Business Context and Reporting Period
Trinity Capital Inc. is an internally managed, non-diversified business development company and regulated investment company focused on loans, equipment financings, warrants and equity investments in growth-stage, venture-backed and institutionally sponsored companies. The filing covers the year ended December 31, 2020. Trinity commenced operations on January 16, 2020 after completing Formation Transactions that combined the Legacy Funds and acquired Trinity Capital Holdings; therefore, the 2019 comparison period reflects only formation activity and is not meaningfully comparable.
The company had 34 employees, including 17 investment, origination and portfolio-management professionals. Its common stock began trading on Nasdaq under “TRIN” on January 29, 2021, and the IPO closed on February 2, 2021.
Key Financial Metrics
| Metric | Year ended December 31, 2020 |
|---|---|
| Total investment income | $55.0 million |
| Total operating expenses | $31.6 million |
| Net investment income | $23.4 million, or $1.29 per share |
| Net realized loss on investments | $(9.4) million |
| Net unrealized depreciation | $(5.0) million |
| Acquisition and formation-related costs | $(15.1) million |
| Net decrease in net assets from operations | $(6.1) million, or $(0.34) per share |
| Net asset value per share | $13.03 at December 31, 2020 |
| Ending net assets | $238.7 million |
| Investment portfolio at fair value | $493.7 million across 80 portfolio companies |
| Total assets | $559.7 million |
| Cash and cash equivalents | $44.7 million; restricted cash was $16.4 million |
| Available liquidity | $86.7 million, including $42.0 million of available Credit Facility capacity |
| Debt outstanding, principal amount | $310.0 million |
| Asset coverage ratio | 177.0% |
| Total return based on NAV | (6.1%); (0.6% excluding acquisition costs) |
Investment income included $51.3 million of interest income and $3.7 million of fee income. The stated interest component was $38.2 million, while original issue discount amortization and acceleration contributed $13.1 million. The effective yield on average investments was approximately 14.0%. The weighted-average cost of debt, including interest and fees, was approximately 6.6%.
The portfolio comprised approximately $320.7 million of secured loans, $122.5 million of equipment financings and $50.5 million of equity and equity-related investments. Debt investments had a weighted-average maturity of approximately three years. Three portfolio companies were on non-accrual status, representing approximately $3.4 million of cost and $2.2 million of fair value, or 0.5% of the investment portfolio’s fair value.
Material Changes Versus the Prior Comparable Period
- There is no meaningful operating comparison with 2019 because Trinity had no substantive operations before January 16, 2020.
- The company acquired approximately $417.0 million of investments through the Formation Transactions and made approximately $240.0 million of additional investments during 2020, including $144.3 million in 18 new portfolio companies and $95.7 million in 18 existing portfolio companies.
- Trinity received $160.9 million from investment repayments and sales, including $108.8 million from early repayments.
- The company raised $125.0 million of common equity, issued $125.0 million of 7.00% unsecured Notes due 2025, and issued $50.0 million of 6.00% Convertible Notes due 2025 for net proceeds of approximately $48.7 million.
- Cash and cash equivalents increased by $61.1 million. Financing cash inflows of $211.3 million offset $58.2 million of operating cash use and $92.0 million of investing cash use.
- Net NAV declined from $14.97 per share at commencement of operations to $13.03 at year-end, primarily reflecting distributions, offering costs, formation costs and investment losses.
Debt, Liquidity and Capital Structure
- The Credit Facility had $135.0 million outstanding at year-end, bore interest generally at three-month LIBOR plus 3.25%, matured January 8, 2022 unless extended, and had approximately $42.0 million of available capacity.
- The 2025 Notes had $125.0 million outstanding, carry a fixed 7.00% coupon and mature January 16, 2025. They are unsecured and effectively subordinated to secured indebtedness.
- The Convertible Notes had $50.0 million outstanding, carry a fixed 6.00% coupon, mature December 11, 2025 and initially convert at approximately $15.00 per share. They are unsecured, pari passu with the 2025 Notes and subject to dilution and potential cash repurchase obligations upon a fundamental change.
- On February 3, 2021, following the IPO, Trinity repaid $90.0 million under the Credit Facility. As of March 4, 2021, borrowings under the facility were $45.0 million.
Guidance, Outlook, Management Commentary and Risks
The filing does not provide formal earnings, NAV, investment-originations or distribution guidance. Management expects the COVID-19 pandemic and any prolonged recession to adversely affect portfolio-company operations, valuations, interest payments, defaults, liquidity and future distributions. Certain portfolio companies curtailed operations, furloughed or laid off employees, deferred capital expenditures or drew available revolving commitments.
- COVID-19-related business disruption, supply-chain constraints, reduced liquidity and future shutdowns could increase non-accruals, defaults and valuation losses.
- Most investments are private, illiquid Level 3 assets valued using significant management judgment. Fair values may differ materially from realizable values.
- The portfolio is concentrated in manufacturing, professional and technical services, and retail; these represented approximately 20.2%, 16.0% and 15.4% of portfolio fair value, respectively. The ten largest portfolio companies represented approximately 42.5% of investment fair value.
- Geographically, approximately 74.7% of portfolio fair value was concentrated in the West and Northeast regions of the United States.
- Leverage magnifies gains and losses. A decline in asset values could impair asset coverage, restrict distributions or require asset sales or debt repayment at unfavorable prices.
- Interest-rate exposure is asymmetric: approximately 25.3% of debt investments were floating rate and 74.7% fixed rate, while the Credit Facility was floating rate. Management’s sensitivity analysis indicated that a 100-basis-point increase in relevant base rates would reduce annualized net income by approximately $0.7 million under the stated assumptions.
- LIBOR discontinuation could require amendments to portfolio-company loans and the Credit Facility and could change borrowing costs or investment income.
- The company must maintain BDC and RIC status, satisfy asset diversification and distribution requirements, and generally distribute at least 90% of investment company taxable income to preserve RIC treatment.
- All investments are subject to credit, collateral, refinancing, covenant-lite, junior-lien, bankruptcy, concentration and portfolio-company capital-raising risks.
Trinity declared 2020 distributions totaling $1.03 per share. The filing states that these distributions were treated as ordinary income. The board retains discretion over future distributions.
Most Important Facts for an Investor to Verify
- Whether COVID-19 effects, subsequent portfolio-company performance and updated valuations have changed non-accrual levels, NAV or portfolio fair values after December 31, 2020.
- The repayment, refinancing and covenant status of the Credit Facility, 2025 Notes and Convertible Notes, including the post-IPO debt reduction.
- The sustainability of net investment income and distributions after accounting for debt costs, prepayments, non-cash OID and end-of-term fee income, and potential credit losses.
- The valuation assumptions supporting the $493.7 million Level 3 portfolio, particularly for control investments, equity holdings, warrants and the largest portfolio exposures.
- Compliance with the 150% asset coverage requirement, BDC qualifying-asset requirements and RIC tax distribution and diversification tests.
- The effect of LIBOR replacement on the Credit Facility and floating-rate portfolio investments.
- Related-party aspects of the Formation Transactions, including management’s receipt of approximately $13.7 million of stock and cash for interests in Trinity Capital Holdings and the Legacy Funds.
- Any dilution from conversion of the Convertible Notes, the distribution reinvestment plan, future equity offerings or other issuances.