Stormy weather at Triplepoint Capital (NYSE: TPVG) (part 2 of 2)
“Oh, I can't go on, can't go on, can't go on
Everything I have is gone
Stormy weather, stormy weather” Etta James (1960)
Following on from my previous post on Triplepoint Capital (NYSE: TPVG), here is part two of my long-form research on TVPG as a whole. The first post focused on background of the firm/team, fake commitments to companies and how loan book diversification is misrepresented to hide deteriorating credit quality and over-exposure to specific industries (e.g. Ecommerce). This second part will focus on the debt stack, cash and the overall liquidity outlook for TPVG and why this should be worrying for customers and shareholders. Recall (in the previous post) that in accurately re-bucketing TPVG’s loan book into proper segments, there is 78% of loan exposure to higher risk consumer companies, and 28% of loan exposure (i.e. $242 million) to higher risk consumer companies that have not publicly raised in the last two years. In short, here is how I think about the liquidity outlook in 2023 (a mid-case and a downside case):
Mid-case where 14% (i.e. 50% of 28% high risk consumer bucket that hasn’t raised for more than 2 years) loan losses/principal postponement and credit facility recalled
Downside case where 22% (i.e. 80% of 28% high risk consumer bucket that hasn’t raised for more than 2 years) loan losses/principal postponement, higher drawings from portfolio and credit facility recalled
With the above in mind, the liquidity outlook adopts the dynamic of a zero-sum game, where to solve liquidity something has to give way. By this, the easiest way to get through 2023 (where the crunch most likely would take place) is to not make new investments and not honour existing commitments to companies, with the latter being the largest driver of illiquidity (more so than losses). Given equity is expensive/scarce for startups, it’s reasonable to think drawings on commitments from portfolio companies will be 75%+. The other large driver here is the existing credit facility ($175 million drawn) which has covenants tied to industry diversification, asset coverage ratio (cash/loans vs debt) and loan gradings. It’s feasible to me that at least 1 if not 2 of these covenants are already tripped in reality:
Real exposure to ecommerce is 27% and total consumer exposure is 78% (as per part 1 of this blog post) implying a severe lack of diversification. I’d expect the credit facility lender to have a ~15-20% concentration limit to any one industry though this is unspecified in the public filings.
Loan gradings do not accurately represent risk in the portfolio. TPVG risk weights clear, white, yellow, orange, red in the loan book (with orange meaning there is concern regarding exit/raising capital, and red meaning impending loss/impaired loan). Senior management has bucketed only $9 million in the orange category and $0 in the red category (as per the Q4’22 public filings). Just between Mind Candy and the Pill Club is $38 million in high risk exposure/impaired loans, with the wider bucket of $242 million in the high risk/haven’t raised for 2+ years consumer category (see part 1/previous blog post).
Thus, I’d expect any reasonable lender to be calling a covenant default on the credit facility today based on a breach of the diversification and/or loan gradings covenant (as well as borrower misrepresentation of this data which is a typical loan default for commercial lenders). Best case, the credit facility lender could ask for a pay-down of 25-30% to cure the default, worst case the credit facility lender asks for a full repayment of the $175 million and the cross-defaults on the $395 million in other long-term debt are triggered by the other lenders and $570 million in total debt is in default/becomes due.
The other item worth a short discussion is Triplepoint’s private credit funds that often co-invest alongside the public TPVG vehicle and how this impacts losses in a bankruptcy/asset sale. To take the Pill Club as an example, the total debt in the company is $30 million (of which $19 million is held by TPVG and $11 million held in the private fund). The Pill Club went into bankruptcy in April 2023 - if the assets are bought for $10 million (33% recovery) for example, then that $10 million would be allocated pro-rata between the two lenders (TPVG and the private Triplepoint fund). This would result in 63% of the $10 million proceeds going to TPVG (i.e. a recovery of $6.3 million) and the remaining to the private fund. If there was only $19 million in TPVG debt (and no private fund co-investment) then TPVG would recover 100% of the $10 million (i.e. 52% of the loan, or a 57% improvement in recovery). So the total debt in TPVG’s loan portfolio is actually really important as this will impact losses and recoveries on TVPG loans significantly. I view it as an iceberg effect, where there is a lot more pari-passu debt in TPVG’s portfolio than is shown in the public filings and from what I can tell the majority of the TPVG public portfolio also has loans from Triplepoint’s private fund (see public sources on the private Triplepoint funds below) which is worrying.
An iceberg of total debt into TPVG’s portfolio companies
Now what does this all mean for public shareholders and customers:
Breach of debt covenants: If the credit facility lender calls a default/demands repayment because of diversification/loan gradings, TPVG will have no liquidity to make new loans and will struggle to honour the existing commitments to portfolio companies. I think it’s more likely that TPVG will not fund customer commitments (nor make new investments) to protect liquidity than risk non-payment of debt however.
Increasing loss rates in 2023/2024: TPVG historically has had ~1.9% loss rates on funded loans in recent years. Considering that 28% ($242 million) of the loan book relates to high risk consumer companies (that haven’t raised for more than 2 years), if annual losses get to 10% (i.e. $86 million on a $857 million loan portfolio), then shareholder yields are negative 30% (given the impact of leverage on returns). Against the market backdrop of a venture downturn, the other question is how long this equity funding drought will last. If the downturn continues into 2024 with a real lack of available funding for the higher risk bets (consumer, ecommerce, retail etc) then potentially 28% of the loan book could be impaired with a lower probability of full recovery given the private fund co-investment reduces recovery proceeds.
In general, the convergence of higher debt and deteriorating asset quality is the main worry for shareholders and customers of TPVG, with illiquidity close in third position. I do feel that senior management has represented the loan book/credit quality inaccurately to hide these issues. How this plays out with the credit facility lender remains to be seen (though they would have firm grounds for calling a default and recalling the debt based on the over-exposure to certain industries, credit quality and misrepresentation by senior management of these two things).
This article is not investment advice and represents the opinions of its author, George Bartlett. All sources used are publicly available. No personal positions are held of the stocks in question.
Sources:
https://s22.q4cdn.com/245062847/files/doc_financials/2022/q4/TPVG-12.31.22-10-K.pdf
https://www.dbrsmorningstar.com/issuers/28241/triplepoint-private-venture-credit-inc
https://www.sec.gov/Archives/edgar/data/1792509/000110465920066446/tm2021057d1_ex10-1.htm
https://fintel.io/doc/sec-triplepoint-private-venture-credit-inc-1792509-10k-2023-march-08-19424-497
