Trinity Capital Inc. — Form 10-Q Summary
Business context and reporting period
Trinity Capital Inc. is an internally managed, non-diversified business development company focused on secured loans, equipment financings, and selected equity and warrant investments in growth-stage and venture-backed companies. The company commenced operations as a BDC on January 16, 2020, following Formation Transactions that acquired Trinity Capital Investment, four legacy funds, a sidecar fund, and Trinity Capital Holdings. This report covers the three months ended March 31, 2020. Because operations commenced during the quarter, the filing states that there are no historical operating results for a comparable prior period.
Financial condition and key metrics
| Metric | March 31, 2020 / Three months ended |
|---|---|
| Total investment income | $10.9 million |
| Total expenses | $6.6 million, including $4.3 million of interest and debt financing costs |
| Net investment income | $4.3 million; $0.24 per share |
| Net realized gain on investments | $0.5 million |
| Net unrealized depreciation | $24.3 million |
| Formation and acquisition costs | $15.6 million |
| Net decrease in net assets from operations | $35.1 million; $(1.97) per share |
| Net asset value per share | $12.44 |
| Total assets | $482.2 million |
| Investments at fair value | $398.6 million across 81 portfolio companies |
| Cash, cash equivalents and restricted cash | $79.5 million, including $62.6 million of cash and cash equivalents |
| Net assets | $224.6 million |
| Asset coverage ratio | 188%; the applicable minimum is 150% |
Total investment income represented an approximate 13.8% yield on investments during the period. The annualized ratio of net investment income to average net assets was 9.19%, while the annualized ratio of total expenses to average net assets was 13.97%. The portfolio’s weighted-average risk rating was 2.9. Three loans were on non-accrual status, with a total fair value of approximately $3.3 million, or 0.8% of the investment portfolio.
Portfolio, liquidity and debt
- The investment portfolio comprised approximately $282.1 million of secured loans, $88.4 million of equipment financings, and $28.1 million of equity and equity-related investments, including warrants.
- Portfolio fair value was concentrated in professional, scientific and technical services at 26.7%, manufacturing at 21.0%, retail trade at 14.4%, and information at 9.7%.
- During the quarter, the company invested approximately $32.7 million in six new portfolio companies and $15.0 million in eight existing portfolio companies; repayments generated approximately $44.5 million.
- The company had approximately $130.0 million outstanding under a $300.0 million Credit Facility, with approximately $57.9 million of borrowing capacity available at quarter-end. The facility bears interest generally at three-month LIBOR plus 3.25% and matures January 8, 2022, unless extended.
- The company had $125.0 million of unsecured 7.00% Notes due January 16, 2025. The carrying value, net of deferred financing costs, was $119.7 million.
- Available liquidity was approximately $120.5 million, consisting of $62.6 million of cash and cash equivalents and $57.9 million of available Credit Facility capacity. Restricted cash was $16.9 million, primarily for facility covenants and a severance-related escrow.
- Credit Facility covenants require, among other items, minimum tangible net worth and leverage ratios, a minimum cash balance of $15.0 million, and a 60-day interest reserve.
Material changes versus the prior comparable period
There is no meaningful prior-period operating comparison because Trinity was formed in August 2019 and commenced BDC operations on January 16, 2020. Compared with December 31, 2019, total assets increased from $6.2 million to $482.2 million, investments increased from zero to $398.6 million, debt increased from zero to $246.4 million before deferred financing costs, and net assets increased from a $0.5 million accumulated loss to $224.6 million. These changes primarily reflect the January Formation Transactions and related private equity and debt offerings, rather than organic quarter-over-quarter growth.
Guidance, outlook, risks and unusual items
- Management expects portfolio companies and operating results to remain adversely affected by the COVID-19 pandemic and related economic slowdown. Certain portfolio companies may experience financial distress, defaults, reduced interest payments, or permanent impairment.
- The quarter’s $24.3 million unrealized depreciation was attributed primarily to COVID-19-related uncertainty, changes in market yields, and deterioration in fundamental portfolio company performance.
- All portfolio investments were Level 3 fair value measurements using significant unobservable inputs. Valuations are inherently uncertain and may differ materially from eventual realizable values.
- Approximately 97.9% of debt investments at fair value were fixed-rate and 2.1% were floating-rate. Credit Facility borrowings are floating-rate, exposing net investment income to changes in LIBOR and future benchmark rates.
- The company recorded $15.6 million of Formation Transaction and acquisition costs, including approximately $13.5 million related to Trinity Capital Holdings and its assumed severance liability and approximately $2.1 million related to the Legacy Funds.
- The company had $1.4 million of unfunded commitments to one portfolio company, available on request and not subject to milestones. No material legal proceedings were pending.
- No dividends were declared or paid during the quarter. On May 7, 2020, the Board declared a $0.22-per-share distribution payable June 5, 2020 to stockholders of record May 29, 2020.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether COVID-19-related portfolio deterioration, defaults, non-accruals and valuation losses increased after March 31, 2020.
- The sustainability of net investment income and future distributions relative to debt service and operating expenses.
- Compliance with Credit Facility covenants, available borrowing capacity, and the January 2022 facility maturity.
- The fair value assumptions supporting the predominantly Level 3 investment portfolio, particularly market yields, revenue multiples, volatility and probability weightings.
- Liquidity and refinancing needs associated with the $125.0 million of 7.00% Notes due in January 2025 and the secured Credit Facility.
- The impact of the Formation Transactions, related-party consideration, acquisition costs and future operating comparability.