Q4 2019 Earnings Call
Greetings and welcome to the Bain capital Specialty Finance fourth quarter 2019 earnings Conference call.
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Good morning, and welcome to the Bain capital Specialty Finance conference call for the fourth quarter and full year 2019 last night, we issued our earnings press release and Investor presentation of our quarterly results a copy of which is available on Bain capital specialty finance is investor Relations website.
Following our remarks today, we will hold the question and answer session for analysts and investors.
Paul is being webcast a replay will be available on our website. This call and the webcast our property a bank capital specialty finance and any unauthorized broadcast in any form is strictly prohibited.
Any forward looking statements made today do not guarantee future performance and actually <unk> actual results may differ materially.
These statements are based on current management expectations, which include risks and uncertainties, which identified in the risk factor section.
Our annual report and form 10-K.
Could cause actual results to differ materially from those indicated.
In capital Specialty finance assumes no obligation to update any forward looking statements at this time unless required to do so by law Lastly, outperformance does not guarantee future results and with that I'd like to turn the call over to our President and Chief Executive Officer, Michael you all.
Thanks, Kyle and good morning, and thank you all for joining us for fourth quarter 2019 earnings call. It as Carl mentioned my name is Michael evolved and I'm joined today by our Vice President and Treasurer, Mike oil and our Chief Financial Officer, Sally Dawned on us.
As usual I'll start with a brief review of the quarter and provide some thoughts on our strategy and the market then both Mike and Sally will give some additional detail on the investment book and our results.
Let me start by saying that 2019 was a solid year for us during our first full fiscal year as a public company I believe we have continued to take the necessary steps to position the company to achieve long term sustainable returns for our shareholders.
We have maintained our disciplined and highly selective investment approach by focusing on first lien senior secured investments and the current economic cycle.
We are further bolstered the right side of the balance sheet with an eye towards long term stability flexibility and overall low cost.
Lastly, we are positioned the company for further growth following the consolidation of the a b C S joint venture, allowing for future growth of yield enhancing strategic partnerships as well just spoke investment strategies such as aviation finance.
All of these actions, we believe put us in a strong position at the ended the year and poised for continued success.
In an illustration about consistency our board has declared a first quarter base dividend of 41 cents per share.
This quarter's dividends will be payable on April thirtyth 2020 to stockholders of record as of March 31st 2020.
At the ended the year the portfolio represented $2.5 billion invested across 30 different industries, and 114 portfolio companies, where the current weighted average yield of 7.8%.
Approximately 87% of our portfolio is invested in first dollar risk, including traditional first lien loans and unitranches.
During the fourth quarter, we originated $341 million of new investments and experienced sales or repayments of $331 million.
This brought new originations for the entire fiscal year to $1.295 billion again sales already payments of $1.088 billion.
Similarly to the ended the third quarter, we continue to operate near the top end of our leverage range.
However, we proactively reduced our leverage during the quarter from 1.63 times debt to equity at the end of the third quarter. Two 1.55 times gross and 1.48 times net of cash at the end of the fourth quarter.
We remain comfortable at this level given our conservative investment book and we continue to be focused on expanding the core earnings of the company through thoughtful portfolio construction.
From a market perspective, and our view the fourth quarter was neither distinguished by high new deal on M&A volume, nor the Choppiness to we experienced during the first <unk> fourth quarter of last year.
Simply said it was rather fine quarter for an experienced lenders such as ourselves.
We made five commitments to new portfolio companies backed by private equity sponsors with whom we have had long standing relationships.
The weighted average spread of new investments with LIBOR, plus 580 basis points inline with our investment objectives.
Exhibited by our activity in the quarter, we remain highly selective and are pleased with the current opportunity set.
As we continue investing here in 2020, we're mindful that married current events impacting the markets broadly and individual portfolio company performance specifically.
For instance, the presidential election in the U.S. could well have an impact not only for growth going forward in that market, but also potentially result, and new regulations across multiple industries.
The expansion of grown a virus concerns beyond China into Europe as recently as this week has also prompt us to review potential impacts to our existing portfolio companies as well as adjustments to our underwriting going forward.
In any event, we do expect to slow down and deal flow over the next few months.
Lastly, I will note that over the last year, our advisors show you won't showing a willingness to support the dividends as we continue to Orient the company for further profitability growth.
We are pleased the voluntary waiver as a management and our incentive fees were at a minimum the fourth quarter.
Back the majority of fourth quarter waiver is related to the previously announced actions from the a b C. S consolidation earlier in the year.
Well, we hope that this trend will continue it is our expectation that advisory advisor support will be president as needed going forward.
Sally will now provide a more detailed financial review.
Thank you, Mike and good morning, everyone.
I'll start the review of the our fourth quarter 2019 results in our income statement.
That's been income for the quarter with $21.3 million for 41 cents per share, which was consistent with a third quarter of 29 <unk>.
For the year ended December 31st 2019, <unk> total net investment income of $84.9 million, an increase of 52% year over year.
GAAP earnings per share for the three months ended December 31st 2019 was 41 cents per share compared to 35 cents per share for the three months ended September Thirtyth 29.
For fiscal year 2019, we had net investment income per share dollarssixty four compared to $1.45 for 2018 GAAP earnings per share of $1.90 compared to 69 cents for 28.
Total expenses for the quarter net of waivers increased $2 million to approximately $33.5 million in the fourth quarter compared to $31.5 million in the third quarter. Our expenses increased primarily due to a full first full quarter interest at the expense associated with <unk>.
2019, dashed one day and no income incentive fee waiver in the fourth quarter.
For the three months ended December 31st 2019, our management and incentive fee medical leveraged with $7.3 million.
$4.5 million respectively.
Similar to last quarter, our advisor voluntarily waived its right to receive a base management fee and the incremental assets associated with the ABS transaction.
Fourth quarter, the impact that voluntary labor with $1.3 million.
Mission, our advisor also voluntarily waived an additional $500000 related to management fee.
As stated in the past and continue to demonstrate we and our advisor believed that the fee waiver alliance with the interest of our shareholders and our commitment to a stable dividend now moving over to our balance sheet as of December 31st our investment portfolio at fair value totaled $2.5 billion and total assets of $2.6 billion.
During the fourth quarter, we had fundings of $341 million offset by sales and paid out a $333 million in the quarter, excluding the impact of the Bcf joint venture distribution on balance sheet. In Q2, we had total net portfolio growth during the year up $207 million the weighted average portfolio.
Ill yield at amortized cost was 7.8%, which is consistent with the third quarter.
Moving to the right side of the balance sheet total net assets, where a billion dollars as of the ended the year NAV per share was $19.72 compared to $19.71 in the third quarter.
As of December 31st we had total principal debt outstanding of $1.6 billion.
Price of our Goldman Sachs and JP Morgan credit facilities, along with our 2018 Dash one note and the 2019 dashed one that.
Subsequent to year end, we're pleased to announce at our recent amendments to both of our Goldman Sachs and JP Morgan credit facilities.
Provided us improved flexibility and pricing that shareholders will benefit from in 2020 and beyond.
The amendment to our Goldman Sachs credit facility alleviated, various covenant, which will allow us to better maximize that facility.
The amendment to our JP Morgan credit facility improved pricing to LIBOR plus she went creates from LIBOR plus 275 and extended the maturity date to January 2025.
Debt to equity ratio was 1.55 times in Q4 compared to 1.63 times in Q3, our net leverage ratio, which represents principal debt outstanding with cash was 1.48 times in Q4, which is consistent with Q3.
Finally, we are pleased to announce that our board declared a fourth quarter dividend of 41 cents per share which is in line with a different about paid throughout 2019. The first quarter dividend is payable on April Thirtyth 2020 to stockholders of record on March 31st 2020.
Thank you as always I will now turn the call over to Mike well, I, Vice President Treasurer to walk through our investment portfolio and some recent investments in more detail.
Thanks Sally.
I'll kick it off with an update on the credit quality of our portfolio and also provide more detail on our originations this quarter.
As of December 31st the fair value of our investment portfolio is 2.5 billion diversified across 114 portfolio companies operating in 30 industries.
99% the fair value of these investments is performing in line or ahead of our underwriting case split between our performance ratings of one and two.
In the fourth quarter, we placed one issue we're on nonaccrual NPC International as a result, the percentage of our portfolio in nonaccrual unamortized cost was 56 basis points.
The performance issues that the business were driven by it wasn't cradic factors and we're actively involved in the restructuring of that business.
Our investments are primarily comprised of first lien senior secured loans, which represent 87% of the portfolio. The weighted average yield at amortized cost of these investments is 7.8% median EBITDA is $47 million with an average leverage level of 5.2 times.
89% of our investments contain financial maintenance covenants.
We have been favoring sectors that should not cycle alongside the macro economy, including high Tech in aerospace and defense. The defensive nature of our investments are the key consideration in choosing to operate at the high end of our leverage range.
Shifting to fourth quarter originations, we invested $341 million, which includes $193 million across five new portfolio companies over the course of the quarter. During the same period, the portfolio experienced $333 million and repayments in sales.
The weighted average spread of new investments with LIBOR, plus 580 versus exit at LIBOR plus 510.
One specific example of in investment in the quarter is the Unitranche, we extended to support the elbow of the living company the living company as a leading furniture fixtures and equipment provider, serving the student housing and hospitality end markets. We like the company do you do with diversified customer in property base exposure to the recession resistant student housing.
Market, an asset light high margin business model, we were well positioned to lead the financing due to our experience in the hospitality in student housing space as well as our strong relationship with the sponsor.
I'd also like to spend a brief moment highlighting the progress we have made to date and our aviation book Bain capital credit as a longstanding presence investing in aviation through various cycle securities and structures.
Given the high current income provided by aviation leasing assets long term contracts and strong downside protection offered by heart collateral. We believe bank capital credits Aviation strategy is well aligned with the investment objectives of the company.
At year end, our total investments in aviation leasing assets stood at 3% of our portfolio at amortized cost operating a yield of 10.8%.
This exposure with currently included our aerospace and defense industry classification.
Well, we are still very much in our infancy building the company's aviation portfolio is our expectation that over time, our aviation investments will serve as an accretive diversified and differentiated source of income for the company.
In summary, we feel good about the current state of the portfolio and our ability to identify and invest in new investment with that I'll turn the call back over to Mike for closing remarks.
Thanks, Mike as always I'd like to thank our investors for their continued support and all of you for your time today operator with that please open the line for questions.
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Our first question is from Finian O'shea with Wells Fargo. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
Just to start out on you mentioned some facility amendments.
And that expands your ability to fill those [laughter] is can you give a little more context here [laughter] pointed to the consideration that [laughter] it may be difficult sort of rotate into unit troche given those.
It's difficult marginal advanced rates [laughter], where are you are today and leverage.
Sure. So I can talk a bit about about our thought process on the amendment really first and foremost we were focused on reducing the cost of those those structures and we did that successfully on the on the JP Morgan Amendment, both facilities both revolving facility.
He is that we have have pre determined advance rates against you know tranche assets and contemplate the fact that we do originate unit tranche often.
So we do continue to have the flexibility through both our different revolving structures to to invest in unitranche loans without without meaningfully lower advance rates.
Okay.
Thank you and then I saw there is on just a couple portfolio questions.
On unsecured.
That was involved in a acquisition post quarter is that something you're you're able to disclose if you're involved in the incremental or you were able to move out of that position [noise].
We are still involved in that situation and you are correct that they are there there wasn't acquisition that was happening that has happened after that.
And with medical depot I saw the loan rate ticked off there was this due to any.
You know is is this something with the leverage grid or was there a form of rearrangement [laughter].
So there wasn't amendment that was completed last year to that capital structure, which we were we were involved in and facilitating.
The uptick in the price of that loan is really driven by the fundamental performance of the business, it's not related to a step up and interest rate or anything like that.
Okay, Great. That's all for me and thank you.
Great. Thanks, Thanks to.
Our next question is from Ryan Lynch KBW. Please proceed with your question.
Hey, Good morning, guys. First question I had is you guys are now or kind of odd year your match leverage point within the BDC.
You guys. Obviously, you have other pools of capital a cross the for the BDC is just one component of that so could you maybe speak.
You know how you guys are still stayed relevant active with both through your sponsors as well as your other lending partners like I'd Terry's given that the capital constraints right now at the BDC.
Sure. Thanks, Ryan the.
One of the things that we've talked about before I think you've really seen hit in the last quarter. So is that the since we started the BDC that the into 2016, where it really investing into 2017, its still a fairly.
Immature full portfolio from that perspective, and so our weighted average life across our book in terms of hold period is somewhere between two and three years and so we're expecting to see that that repayment number continue to pick up and we've had some low quarters, where it's been like $60 million, but last year was 300, <unk> or last quarter was 300 million dollar so.
I think again to see continued churn in the book, which I think generates a fair amount of appetite and in of itself within the Bdcs still and then to your point, we do have a range of other accounts commingled and managed accounts that that end up spending about $8 billion across our platform. So there's still appetite there.
They are allowing us to stay relevant within our segment, yes, we certainly haven't had explosive growth in already you I mean, that's very much on purpose. Because we are focused really on that tend to 150 million dollar EBITDA arrangements really 20 to 75 million dollar EBITDA range and we think we have the appropriate level of capital it to continue the target.
That well.
Okay that makes sense.
Eventually.
<unk> virus in your prepared comments I know, it's it's very early on it's still an extremely fluid situation.
Not necessarily ask you about that impact you know that it's gonna have like a portfolio.
Oh, it's such a fluid situation, how big we know how it's going to look like even from months from now, but I do want to ask you about when something like this happens and we're currently in.
No.
Kind of evaluation or process, Yes can you just walk me through out the prostacyclin stats that you guys take as as a credit platform.
To monitor.
Moving pieces, what the virus and how it is impacting or potentially impacted your borrowers.
Sure.
Yeah, Let me just started kinda it got to a big picture I guess, you're right Phil fluid and I appreciate that that point of view, yeah look at certainly well documented that we are considerably positioned across our investment book you know everything from from being the 87% in first dollar risk a weren't defensive industries, primarily we're highly focused on documentation and cover.
That's a weren't control the majority of our investments or you can see all that in the investor presentation. That's on our website as well. So yeah, we have been positioning the portfolio that way, primarily due to what we've perceived as economic cycle risk out in the market and we perceive it for a few years now whether the catalyst first.
Lower growth and are higher cost across our portfolio companies ends up being covert 19, you I think we still feel like were appropriately positioned that way and are now you know even more happy that we've done it that way in terms of monitoring portfolio company performance, especially as the virus has expanded beyond China.
More into Europe, especially Italy, so far this week, we actually spent a fair amount of time. This week Recalibrating all of our portfolio company performance is now we're in pretty active conversations with our sponsors and portfolio company management, a fairly regular basis or I will tell you that that communication has picked up in the last couple of weeks year.
As we've tried to understand the impact across the portfolio I don't think it's as simple as saying 85% of the portfolios U.S. So therefore, there's nothing to worry about in the U.S. because that's not overly simplistic is as you point out we don't know what's going to happen yet a within the U.S. or whether and how.
The the virus is going to impact us here and not only that you a lot of these companies are selling on since in the middle market companies selling on other companies or even if those companies are American they might have a revenue or supply chain issues tying back to China. For example, so it is something we're monitoring actively a in in that we've been talking to management team.
James.
Or actually a lot of unless this week in particular add to see how that's going to shake out I think from a reported numbers perspective, you probably won't see that until first quarter or second quarter numbers are reported by those individual portfolio companies.
Okay. That's that's really helpful color and contacts and all that so.
Those are all my questions I appreciate the time today.
Great. Thanks, Ryan.
Our next question is from Derek Hewett Bank of America. Please proceed with your question.
Good morning, everyone on the international portfolio represents I think as as Mike said.
Earlier about 15% versus about 11% that the prior quarter or are you seeing better risk adjusted spreads even in Europe at this point and more importantly is there a longer term target size as a percentage of the overall portfolio for international.
Thanks, Eric Yeah look the I I think part of the growth. There has just been with the consolidation to have a b C. S. Yeah, there's been more room and the qualifying bucket. So weaves we prudently expanded our national exposure within be CSF, It's clearly been.
A tenant of our investment thesis <unk> from the gecko really went when we first raised the BDC that or that Theres. Some interesting relative value that we can play a globally.
I will say that last year, we've found that the relative value of Europe. A was in fact more attractive than it was in 2018. For example, so a there is some natural growth just because we've seen the opportunity set there'll be more interesting they'd be the first point the second point in terms of.
Yeah, what we think from a from arrange perspective, obviously were limited to 30%, but what you'll see in our in our portfolios across the asset class is 20, 30% Europe is certainly not or what are you, including Australia I guess, two so 23% international certainly not outside their own possibility.
Okay, Great and then one on spread if I may on its <unk>.
Spreads on nonperforming axis <unk>, if I believe I heard correctly was 5.1% this quarter I think it was 4.9 I last quarter seems like it that's helped the company to defend the portfolio yield at least this past quarter. So what percentage of the portfolio still has these lower.
Yielding types of investments that could potentially be rotated into more.
Higher spread investments over over the next couple of quarters.
Sure I I'd say, there's broadly about 5% to 10% of the portfolio that left that is on the lower end of our spread range that we think.
Could could be rotated in coming quarters.
Okay, great. Thank you that's all for me.
Thank you that's there.
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We have reached the end of the question answer session that we'll now turn the call back over to Michael you all for closing remarks.
Great. Thanks, Omar and again, thanks, everyone for your time say really appreciate a the time and the support certainly do you have any further questions feel free to reach out to us and we look forward to sharing upcoming results in future calls thanks very much.
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