DBRS Confirms TriplePoint Venture Growth BDC Corp. at BBB, Trend Changed to Negative

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of TriplePoint Venture Growth BDC Corp. (TPVG or the Company), including the Company’s Long-Term Issuer Rating of BBB and Long-Term Senior Debt Rating of BBB. The trend for the ratings has been revised to Negative from 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
In confirming the ratings and revising the trend to Negative, DBRS Morningstar recognizes the considerable headwinds facing all non-bank financial institutions, particularly those focused on direct lending where many borrowers are likely facing significant near-term challenges. TPVG is a business development company (BDC) that has a strong franchise and substantial scale in a niche lending market that is focused on providing debt financing to high-growth venture capital (VC)-backed companies.

Given the abruptness and severity of the economic contraction caused by the Coronavirus Disease (COVID-19), combined with the uncertainty of the magnitude or duration of the downturn, we have concerns regarding the impact on the Company’s concentrated business model. We see the near-term challenges in the VC markets as significant, with potential issues including reduced venture capital transaction volume, uncertainty of funding vis a vis lower valuations, more limited exit opportunities, and diverted managed focus toward managing cash burn at portfolio companies, all of which could directly or indirectly adversely impact on TPVG’s financials. Additionally, while we see TPVG as having strong underwriting capabilities, the risk/reward assumptions associated with its loans and investments may have significantly changed in recent weeks.

Supporting the rating is 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 growth stage VC-backed companies. Its long-standing relationships with banks, investors and VC sponsors should contribute to TPVG’s ability to manage through this highly stressed period.

RATING DRIVERS
We see a reversion to a Stable trend as unlikely for the duration of the coronavirus-related downturn. Over the longer-term, the trend could revert back to Stable if TPVG continues to maintain appropriate balance sheet fundamentals, while its portfolio investments maintain support from sponsors.

Conversely, a significant deterioration in the buffer to debt facility covenants or regulatory requirements could result in a ratings downgrade. A severe economic downturn that is prolonged resulting in significantly weakened credit fundamentals would likely result in a ratings downgrade. Additionally, any indication of notable pullback of sponsor funding for TPVG’s portfolio companies could result in a ratings downgrade.

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 Morningstar 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. At the end of 2019, TPVG’s investment portfolio totaled $605 million at fair value (FV) with debt investments across 38 portfolio companies.

The Company has demonstrated sound earnings generation capabilities. Revenues are predominately from interest income and typically recurring in nature, though these revenues could be impacted if portfolio companies are unable to make interest payments for a period, or if loans are restructured. TPVG’s equity and warrant investment portfolios will likely experience mark-to-market volatility in the current environment resulting in potential unrealized losses.

DBRS Morningstar 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. Furthermore, the Company receives warrants and makes direct equity investments that have over-time generated sizable gains, but in the current environment could result in realized or unrealized losses. At the end of 2019, TPVG had four investments on non-accrual status, or 7.5% of investments at cost. This nonaccrual ratio was high compared to the peer group even before heading into this period of severe stress, which DBRS Morningstar will continue to monitor closely.

Financial flexibility has been enhanced with an upsize of the Company’s credit facility last year, as well as with an unsecured debt issuance in March 2020. The privately placed debt issuance helped to diversify TPVG’s funding profile, while also demonstrating market access during a highly stressed period. The Company’s debt profile has well-laddered, term maturities. Liquidity is appropriately managed with sufficient liquidity to meet all unfunded commitments, as well as to fund new investments over the near-term.

TPVG’s balance sheet strength is solid and leverage is prudently managed. At the end of 2019, the Company’s debt-to-equity ratio was 1.01x, at the top end of its target range but still provides a strong cushion to the regulatory limit of 2.0x.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions, (September 24, 2019), which can be found on our website under Methodologies & Criteria: https://www.dbrsmorningstar.com/research/350802/global-methodology-for-rating-non-bank-financial-institutions

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar 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 for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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