Special situation: Trinity Capital

Trinity Capital (LON:TRC) is a company listed on AIM in London that was formed in 2006 with the purpose to invest in Indian real estate and real estate entities. These investments were structured as special-purpose vehicles and joint ventures.

In March 2009 shareholders voted to change Trinity’s investment policy, requiring the company to dispose of its assets over time and to return cash to shareholders. The company has made a number of large capital returns since then, totalling £150.5m.

The investment policy explicitly requires Trinity to return capital to shareholders when shares are trading below NAV:

If the Company’s Ordinary Shares are trading at a price below the NAV per Ordinary Share the Company shall immediately effect a return of capital through a cash distribution to Shareholders.

The Company shall continue to seek new investment opportunities. If the Company’s Ordinary Shares are trading at a price above the NAV per Ordinary Share, the Board will selectively determine, on a periodic basis, whether or not to make new investments.

[Emphasis added]

These disposals and capital returns have resulted in a company that only had net assets of £11.62m as of March 31, 2016, the date of the latest published financials.

What’s left?

Currently Trinity is left with some cash (about £3.5m) and only three remaining investments in Indian real estate projects, which are held through three Mauritian special purpose vehicles called Trinity Capital (One) Limited (“TC1”), Trinity Capital (Five) Limited (“TC5”) and Trinity Capital (Ten) Limited (“TC10”). All three of these investments have a German co-investor called Immobilien Development Indien I / II GmbH (“Immobilien Funds”). Trinity holds a majority interest in TC1 and TC5, with Immobilien Funds holding the balance. In TC10, Trinity is the minority owner with a 12% interest.

A dispute had arisen between Trinity and Immobilien Funds. Trinity has been trying to recover a £7.5m loan together with interest from TC1, but Immobilien Funds has been blocking this loan repayment. Trinity has initiated legal proceedings in Mauritius against TC1 and a £2m provision has been established by the company for the estimated amount of legal costs. This £2m shows up on the balance sheet as a liability and has been there since 2012.

The Agreement and sale of TC1 & TC5

On October 21 an interesting press release came out, announcing an agreement with Immobilien Funds. Under the agreement, Trinity will dispose of its investments in TC1 and TC5 held by its wholly owned subsidiary Trinity Capital Mauritius Limited (TCML). Trinity will receive INR 720,000,000 (or currently around £8.55m) in return. Immobilien Funds will also permit and facilitate TC10 to distribute the proceeds of any future sale of the indirect interests in this vehicle. All legal proceedings will also be terminated as part of the agreement. The sale of TC1 and TC5 needs to be completed within eight weeks from the date of the agreement (October 20), otherwise the agreement will terminate.

Adjusted NAV

I think this agreement has created a potentially attractive special situation. I’ve tried to construct a pro-forma balance sheet, assuming the sale of TC1 and TC5 goes through and £8.55m is ultimately received by Trinity. Other items I’ve adjusted for are a £2.1m distribution that was made to shareholders in September 2016, estimated management costs of £0.4m for the period since March and the elimination of the £2m liability for legal costs on the balance sheet.

My estimate for the adjusted NAV is £11.35m or 5.39p per share. Shares have been trading for 3.88p per share or a discount of 28% to this estimate.

Value of stake in TC10?

I have completely ignored the potential value of Trinity’s stake TC10 in my estimates. I’ve not looked deeply into this investment and have no idea if anything can be salvaged from this. The annual report has this to say about the value of the investment in TC10:

The value of the investment in MK Malls is based on the net sales proceeds to be received under the terms of a final draft (but not yet binding) sales agreement.

The financial statements have not specified estimates for each of the three investments individually. It seems impossible to get a good idea of the value of Trinity’s interest in TC10, but it is positive that there is already a sales agreement in place. So any proceeds from a sale of their TC10 stake should provide some more upside.

Conclusion

There is definitively risk here of the sale not completing. Trinity and Immobilien Funds have had a dispute for a number of years now and that might cause resentment from both parties. If some trouble develops in the finalization of the sale of TC1 and TC5, there is a chance that one or both parties will be unwilling to compromise and that the agreement falls apart.

I view this as a risk arbitrage situation where the risk is certainly a lot greater than the risk of any typical merger arbitrage situation falling apart, given the existence of this dispute and the nature of the assets. Still, there appears to be a large discount to NAV and both parties do have an incentive to come to an agreement and to finally part ways. Additionally, Trinity is committed to return capital to shareholders provided that shares are trading below NAV. I believe investors should see capital returned to them relatively quickly when Trinity does receive the payment for TC1 and TC5.

It looks like Trinity Capital will ultimately be liquidated completely. The company has already shrunk tremendously and these are the final assets that are left to be realized for shareholders. There has been a lot of uncertainty about what could be realized from these investments. Shares were trading at 1.5-2.0p in September, before the agreement with Immobilien Funds was announced. I think a situation like this leads many shareholders to sell at a relatively large discount and to leave some potential money on the table, especially considering the now microscopic size of the company.

Special situations and (merger) arbitrage are not my strength, but this seems like an attractive situation that offers a decent payoff for taking the risk of the sale falling apart. This is why I’ve taken a small position in Trinity Capital.

Disclosure: long Trinity Capital (LON:TRC)