DBRS Assigns BBB Long-Term Issuer Rating to TriplePoint Venture Growth BDC Corp., Trend Stable

DBRS, Inc. (DBRS) assigned a Long-Term Issuer Rating of BBB and a Long-Term Senior Debt rating of BBB to TriplePoint Venture Growth BDC Corp. (TPVG or the Company). The trend on the ratings is Stable. The Company’s Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA3, resulting in TPVG’s final ratings positioned in line with its IA.

KEY RATING CONSIDERATIONS
The ratings and Stable trend reflect TPVG’s sound franchise strength, which benefits from access to TriplePoint Capital LLC’s (TPC) global venture lending platform. TPC has a strong reputation and market presence that has developed over more than a decade in providing financing to venture capital (VC)-backed companies. The TPC platform has scale that provides certain advantages, including a greater capacity to source and finance deals through a borrower’s life cycle. TPVG’s sound credit performance, strong cushion to the asset coverage ratio (ACR), and ability to cover dividends regularly through net investment income are also factors underpinning the rating.

The ratings also consider the less granular investment portfolio that includes some large single name exposures, though these positions continue to become less concentrated as the portfolio grows and the Company utilizes its co-investment capabilities. The ratings also incorporate TPVG’s exposure to VC-backed, venture growth stage companies which introduces elevated credit risk. This niche exposure could adversely impact the Company if borrowers are unable to repay their loans due to an economic downturn or a pullback of VC funding. As a business development company (BDC), the Company’s inability to retain its organic capital to support balance sheet growth is also a ratings constraint.

RATING DRIVERS
If TPVG continues to reduce investment portfolio concentrations while also diversifying its funding profile, there could be positive rating implications. Furthermore, continued strong earnings generation, low levels of nonaccruals and disciplined balance sheet leverage could benefit the ratings.

Conversely, ratings could be lowered should financial performance deteriorate to such an extent that net investment income does not consistently cover dividends, and non-accrual investments increase to a level that contributes to a sustained weakening of the buffer to the ACR. Additional ratings pressure could arise from the Company’s exposure to more volatile assets, such as equity investments, if these assets become a more meaningful portion of the investment portfolio.
 
RATING RATIONALE
TPVG has a sound franchise that benefits from its relationship with TPC, a leading provider of financing solutions for privately-held, VC-backed companies across all stages of development (seed stage, early stage or venture growth stage). TPVG’s investment portfolio is focused on investments in venture growth stage VC-backed companies, which is typically when these companies begin operational and financial preparations for a liquidity event, such as an initial public offering or private sale. Through TriplePoint Advisers LLC (the Adviser), a subsidiary of TPC, all investments are directly originated, which DBRS considers a positive for credit performance, and a competitive advantage for TPVG, as it requires specialized underwriting to appropriately originate venture growth loans. The Company benefits from a strong distribution network, as well as its long-standing relationships with select venture capital investors to ensure access to high quality VC-backed companies.

In March 2018, TPVG received co-investment exemptive relief from the SEC so it may invest alongside other TPC funds, allowing TPVG greater flexibility to negotiate terms of co-investments with TPC. DBRS views this exemptive relief as a positive, as it allows TPVG to participate in larger deals along with TPC, where it may have previously been unable to invest. The co-exemptive relief also allows TPVG to lower concentrations in the portfolio as investment hold sizes can be better managed through allocation across the TPC platform. As of 2Q19, TPVG’s investment portfolio totaled $496 million at fair value (FV) with debt investments across 29 portfolio companies.

TPVG’s franchise and market positioning provide the Company with good access to quality, attractive investment opportunities with strong risk-adjusted returns. DBRS expects TPVG’s earnings generation to continue to strengthen as the investment portfolio grows, while maintaining solid credit performance. Revenues are predominately from interest income and largely recurring in nature, with more volatile fee income related to the termination of unfunded commitments and loan prepayments remaining modest. TPVG’s net investment income as a percentage of the average investment portfolio at cost is well above peers. DBRS expects the Company will continue to generate more than sufficient net investment income to allow for continuing solid dividend coverage.

DBRS considers TPC’s disciplined investment strategy combined with underwriting that has been tested through several business and economic cycles as supportive of the solid credit performance of the investment portfolio to date. While lending to venture growth companies typically carries a higher risk profile than lending to larger commercial companies, TPC has a long track record in this niche market that allows for selectivity in originations given the high level of inbound deal flow. Nevertheless, credit risk is elevated given the youthful age of the VC-backed companies that TPVG lends to, most of which are not profitable and are highly reliant upon future rounds of fundraising to complete a successful exit strategy. While riskier, the Company receives warrants that have generated sizable gains and provide an offset to losses from other companies in the investment portfolio. At 2Q19, TPVG had four investments on non-accrual status, or 7% of investments at cost. While higher than in recent years and also high as compared to the peer group, the elevated level of nonaccruals is largely driven by one investment whose financing arrangements only recently became past due. DBRS will continue to monitor and would expect a return to more normalized nonaccrual levels in the coming quarters.

The Company has a narrow funding profile that could benefit from unsecured debt issuance that would further unencumber the balance sheet, diversify its funding profile, while also demonstrating market access. As of June 30, 2019, TPVG had $159 million of debt outstanding, sourced from utilizing its credit facility and senior unsecured notes. The Company’s credit facility was recently upsized to $300 million, up from $265 million at the end of 2Q19, and adds new lenders to the banking syndicate. As of 2Q19, TPVG had outstanding borrowings of $86 million under the facility, which matures in November 2022. The Company also has $75 million of senior debt outstanding, maturing in July 2022. Liquidity is appropriately managed with a good ability to assess the probability of draws on liquidity to fund contractual commitments. At June 30, 2019, TPVG had available liquidity of approximately $227 million, including cash and available capacity on its revolving credit line. This liquidity provides appropriate coverage for unfunded commitments of $350 million, some of which have a low probability of being drawn upon.

TPVG’s balance sheet strength is solid and leverage is prudently managed. At June 30, 2019, the Company’s debt-to-equity was 0.45x, well below its target range of 0.80x to 1.00x and provides a strong cushion to the regulatory limit of 2.0x. As of 2Q19, the Company’s cushion was estimated at $546 million implying that TPVG could need to take a loss on its entire investment portfolio without breaching the regulatory limit. TPVG’s largest single name exposure as a percentage of the ACR cushion has come down over the past year, now at 8% of the ACR cushion as compared to 14% of the ACR cushion as of 2Q18.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Non-Bank Financial Institutions (November 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and S&P Global Market Intelligence. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.

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