TRINITY CAPITAL INC. The trend on all ratings is Stable. The Company's Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3, resulting in Trinity's final credit ratings positioned in line with its IA.
KEY CREDIT RATING CONSIDERATIONS
The credit ratings reflect Trinity's established franchise as an internally-managed business development company (BDC) which lends to venture capital-backed growth stage companies, track record of operating performance despite volatility in the VC financing ecosystem, and diversified funding profile, which is comprised predominantly of unsecured funding. At 3Q23, Trinity had
The Stable trend incorporates both the challenges and opportunities stemming from limited exits for VC-backed companies and a renewed focus on operational cost savings and cash runways over revenue growth for portfolio companies. The disruption in the banking sector in early 2023 helped drive originations for Trinity, which continues to benefit from the pullback in bank lending to the sector, as growth-stage VC-backed companies look for established lending partners. Importantly, the Company has sufficient scale and access to capital to actively compete for new secured loan and equipment finance originations while maintaining investment portfolio diversification.
CREDIT RATING DRIVERS
Over the long-term, improved earnings stability combined with sound credit performance and conservative balance sheet leverage would result in a credit ratings upgrade. Conversely, should operating performance worsen, including sizable losses that erode net asset value or significant credit deterioration from expectations, the credit ratings would be downgraded. If leverage increases beyond the Company's long-term target range for a sustained period, the credit ratings would also be downgraded.
CREDIT RATING RATIONALE
Franchise
Trinity's growing franchise as a publicly-traded, internally-managed BDC, provides loan origination and equipment financing transactions across VC-backed growth-stage companies across technology sectors with a developing life sciences team. At 3Q23, the
Earnings
Trinity had net change in net assets (net income) of
Risk
We believe the credit risk of VC-backed loans is elevated as repayments are more reliant upon future capital raises and exits to repay obligations than internal cash flow deleveraging despite the amortization features found in Trinity's investments. Trinity's historical credit performance has been acceptable with non-accruals representing 3.7% of the investment portfolio at cost at 3Q23, with a high of 4.3% at 4Q22 since the Company went public in 1Q20. At the height of COVID-19, non-accruals were approximately 2.0% of the investment portfolio at cost. Since 2008, excluding equity gains, Trinity's annualized loss rate on loans originated by the BDC and predecessor funds is 30 basis points, and including equity gains was a realized gain of 17 basis points per annum. Trinity's secured term loans are with growth stage VC-backed companies which have had multiple rounds of institutional funding behind them with well-defined revenue streams, and not early-stage companies. The equipment financing investments are backed by mission critical equipment with a loan that immediately amortizes. In a restructuring process, the equipment is typically needed by the buyer of the platform to continue operations, or may be liquidated for other corporate customers.
Funding and Liquidity
Trinity has a diversified funding profile with a
Capitalization
The Company's capitalization has strengthened as it continues to utilize its at-the-market equity program to issue accretive equity while its stock trades at a premium to book value (1.07x as of
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (
Notes:
All figures are in
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
The primary sources of information used for this rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.
For more information on this credit or on this industry, visit dbrs.morningstar.com.
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