Q3 2019 Earnings Call

Greetings and welcome to the Bain capital Specialty Finance third quarter 29 chain earnings Conference call. At this time all participants are in English only about a question and answer session will follow the formal presentation.

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I'll now turn the conference over to your host slow in Berlin Investor Relations you may begin.

Good morning last night, we issued our third quarter earnings press release and Investor presentation.

So.

I'll be which is available on Bain capital, especially Financers Investor Relations website.

Following our remarks today, we will all the question answer session for analysts and investors.

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Any forward looking statements, we make today do not guarantee future performance <unk> actual results may differ materially.

These statements are based on current management expectations, which include risks and uncertainties, which are identified in the risk factor section or annual report on Form 10-K that could cause actual results to differ materially from those indicators.

Bain capital, especially say assumes no obligation to update any forward looking statements at this time unless required to do so by law Lastly, past performance does not guarantee future results.

That I'd like to turn the call over to our President and Chief Executive Officer, Michael You all.

Good morning, and thank you for joining us for third quarter 2019 earnings call.

Slowed mentioned my name is Michael evolved and I'm joined today by our Vice President Treasurer, Mike Boyle.

Our Chief Financial Officer, Sally Doris.

Let's start with a brief snapshot of the portfolio and will provide some high level comments on our strategy the market and both Mike and Sally will give some additional detail on the investment book and our results.

At the end of the third quarter, the BCS <unk> portfolio, representing $2.5 billion invested across three different industries and 126 portfolio companies.

The current weighted average yield of 7.7%.

In the quarter, we originated $275 million of new investments and had sales will repayments of $184 million.

Excluding the impact of the B C S balance sheet consolidation in the second quarter or new originations. Your they totaled $953 million against sales are repayments of $755 million.

That's where the make up the portfolio, it's relatively unchanged by loan type and industry exposure.

At quarter end, approximately 88% of our portfolios and best first dollar risk is made of traditional first lien loans and unitranches.

Got it the portfolio still very strong and the remains zero nonaccruals.

We are again pleased to announce our board declared a fourth quarter dividend of 41 cents per share.

The quarterly dividend will be payable on January Thirtyth 2020 to stockholders of record on December 31st 2019.

Overall, we remain cautious with regard to credit and believe the portfolio is well positioned or weakening economy that eventually occurs.

Our portfolio remains overweight and resilient sectors like technology in health care.

Before I discuss what we're seeing in the markets, let me take a moment to speak to our capital structure.

As you can see we ended the quarter with leverage at 1.6 times gross debt to equity, but it is 1.5 times net of cash.

As we continue to operate at the high end of our stated one one and a half times range. We continue to be focused on expanding the core earnings of the company through thoughtful portfolio construction.

In short we continue to believe that the natural rotation in the portfolio went to higher spread assets further expansion of Unitranche loans under the B C. S program and access to strategic partnerships and verticals such aren't as our aviation efforts will drive continued earnings growth over the near term.

Mike oil will expand on this in a bit.

From a market perspective since the beginning of the year, while we have seen periods of fits and starts the market is generally remain more subdued versus recent years as evidenced by lower new issue volumes published by various providers.

This is particularly evident in the broadly syndicated markets, where we have seen the increase in flex pricing spread widening and general terms and documentation pushback.

This is most obvious at the low rent to the credit quality spectrum, where there continues to be further bifurcation and who can access the market and then what terms.

Such environment as well suited for an experienced middle market lender such as ourselves.

The ability to remain selective dictate terms and pricing and work alongside trusted private equity partners, who we have seen execute in the past all the while overlaying our senior secured focus creates the opportunity to originate high quality loans.

So without getting overly rosy picture. This is our way of saying that we continue to find compelling investment opportunities I expect we'll be able to continue to execute on our direct lending strategy.

So I will now provide a more detailed financial overview.

Thank you, Mike and good morning, everyone.

Third the review of our third quarter 2019 results with our income statement.

Net investment income for the quarter with $21.2 million.41 per share.

Was consistent with the second quarter of 29.

GAAP earnings per share for the three months ended September Thirtyth, 2019, 35 cents per share compared to 37 cents per share, but the three month ended June Thirtyth 29.

Quarter over quarter decreased due to net unrealized depreciation of $3.5 million offset by net realized gains of 500 nice.

Total expenses for the quarter net of waivers increased sequentially by 2.1 million to approximately $35 million in the third quarter compared to 29.4 million in the second.

Our expenses increased primarily due to the first full quarter of interest expense associated with our JP Morgan credits.

For the three month ended September Thirtyth 2019, our management incentive fees met a waiver.

$3 million $3.6 million, respectively, compared to a management team and incentive fee waivers $6.4 million and $4.5 million for the three months ended June 30 years 2019.

Similar to last quarter, our advisor voluntarily waived its right to receive base management fee and the incremental assets associated with the ABS transaction.

Third quarter.

That voluntary waiver was $1.5 million. In addition, our advisor also voluntarily waived an additional $1.1 million related to management.

As you stated in the past that continued to demonstrate we and our advisor believed the fee waiver aligns the interest threshold, there and our commitment to a stable dividend.

Now moving to our balance sheet.

Tempur Thirtyth alright.

Yeah fair value total $2.5 billion.

Increase is driven by about $275 million offset by sales and pay down to 184 million whatever.

The weighted average portfolio yield was 7.7 per cent compared to 8% and the second quarter.

Folio yield decline due to the decrease in linerboard during the quarter. However, overall weighted average portfolio spread increased 80 basis points quarter over quarter.

Moving to the right side of the balance sheet. The total net assets, where a billion dollars as of the end of third quarter.

NAV per share was $19.71 compared to 90 977 cents second quarter due to the net activity losses of $3 million.

As of September Thirtyth total principal debt outstanding and 1.7 billion impact comprised about Goldman Sachs JP Morgan credit facilities, along with our 2018 dashed one and 29, that's why not.

In August we closed our second middle market CLL.

Total amount that's $398.8 million, we priced a AAA lie more one seven day.

On the liabilities that has a weighted average cost.

Oh My board to 30 maturing in October 2031.

As you talked about before in relation to our first middle markets yellow its structure works very well dressed cycle given the protection it provides around market volatility.

In conjunction with in 2019, that's one issuance.

Terminated our hundred 90.

2 million dollar amounts drawn on the Citi Bank facility.

This is expected to reset at LIBOR plus 260 in February 2020.

Our debt to equity ratio was 1.63 times in Q3 compared to 1.48 times in Q2, our net leverage ratio <unk>, which represents principal debt outstanding less cash was 1.48 times in Q3 compared to 1.35 times.

Finally, we are pleased to announce that our board declared a fourth quarter debit and 41 cents per share.

Fourth quarter dividend is payable on January Thirtyth 2020 to stockholders of record.

Number 31st 29.

Thank you as always I will now turn the call over to Mike well, our Vice President Treasurer to walk through our investment portfolio. Some recent investments.

Thanks Ali and good morning, I'll kick it off with an update on the credit quality of our portfolio and also provide more detail on originations this quarter.

At September Thirtyth, the fair value of our investment portfolio with $2.5 billion diversified across 126 companies operating in 30 industry.

99% the fair value of these investments performing in line or ahead of our underwriting.

Flip between our performance rating of one into.

We're pleased to report we've had no nonaccrual since the inception to be set up in 2016 and have no non accruals in the portfolio at the ended the third quarter 2019.

Our investments are primarily comprised of first lien senior secured loans, which represent 87% of the portfolio. The weighted average yield of investment to 7.7% median EBITDA was 54 million with an average leverage level of 5.0 times.

87% of our investments contain financial maintenance costs.

Recently, we had been favoring sectors, but you're not cycle alongside the macro economy, including high Tech health care and aerospace.

We believe the some product of these variables create the portfolio that is well positioned to withstand any potential market volatility.

The defensive nature of our investments the key considerations in choosing to operate at the high end of our leverage range, which Mike do you all discussed earlier, one to 1.5 times.

Shifting to third quarter origination, we invested $275 million in 10, new portfolio companies over the course of the quarter.

Weighted average spread of new investments with LIBOR, plus 6% versus exits over the quarter.

LIBOR or 4.9%.

Approximately 20% of our new originations were Unitranche loan.

One specific example, the unitranche, we extended to support the elbow of Ventev technology provider of risk management software enterprises, and government agencies, but the specialization and insurable risks.

With strong retention statistics, and a clear value proposition. We view this investment as one that will demonstrate resilient performance in a variety of macroeconomic environment.

The loan represents a 1% positioning the portfolio and is one component of our largest industry exposure Hi Tech.

Another investment made in Q3 was the first lien loan to Kallstrom, a U.S. based provider of replacement parts to the airline industry.

The company has many of the positive attributes we look for in distributors operating with the many many model, which includes long term relationships across multiple stakeholders.

On the demand side, they have good forward visibility driven by the size and diversification of the global aircraft fleet.

Given our deep understanding of the aviation industry, we were able to lead the financing and provide a valued solution.

As Mike mentioned earlier, well the direct lending market is competitive we continue to believe is investable and requires a manager, but long term expertise and a proven track record.

Looking forward our pipeline for the fourth quarter has continued to be full and is inline with our demonstrated investment pace that we've shown over the course of 29 team.

With that I'll turn the call back over to Mike for closing remarks.

Thanks, Mike before I conclude I would like to reflect on our first year as a publicly traded business development company as we approach the anniversary of our IPO last November .

We have continued to execute on the core middle market investment strategy, we've owned it being capital credit for over 20 years.

The asset side, we are proud of the portfolio 126 companies, we have built no nonaccruals inception to date.

We are maintaining our cautious view macroeconomic considerations and are focusing on the senior most exposure indefensible industries.

In addition to our comprehensive diligence work aided by the greater Bain capital platform. We spent significant time, ensuring we have tight documentation or transactions and irrelevant to driving outcomes by controlling the majority of our conscious.

We continue to look for relevant investment opportunities globally with local teams on the ground.

On the liability side, we're looking to match our debt to our assets as best we can especially while maintaining competitive pricing and flexibility and ensuring let longevity and certainty through moves like issuing middle markets yellows.

Put together, we look to provide an appropriate risk adjusted returns to our shareholders including ourselves.

As always I'd like to thank our investors for their continued support and all of you for your time today.

Operator, please open the line for questions.

Thank you at this time it will be conducting a question and answer session. Please limit your question to one question and one follow up.

If he would like to ask a question. Please press star one on your telephone keypad, a confirmation turn will indicate your line is my question can you May press star to if he would like to remove your question from the Q.

Participants using speaker equipment and may be necessary to pick up your handset for pressing the star Keith [laughter] one moment, please model they pull for questions.

The first question is from San O'shea of Wells Fargo Securities. Please go ahead.

Hi, guys. Good morning, Thanks for taking my question.

Have a.

First one on.

Your topline yields you outlined full [laughter], Mike and Mike said, there and this is Ben you know.

The plan for sometime you have some lower yielding assets and plans for expansion to unitranche in specialty or is it backs for now [laughter] can you talk about sort of.

You know in the context of today with Whiteboard down you know late cycle concerns what you.

I think is reasonable or what you.

And tend to push toward near to intermediate term on a topline.

Spread perspective [laughter].

Sure. Thanks for the questions Ben.

So in the last in the third quarter, our originations averaged five were plus 6% as we're thinking about just from a coupon perspective, and I think that's a fair characterization of what we're seeing attractive risk return I think that LIBOR, 6% is it's something that.

But in line with our Q4 pipeline and we are assuming that that that's kind of an average pace originations going forward, but he thinks about first lien unitranche loans.

And then I'll just add yeah, you're absolutely right in terms of.

Our thinking about where we are the economic cycle. So we don't think this is a big on unnecessary risk. So while we improved our spread I think it was eight basis points quarter over quarter I would expect to see a huge jump there, it's really level coming down obviously helps from a liability perspective as well.

Okay. Thanks, and on the theme you also touched on of.

Push back in the liquid markets.

Demand for documentation.

Is this impacting you know.

I'd imagine and in a positive way, but on any specific front of your strategy one we will.

Things are now is it fair to say you're looking at larger deals or is it still or are you in the cap where those are you know wobbly for a reason then you're still going to stick to the core middle market.

Yes, our average EBITDA has really changed much were about $54 million for average examines our portfolio companies.

Consistent and that's really the segment really we've certainly seen most folks.

EBITDA numbers increase and that certainly different strategy, but this is the segment that we've been in for 20 plus years. It's a segment we like so I don't see us came from that perspective.

So you're right, though we're able to push back a little bit more.

On things like terms documentation. So you know if anything else, we're not as much of an outlier.

Ben.

Yeah by demanding covenants and those sorts of things and the vast majority or deals. So that's that's really helps but I guess stick out as the us declares lunch.

Got it. Thank you Doug that's all from ill hop back in the Q.

Thanks, Ed.

The next question is from Ryan Lynch as KBW. Please go ahead.

Good morning, Thanks for taking my questions I'm, just wanted to comment or get your guy's comment on a year or you mentioned.

Nice pipeline building, a you guys had strong portfolio growth Oh.

In this quarter.

Guys are at your leverage target. So can you just talk about how you guys manage that that pipeline and growth to be you'd have to leverage target. In addition to.

One of the reasons I know that you consolidated JV onto the balance sheet was that.

You guys are bumping up against your 30% bucket and wanted to continue in investing in that fund and having a BDC and best and grow grow grow the assets you know what that relationship given that you guys are up against your leverage target.

How do you manage that.

Sure.

Sorry, Mike will jump in.

So a couple different questions and answers a wrap that up and there certainly from a.

Leverage range for said the Liberal definitely the high end of that range and they as we mentioned that doesn't but gosh, the severance and pay down at the end of the quarter, which admittedly going into Q4. So it was somewhat artificially high <unk> per se.

As we've said before we certainly think that the nature of the portfolio being such a senior BOPUS portfolio.

Does lend itself to you know.

Average a higher level of leverage that you might see out they have on the other only add to think about our leverage at this point all of our leverage is actually on the balance sheet. So from a look through perspective. The number we reported 1.6 as of the number that we have or you know on balance sheet not balance sheet. So I.

I think overall that that number is fine.

In terms of the collapsing of of the JV you know you're absolutely right.

We're bumping up against that 30% limit bucket that you're calling me that we do their favorite pretty active international business well.

And with ABTS as big as it was about roughly 20% of that 30% bucket International Therefore is limited 10%.

We've seen so some pretty interesting opportunities internationally from our teams on the ground in Europe , and Australia, and so do you think about our Q3 originations about 17% of those were international deals that would not have been possible. We still been limited that 30%. For example, we think it's nice way to diversify the risk and so.

If we find better opportunities globally, we will utilize this fund structure to take advantage of those.

Okay and.

And then.

You guys weighed about 3.3 million in fees this quarter or about 1.5 million a was really a your guys kind of a continual waiver from from collapsing the JV, but.

Manger was just you know on top bad I would assume to support the dividend.

You guys have done this in the past.

Your guys Colin intention to continue waiving fees to extent necessary.

Sure in order to support the dividend.

Oh, it's hard to comment on what we do the future, but clearly we have a pretty proven track record of having done that now.

Certainly the than the last four quarters and that that we'd been that we've been public. So I think it's reasonable to assume that that would be the case on board as though.

Okay. Thank you I will.

Hop back in the Q.

Thanks Ryan.

As a reminder, it is star one to ask a question.

Your next question is from Sam Kelley of Credit Suisse. Please go ahead.

You guys I'm on for Doug today, one on credit quality I know you guys I don't have any non accrual accrual status, whose into portfolio, but I mean, I'm just forget your investment portfolio, writing and the rating three bucket had a company and tourettes. So I'm just wondering if there's any common thread.

You're seeing with those companies or if the the concerns are pretty idiosyncratic.

Sure. Thanks for the question or are the risk rating threes, and where we're seeing underperformance has been very idiosyncratic.

Ranging from a company that.

Overspend on Opex to another business, where the carve out that adds some customer losses that were on anticipated on the back of the carve out so as we think about the overall quality of the portfolio. It is still quite strong and then any situation that had been not performance running three Ben.

I bet idiosyncratic.

Environment at the at the individual business.

I did highlight the average leverage across the whole portfolio is 5.0 times. So we're still feeling quite good about about average leverage and EBITDA trends across the <unk>.

Great and then another one on investment activity, how has that trended in the month of October .

If you can comment on that.

Sure I I did comment and my statement that it has been fairly in line with a strong investment activity. We've seen over the course of 29, he and I won't give kind of specific guidance there, but it has been a very busy Q4.

You will note. Our Q4 2018 was our largest origination quarter since IPO. So.

So we certainly have continued to see a strong pipeline and know that Q4 tends to be a busy quarter and Brett lending as there's many transactions looking to get done before the end the year.

Okay Super helpful. Thank you so much.

[noise], we have reached the end of the question and answer session I will now turn the call back over to Michael evolve President and CEO for closing remarks.

Great. Thanks, a lot and thanks, everyone for your time and attention today, Oh, we're happy with.

Forms for the quarter and again, we're happy to have been public for the past year and look forward intending to deliver our news to you in future quarters. Thanks very much.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Oh.

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