Trinity Capital Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing provides annual results, not standalone fourth-quarter financial results. Trinity Capital is an internally managed business development company (BDC) lending primarily to growth-stage and venture-backed businesses through secured loans and equipment financings.
Key financial results and position
| Metric | FY 2022 / December 31, 2022 | Comparable 2021 |
|---|---|---|
| Investment income | $145.5 million | $82.2 million |
| Net investment income, after excise tax | $71.6 million | $39.0 million |
| Net increase (decrease) in net assets from operations | $(30.4) million; $(0.96) per share | $132.3 million; $5.09 basic per share |
| Net realized gains on investments | $32.9 million | $12.7 million |
| Net unrealized appreciation (depreciation) | $(134.8) million | $80.6 million |
| Portfolio fair value | $1,094.4 million across 116 companies | $873.5 million across 94 companies |
| Cash and cash equivalents | $10.6 million | $31.7 million, plus $15.1 million restricted cash |
| Outstanding debt principal | $620.0 million | $466.0 million |
| Net assets / NAV per share | $459.6 million / $13.15 | $446.5 million / $16.40 |
| Asset coverage ratio | 174.1% | 195.8% |
Investment income was primarily interest and fees; it is not conventional product-sales revenue. Total expenses were $71.5 million before $2.4 million of excise tax; net investment income after excise tax was $71.6 million. The effective yield on average investments was 15.1%, versus 15.4% in 2021. Net investment income represented about 49% of investment income.
At year-end, the portfolio comprised $802.9 million of secured loans, $246.0 million of equipment financings, and $45.5 million of equity and warrants. Cash plus reported available KeyBank borrowings of $162.5 million provided liquidity; the company said these resources were expected to be sufficient for operations and investing in the near and long term. Cash provided by financing activities was $199.8 million, while operating activities used $235.7 million, principally reflecting investment activity; cash and cash equivalents declined by $36.1 million during the year.
The company declared 2022 distributions of $2.33 per share, including supplemental distributions. The board’s variable distribution policy targets quarterly distributions approximating 90%–100% of taxable quarterly income or potential annual income, but future distributions are not assured.
Material changes versus 2021
- Investment income rose approximately 77%, and net investment income rose approximately 83%, reflecting a larger income-producing debt portfolio and higher interest and fee income. Expenses also increased, including interest and financing costs to $34.1 million and employee compensation to $27.2 million.
- Despite higher net investment income and realized gains, operations shifted from a $132.3 million increase in net assets to a $30.4 million decrease. The principal driver was $134.8 million of net unrealized depreciation, compared with $80.6 million of unrealized appreciation in 2021.
- NAV per share fell from $16.40 to $13.15. The debt portfolio’s weighted-average risk rating weakened from 3.0 to 2.8; investments rated “very strong performance” fell to 0.3% from 11.5% of the rated debt portfolio.
- Debt investments on non-accrual increased to four portfolio companies, with $17.8 million fair value (1.7% of the debt portfolio), from two companies and $5.1 million (0.7%).
- Debt principal increased by $154.0 million, while asset coverage declined to 174.1%. The ten largest portfolio companies’ share of portfolio fair value decreased to 31.7% from 36.1%.
Outlook, risks and unusual items
- The filing gives no quantitative earnings, deployment, or distribution guidance. Management’s liquidity statement is not a forecast of investment returns.
- Key risks include credit losses among growth-stage borrowers, portfolio-company dependence on additional financing, illiquidity and uncertainty in Level 3 valuations, leverage and refinancing needs, and the effects of inflation and higher interest rates. About 67.5% of debt investments by outstanding principal were floating-rate; management estimated a 100-basis-point rate increase would raise annualized net income by approximately $5.2 million, assuming the investment and borrowing structure remained unchanged. Higher rates may also pressure borrowers and increase defaults or funding costs.
- Portfolio concentrations warrant attention: green technology was 14.0% and finance and insurance 10.4% of investments at fair value; the West and Northeast represented 40.3% and 28.4%, respectively. Almost all investments were Level 3, using significant unobservable valuation inputs.
- Unusual credit and valuation items included significant impairment in equity and debt positions. For example, Core Scientific equipment financings were carried at $8.2 million fair value versus $23.2 million cost; several Core Scientific positions were non-accrual. FemTec Health’s investments also had substantial valuation reductions. Verify borrower developments and subsequent recoveries against the underlying investment disclosures.
- The company reported a $21.4 million capital commitment to its i40 joint venture; the venture had not called capital or made investments by year-end. It reported no outstanding unfunded portfolio-company commitments at December 31, 2022. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether the 2022 unrealized depreciation and lower NAV reflect lasting changes in borrower credit quality, particularly among non-accrual and materially written-down investments.
- Current non-accrual balances, collection prospects, and any subsequent restructurings, repayments, or write-offs.
- Available liquidity and KeyBank facility borrowing capacity, plus compliance with debt covenants and the 150% BDC asset-coverage requirement.
- Ability to sustain distributions from recurring cash income, considering the $2.33 per-share declared for 2022 and RIC distribution requirements.
- How fair values for Level 3 investments are determined and how sensitive valuations are to market yields, borrower performance, and other assumptions.
- Potential dilution and capital allocation: the company issued shares in public offerings during 2022 and repurchased 185,722 shares at an average $10.77; year-end market price was $10.93, below NAV of $13.15. It repurchased a further 91,691 shares in January 2023.
Audit: Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022; the auditor did not provide an internal-control attestation.