Morningstar DBRS Confirms Trinity Capital, Inc.'s Long-Term Credit Ratings at BBB (low) With a Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the BBB (low) Long-Term Issuer Rating and Long-Term Senior Debt rating of Trinity Capital, Inc. (Trinity or the Company). The trend on all ratings is Stable. The Company's Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3, resulting in the Company's final rating being equalized with its IA.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings confirmation considers Trinity's solid franchise strength which has grown its assets under management (AUM) by approximately 50% over the past year to $2.0 billion at Q3 2024. The Company's earnings power has improved as the investment portfolio has scaled, though potential base rate declines may moderate profitability over the medium-term. We also consider the elevated credit risk profile and volatility of the VC-sector, and portfolio companies which typically rely on future fundraising rounds or exits for loan repayments instead of internally generated capital. While Trinity's non-accruals peaked early in 2024, by Q3 2024 it was at an acceptable level while only 5.5% of the investment portfolio at cost was fair value marked at 85% or below of cost. Trinity's leverage has increased but remains within its target range, which is supportive of the credit ratings.

The Stable trend reflects our expectation that Trinity will continue to scale its investment portfolio as protectionist domestic federal policies and easing regulation accelerates M&A transactions driving origination volume. While medium-term profitability may be constrained by lower base rates and potential credit deterioration, we expect the Company will navigate uncertain economic conditions as demonstrated by its management team's 17 year long track-record of investing in the VC space.

CREDIT RATING DRIVERS
Broadening and scaling of the investment platform, improved earnings stability combined with sound credit performance and conservative balance sheet leverage would result in a credit ratings upgrade. Conversely, should operating performance worsen, including sizable losses that erode net asset value or significant credit deterioration from expectations, the credit ratings would be downgraded. If leverage increases beyond the Company's long-term target range for a sustained period, the credit ratings would also be downgraded.

CREDIT RATING RATIONALE

Franchise Building Block Assessment: Good / Moderate
Trinity's franchise provides loan origination and equipment financing transactions across VC-backed growth-stage companies across technology sectors while recently adding capabilities with a life sciences team, sponsor finance, and warehouse lending. The internally-managed BDC has also raised third-party capital in an investment vehicle with Eagle Point Credit, which provides another pocket of capital to syndicate loans into while increasing fee income to Trinity. At Q3 2024, the $1.7 billion on-balance sheet investment portfolio consisted of 75.2% secured loans, 18.1% equipment financings, and 6.7% equity and warrants across 145 portfolio companies. This scale is sufficient to maintain diversification and is augmented by Trinity's ability to raise third-party funds and speak for larger sized transactions while limiting concentration risk by co-investing with affiliated investment vehicles.

Earnings Building Block Assessment: Moderate
The Company's earnings power has strengthened despite core yields decreasing slightly to 14.9% at Q3 2024 from 15.5% in Q3 2023. Growth of the investment portfolio alongside limited mark-to-market valuation changes has improved earnings for full year 2023 and 9M 2024 to a net change in net assets of $76.9 million and $69.7 million, and net investment income (NII) of $89.9 million and $81.3 million, for the respective periods. We expect earnings to moderate as interest rates decline, pressuring investment income, while lower-cost debt is refinanced in the current environment, and potential credit losses increase.

Risk Building Block Assessment: Good / Moderate
We continue to view the credit risk of VC-backed loans as elevated as repayments are more reliant upon future capital raises and exits to repay obligations than internal cash flow deleveraging despite amortization features in these loans. The risk profile is acceptable with non-accruals at 2.7% of the investment portfolio at cost at Q3 2024, but peaked at 4.8% at Q1 2024. Trinity's debt investment portfolio consists of approximately 80% of first-lien senior secured loans. Only 5.5% of the investment portfolio at fair value was marked at or below 85% of cost at Q3 2024, though we do expect some credit deterioration as the VC ecosystem experiences volatility.

Funding and Liquidity Building Block Assessment: Moderate
Trinity has been active in the capital markets, diversifying its funding profile further through the baby bond and private placement market for $372.5 million of debt issuance in 2024 in various tenors maturing between 2027 and 2029. The Company upsized its revolving credit facility to $600 million led by KeyBank with an extended maturity of July 2029. Trinity has recently repaid $152.5 million due in January 2025, leaving near-term maturities very manageable with $50 million due in December 2025, and another $200 million due in the H2 2026, which we expect will be addressed over the medium-term. Unsecured funding comprised 69% of total drawn funding at Q3 2024, providing a high level of unencumbered assets should the need arise for additional pledged assets. Liquidity consisted primarily of available capacity of $220 million on the credit facility compared with unfunded commitments and backlog of approximately $600 million, the vast majority of which are still subject to milestone events and further investment committee approval at Q3 2024. Indeed, just $25 million was available to be drawn in addition to $9 million of uncalled capital commitments at September 30, 2024.

Capitalization Building Block Assessment: Moderate
While Trinity's capitalization has weakened with increased leverage of 1.22x debt-to-equity at Q3 2024, it operates within its target range of 1.00x - 1.25x, still well below regulatory limits of 2.00x. The cushion to the asset coverage ratio (ACR) cap was approximately $295 million, implying that Trinity would need to take a full loss on 18% of its investment portfolio at fair value to breach the 2.0x regulatory limit. Beneficially, the Company's stock price trades at a premium to NAV, which allows it to issue accretive equity to maintain leverage levels and fund new originations. For 9M 2024, Trinity raised net proceeds of $150.6 million through its at-the-market program.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024): https://dbrs.morningstar.com/research/443208/global-methodology-for-rating-non-bank-financial-institutions. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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