Trinity Capital: Crypto Winter Exposure Is Being Materially Overstated (NASDAQ:TRIN)

A long-crypto winter and implosion of a number of crypto institutions last year would seemingly have gone unnoticed by income investors in Trinity Capital (NASDAQ:TRIN) were it not for its small exposure to three Bitcoin mining entities. The internally managed Phoenix, Arizona-based business development company extended $35 million to CleanSpark (CLSK) in April 2022 and $30 million in equipment financing to Hut 8 (HUT) in December 2021. These two companies along with the now-bankrupt Core Scientific (OTCPK:CORZQ) form the BDC’s only crypto exposure. It’s important to note that the principal including accrued interest owed by Core stands at $23 million on the back of the original $30 million master equipment finance facility agreement made in August 2021.

Using figures from the BDC’s last reported fiscal 2022 third quarter, the total fair value of its crypto loans now stands at $63.58 million, around 6.38% of Trinity’s total debt securities at fair value. The bears are overreacting here with Trinity’s crypto exposure at single digits and with these mining companies still operating. Core Scientific has maintained its mining operations and Trinity together with five other creditors owns 50% of the miner’s hash rate. Hence, even with Bitcoin recently partially recovering from lows to provide a boost to miners, Trinity’s exposure is limited and the loans are broadly still being serviced. The BDC’s larger portfolio is made up of venture debt and equipment financing extended to high-growth venture-backed companies looking for non-dilutive financing.

Income Backed By Innovation And Growth

Trinity last paid out a quarterly per share cash dividend of $0.61, an increase of 2% from its prior payout, for a forward annualized yield of 20% on the current price of its commons. The BDC went public in February 2021 and has increased its regular quarterly dividend seven times since then.

The most recent payout consisted of a $0.46 regular dividend and a $0.15 supplemental dividend, the former has grown at a compound annual growth rate of 7.35% since the initial payout. The payout has grown to be so high as a rapidly growing dividend payout profile has intersected with the historical pullback in equities seen last year. Trinity went public just before inflation spiked to multi-decade highs and forced the Fed on a hawkish path of rate hikes that have inverted once buoyant equity markets.

Is the large yield a trap? I don’t think so. The BDC’s earnings report saw net investment income of $18.6 million, or $0.56 per share and an increase of 67.6% over the year-ago comp. This came on the back of total investment income of $38.7 million, year-over-year growth of 77.6% and a beat of $3.21 million on consensus estimates. Hence, the BDC only paid out 82% of its NII to shareholders as a regular dividend. The supplemental payouts are from undistributed earnings spillover which stood at $67 million or $1.91 per share at the end of the quarter. Not only is the regular dividend covered, but the company has more than 12 quarters of supplemental dividend payouts essentially stored in reserves.

What Are The Bears Saying

As of the end of the third quarter, Trinity’s investment portfolio had an aggregate fair value of $1.04 billion. This was constituted of $751.2 million in secured loans, $246 million in equipment financings, and $45 million in equity and warrants spread across 112 portfolio companies. Total net assets were $482.5 million, a growth of 5.3% versus the prior second quarter to drive net asset value of $13.74 per share. Bears would highlight that NAV per share during the third quarter was a sequential decline of 6% from $14.62 in the second quarter. This was due to unrealized depreciation from fair value adjustments on two portfolio companies. With the current discount to NAV at 12.3%, prospective bulls would still be buying at a discount to Trinity’s hard intrinsic value. The current disruption is temporary and interest rates are set to finally stabilize in the first half of this year.

Against a short interest of 2.55%, it’s hard to state that there is a comprehensive bearish base in the BDC. Bears would be right to flag that the US stands to potentially fall into a recession this year on the back of Fed fund rates rising to between 5% to 5.25%. They would also point to the company’s high-risk portfolio as a reason for caution against the specter of a recession and capital markets that have retrenched markedly. Trinity’s portfolio is indeed formed by companies like Axiom Space, which is building the world’s first commercial space station and Impossible Foods, a plant-based food company. But these are venture-backed and in industries set for secular growth. Impossible Foods for example realized sales growth of 50% in 2022. I’ve been a buyer of the BDC here with a view of holding shares as a long-term core income position.