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 regulated investment company focused on secured loans, equipment financings, and related equity investments for growth-stage and venture-backed companies. The filing covers the three months ended March 31, 2021. Trinity began operations on January 16, 2020, so the prior-year comparison is a partial-period comparison.
Financial performance and key metrics
| Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 |
|---|---|---|
| Total investment income | $17.3 million | $12.2 million |
| Total expenses | $10.1 million | $6.5 million |
| Net investment income | $7.3 million | $5.7 million |
| Net realized gain/(loss) | $2.6 million | $(0.9) million |
| Net unrealized appreciation/(depreciation) | $15.5 million | $(24.3) million |
| Net increase/(decrease) in net assets from operations | $25.3 million | $(35.1) million |
| Net investment income per share | $0.31 | $0.32 |
| Net increase/(decrease) per share from operations | $1.08 | $(1.97) |
- Investment income increased approximately 41%, driven by higher stated interest income and OID/EOT accretion; fee income declined.
- Net investment income represented approximately 42% of investment income. The filing reports an annualized net investment income-to-average-net-assets ratio of 9.8%, compared with 12.2% in the prior-year period.
- Interest expense and other debt financing costs were $4.6 million, versus $4.3 million, while the weighted effective borrowing rate increased to approximately 7.2% from 6.4%.
- Net asset value increased to $13.69 per share from $13.03 at December 31, 2020. The company declared a $0.28-per-share distribution, paid April 16, 2021.
- Portfolio investments at fair value were $535.7 million across 80 portfolio companies, compared with $493.7 million at December 31, 2020. Secured loans comprised 62.6% of fair value, equipment financings 23.9%, equity 9.3%, and warrants 4.2%.
- Non-accrual investments totaled approximately $1.4 million at fair value, or 0.3% of the investment portfolio, compared with 0.5% at December 31, 2020.
Cash flow, debt and liquidity
- Net cash used in operating activities was $19.7 million, reflecting $86.7 million of investment purchases versus $67.0 million of investment repayments and sales.
- Net cash used in investing activities was $0.5 million, and financing activities provided $10.4 million.
- Cash, cash equivalents and restricted cash declined to $51.3 million from $61.1 million at year-end; approximately $15.3 million was restricted under Credit Facility covenants.
- Credit Facility borrowings declined to $45.0 million from $135.0 million, with approximately $72.5 million of borrowing availability. The facility matures January 8, 2022, unless extended, and bears interest at three-month LIBOR plus 3.25%.
- Outstanding debt principal totaled $220.0 million: $45.0 million under the Credit Facility, $125.0 million of 7.00% Notes due 2025, and $50.0 million of 6.00% Convertible Notes due 2025.
- The asset coverage ratio was 264.3%, compared with 177.0% at December 31, 2020, versus a 150% regulatory minimum. Management targets leverage of 1.15x to 1.35x.
Material changes versus comparable periods
- The company completed its initial public offering on February 2, 2021, issuing 8,006,291 shares at $14.00 per share. Net proceeds were primarily used to repay Credit Facility borrowings.
- Shares outstanding increased to 26.4 million at March 31, 2021 from 18.3 million at December 31, 2020, reflecting the IPO and distribution reinvestment activity.
- Portfolio fair value increased by $42.1 million sequentially. New investments totaled approximately $87.1 million, while repayments and sales totaled $67.0 million, including $40.8 million of early repayments.
- Unrealized appreciation shifted to $15.5 million from a $24.3 million depreciation in the prior-year quarter. The largest positive valuation change was Atieva, Inc. at $22.2 million; significant depreciation included Birchbox at $8.0 million and Ology Biosciences at $5.7 million.
- Investment concentration changed toward manufacturing and retail trade, while professional, scientific and technical services declined as a percentage of portfolio fair value.
- The company early adopted ASU 2020-06, simplifying accounting for the Convertible Notes and reducing net assets by approximately $0.5 million at adoption.
Guidance, outlook, commentary and risks
The filing does not provide quantitative earnings or investment guidance. Management states that available cash, restricted cash and Credit Facility availability are expected to be sufficient for near-term operations and investing activity. No material subsequent events were reported through the filing date.
- The portfolio is concentrated in growth-stage companies, many with limited operating histories and continuing capital needs. The ten largest portfolio companies represented 40.9% of investment fair value.
- All portfolio investments were classified as Level 3, requiring significant unobservable assumptions. Fair values may differ materially from realizable values.
- Interest-rate risk is material: approximately 32.1% of debt investments at fair value were floating-rate, while Credit Facility borrowings are floating-rate. A hypothetical 300-basis-point increase in base rates was estimated to increase annualized net income by $2.5 million, subject to stated assumptions.
- LIBOR discontinuation creates refinancing, repricing and documentation risk for the Credit Facility and LIBOR-linked portfolio investments.
- Unfunded commitments totaled approximately $8.3 million to Dandelion, Inc. and Greenlight Biosciences, Inc.; commitments may require funding if conditions are met, although some may expire without being drawn.
- COVID-19-related economic and market volatility, borrower defaults, illiquidity, leverage, regulatory compliance, RIC qualification, distribution capacity and dependence on key personnel remain principal risks.
- The filing reports no material legal proceedings and states that disclosure controls and procedures were effective at March 31, 2021.
Most important facts for investors to verify
- Whether Level 3 valuation gains, particularly the Atieva appreciation, are sustained or reverse.
- Borrower credit quality, watch-list exposure, non-accrual trends and recoverability of the three non-accrual investments.
- Credit Facility renewal or refinancing before its January 2022 maturity and the effect of LIBOR transition.
- Coverage of the $0.28-per-share distribution by recurring net investment income rather than realized or unrealized gains.
- Liquidity after the IPO-related debt repayment, including $72.5 million of stated Credit Facility availability and $8.3 million of unfunded commitments.
- Portfolio concentration, especially manufacturing, retail trade and the ten largest investments.
- Execution of the company’s RIC and BDC regulatory requirements and any impact from future SEC fair-value requirements.