Since stresses in the regional banking sector emerged in March, more companies have tapped alternative ways to borrow money, and are turning to permanent-capital business development companies, said Trinity Capital (NASDAQ:TRIN) President and Chief Investment Officer Kyle Brown.
The banking turmoil, stemming from the Federal Reserve’s most aggressive tightening campaign since the 1980’s, took hold after the high-profile failure of Silicon Valley Bank, Signature Bank and First Republic Bank in a matter of weeks. That, in turn, shook confidence in the sector, although authorities have intervened to protect the depositors of those lenders.
Companies that no longer want exposure to bank lending are “leaving senior secured term debt to alternative lenders like Trinity (TRIN),” Brown told Seeking Alpha in an interview this past week. “We have seen over the last couple of months a massive uptick in deal flow,” given “less funding options available now.”
Trinity (TRIN), an internally managed BDC, has a leverage ratio of one-to-one (i.e., $1 of equity to $1 of debt), representing “significantly less” leverage than banks, he touted. And since BDCs do not hold deposits and capital is permanent, it’s impossible for such firms to encounter a bank run. Going forward, “there’s probably going to be more banks that struggle,” and “we’re going to continue to step in and provide financing on- and off-balance sheet to fill that void.”
The high interest-rate environment has been a big headwind for a raft of small- to medium-sized banks as their net interest margins deteriorated in recent quarters due to increased liability/deposit costs. Trinity (TRIN), though, has “seen benefits from rate increases” as the company has mostly floating rates to its borrowers with more than half of its debt capital fixed.
For its stronger-than-expected first quarter, TRIN’s total investment income of $41.51M was unchanged from the prior quarter and jumped from $31.8M in the year-earlier quarter.
When asked about his prospects for the direction of rates, Brown said he does not expect rate cuts will come to fruition, saying “the Fed is incentivized to play their hand a little bit and probably cause a little more pain” with inflation still well-above its target. “Historically, they’re going to take it further than they probably should.”
Other publicly-traded BDCs: Prospect Capital (PSEC), Main Street Capital (MAIN), Ares Capital (ARCC), MidCap Financial Investment (MFIC), Hercules Capital (HTGC), Oaktree Specialty Lending (OCSL), Gladstone Investment (GAIN), NewtekOne (NEWT), Oxford Lane Capital (OXLC), Goldman Sachs BDC (GSBD) and Monroe Capital (MRCC).
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