Trinity Capital Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Trinity Capital is an internally managed business development company (BDC) providing loans and equipment financing primarily to growth-stage, venture-backed companies. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Investment income | $38.7 million | $21.8 million | $104.0 million | $58.6 million |
| Net investment income | $18.6 million | $11.1 million | $50.0 million | $28.5 million |
| Net increase (decrease) in net assets from operations | $(12.0) million | $27.2 million | $(28.8) million | $77.2 million |
| Net investment income per share, basic | $0.56 | $0.42 | $1.64 | $1.11 |
| Net asset value per share | $13.74 at quarter-end | $14.70 at September 30, 2021 | $16.40 at December 31, 2021 |
- Investment income increased substantially year over year, reflecting a larger income-producing debt portfolio, stated interest, OID/EOT accretion, and fees. Management reported effective yields of 15.2% for Q3 2022 and 15.0% for the first nine months of 2022, versus 15.8% in each comparable 2021 period.
- Despite higher net investment income, fair-value changes drove operating losses: unrealized depreciation was $30.0 million in Q3 and $121.2 million year to date, compared with unrealized appreciation of $15.4 million and $43.5 million in the comparable 2021 periods. Year-to-date realized gains were $42.4 million, versus $5.3 million in 2021.
- At September 30, investments were valued at $1.042 billion, against cost of $1.088 billion. The portfolio comprised 112 companies, up from 94 at year-end 2021; secured loans were $751.2 million and equipment financings $246.0 million. Manufacturing and professional/scientific/technical services represented 28.6% and 21.7% of portfolio fair value.
- Cash and cash equivalents were $34.1 million, with no restricted cash. Cash flow from operations was $(185.0) million for the nine months, primarily reflecting investment deployment; financing activities provided $172.5 million. Purchases of investments, net of deferred fees, were $507.3 million and repayments and sale proceeds were $283.6 million.
- Debt principal outstanding totaled $570.0 million, versus $466.0 million at December 31, 2021. This included $137.5 million under the KeyBank facility, $182.5 million of 2025 Notes, $125 million of August 2026 Notes, $75 million of December 2026 Notes, and $50 million of convertible notes. KeyBank availability was approximately $212.5 million. Asset coverage was 184.6%, down from 195.8% at year-end.
- Distributions declared during the first nine months totaled $1.72 per share, including supplemental distributions. The Q3 quarterly distribution was $0.45 per share, plus a $0.15 supplemental distribution.
Material changes versus comparable periods
- Year-to-date net investment income rose to $50.0 million from $28.5 million, while operating results shifted to a $28.8 million decrease from a $77.2 million increase, chiefly because of the large 2022 unrealized depreciation.
- Portfolio fair value grew from $873.5 million at year-end 2021 to $1.042 billion, largely through new and follow-on investments. Equity investments fell to $14.8 million fair value from $100.7 million, while secured loans and equipment financing expanded.
- Non-accrual exposure increased: loans to four companies and equipment financing to one company were on non-accrual, with $13.9 million fair value (1.4% of debt investments), versus two companies and $5.1 million (0.7%) at year-end 2021. The risk-rating share classified as “Watch” or “Default/Workout” also increased, from 2.5% to 4.8% of debt fair value.
- During 2022, the company issued common stock in public offerings and ATM sales and issued an additional $57.5 million principal of 2025 Notes. Shares outstanding increased to 35.1 million from 27.2 million at year-end 2021.
Outlook, commentary, and risks
- The filing provides no specific earnings or investment guidance. Management said cash and available KeyBank borrowings were expected to be sufficient for near-term investment activity and operations.
- Management attributed increased investment income to growth in income-producing debt and described non-recurring fees as variable with investment and early repayment activity. It also cited higher interest expense from increased KeyBank borrowings and the additional 2025 Notes issuance.
- Interest-rate exposure is significant: 62.2% of debt investments by principal were floating-rate and 37.8% fixed-rate. The facility also bears floating-rate interest. The filing estimates that a 100-basis-point increase in reference rates would raise annualized interest income by $6.2 million and expense by $1.4 million, for a net increase of $4.8 million, assuming no portfolio or borrowing-structure changes. Management cautioned that inflation and tighter monetary policy could pressure portfolio-company margins and increase borrowing costs.
- Most portfolio values rely on Level 3 inputs and are inherently uncertain. The company reported five debt investments on non-accrual, including FemTec Health, WorkWell, and GoFor among disclosed holdings; the filing also notes FemTec was negotiating new terms after a payment default. Overall, 99.8% of investment fair value was Level 3.
- The company reported no material pending legal proceedings and no material subsequent events through the filing date. It disclosed that stockholders had approved below-NAV equity issuance authority through the earlier of the 2023 annual meeting or the one-year anniversary of the 2022 meeting, subject to a 25% share limit; such issuance could dilute existing holders.
Important facts for investors to verify
- How recent portfolio markdowns, the five non-accrual investments, and the “Watch”/“Default/Workout” exposure evolve, including recoveries and borrower restructuring outcomes.
- Whether the portfolio’s reported Level 3 fair values and valuation assumptions remain supportable; fair-value changes materially affected NAV and reported operating results.
- Debt capacity, asset-coverage compliance, floating-rate funding costs, and liquidity after investment commitments and distributions; verify the $212.5 million KeyBank availability under facility terms.
- Whether net investment income and cash collections support distributions, given operating cash outflows from portfolio growth and $21.1 million of distributions payable at quarter-end.
- Potential dilution from equity issuance, including any below-NAV offerings, and the impact of share growth on NAV and per-share results.