Trinity Capital: Selling at the Silver Put Options Can Be Attractive (NASDAQ:TRIN)

JONGHO SHIN

Written by Nick Ackerman. A version of this article originally appeared in Cash Builder Opportunities on August 16, 2022.

Trinity Capital (NASDAQ:TRIN) announced a secondary stock offering a few weeks ago. This caused stocks to crash at the opening the next day. This is a common reaction to this fairly regular occurrence for BDCs and REITs. Since TRIN is a position I already own and wanted to add, here is why I bought stocks but also sold silver put options.

The shares sold in the secondary offering for TRIN were sold above their net asset value, therefore at a premium which is accretive and expected to be accretive to earnings. This is natural for BDCs, as it is one of their primary means of growing their assets. Last year we initiated a position in TRIN. I take this opportunity to add by directly buying shares and selling some put options.

This is how I played the secondary offer

On the news, I bought shares of TRIN the day after the crash at around $15.07. However, I also sold put options to potentially expand my position even further.

The put options I sold at a strike price of $15 are right at the money. In this case, it might seem a bit more unusual than the types of trades we get into. This one is just in the money with virtually no downside protection. The reason is that, in my opinion, I was already buying stocks at this price.

By selling put options, I am looking to increase my position even further, which I would be happy to do. This way, I break the break even point of the trade to $14.59. This takes into account the collection of $0.41 in option premium. So that’s where some of the downside cushioning can come into play. I could buy at $15 if the stock is offered to me, but my base price will be $14.59.

This is around 3.2% lower than the current trading price of $15.07 at the time of writing. Like any other type of corporate news event like this, there may be some volatility over the next few days.

The probability of not accepting a stock transfer is still a slightly higher percentage, as Fidelity predicts a 56.62% chance that the stock will be above $15.

IRR probability

TRIN Probability (Reliability)

The latest earnings from TRIN put the net asset value at $14.62. This was down from $15.15 at the end of March 31, 2022. As the market sold off, it’s not too surprising that TRIN’s underlying portfolio also declined. This also takes into account their regular dividend of $0.40 paid during the quarter as well as an additional $0.15.

TRIN Dividend History

TRIN Dividend History (TRIN Investor Presentation)

The cover of this cast also looks very appealing. They had announced an NII of $0.51 for the quarter, an increase of 55.4% year over year. That’s why it’s no surprise that they increased their regular dividend even further. Last quarter paid $0.42 plus another extra $0.15. In our previous coverage, we noted that they plan to pay $0.15 per quarter throughout the year.

This net asset value is important because they sold these new shares on this secondary offering at $15.33. This means it was above NAV, which means it is accretive to NAV and should be accretive to earnings. Now that yields are rising, they can put it to use in higher yielding instruments.

In addition, they also indicated that they were looking to repay part of their credit facility. This means potentially reducing their reliance on floating rate debt and relying more on their fixed rate leverage.

Trinity intends to use the net proceeds of this offering to repay a portion of its current outstanding indebtedness under its KeyBank credit facility, to make investments in accordance with its investment objective and strategy, and general business purposes.

TRIN Loans

TRIN Loans (TRIN Investors Presentation)

They raised an additional $50 million in 2025 tickets in July.

A final note on the secondary offering is that they are basically selling stocks all the time. This is thanks to their offers in the market. This is made possible when a BDC’s shares trade at a premium. These advertised secondary offers do just that in one fell swoop. These ATM offers are also beneficial for long-term shareholders since they are made at a high price.

On November 9, 2021, the Company entered into an open market sale agreement (the “2021 Sale Agreement”) with Jefferies LLC, as sales agent and/or principal, pursuant to which the Company may issue and sell , from time to time , up to $50 million in aggregate stock offering price of its common stock by any method permitted by law and deemed to be part of an “in-the-market” offering (as defined in Rule 415 of the Securities Act) (the “ATM Program”). During the six months ended June 30, 2022, the Company issued and sold 176,148 common shares at a weighted average price of $16.56 per share and raised $2.9 million in net proceeds after sales agent commissions on shares sold under the ATM Program.During the year ended December 31, 2021, the Company raised issued and sold 35,714 common shares at a weighted average price of $16.55 per share and raised $0.6 million ars of net proceeds after deducting commissions to the sales agent on shares sold under the ATM. Program. The Company did not have an ATM Program prior to November 9, 2021. The Company generally uses the net proceeds from the ATM Program to make investments in accordance with its investment objective and strategy and for general corporate purposes.

As we can see, the total number of shares issued here is relatively small in the ATM. Every little bit counts, though, and pennies can be dollars in our pockets.

Quick Notes on Portfolio Changes

The NII being enough to cover the regular distribution is great to see. The amount of hedging and the continued increase in earnings so far could suggest further increases in dividends in the future. They really built their portfolio. Fear of a slowdown in venture capital hasn’t slowed this BDC down, it seems. This is despite what we see in the decline in net asset value last quarter.

Additionally, their portfolio changed in the last quarter to include only a portion of the equity they had at the end of 2021. This should mean more consistent revenue generation going forward as loans are more predictable in what they pay.

TRIN Wallet

TRIN Portfolio (TRIN Investors Presentation)

I wouldn’t want them to abandon equity investments if the opportunities arise. These equity positions are the types of investments that generate these supplements. A BDC is required to pay out substantially all of its income and gains as a regulated investment company.

In this transition where equities are no longer a significant part of the portfolio, it means they can position themselves more in floating rate debt investments. These are the types of secured loans that can qualify for higher interest rates.

TRIN Debt Investments

TRIN Debt Investments (TRIN Investors Overview)

While the Fed still expects to raise rates going forward, despite what we might consider a spike in inflation, this should bode well for TRIN and overall for the BDC space. This is why most BDCs have held up relatively well across the board. Of course, that’s until they get that kind of short-term volatility that leads to long-term opportunities.

They believe that, overall, their portfolio is still in the “strong performance” category. The defaults category has become almost non-existent. However, the watch category almost doubled with tighter financial conditions. We can expect this to cause a bit of a headache if economic conditions deteriorate. I don’t think that’s enough to make TRIN unattractive right now. However, I note that this is something that needs to continue to be monitored.

Quality of the TRIN portfolio

Quality of the TRIN portfolio (TRIN investor presentation)

Conclusion

TRIN sells on a secondary supply basis. I think this is an opportunity for investors to buy straight or play the options game. This is how BDCs grow. They issue stocks, raise debt, invest, pay dividends and repeat. They also had another stock offering in April of this year. The market at that time was still making new lows, which is probably not a good representation of the stock price we can expect this time around. If the market can continue to rise, this could be a short-lived decline. Similar to what we saw with Main Street Capital (MAIN) with their latest stock offering.

That being said, TRIN could still be considered a somewhat newer publicly traded BDC. They have a longer history as a private BDC. Their focus on venture capital also makes them a more volatile offering. In an economic crisis, they could perform poorly. So I wouldn’t put all my eggs in this basket, but it seems attractive enough to allocate a smaller share of his wallet. I also see this as a longer term position.

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