Trinity Capital Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Trinity Capital is a business development company (BDC) specializing in loans and equipment financing for growth-stage, often venture-backed, companies. Figures below are in millions of dollars except per-share data and percentages.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total investment income | $41.5 | $31.8; up about 30% |
| Net investment income | $19.3; $0.55 basic per share | $15.6; $0.57 basic per share |
| Net change in net assets from operations | $22.5; $0.64 basic per share | $(9.1); $(0.33) basic per share |
| Net realized investment gains/(losses) | $(0.4) | $52.6 |
| Net unrealized investment appreciation/(depreciation) | $3.5 | $(77.3) |
| Operating cash flow | $20.7 provided | $52.4 used |
| Cash and cash equivalents | $8.3 at March 31 | $10.6 at December 31, 2022 |
| Portfolio investments at fair value | $1,091.5 | $1,094.4 at December 31, 2022 |
| Net assets / NAV per share | $469.7 / $13.07 | $459.6 / $13.15 at December 31, 2022 |
| Total liabilities / debt outstanding | $653.6 / $616.0 | $666.8 / $620.0 at December 31, 2022 |
- Investment income growth reflected higher interest income and OID/EOT accretion, associated with a larger income-producing debt balance and higher stated rates. Reported effective yield on average investments was 15.2%, versus 16.3% in Q1 2022.
- Expenses excluding excise tax were $21.6, up from $15.6; excise tax was $0.6. Interest expense and other debt financing costs rose to $11.1 from $6.8. Management attributed the increase mainly to higher KeyBank facility borrowings and base rates. Weighted-average effective borrowing cost was about 7.0%, compared with 5.9%.
- Cash decreased by $2.3 during the quarter: $20.7 provided by operating activities was offset by $22.7 used in financing and $0.3 used in investing activities. Financing cash flows included $20.7 of distributions paid.
- Debt outstanding comprised $183.5 under the KeyBank facility, $182.5 principal of 2025 Notes, $125.0 of August 2026 Notes, $75.0 of December 2026 Notes, and $50.0 of Convertible Notes. The KeyBank facility had $166.5 of stated borrowing availability. Asset coverage was 176.2%, above the 150% statutory minimum, versus 174.1% at year-end.
- Declared quarterly distribution was $0.47 per share. Net investment income was $0.55 per basic share. The filing reports annualized net-investment-income-to-average-net-assets of 16.9%, versus 15.7%; total-expense ratio was 19.4%, versus 16.3%.
Material changes versus the prior comparable period
- Investment income and net investment income increased, but NII per basic share declined from $0.57 to $0.55, with weighted-average basic shares rising from 27.4 million to 35.1 million.
- Operations moved from a $9.1 loss to a $22.5 increase in net assets, primarily reflecting the prior-year $77.3 unrealized depreciation and $52.6 realized gain versus current-period modest unrealized appreciation and a small realized loss.
- The investment portfolio was broadly stable in fair value, while its company count declined from 116 to 115. Secured loans were 74.0% of portfolio fair value and equipment financings 21.9%.
- Debt outstanding declined $4.0 from year-end, while cash declined $2.3. NAV per share decreased from $13.15 to $13.07.
- Non-accrual debt investments rose in fair value from $17.8 at year-end to $23.9, but remained 2.3% of the debt portfolio versus 1.7%. The count remained two loan borrowers and two equipment-financing borrowers.
Outlook, risks and unusual items
- The filing provides no specific earnings, investment, or distribution guidance. Management states that cash and cash equivalents plus available KeyBank facility borrowings are expected to be sufficient for operations and investing needs in the near and long term; this is subject to facility terms and regulatory requirements.
- Management highlights risks from growth-stage borrower credit quality, inflation and interest rates, market volatility, illiquid investments, and the uncertainty of fair-value estimates. Approximately 99.7% of investments by fair value were Level 3. About 70% of debt principal was floating-rate, while KeyBank borrowings also bear floating rates; higher rates may lift asset income but increase funding costs and pressure borrowers.
- The filing identifies bank failures as a risk through portfolio companies’ access to deposits, credit facilities, and funding. It specifically discusses the 2023 failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, and says the company monitors potential impacts on borrowers.
- Portfolio credit concerns include non-accrual positions and investments marked substantially below cost, including Core Scientific, FemTec Health, and other workout investments. The filing also notes a portfolio-company payment default for which new terms were being negotiated. Non-accrual investments were carried at $23.9 fair value on $49.2 cost.
- Most portfolio fair values depend on unobservable inputs and Board judgment; actual realizable values could differ materially. The quarter included a $5.0 decline in warrant fair value, partly offset by appreciation in debt investments.
- The company formed the i40 joint venture with a specialty credit manager. It contributed $5.2, held $3.6 of JV debt and $1.6 of JV equity, and had a $16.2 unfunded capital commitment at quarter-end. It earned about $0.5 of JV origination and administrative fees in the quarter.
- No material subsequent events were reported through the filing date, and the company reported no material pending legal proceedings. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Current status, repayment prospects, and fair-value assumptions for non-accrual and workout investments, including the borrowers with past-due or defaulted payments.
- Whether portfolio-company cash needs, refinancing access, and deposit exposure to failed or impaired banks affect borrower performance or collections.
- KeyBank facility availability, collateral eligibility, covenants, and asset coverage headroom, especially if portfolio marks or borrowing costs worsen.
- Whether NII per share can support the $0.47 quarterly distribution as interest expense, share count, and portfolio credit costs change.
- Valuation sensitivity of the predominantly Level 3 portfolio, particularly warrants, equity positions, and investments with significant markdowns or restructuring risk.
- The utilization and economics of the i40 commitment, including the remaining $16.2 unfunded amount and the JV’s role in future originations.