Morningstar DBRS Revises TriplePoint Private Venture Credit Inc.’s Trend to Negative; Confirms Long-Term Credit Ratings at BBB (low)

DBRS, Inc. (Morningstar DBRS) confirmed the Long-Term Issuer Rating and Long-Term Senior Debt rating of TriplePoint Private Venture Credit Inc. (TPVC or the Company) at BBB (low). The trend on the ratings has been revised to Negative from Stable. The Company’s Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3, resulting in TPVC’s final credit ratings positioned in line with its IA.

KEY CREDIT RATING CONSIDERATIONS
The trend revision to Negative from Stable considers the credit deterioration within TPVC’s investment portfolio resulting in significant realized losses and erosion of net asset value (NAV). Despite higher base rates, earnings have also been constrained from the net realized and unrealized losses. The funding profile remains narrow, and TPVC’s equity stockholders were released from any undrawn capital commitments in 4Q23 (subject to limited exceptions set forth in the stockholders’ subscription agreements), which limits the Company’s ability to access new equity capital until a liquidity event (including either an IPO/listing or merger into another BDC) is completed.

The confirmation of the credit ratings reflects that TPVC’s leverage has been well-managed at low levels, well below peers in its credit rating category. Additionally, TPVC’s franchise still benefits from its relationship to the overall TriplePoint Capital LLC, (TPC) platform, a global venture lending platform with long-standing relationships with key venture capital sponsors. While continued challenges may exist in the venture capital ecosystem which may affect TPVC’s credit performance, we expect it will return to historical normalized levels in line with BDC peers.

CREDIT RATING DRIVERS
Improved net income and stable credit performance while maintaining conservative leverage would result in the trend being revised to Stable. Over the long-term, consistent financial operating results with improved credit performance and conservative leverage would result in a credit ratings upgrade. Conversely, should operating performance materially worsen, including further notable losses that erode net asset value, or significant credit deterioration, the credit ratings would be downgraded.

CREDIT RATING RATIONALE

Franchise Building Block (BB) Assessment: Good
TPVC’s franchise is supported by TPC’s reputation in the VC ecosystem and an executive management team which has long-standing experience investing through economic cycles. At 4Q23, TPVC’s $400.2 million investment portfolio consisted of 73% first lien debt, 21% second lien debt, 4% warrant positions and 2% equity investments across 83 debt-related portfolio companies, 144 warrant portfolio companies and 44 equity portfolio companies. The investment portfolio has decreased by 10% year-over-year, as conservative underwriting constrained originations and TPC selectively allocated new investments into TPVC. While the final capital call from investors was in 4Q23, TPVC has two years (subject to the discretion of its Board of Directors to extend the term for up to two consecutive one-year periods) to invest in new originations through repayments and retained earnings from the portfolio.

Earnings Building Block (BB) Assessment: Moderate
TPVC’s earning power has been challenged by net realized and unrealized losses which have constrained net income while high portfolio yields and prevailing base rates have supported net investment income growth. TPVC had a net increase in net assets from operations (net income) of $2.2 million in 2023 compared to a net loss of $2.8 million in 2022, as net realized losses of $45.6 million restricted TPVC’s ability to benefit from the higher rate environment. Net investment income (NII) increased by 21% to $46.0 million in 2023 from 2022, benefitting from no incentive fees with the total return hurdle, and despite the weighted average portfolio yield on debt investments decreasing to 15.4% in 2023 from 16.0% in 2022. We expect profitability to remain challenged as base rates appear to be at their peak levels and the Company continues to have potential credit issues in their investment portfolio.

Risk Building Block (BB) Assessment: Moderate
The Company’s risk profile has worsened as credit performance has been under stress, with multiple realized losses through the full year and at 4Q23. Even with the realized losses, eleven portfolio companies remain on non-accrual at year-end 2023, representing 4.9% of the investment portfolio at cost. Loss severity was worse than expected as both private and public technology market valuations were low through the year, combined with potential strategic buyers being less active in sale processes, which hampered recovery efforts. PIK interest income remained stable at just $1.4 million in 2023, or less than 2% of total investment and other income. Payment on PIK is normally received only in the event of payoff, unlike cash interest income, and is at risk if a portfolio company defaults.

Funding and Liquidity Building Block (BB) Assessment: Moderate / Weak
TPVC has a narrow funding profile with reliance on its secured revolving credit facility to fund operations, alongside a $75 million unsecured private placement, with unsecured debt representing 46% of its drawn financing at 4Q23. Refinancing risk is low with the next maturity date for both its revolving credit facility and private placement offering not until 2027. At 4Q23, TPVC had liquidity of approximately $208 million comprised of available capacity under the revolving credit facility ($162.5 million), and unrestricted cash and cash equivalents ($45.4 million) compared to unfunded commitments of $72.2 million.

Capitalization Building Block (BB) Assessment: Moderate
The Company’s capitalization remained acceptable with low leverage of 0.56x, gross debt-to-equity at 4Q23, within its target leverage of 0.5x to 0.7x, and well below the regulatory limit of 2.0x. TPVC’s cushion to the asset coverage ratio limit was $208.5 million, representing a high 52% of the Company’s $400.2 million investment portfolio at 4Q23. The Company has limited access to raise new equity, as its current stockholders were released from any undrawn equity capital commitments in 4Q23 (subject to limited exceptions set forth in the stockholders’ subscription agreements). Through the year ended 2023, TPVC received gross proceeds of $42.3 million from its final capital call. Book value per share has decreased by 13% from $14.00 at 4Q22 to $12.24 at 4Q23.

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 Risk Factors in Credit Ratings at (January 23, 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-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 (September 1, 2023): https://dbrs.morningstar.com/research/420144/global-methodology-for-rating-non-bank-financial-institutions. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this 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’ outlooks and credit ratings are monitored.

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

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