TRIN - Trinity Capital: 13.6% Yield Healthy Financials Still A Buy?

2023-11-11 09:35:23 ET

Summary

• Trinity Capital's performance has been strong, with a base dividend increase and total returns boosted by supplementals.
• The BDC's fiscal 2023 third-quarter total investment income grew by 20% year-over-year, driven by a rise in its portfolio yield and a focus on lending to venture-backed companies.
• Trinity's leverage ratio has decreased and its NAV is growing, but the direction of supplementals will depend on inflation and the Fed.

Trinity Capital ( TRIN ) went public in the winter of 2021, a period that still captured the zeitgeist of the pandemic. The venture debt-focused business development company would quickly see its common shares hit the economic quagmire of rising inflation, higher interest rates, and the specter of a recession. Performance since then has been terrific with the base dividend raised every year and total returns juiced by supplementals. The BDC last declared a $0.49 per share base quarterly cash dividend, a 2.1% increase from the prior distribution for what's currently a 13.6% annualized forward dividend yield. The distribution also included a 5 cents per share supplemental for an aggregate $0.54 per share quarterly dividend distribution. Including the supplemental would boost the dividend yield by roughly 138 basis points to 15%. I last covered Trinity in the summer with a buy rating on the back of a small dip from highs. Total returns have been positive since then to dampen the conviction for further purchases.

The broader macroeconomic picture plays a core part in positioning here with the market currently pricing in a nearly 91% chance that the Fed keeps rates unchanged yet again at its upcoming FOMC meeting next month on 13 December. A year out and the consensus is that the Fed funds rate would have realized at least a 75 basis point cut from what's currently a 22-year high of 5.25% to 5.50%. Still pessimistic forecasts that the US will enter a 2024 recession loom to further complicate what's fast becoming material economic uncertainty. Critically, BDC investors need to be positioned for a macroeconomic environment where growth, as driven by higher rates, is lower and a possibly deteriorating economic picture sees loans on non-accrual status pulled up.

Yields, Investment Income, And Dividend Coverage

The internally managed BDC saw total investment income grow by 20% year over year during its fiscal 2023 third quarter to $46.44 million . This beat analyst consensus by $750K and was driven by a rise in Trinity's effective portfolio yield by 50 basis points to 16.7% from 16.2% in the second quarter. This came as its total debt investment portfolio at cost fell sequentially to $1.09 billion from $1.12 billion. Trinity's focus is on lending to venture-backed companies and its investment portfolio was comprised of roughly $840.7 million in secured loans, $223.2 million in equipment financings, and $52.7 million in equity and warrants across 121 growth companies.

Trinity's debt portfolio was 73.8% formed from floating rate debt with the principal outstanding 74.5% first lien loans and 25.5% second lien loans. Floating rate loans as a percent of the debt portfolio have progressively been dragged higher, up 170 basis points sequentially to drive the gains in investment income seen. This is why the direction of interest rates matters significantly as BDCs are currently operating in a Goldilocks period of elevated interest rates and strong economic growth. My bullish base case for 2024 will see a continuation of this scenario perhaps with rates dropping around 75 basis points. This could reduce the propensity of supplementals, hence, the regular base dividend payment should anchor any investment decision.

The BDC originated $228.3 million of total new commitments with $176.7 million of repayments of debt. However, the investment portfolio dipped by $26.8 million on a cost basis with Trinity funding $149.1 million of its commitments during the third quarter. The Phoenix-based BDC saw net investment income come in at $23.4 million, around $0.58 per share, and up by 25.6% over its year-ago comp. This meant 118% coverage over the base dividend payment and 107% coverage when the 5 cents per share supplemental is included. Hence, we've seen large gains in NAV from the BDC realizing NII that's in excess of its aggregate dividend distribution.

Falling Leverage And Premium To Net Asset Value

Net asset value at $569.5 million, around $13.17 per share, grew by 2 cents per share over the second quarter. Trinity's common shares are currently trading at a 9.7% premium to NAV per share as its leverage ratio gets pushed lower on the back of a $75 million accretive equity offering conducted during the third quarter. NAV should continue to see growth on the back of NII expected to remain higher than the aggregate dividend.

This comes as the BDC's leverage ratio at 94% dipped markedly from 138% in the second quarter. The lower leverage ratio came as loans on non-accrual status at 2.6% of Trinity's debt investment portfolio at fair value jumped from 2% in the second quarter. I'd expect the supplemental to be maintained in the near term but the overall direction of this will be heavily influenced by inflation and the Fed. Trinity is a hold against an uncertain macro backdrop.

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