations and future results, with potential impacts including reduced interest collections, defaults, additional non-accruals, lower investment valuations and reduced distributions.
- Three portfolio company loans were on non-accrual status at June 30, 2020, with total cost of approximately $4.7 million and fair value of approximately $2.8 million, or 0.7% of the investment portfolio’s fair value.
- The portfolio’s weighted average risk rating was 3.2. Investments rated 4.0 to 5.0 represented $63.9 million, or 16.8% of the loan and equipment-financing portfolio at fair value.
- Available liquidity was approximately $92.0 million, comprising cash and cash equivalents and Credit Facility availability. The Credit Facility requires a minimum cash balance of $15.0 million and a 60-day interest reserve, in addition to other financial covenants.
- Debt consisted principally of approximately $105.0 million outstanding under the Credit Facility, which generally bears interest at three-month LIBOR plus 3.25%, and $125.0 million of 7.00% unsecured notes due January 2025.
- The company had $1.4 million of unfunded commitments to one portfolio company. Management stated that these commitments may not represent future cash requirements because they can depend on milestones or adverse-event conditions.
- Interest-rate sensitivity is unfavorable because borrowings are predominantly floating-rate while 91.7% of debt investments at fair value were fixed-rate. A 100-basis-point increase in applicable rates was estimated to reduce annualized net income by approximately $1.0 million.
- The company intends to qualify as a regulated investment company and must generally distribute at least 90% of investment company taxable income and tax-exempt income to maintain pass-through tax treatment.
- No material legal proceedings were pending, and management concluded that disclosure controls and procedures were effective as of June 30, 2020.
Most important facts for investors to verify
- Whether COVID-19-related portfolio deterioration results in additional non-accruals, defaults, restructurings or fair-value markdowns after June 30, 2020.
- The sustainability of net investment income and distributions relative to borrowing costs, operating expenses and required RIC distributions.
- The company’s compliance with Credit Facility covenants, including minimum cash, leverage and asset-coverage requirements.
- The accuracy and sensitivity of Level 3 investment valuations, particularly for investments with substantial unrealized depreciation.
- Repayment or refinancing plans for the Credit Facility maturing in January 2022 and the $125 million of unsecured notes due in January 2025.
- The effect of fixed-rate portfolio investments, floating-rate borrowings and LIBOR transition on future net investment income.
- Exposure to higher-risk portfolio companies, including the three non-accrual investments and holdings concentrated in professional services, manufacturing and retail.
- Completion and effectiveness of the required resale registration statements and any future listing or capital-raising activity.