Trinity Capital is a Promising Business Development Company with High Yield

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Written By Marcus Reynolds

Trinity Capital Inc. is an internally managed business development company (BDC) providing debt and equipment financing to middle-market growth-stage companies. As a BDC, its primary goal is to generate consistent income and slight capital appreciation through its debt and equity investments.

Recently, TRIN has demonstrated strong performance, making it an attractive option for income-focused investors.

Strong Performance and High Dividend Yield

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Since the beginning of March, TRIN’s total return has matched the S&P 500’s performance. Over the past year, TRIN has outperformed the broader market, thanks to its high cash flow generation and substantial distribution yield.

Currently, TRIN offers a dividend yield of 13.7%, appealing to investors seeking income from their portfolios. This high distribution also makes TRIN a valuable investment in a high-interest-rate environment.

Despite trading at a premium to net asset value (NAV), TRIN remains a compelling investment, given that many internally managed BDCs trade at even higher premiums.

Revenue Segments and Portfolio Diversification

TRIN’s earnings come from three main segments: debt investments, equipment financing, and equity & warrants. Debt investments make up the largest portion, accounting for about 74.1% of revenue.

Equipment financing contributes around 20.4%, while equity and warrants account for the remaining 5.5%. The company maintains a diversified investment portfolio across various regions and industries.

Finance and insurance-based businesses represent the largest share of TRIN’s portfolio at 13.9%, followed by green technology at 11.4% and space technology companies at 9.1%.

Although the portfolio is diverse, there is some concentration risk in the technology sector. Most investments are spread across different regions of the US, with a slight 2.2% international exposure.

Strategic Approach and Risk Management

TRIN’s strategy focuses on maintaining a majority exposure to floating-rate debt investments. As of the latest Q1 earnings, 75.4% of TRIN’s debt investments follow this structure. This approach is advantageous in a high-interest-rate environment, as rising rates increase the interest payments borrowers must make on their debt.

However, higher interest rates can also strain borrowers, potentially leading to increased defaults and late payments. Despite these risks, TRIN’s strong underwriting process has proven effective, with improvements in the overall credit quality of its debt investments.

TRIN uses an internal rating system on a scale of 1 to 5 to assess the credit quality of its portfolio. The highest rating of 4.5% marks a slight increase from the prior quarter’s 3.3%. Additionally, 21.5% of the portfolio falls within the strong performance category (ratings 3 to 3.9).

The percentage of investments in the 1.6 to 1.9 range increased slightly to 5.1%, up from 4.7% the previous quarter. The rate of investments in the worst category (1.0 to 1.5) has significantly decreased to 0.4%, a major improvement from the previous quarter’s 2.8%.

Non-Accruals and Financial Health

Non-accruals measure the amount of portfolio companies with delinquent debt payments no longer contributing to TRIN’s net investment income. As of the latest earnings call, TRIN’s non-accrual rate is 2.4% of fair value.

Chief Operating Officer Gerry Harder highlighted the company’s healthy position, stating:

“At the end of Q1, our nonaccrual credits had a total fair value of approximately $30.4 million, representing 2.4% of the total debt portfolio. At quarter end, 75% of our total principal outstanding was backed by first position leans on enterprise equipment or both. The weighted average loan-to-value of our entire portfolio sits at just under 19%, demonstrating that our portfolio companies are generally not over-levered and are in a healthy position to service the debt, even if our loan is not in first position.”

Compared to peers like Main Street Capital (MAIN), Ares Capital (ARCC), and Golub Capital BDC (GBDC), TRIN’s non-accrual rate is slightly higher but still within a manageable range given the company’s improving credit quality.

Financial Performance and Growth Prospects

TRIN’s Q1 earnings report showed strong results, with net investment income (NII) at $0.54 per share and total investment income at $50.5 million, representing a 21.6% year-over-year growth.

The total debt investment portfolio is valued at $1.33 billion, producing a weighted average yield of 15.8%. Despite a slight increase in operating expenses, TRIN continues to generate strong investment income.

Recent investments include $25 million in growth capital for Elevate K-12 and $60 million for Metabolon. These investments have the potential to increase NAV and contribute to higher NII per share. TRIN also maintains $405 million in unfunded commitments, providing opportunities for continued growth in 2024.

Dividend and Valuation

TRIN’s quarterly dividend of $0.51 per share results in a 13.7% dividend yield. The current NII covers the dividend, providing a coverage rate of 105.8%. However, a significant drop in interest rates could reduce NII and potentially lead to a dividend cut.

Despite trading at a 15.76% premium to NAV, TRIN’s premium is lower than peers like Main Street Capital, Hercules Capital, and Capital Southwest, which trade at much higher premiums.

Particularly Attractive for Income Investors

Credits: DepositPhotos

Trinity Capital Inc. remains a strong buy despite its premium to NAV. With effective underwriting, consistent income generation, and strategic investments, TRIN offers significant potential for price appreciation and distribution growth.

The company’s strong dividend yield and diversified portfolio make it an appealing choice for income-focused investors. As TRIN continues to grow its NII and maintain a robust portfolio, it is well-positioned to deliver long-term value to shareholders.


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