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 equity-related investments in growth-stage and venture-backed companies. The filing covers the three and nine months ended September 30, 2021; the financial statements are unaudited. Common stock began trading on Nasdaq under TRIN in January 2021, and the company completed its IPO in February 2021.
Key financial metrics
| Metric | Three months ended Sept. 30, 2021 | Three months ended Sept. 30, 2020 | Nine months ended Sept. 30, 2021 | Nine months ended Sept. 30, 2020 |
|---|---|---|---|---|
| Total investment income | $21.8 million | $13.5 million | $58.6 million | $39.6 million |
| Total expenses | $10.7 million | $7.9 million | $30.1 million | $21.5 million |
| Net investment income | $11.1 million | $5.6 million | $28.5 million | $18.1 million |
| Net realized gain/(loss) | $0.7 million | $(1.5) million | $5.3 million | $(4.4) million |
| Net unrealized appreciation/(depreciation) | $15.4 million | $8.2 million | $43.5 million | $(14.0) million |
| Net increase/(decrease) in net assets from operations | $27.2 million | $12.3 million | $77.2 million | $(15.8) million |
| Basic earnings per share | $1.02 | $0.68 | $3.02 | $(0.88) |
| Diluted earnings per share | $0.94 | $0.68 | $2.77 | $(0.88) |
Net investment income represented approximately 51% of investment income for the quarter and 49% for the nine-month period. Management reported effective investment yields of approximately 15.8% for both the quarter and nine-month period, compared with 14.1% and 14.6%, respectively, in the comparable 2020 periods.
- Net assets were $399.0 million at September 30, 2021, compared with $238.7 million at December 31, 2020.
- Net asset value was $14.70 per share, compared with $13.03 at year-end 2020.
- Investments at fair value were $677.2 million, up from $493.7 million at December 31, 2020, across 89 portfolio companies versus 80.
- The portfolio comprised $468.9 million of secured loans, $108.8 million of equipment financings, and $99.6 million of equity and warrant investments at fair value.
- Cash, cash equivalents, and restricted cash totaled $40.3 million, including $15.0 million of restricted cash.
- Cash flow from operating activities was $(104.3) million for the nine months, reflecting $358.5 million of investment purchases versus $240.1 million of sales and paydowns.
- Cash flow from financing activities was $84.7 million, including $125.0 million of 2026 Notes proceeds, $112.1 million of common-stock proceeds, and net Credit Facility activity.
Debt, liquidity, and distributions
| Debt instrument | Principal outstanding at Sept. 30, 2021 | Key terms |
|---|---|---|
| Credit Facility | $10.0 million | Generally three-month LIBOR plus 3.25%; matures Jan. 8, 2022 unless extended |
| 2025 Notes | $125.0 million | 7.00% fixed rate; mature Jan. 16, 2025 |
| Convertible Notes | $50.0 million | 6.00% fixed rate; mature Dec. 11, 2025; initial conversion price approximately $15.00 per share |
| 2026 Notes | $125.0 million | 4.375% fixed rate; mature Aug. 24, 2026 |
Total debt principal was $310.0 million, with a carrying amount of approximately $300.4 million after financing costs and discounts. Credit Facility availability was approximately $181.5 million. Asset coverage was 228.7%, compared with 177.0% at December 31, 2020, and management stated a target leverage range of 1.15x to 1.35x.
The company declared a $0.33 per-share distribution for the quarter, payable October 15, 2021. Total distributions declared since inception were $1.93 per share. Distributions remain subject to Board discretion, earnings, liquidity, regulatory requirements, and continued RIC qualification.
Material changes versus prior comparable periods
- Quarterly investment income increased 61% and nine-month investment income increased 48%, primarily due to a larger income-producing debt portfolio, higher stated interest, OID and end-of-term fee accretion, and investment activity.
- Quarterly net investment income increased 98%; nine-month net investment income increased 57%.
- Net unrealized appreciation shifted from a $14.0 million nine-month depreciation in 2020 to $43.5 million of appreciation in 2021. The 2021 increase was driven materially by appreciation in Lucid Motors, Matterport, Edeniq, and indie Semiconductor.
- The portfolio expanded substantially, while equipment financing declined as a percentage of fair value from 24.8% to 16.1%; secured loans increased from 65.0% to 69.2%.
- Equity and warrant fair values increased from $50.4 million to $99.6 million, including significant gains associated with public-company investments and warrant exercises.
- Non-accrual investments increased to two portfolio companies with $7.6 million of fair value, or 1.1% of the investment portfolio, from $2.2 million, or 0.5%, at year-end 2020.
- Investments rated “Default/Workout” increased to 1.2% of loan and equipment-financing fair value from 0.4%, while the weighted-average risk rating remained 3.1.
- Interest expense increased because of the Convertible Notes and 2026 Notes, partially offset by lower Credit Facility borrowings. Compensation and benefits also increased due to higher headcount and bonus accruals.
Outlook, commentary, risks, and unusual items
- Management stated that available cash and Credit Facility borrowings were expected to be sufficient for near-term investing and operating needs.
- On October 27, 2021, after quarter-end, the company entered into a KeyBank Credit Facility through TrinCap Funding. The facility permits borrowings of up to $300 million, initially includes a $75 million commitment, and matures October 27, 2026. It has a three-year revolving period and two-year amortization period.
- The company has substantial valuation exposure: 92.2% of investments by fair value were Level 3 assets using significant unobservable inputs. Changes in portfolio-company performance, revenue multiples, market yields, volatility, and liquidity could materially affect NAV and earnings.
- Approximately 60% of debt investments by outstanding principal were floating-rate and 40% fixed-rate. The filing estimates that a 100-basis-point increase in applicable base rates would increase annualized net income by approximately $2.5 million, while decreases would have little modeled effect because of interest-rate floors.
- LIBOR discontinuation creates refinancing, repricing, and contract-renegotiation risks for portfolio investments and the Credit Facility.
- Additional risks include venture-company credit deterioration, limited operating histories, concentration in growth-stage businesses, use of leverage, COVID-19 and macroeconomic effects, regulatory and tax changes, dilution from below-NAV equity issuance, and possible distribution variability.
- The filing reports no material legal proceedings and approximately $0.4 million of unfunded commitments to one portfolio company. Management reported compliance with debt covenants at September 30, 2021.
- The company early adopted ASU 2020-06, reducing net assets by approximately $0.5 million at adoption and simplifying accounting for the Convertible Notes.
Facts investors should verify
- Whether the KeyBank Credit Facility fully replaces or supplements the Credit Suisse facility and how quickly borrowing capacity is deployed.
- The January 2022 maturity and extension or refinancing status of the Credit Suisse Credit Facility.
- Credit quality and recovery prospects for the two non-accrual investments and assets classified as Default/Workout.
- The sustainability of earnings supported by unrealized appreciation, public-equity valuations, OID accretion, prepayment fees, and other non-recurring income.
- The valuation assumptions supporting the $677.2 million investment portfolio, particularly Level 3 debt, equity, and warrant assets.
- Future distribution coverage from recurring net investment income and the potential impact of leverage, interest rates, and RIC distribution requirements.
- Potential dilution from future below-NAV stock issuance authorized by stockholders through the earlier of the 2022 annual meeting or June 17, 2022.