DBRS Morningstar Confirms TriplePoint Venture Growth BDC Corp.’s Ratings at BBB and Revises Trend to Negative

DBRS, Inc. (DBRS Morningstar) confirmed the Long-Term Issuer Rating and Long-Term Senior Debt Rating of TriplePoint Venture Growth BDC Corp. (TPVG or the Company) at BBB. The trend on 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
The revision of the trend to Negative from Stable reflects both the upheaval in the VC ecosystem from the failure of Silicon Valley Bank (SVB) and challenges at TPVG. For the near term, the Fed has backstopped uninsured deposits and cash is available for portfolio companies’ ongoing operations including for debt service. As the largest VC lender, SVB provided revolving credit facilities and term loans to VC-backed companies, who likely will seek out alternative financing sources over the medium-term, creating a strong origination tailwind for well-capitalized direct lenders with ample available capacity within leverage targets. Given TPVG's capitalization, we expect it will be less likely to substantially grow its investment portfolio in this investment vehicle at a pace commensurate with TPVG’s potential available origination opportunities. While origination opportunities have strengthened, SVB was a key player in the VC and early stage company ecosystem, which will be hard to replace. Moreover, decreased portfolio company valuations from the market dislocation will drive mark-to-market losses in the near-term, challenging net asset growth. TPVG has a number of portfolio companies with exposure to SVB through cash management and is in continuous contact with VCs and management teams to navigate the near term disruption. In the interim, direct lenders with established franchises in the VC ecosystem should generally benefit from VC market stress as companies seek structured borrowing options from lenders who have a history of working with borrowers through economic turbulence.

TPVG’s lower net income, weaker credit performance and increased leverage through 2022 are also considered in the Negative trend. TPVG had its first full year net loss of $20.1 million in 2022 since its 2014 IPO, driven by significant realized losses on its investment portfolio, as well as mark-to-market valuation challenges in VC-backed companies. The net realized losses on its portfolio is balanced by the increased top line revenue generation as the investment portfolio continued to grow with high yields through 2022. TPVG has demonstrated its ability to raise both equity and debt capital through 2022, and with $200 million of portfolio company repayments projected in 2023, the Company may need to raise more capital should it originate transactions well beyond that figure for the rest of the year.

The confirmation of the ratings is driven by the strength of TPVG’s franchise as part of the TriplePoint Capital LLC (TPC) platform which benefits from a management team with long-standing experience investing through economic cycles. DBRS Morningstar expects some continued credit deterioration in the TPVG portfolio and increased market risk from stress in the venture capital (VC) ecosystem. At the same time we recognize that the outsized (approximately $35 million realized) loss from Medly Health Inc. was driven in part by fraud conducted by the portfolio company’s former management team and therefore was challenging to detect.

RATING DRIVERS
Improved net income and sound credit performance coupled with overall lower leverage levels would result in the trend being revised to Stable. Over the long-term, demonstrated ability to generate sound financial results while maintaining solid credit fundamentals and a conservative leverage profile would result in a ratings upgrade.

Conversely, should operating performance worsen, including a notable loss that erodes net asset value, or significant credit deterioration from expectations, the ratings would be downgraded. A material loss that results in an increase in gross leverage that drastically reduces the Company’s capital buffer to regulatory requirements would also result in a ratings downgrade.

RATING RATIONALE
TPVG has a solid franchise that benefits from its relationship with TPC, a global venture lending platform with long-standing relationships with key VC sponsors. TPVG focuses on providing financing solutions to VC-backed growth companies. Over 2022, the investment portfolio at fair value as of December 31, 2022, grew by $85 million to approximately $950 million, consisting of 71% first lien debt, 19% second lien debt, 5% warrant positions and 5% equity investments across 57 debt-related companies, 107 warrant portfolio companies and 48 equity holding companies. TPVG has been successful in continuing to diversify its investment portfolio with a net increase of 30 additional portfolio companies, and funded 21 new debt companies over the full year 2022.

TPVG had its first net decrease in net assets resulting from operations producing a net loss of $20.1 million in 2022 compared with $76.6 million of net income in 2021, as net unrealized losses of $37.6 million and net realized losses of $46.0 million constrained earnings. Net investment income (NII) was strong at $63.6 million, a 55% increase year-over-year, benefiting from higher base rates, a larger investment portfolio, and increased leverage to support NII.

We consider the underlying credit risk of VC-backed loans to be elevated as repayments are heavily reliant upon future rounds of fundraising or exits and not internal deleveraging. TPVG’s historical credit performance has been adequate, with one investment on non-accrual at year-end 2022, representing 3.1% of the portfolio at historical cost. Medly’s approximately $35 million realized loss constituted 3.6% of the investment portfolio at cost. While we expect non-accruals will increase across our BDC coverage universe, we expect credit performance at TPVG will return to normalized levels given its strength in working out troubled credits. As TPVG’s investment portfolio is only 61.2% floating-rate based as of December 31, 2022, NII should benefit from a rising rate environment to a lesser-extent than other BDCs who are more heavily invested in floating-rate instruments.

TPVG has an acceptable funding profile supported by significant unsecured debt comprising 69% of its drawn financing at 4Q22. The Company has issued three private placements with well-laddered maturities while the next maturity is not until March 2025. The Company’s revolving credit facility was amended in July 2022 to extend its revolving period until May 2024 with a scheduled maturity of November 2025. At the end of 4Q22, TPVG had adequate liquidity coverage with $234 million of liquidity comprised of $59 million of cash and $175 million of credit facility capacity compared to $324 million of unfunded commitments, of which $88.9 million was dependent on portfolio companies reaching specified milestones.

Despite issuing $57.2 million of equity in an overnight offering in August 2022, TPVG’s capitalization has weakened to 1.36x gross debt-to-equity at the end of 4Q22, above its historical target leverage range of 1.0x to 1.2x, though well below the regulatory limit of 2.0x. While net leverage remained at 1.22x debt-to-equity, we expect cash to be utilized to fund new originations as the investment portfolio continues to grow. At the end of 4Q22, the cushion to the asset coverage ratio (ACR) cap was approximately $135 million, implying that TPVG would need to take a full loss on 14% of its investment portfolio at fair value to breach the limit. The Company has entered into an at-the-market equity program and trades at 1.0x book value, as of April 4, 2023, giving TPVG ready-access to issue equity.

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions: https://www.dbrsmorningstar.com/research/402314/global-methodology-for-rating-non-bank-financial-institutions. (September 2, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-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://www.dbrsmorningstar.com/about/methodologies.

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

The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this 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. 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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