Trinity Capital Inc

Note 4. Fair Value of Financial Instruments

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the observability of inputs used to measure fair value, and provides disclosure requirements for fair value measurements. The Company accounts for its investments at fair value in accordance with ASC 820. As of December 31, 2023 and December 31, 2022, the Company’s portfolio investments consisted primarily of investments in secured loans and equipment financings. The fair value amounts have been measured as of the reporting date and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different than amounts reported.

In accordance with ASC 820, the Company has categorized its investments based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical investments (Level 1) and the lowest priority to unobservable inputs (Level 3). See “Note 2 - Summary of Significant Accounting Policies.”

As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).

The fair value determination of each portfolio investment categorized as Level 3 requires one or more of the following unobservable inputs:

•

Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;

•

Current and projected financial condition of the portfolio company;

•

Current and projected ability of the portfolio company to service its debt obligations;

•

Type and amount of collateral, if any, underlying the investment;

•

Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio) applicable to the investment;

•

Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);

•

Pending debt or capital restructuring of the portfolio company;

•

Projected operating results of the portfolio company;

•

Current information regarding any offers to purchase the investment;

•

Current ability of the portfolio company to raise any additional financing as needed;

•

Changes in the economic environment, which may have a material impact on the operating results of the portfolio company;

•

Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;

•

Qualitative assessment of key management;

•

Contractual rights, obligations or restrictions associated with the investment; and

•

Time to exit.

The use of significant unobservable inputs creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement of the Company’s investments, are (i) earnings before interest, tax, depreciation, and amortization (“EBITDA”) and revenue multiples (both projected and historic), and (ii) volatility assumptions. Significant increases (decreases) in EBITDA and revenue multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Similarly, significant increases (decreases) in volatility inputs in isolation would result in a significantly higher (lower) fair value assessment. Conversely, significant increases (decreases) in weighted average cost of capital inputs in isolation would result in a significantly lower (higher) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the tables below.

The Company’s assets measured at fair value by investment type on a recurring basis as of December 31, 2023 were as follows (in thousands):

(1)

In accordance with ASC 820, the Company's equity investment in Senior Credit Corp 2022 LLC is measured using the net asset value per share (or its equivalent) as a practical expedient for fair value, and thus has not been classified in the fair value hierarchy.

(2)

Escrow receivable is included in other assets on the Consolidated Statements of Assets and Liabilities.

The Company’s assets measured at fair value by investment type on a recurring basis as of December 31, 2022 were as follows (in thousands):

(1)

Escrow receivable is included in other assets on the Consolidated Statements of Assets and Liabilities.

The methodology for determining the fair value of the Company’s investments is discussed in “Note 2 – Summary of Significant Accounting Policies”. The significant unobservable input used in the fair value measurement of the Company’s escrow receivables is the amount recoverable at the contractual maturity date of the escrow receivable. The following table provides a summary of the significant unobservable inputs used to measure the fair value of the Level 3 portfolio investments as of December 31, 2023.

(1)

The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The significant unobservable inputs used in the fair value measurement of the Company’s equity and warrant securities are revenue multiples and portfolio company specific adjustment factors. Additional inputs used in the option pricing model (“OPM”) include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing, merger or acquisition events near the measurement date.

(2)

Weighted averages are calculated based on the fair value of each investment.

(3)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(4)

(5)

Represents the range of industry volatility used by market participants when pricing the investment.

(6)

Includes debt investments originated within the past three months, for which cost approximates fair value, unless events have occurred during the period that would indicate a different valuation is warranted.

(7)

Represents investments where there is an observable transaction or pending event for the investment.

(8)

Under the enterprise value technique, the significant unobservable inputs used in the fair value measurement of the Company's investments in debt or equity securities are: (i) the earnings before interest, taxes, depreciation and amortization ("EBITDA"), (ii) revenue or (iii) asset multiple; as applicable. Increases or decreases in the valuation multiples in isolation may result in a higher or lower fair value measurement, respectively.

The following table provides a summary of the significant unobservable inputs used to fair value the Level 3 portfolio investments as of December 31, 2022.

(1)

The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The significant unobservable inputs used in the fair value measurement of the Company’s equity and warrant securities are revenue multiples and portfolio company specific adjustment factors. Additional inputs used in the option pricing model (“OPM”) include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger acquisition events near the measurement date.

(2)

Weighted averages are calculated based on the fair value of each investment.

(3)

Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments.

(4)

(5)

Represents the range of industry volatility used by market participants when pricing the investment.

(6)

Represents investments where there is an observable transaction or pending event for the investment.

(7)

The fair value of these investments is derived based on recent private market and merger and acquisition transaction prices.

(8)

The following table provides a summary of changes in the fair value of the Company’s Level 3 debt, including loans and equipment financings (collectively “Debt”), equity, warrant and escrow receivable portfolio investments for theyear ended December 31, 2023 (in thousands):

(1)

The non-cash conversion includes restructuring of a convertible note position to preferred equity and an exercise of a warrant to an equity position during the period.

(2)

During the year ended December 31, 2023, there wereno transfers into Level 3.

The following table provides a summary of changes in the fair value of the Company’s Level 3 debt, including loans and equipment financings (collectively “Debt”), equity, and warrant portfolio investments for the year ended December 31, 2022 (in thousands):

(1)

The non-cash conversion includes the non-cash exercise of warrant investments.

(2)

Transfers out of Level 3 during the year ended December 31, 2022 primarily relates to the exercise of warrants held in four portfolio companies to equity investments during the period, and the corresponding company’s public offering transaction. During the year ended December 31, 2022, there wereno transfers into Level 3.

Fair Value of Financial Instruments Carried at Cost

As of December 31, 2023 and December 31, 2022, the carrying value of the KeyBank Credit Facility was approximately$213.0 million and $187.5 million, respectively. The carrying value of the KeyBank Credit Facility as of December 31, 2023 and December 31, 2022 approximates the fair value, which was estimated using a relative market yield approach with Level 3 inputs.

As of December 31, 2023 and December 31, 2022, the carrying value of the 2025 Notes was approximately$180.5 million and $178.6 million, respectively, net of unamortized deferred financing costs of$2.0 million and $3.9 million, respectively. The 2025 Notes have a fixed interest rate as discussed in “Note 5 – Borrowings.” The fair value of the 2025 Notes as of December 31, 2023 and December 31, 2022 was approximately $183.4 million and $183.2 million, respectively, based on the market closing price of these notes, which trade on the Nasdaq Global Select Market under the symbol “TRINL”.

As of December 31, 2023 and December 31, 2022, the carrying value of the Convertible Notes was approximately$48.8 million and $48.1 million, respectively, net of unamortized deferred financing costs and discount of$1.2 million and $1.9 million, respectively. The Convertible Notes have a fixed interest rate as discussed in “Note 5 – Borrowings.” The fair value of the Company’s Convertible Notes as of December 31, 2023 and December 31, 2022 was approximately $50.6 million and $40.7 million, respectively, which was estimated using a relative market yield approach with Level 3 inputs.

As of December 31, 2023 and December 31, 2022, the carrying value of the 4.375% Notes due 2026 (the “August 2026 Notes”) was approximately$123.5 million and $122.9 million, respectively, net of unamortized deferred financing costs and discount of$1.5 million and $2.1 million, respectively. The August 2026 Notes have a fixed interest rate as discussed in “Note 5 – Borrowings.” The fair value of the Company’s August 2026 Notes as of December 31, 2023, and December 31, 2022, was approximately $111.5 million and $99.2 million, respectively, which was estimated using a relative market yield approach with Level 3 inputs.

As of December 31, 2023, and December 31, 2022, the carrying value of the 4.25% Notes due 2026 (the “December 2026 Notes”) was approximately$73.9 million, and $73.5 million, respectively, net of unamortized deferred financing fees of $1.1 million and $1.5 million, respectively. The December 2026 Notes have a fixed interest rate as discussed in "Note 5 - Borrowings." The fair value of the Company’s December 2026 Notes as of December 31, 2023 and December 31, 2022 was approximately $66.8 million and 59.6 million, respectively, which was estimated using a relative market yield approach with Level 3 inputs.