As a follow-up to our initiation of Trinity Capital (TRIN) to the Action Alerts PLUS portfolio, let's dig deeper into our thinking behind this move.

In the past when we've seen major retailers such as Circuity City, Modell's Sporting Goods, Sports Authority, Toy "R" Us, and dozens of others go out of business, competing companies such as Best Buy  (BBBY) , Dick's Sporting Goods (DKS) , and Amazon (AMZN) benefited as they absorbed the remaining business and customers.

With the recent failures of Silicon Valley Bank (SIVB) and Signature Bank (SBNY) , we are likely to see a similar void being filled by a combination of banks and business development companies (BDCs). As a reminder, much like real estate investment trusts or REITs, BDCs must pay out 90% of their net income to shareholders. We tend to see this through a combination of quarterly dividends and special dividends.

This had us taking another look at Trinity Capital, which we added to the Bullpen at the end of last year after having the President and Chief Investment Officer on the AAP Podcast. Right before Silicon Valley Bank started to spiral, we shared a deeper look at TRIN shares, but ultimately held off, opting instead to revisit them as the bank failure storm cleared. We also said that at a share price of $12.50 the risk-to-reward proposition for TRIN -- upside to $15.75 and downside closer to $11, especially given the unfolding news at the time -- wasn't favorable enough to make a move.

A month later, TRIN shares are trading lower, which improves the risk-to-reward tradeoff. In addition, the company announced its latest dividend of $0.47 per share after paying a $0.46 per share dividend in January. That suggests the market expects Trinity to pay roughly $1.87 per share in dividends during 2023. But we have to remember that because Trinity is a BDC it must pay out at least 90% of its net income.

Currently, the 2023 consensus EPS for Trinity is $2.14, which suggests the company has to pay out at least $1.925 in dividends this year. That dividend could come in the form of higher quarterly dividend payments or a special dividend payment later this year. Either is possible given the company has delivered eight consecutive quarters of dividend increases. There are also reasons to think Trinity's earnings could be higher than the consensus forecast.

That brings us back to our opening comments about companies benefitting from their competitors falling by the wayside. With Silicon Valley Bank and Signature Bank out of the picture, their existing and prospective customer bases will be turning elsewhere.

When we added Bank of America (BAC) shares to the portfolio, we shared we were likely to see a bump in the road for loan activity as companies looked for new lenders and those lenders did their due diligence on new prospects. Indeed, this morning's March survey from the National Federation of Independent Business showed a net 9% of owners who borrow frequently said financing was harder to get compared to three months earlier, the most since December 2012.

One thing to note with Trinity and other BDCs is they tend to fund their business efforts by tapping the debt market. Given the move higher in interest rates, this means borrowing costs have gotten more expensive, but it also means their hurdle rates for prospective loans and financing have risen also. This points to tougher lending standards from the borrower's perspective, but from the lender's it means they can be far more choosey with their loan portfolio, arguing for a stronger pick from the candidate litter.

Given concerns over the economy and job cuts announced year-to-date, odds are these smaller growth-stage companies have already sharpened their pencils and dialed back their capital needs. Today's March NFIB Small Business Optimism Index showed more companies taking a more thoughtful approach to sales forecasts and a slower pace of capital spending. That along with greater competition for remaining financing dollars should lead to a stronger investment pool compared to this time last year.

Exiting 2022, Trinity had $393 million in unfunded commitments, which points to its debt portfolio rising further in the coming quarters. During 2022, the company's gross investments funded were $631.2 million, up 13% year over year. At the end of 2022, it also closed on a joint venture, i40 LLC, with a large special credit manager to invest in loans and equipment financing to growth-stage companies originated by Trinity.

That joint venture started with $171.4 million in capital with $150 million coming from Trinity's credit manager partner. As Trinity puts that capital to work it should translate into rising fee and investment income that should be rather predictable given the nature of Trinity's loan and financing products.

In the medium to longer term, we will want to see how and when Trinity establishes the investment advisor it received approval for in late 2022. The company is likely to replicate the above strategy with capital raised from institutional funds, not individuals, and we're likely to get more details before that capital is deployed. Both of these efforts could prove rather timely given our comments about higher interest rates for longer-term debt securities.

We recognize we are just one month out from the start of Silicon Valley Bank's unraveling, but as we've discussed before calling the absolute bottom in any stock is challenging. For that reason, we will begin with a small starter off a position in TRIN shares with a Two rating and a $14 price target, which matches the current Wall Street consensus target. As our thought process plays out, we'll look for confirmation in Trinity's loan and financing announcements as well as those for future dividend payments.

Similar to other recent additions like Marvell Technology  (MRVL) and Bank of America, we will patiently build out our exposure to TRIN shares.

One thing we should keep in mind is we should receive $0.94-$1.00 in dividends per share before the end of 2023. Even if TRIN shares are flat for the rest of 2023, it means the shares will return at least 8% and potentially more should 2023 consensus EPS move past $2.14, or the company's dividend payout exceed the 90% net income BDC payout threshold.

We would also suggest further downside in the shares could be limited by Trinity's current $25 million share repurchase authorization. At the current share price that equates to ~2.18 million. We also suspect the company would use the program much the way we think about adding to existing portfolio positions trading below their average costs basis with Trinity buying back stock when the share price is below its net asset value per share of $13.15 exiting 2022 like it is today.