TPVG - TriplePoint Venture Growth: Net Asset Value Dips Bad Loans Spike Dividend Safe

2023-08-04 13:36:11 ET

Summary

• TriplePoint Venture Growth fell double digits in intraday trading following its fiscal 2023 second-quarter earnings. This decline came on the back of continued net asset value weakness.
• The venture-focused BDC saw loans on non-accrual status rise markedly during its second quarter.
• A quarterly dividend of $0.40 per share was well covered by net investment income which also handily beat consensus estimates.

It's not great when a ticker immediately falls by double digits following the publication of their earnings result and TriplePoint Venture Growth's ( TPVG ) decline of just over 10% was not an overreaction. The venture-focused business development company recently declared a quarterly cash dividend payout of $0.40 per share , in line with the prior payout declared in April and for an annualized 14.3% forward yield. This yield has consolidated its move to 3-year highs on the back of the double-digit intraday post-earnings dip and a quarterly payout that is up around $0.04 from its year-ago distribution. The income is the prize here, but this is one part of a BDC's investment pitch as the direction of net asset value forms the other part.

The direction of TriplePoint's net asset value, or tangible book value, has formed a hindrance to its investment pitch. The BDC recorded dual beats on revenue and net investment income for its fiscal 2023 second quarter, but its net asset value came in at $379.4 million, down $34.6 million sequentially. Why is this a problem? Price returns and the premium and discount to NAV paradigm. The price of a BDC follows its NAV profile and in the absence of the dividend, TriplePoint's 3-year total returns of 44.1% drops to just 3.4%.

BDCs are regulated investment companies and have to pay out 90% of their net investment income, hence, NAV is driven by several factors including overspill income, the number of loans on non-accrual status, and the value of the underlying loans and investments. The BDC is still trading at around 47 cents more than its NAV per share of $10.70 after the 10% drop. Critically, TriplePoint's NAV has dropped to its lowest level in three years and on a per share basis is down 18% from its year-ago figure.

Net Investment Income And Dividend Safety

TriplePoint recorded a total investment income of $35.15 million , up 28.1% from its year-ago figure and a beat by $110,000 on consensus estimates. Growth was driven by heavy investment activity with TriplePoint signing term sheets of $114 million with venture growth stage companies at TriplePoint Capital LLC, its sponsor. The BDC closed $18 million of debt commitments to four of its portfolio companies and funded $30.6 million in debt investments to eight portfolio companies. This was at a high 16.4% weighted average annualized portfolio yield at origination with the broader portfolio of debt investments sporting a 14.7% weighted average annualized yield as of the end of the second quarter.

The BDC skipped paying income incentive fees of $3.8 million during the second quarter due to the shareholder-friendly terms of its total return requirement agreement with its external manager. This came as interest expenses and amortization of fees grew to $9.94 million from $6.12 million in the year-ago comp. Net realized and unrealized losses came in at $39.7 million, up from $27 million in its year-ago quarter with TriplePoint seeing net investment income per share come in at $0.53, a beat by $0.06 on consensus estimates and up from $0.41 in its year-ago comp. The safety of the dividend was never in question with the BDC covering it by 132.5%.

Leverage, Loans On Non-Accrual Status And VanMoof

TriplePoint's gross leverage ratio has been on the move with its debt to NAV ratio currently sitting at 1.67x, up from 1.49x in the prior first quarter. Hitting accelerate on gearing going into what could be a period of slower economic growth does raise some risk. There were six portfolio companies on non-accrual status at the end of the second quarter with a total cost and fair value of $102.6 million and $40.1 million, respectively. This was up from one portfolio company on non-accrual status with an aggregate cost and fair value of $29.5 million and $9.1 million as of the end of the fiscal 2022 fourth quarter.

Dutch electric bicycle manufacturer VanMoof filed for bankruptcy post-period end, a significant event with the company widely recognized as a leader in the fast-growing e-bike space. VanMoof and Health IQ formed roughly 70% of the NAV reduction TriplePoint realized during the second quarter with VanMoof having a principal balance of $22.5 million. The VC industry is hurting and the marked rise in the Fed funds rate has rendered it more difficult for venture-backed companies to attract additional capital or to go public. This dearth of capital forms a material headwind that further heightens the risk faced by the BDC. The increase in leverage and loans make TriplePoint less of a compelling buy, but the double digit yield is safe and shareholders are getting paid to wait for a potential stabilization of NAV.

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