TRIN - Trinity Capital: Get Ready For A Surge

Summary

• Trinity Capital is a growth-focused business development company.
• As such, TRIN has been battered by the Fed's rapid rate hikes as the market feared the worst for its portfolio companies.
• But the market seems to be positioning for an earlier-than-expected Fed pivot, which should drive a further recovery in TRIN.
• So the critical question is, are you in the Fed pivot camp?

Trinity Capital Inc. ( TRIN ) is a business development company ((BDC)) that focuses on growth-stage companies. Its portfolio mainly consists of term loans and equipment financing. Accordingly, loans drove nearly 69% of its total investment income in Q3 , followed by equipment financing at 20%.

As such, manufacturing companies have a relatively large share of its portfolio fair value, accounting for a weighting of nearly 29%. In addition, its equipment financing portfolio is backed by assets collateral, helping mitigate nonaccrual risks resulting from unforeseen circumstances.

Notably, the company has been beset by Core Scientific , whose business performance has been significantly challenged by the crypto market environment. Core Scientific focuses on infrastructure solutions relating to high-performance blockchain. As such, Trinity Capital has placed it on a nonaccrual basis, with the company still assessing its options, including asset repossession, if necessary. Hence, we encourage investors to continue monitoring the developments at its upcoming Q4 earnings release.

Notwithstanding, the company's investment activity has continued to perform well on a portfolio basis. Its recently released Q4 investment activity report saw Trinity Capital drive $239M in new commitments, setting a record high of $975M for FY22.

Moreover, the company also funded $121.3M of its investments, above Q3's 94M. Furthermore, the company's repayment activity in Q4 remains robust, as it received $52.8B in repayments. Therefore, as market volatility subsided, the company's investment activity seemed less impacted by the Fed's rate hikes in Q4. Given the company's growth-stage focus, a less hawkish Fed is constructive for the operating health of its portfolio companies.

Notably, its portfolio credit ratings deteriorated in Q3'22, as it posted an average rating of 2.9, down from the 3.1 it posted in Q3'21. Therefore, investors should continue to assess the performance of its underwriting trend as interest rates could remain high.

TRIN has declined more than 20% over the past year, with the Fed's rapid rate hikes affecting many growth-focused companies. Therefore, it's imperative that the Fed not only temper its rate hikes in 2023 but also potentially pivot earlier than anticipated to drive a further recovery in TRIN.

But, are market operators positioning for such a possibility?

As seen above, TRIN suffered a steep fall from its August highs toward its December lows. As such, we believe market operators have likely baked in a significant bottoming process, given the battering seen in growth and tech stocks.

Is it justified? We believe it is. Investors shouldn't understate the risks of investing in BDCs. Moreover, Trinity Capital also accentuated the risks of its growth-focused strategy as it added in its filings:

The Company’s investments consist of growth stage companies, many of which have relatively limited operating histories and also may experience variation in operating results. Many of these companies conduct business in regulated industries and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital to satisfy their continuing working capital needs and other requirements, and in many instances, to service the interest and principal payments on the debt. - Trinity Capital 10-Q

Despite that, TRIN has recovered nearly 20% (in price-performance terms) from its December bottom, as investors are likely positioning for a less hawkish Fed. Hence, we think the opportunity to add exposure to TRIN is close, as it continues to trade at a discount (NTM NII per share multiple: 6x) against its peers' median of 8.4x (according to S&P Capital IQ data).

Coupled with an NTM dividend yield of 16.5%, we believe that more aggressive investors can consider adding at these levels.

However, we think a pullback seems likely, which should improve the reward/risk for investors. Hence, investors who want a higher margin of safety can wait patiently on the sidelines first, given its recent sharp recovery.

Rating: Hold.

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