TRIPLEPOINT VENTURE GROWTH BDC CORP. The trend on the ratings has been revised to Stable from Negative. The Company's Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3, resulting in TPVG's final credit ratings positioned in line with its IA.
KEY CREDIT RATING CONSIDERATIONS
The credit ratings downgrade reflects the operating performance challenges at TPVG with credit deterioration in the investment portfolio that has led to significant realized losses and erosion of net asset value (NAV). Additionally, gross leverage has been well above BDC peers for the past year, in part driven by compliance requirements associated with unfunded commitments to borrowers that are deemed to be 'non-qualifying assets' under Section 55(a) of the Investment Company Act of 1940, as amended (the 1940 Act).
Balancing these headwinds, TPVG's franchise still benefits from its relationship to the overall
Concurrently. the trend has been revised from Negative to Stable, which considers our expectation that the Company will de-lever in the near-term and that its credit performance migrates to historical normalized levels commensurate with BDC peers. We expect TPVG's franchise strength to support the credit ratings, despite potential continued challenges in the venture capital ecosystem.
CREDIT RATING DRIVERS
Over the long-term, a sustained improvement in earnings and credit performance while operating with conservative gross 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. If the asset coverage ratio regulatory limit of 150% is breached, the credit ratings would also be downgraded.
CREDIT RATING RATIONALE
Franchise
TPVG's franchise is supported by TPC's strong reputation and an executive management team which has long-standing experience investing through economic cycles. At 4Q23, TPVG's
Earnings
TPVG'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. TPVG had a net decrease in net assets from operations (net loss) of
Risk
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. Despite realized losses, five 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. The company's investment portfolio is actively being rotated to those sectors of technology with more active venture capital investment activity and stable public market valuation multiples. Additionally, as repayments and losses were primarily attributable to investments in
Funding and Liquidity
TPVG has an acceptable funding profile supported by significant unsecured debt comprising 65% of its drawn financing at 4Q23 which provides a good level of unencumbered assets should the need arise for additional pledged assets. The Company's private placements have well-laddered maturities, with
Capitalization
The Company's gross leverage continues to be well above other BDCs, operating at 1.76x gross debt-to-equity (net leverage of approximately 1.27x) at 4Q23, and above its historical target net leverage range of 1.0x to 1.2x. Through the four quarters of 2023, the average gross debt-to-equity was 1.64x, which was elevated due to compliance requirements associated with unfunded commitments to borrowers that are deemed to be 'non-qualifying assets' under Section 55(a) of the 1940 Act. As international exposures repay and the domestic investments grow leading to a more balanced investment portfolio, we expect gross leverage to be meaningfully reduced. TPVG's cushion to the asset coverage ratio limit has shrunk to
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 (
Notes:
All figures are in
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (
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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