Q4 2020 Bain Capital Specialty Finance Inc Earnings Call
[music].
Good morning, and welcome to the Bain capital Specialty finance fourth quarter and fiscal year ended December 31st 2020 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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Alright repeat the dance it seems no obligation to update any forward looking statements at the time unless required to do so by law.
Lastly, past the apartment does not guarantee future results.
With that I'll turn the call over to our Chief Executive Officer, Mike What you want.
Thank you Catherine and you're moving to all of your of extra of joining us today on the Orange call also with me or like boil on president enter of Chief Financial Officer, Sally Dorn us.
I'll start with an overview of our fourth quarter on your end of December 31st 2020 results and provide some thoughts on our portfolio performance the market environment.
As well as of recently announced dziedzic joint venture of partnership.
Thereafter, Mike and Sally will discuss our investment portfolio credit quality and financial results in greater detail.
Yesterday aftermarket clothes, we reported solid fourth quarter results that were consistent with the preliminary figures that we provided back on February 11th of.
The results of a reflection of solid net investment income earned from our investment portfolio and strong earnings as we've demonstrated our third consecutive quarter of producing net gains across our investment portfolio.
Q for net of investment income per share was 34 cents queue for earnings per share was 61 cents.
The Springs net investment income per share to one dollar and 46 cents for the full year of 2020, representing of 8.6 per cent and I I return on average net assets.
On that investment income per share results for 2020, where above of distributions of of dollar and 43 cents per share of for the four year.
Earnings per share of for 2020 or 14 cents.
Net asset value per share as of December 31st was $16.54, reflecting on 1.7 per cent increase from her nap as of September 30th.
Well, we of recaptured a large portion of the unrealized depreciation experienced across our port folio and Q1 due to the significant market volatility. Following the initial outbreak of of the pandemic. We expect of gradual recovery the remaining unrealized depreciation overtime, given our belief that the portfolio as large of comprised of high quality companies with demonstrated value propositions.
Subsequent to quarter and our board declared the first quarter dividend equal to 34 cents per share and payable the record date holders as of March 31st 2021.
This represents an 8.2 per cent annualized the yield on ending book value as of December 31st.
And while the events of 2020 created a challenging backdrop due to the global pandemic. We believe our solid performance was attributable to the core fundamental tenants of our investment strategy that we of honed over our 20 plus years of experience of pain capital.
In particular, constructing well diversified global portfolios, primarily invested in firstly on loans of financial covenants investing alongside high quality private equity sponsors and maintaining of control of position in our loans. All of these attributes help to mitigate downside risk throughout the year.
For example, we successfully conducted the amendments with the small portion of the borrowers in our portfolio.
Maintaining strong documentation standards, including the presence of covenants <unk> early to the table to derisk certain investments and resulted in credit enhancing outcomes, such as receiving additional economics equity contributions and or even tighter credit documentation.
In fact, approximately $450 million of new capital was provided by or sponsored to support the portfolio of companies that required liquidity preserve value.
Highlighting one of the benefits of partnering with well funded talk to your sponsors.
We believe the strength of our quite of qualities reflected in our low non of cool rates and the improving trends across hour of proprietary investment risk ratings.
As of December 31st 2020, we had one portfolio of company on nonaccrual status, representing 0.2 per cent of the total investment portfolio of both cost and fair value.
Furthermore of our peaked on the cool right throughout 2020 with only 1.8 per cent of the portfolio of cost and 1.1 per cent of the fair value and we were successful I'm coming to quick resolutions with impact of companies during the year.
Likewise, our internal investment performance ratings demonstrated stable to improving trends across our borrowers.
Turning now to the market environment, we witnessed the debt and equity markets beginning to normalize during the second half of 2020.
Fourth quarter origination levels of cross our platformer elevated given the backlog of deals from earlier in the year.
We believe our platform is well positioned to capitalize on these opportunities given are strong sponsor relationships and incumbency advantage of cross our large portfolio over 100 existing borrowers.
During 2020, we remained active in providing capital of the new platforms and existing borrowers that Mike Boyle will touch on shortly that we did remain on cautious of putting throughout much of the year will call. The there wasn't an approved vaccine in the U S until midway through the fourth quarter last year.
In addition to demonstrating strung credit performance and invest in capabilities tour shareholders. Twenty-twenty. We also focused on making significant improvements toward balance sheet and capitalization.
First we stripes on the company's balance sheet, but sort of the diversifying on liability structure of include unsecured debt given the increased flexibility that the structure provides.
And we're actually very pleased to report that this morning. The company also received an investment grade rating of B W. Three with the stable outlook for Moody's.
We believe this reading is a reflection of our demonstrated credit performance across the are diversified primarily first lean portfolio and the broader being capital platform and risk management oversight that it provides to the company.
This investment grade reading from Moody's the significant achievement for the company as it provides us with greater access to the institutional unsecured debt Margaret.
And the recent months, we've observed this market increasingly attractive given historically low interest rate environment.
Next we demonstrated meaningful progress and deleveraging our balance sheet throughout 2020, while delivering stable net income invest net investment income to our shareholders.
As of December 31st of our net leverage ratio was 1.30 times down from the peak level of 1.78 times as of Q1.
Available liquidity, consisting of cash and undrawn capacity on our credit facilities improve throughout the year.
With approximately $430 million of availability against $198 million of Undrawn investment commitments at year end, representing coverage of 2.25 times.
Lastly, we announced the strategic joint venture partnership with Pantheon earlier this month and importantly, this transaction further deleverages our balance sheet too approximately 1.1 times on of pro form the basis based on our portfolio year and is B C. S. F contributed approximately $320 million of loans from its balance sheet to the newly created joint venture structure on February 22nd.
As a result of this deleveraging we of significantly improve the company's balance sheet to take advantage of the new attractive loan opportunities on the current market environment and to provide for accretion to our net investment income.
Here in 2021, we've revised the companies target net leverage range to be between 1.0, and 1.25 times down from our previous outer of of found level of approximately 1.5 times.
We believe this chain provides the company with greater ask the question of relative to a regulatory leverage limitation of 2.0 times and demonstrates prudent liability management.
However, we do not plan to change on investment strategy focus of lending to primarily firstly middle market borrowers as a result of this change.
Before turning the call over to Mike Boyle to walk through on investment portfolio in greater detail I wanted to spend a few minutes discussing on recently announced the T. Jake partnership with Pantheon.
By the way background Pantheon is the leading global alternative private markets manager, we've known institutionally across our platform for a long time.
In February of 2021, you're fond of joint venture with their private quite a business known as the international Senior loan program, where I S. L. P T.
To provide direct lending solutions to middle market borrowers, primarily across Europe and Australia.
These are markets on which being capital of credit has had a long standing presence and track record of investing as we have of global footprint and local teams focused on providing financing solutions to middle market companies there.
We've been an active investor Cross your of since 2007, and I've been investing in Australia as middle market for nearly a decade.
This partnership with Panther on will allow us to further expand DCSS reach and capabilities into Europe, and Australia markets, where we continue to see attractive investment opportunities.
And when forming this joint venture partnership it was important for us to select the partner with whom we get into this thing pre existing relationship and someone who brought the capabilities to diligence investments alongside us give them the structure of the joint venture, which requires 50 50 voting rights among both partners.
Within being capital broadly of Pantheon has been of known limited partner overtime and they of a dedicated private credit team with offices in New York and London.
We believe the formation of the I S. L. P provides b C. S. I for three key benefits first the.
The I S. L. P is expected to enhance P. C. S S balance sheet flexibility to expand its global capabilities.
Non U S dollar investments, which count against the 30 per cent non qualifying ask the bucket of Bdcs represented approximately 17 per cent of V. C. S. S. Total of investments as of your end.
Following the transfer of these assets from V. C. S. S balance sheet, the I S. L. P nah.
<unk> dollar denominated investments represent less than five per cent of the total you're on portfolio on of pro forma basis.
Second be Csf's investment is N I S. L. P is projected the result in higher portfolio yields to drive greater net investment income for our shareholders. As we estimate B C of stuff's investment will produce of low double digit yield.
As of resolve Ucsf's investment portfolio yield is expected to increase by approximately 20 basis points on of pro forma basis based on the investment portfolio as of your end.
B C of Stuff's investment in I S. L. P represents approximately five per cent of our total portfolio of fair value based on the 12 31 pro forma portfolio. However, there is the potential for bcf's. After the increases investment commitment over time, as we identify attractive investment opportunities in Europe, and Australia, which could lead to additional yield enhancement too on a portfolio.
And third given the deleveraging impact of the transfer of assets I S. L. P. P. C. S. F is greater capacity continue to continue investing in new senior secured loans tomato mark the companies to drive further accretion doesn't that investment income.
Our ability the form the ice L. PS of demonstration of harnessing the relationships resources and investment capabilities across Bain capital in a manner of that seeks to drive shareholder value.
We look forward to providing further updates on transparency on our I S. L P investment overtime.
I will now turn the call over to Mike Boyle, our president to walk through our investment portfolio in greater detail.
Thanks, Mike and good morning I'll.
I'll take it off with our investment activity for the fourth quarter, and then provided update on the credit quality of our portfolio.
Q for new investment fundings $173 million, and 26 portfolio of companies, including $121 million and fix new companies and 52 million in 20th of distinct companies sales.
Sales and repayment activity total of $188 million and a quarter.
During the fourth quarter of who are pleased to see investment activity levels revert back to help the level of as a result of pent up demand from the slower quarters experienced earlier in the year due to the market disruption.
While our queue for activity levels were skewed to lending to new platforms. We also are made active throughout the year and capitalizing on our income at the advantage, but they just didn't borrowers.
Our new investment funding activity was split approximately 60 40 between new and existing borrowers during the six months end of December 31st.
Throughout 2020, we were able to invest with confidence in new platform into existing portfolio of companies, giving bank capital of credits investing experience that had been honed over multiple market cycles. In addition, we aligned ourselves to invest alongside sponsors that we view to be high quality and whom we saw is highly supportive of their portfolio of companies during the most of.
Recent period of market disruption <unk>.
Lastly, P C S F benefits from being capital credits industry research team, providing us with even deeper sector expertise across many vertical this.
This allowed us the pivot to identify companies and sectors that are expected to be strong performers over the coming years.
And it might be you all discussed our new joint venture through the International Senior loan program is noteworthy to Empathise are flexible in global capital base that enables us to reach the unique financing need that we saw from across the wide pipe line of our borrowers.
The majority of our new commitments during the fourth quarter, where firstly low and opportunities the weighted average yield on new investments was approximately 7.6 per cent almost 100 basis points greater than the weighted average yield across our sales of repayment activity.
As a result, this drove our portfolio yield higher quarter over quarter by approximately 20 basis points.
At the end of the fourth quarter the size of our investment portfolio at fair value was $2.5 billion across the highly diversified set of 105 portfolio of companies operating across 20, <unk> 28 different industries.
Our investments consists largely of firstly low to sponsor back middle market businesses.
As of December 31st 87 per cent of the investment portfolio at fair value was invested in first lien debt seven per cent, and secondly debt and six per cent and equity interest.
The median EBITDA across our portfolio of companies was $48 million as of December 31st we.
We continue to favor middle market companies within the core of the Middle market is these companies have diversified revenue streams and top line resiliency, both of which were demonstrated throw of 2020.
The industry is that our portfolio of companies operate within are largely comprised of defensive sectors that are less tied to consumer consumption.
Our top industries include technology, Aerospace and defense and health care.
We continue to believe that we have limited exposure to industries experiencing the most severe impacts of of the pandemic.
Credit quality of <unk> trends within our portfolio improved quarter over quarter.
Within our internal risk rating scale 87 per cent of our portfolio at fair value was comprised of writing one and two investments as of December 31st indicating that the underlying portfolio of companies are performing in line for better than our expectations.
Throughout 2020 or portfolio is experienced the gradual mark up on these investments following the mark to market volatility experienced thank you one.
The weighted average fair value Mark on these investments was 97.8 as of quarter and compared to an average mark of 99.4 at your end of 2019.
The remaining 13 per cent of the portfolio with classified of the risk rating three or four.
<unk> that's the that's have experienced some impact on the pandemic and we have been encouraged by the liquidity positions of these companies as we look ahead.
Many of our borrowers within the category are performing better than originally expected at the outset of the pandemic due to cost cutting measures and diversified revenue stream that of helps to offset pressures.
The vast majority of a risk waiting three and four investments are comprised of first lien senior sector of loans. This places us of the top of of the capital structure and minimize the downside risk.
As of December 31st of risk wedding, three and four investments had a weighted average fair value Mark of 84 per cent of car, which was relatively unchanged from the prior quarter.
Well it continues to be our expectation that will recognize of party payment for the majority of these investments are robust valuation processes apply disciplined practices and techniques to assess the risk profile on the card environment, given some of the existing macro of conditions for these borrowers.
As Mike mentioned earlier during the call no new investments were added to nonaccrual status during queue for reflecting overall stable credit quality as of December 31st one of our total 105 companies was on nonaccrual status, representing 0.2 per cent of the investment portfolio of the cop and for of value.
Sally will now provide a more detailed financial review.
Thank you, Mike and the morning, everyone.
I'll start the review of our force corner of 2020 results that our income statement.
Total investment income, let's $48.3 million for the three months ended December 31st 2020.
Can't $46.8 million for the three months on that September 30th 2020.
The increase in that's an income is primarily day to an increase in P payment made of income and other income.
Of the end of December 31st 2020 of the of totally messed an income of 194.5 $90.
Of 2020 investment income is comprised primarily of contractual cash hang on just income.
Heck income quite payment of time represented only 3.2 per cent of our total interest income for the end at December 31st.
We believe the quality of any kind of of high given lots of mine on the one time.
The income.
Hold on that expensive for the fourth of quicker with 26, 19, $90 as compared to $25.4 million on the third clutter. The increase is primarily check on my hiring contact the partially.
Partially asked on five voluntary management, so on them contact the arrangements and lower interest on the finance on Saturday.
Neither the waiver sending the state.
And I can check the next shareholders on supporting them I can I get the day ma'am.
Not investment income credit card on the $21.9 million or 35 cents per song of the parents of 21.5, $90 or 33 cents per share for the kind of corner.
As a result, net and that's the main comforter set up for the full year 2020, with the dollar 46 per share.
During the three months and on December 31st 2020, the company had that realized in on me like game of $17.6 million driven by the continued spread paint ma'am moving fundamental performance trying to cross our quick for you on the back fence stabbing.
Stabbing kind of for sure for the three months end of December 31st 20th of my name is 61 cent, bringing her name is Christiana for 2022 of <unk>.
Moving over the white balance it as of December 31st the time that sound portfolio of fair value total of two and a half billion dollars on total happen at $2.6 million.
And that asset.
Where a billion.
68 million as of December 31st.
My first day I was 16, 54, I'm tired of $16 and 27th at the end of the third corner of.
Representing of 1.7 per cent of increased clutter of of Claire.
Following the significant market file of Kennedy and distraction during the first corner, which caused an increase in the unrealized depreciation of cross on that day. We are pleased to see of gradual recovery throughout the filing flutters in 2020.
And while we ever covering of life question of the related matter of recovery.
The cancel to recapture further unrealized appreciation of the <unk>.
The weighted average fair value Mark on our on that same portfolio of <unk>.
Approximately 95.8 as of December 31st 2020 of can help.
To the advertised cost of 97 painting.
At the end of queue for our debt Taffety ratio at 1.37 times compared to the 1.45 times at the end of the <unk>.
I'm not laboratory, which represents pencil of that outstanding that cash cause the 1.3 times at the end of two four as compared to 1.33 times on the end of Q3.
It might be awhile highlighted earlier during the call on that leverage ratio further decrease to approximately 1.1 time pro forma for the assets contributed by the C. F. S. T D. I S. L. P based on the December 31st the static portfolio.
Getting 2020 of of your Hackett on conducting a number of credit enhancement of cross or liability structures, Tim for the company of balance sheet.
It's included reducing the rate and extending the maturity day on one of our bilateral of take care of society on Friday of diversifying our funding next to include on took care of that.
As might be lots of highlighted earlier during the call. The company recently received an investment grade right income Moody as the announced this morning. We believe this is a noteworthy milestone for the company of the provide the fifth grader access to the institution of that my car.
And the three months and the December 31st 2020, the weighted average interest rate on our debt outstanding was 3.2 per cent as compared to 3.3 per cent for the same on standard September 30th 2020.
As of December 31st 2020, the company had cash and cash equivalent of $55 million on $374 million of.
I'm gonna get capacity under it's credit facility.
As of December 31st 2020, the company with income clients at all times on there.
Take care of credit the 30th.
With that I will turn the call back over it it might be lots of closing remarks.
Thanks Alley in before concluding the call we wonder mind, our shareholders that the company has of $50 million share repurchase program. This was authorized by on board of directors in May of 2019 and continues to be in place today.
Well, we believe UCSF shares offer the very attractive valued of shareholders around 2020 on primary focus was on deleveraging and preserving liquidity of the company. We've been pleased to see the positive performance of our stock in recent months and believe B C. S. F chairs continue to offer an attractive yield and value for shareholders.
Given the improved strength of our balance sheet in 2021.
We will look to evaluate additional investment opportunities during the year, while weighing a number of considerations such as evaluating the companies liquidity position and leverage level. The portfolios continued performance and credit quality in general market conditions, all while remaining disciplined and our credit selection approach.
Thank you for your continued support that'd.
That'd be if you could please up on the line for questions.
We will now begin the question and answer session to ask the question you May press start then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys to.
The withdraw your question. Please press Star then too at this time, we will pause momentarily to assemble a roster.
The first question comes from Simian of Chez with is Wells Fargo. The security. Please go ahead.
[noise], Oh, hi, everyone on good morning confirm the.
On.
Of the first question on a little bit of an interest rate pick up or spread pick up you experienced this quarter can you expand on.
On I guess first what happened there was this more low yield exits or are you picking up more spread.
And if so if you're picking up more spread is is that sort of the you know 2020th phenomena uhm.
Or do you anticipate uhm continued spread pick up now that the market is more competitive uhm and the outlook there.
Sure. So on the exit the that we did talk about the weighted average yield on the exited physicians in the portfolio was about 6.6 per cent and those reflect the security that we had underwritten two or three years ago companies had the <unk>.
<unk> and the cost of capital was reduced at the risk profile was reduced and then I'll play paid us down and so the fact that we're able to pick up about 20 basis points of weighted average yield while still saying in the first link focused investments was really a product of exiting those deleverage companies and underwriting new deals.
That are fresh M and a activity of in the middle market.
And then your question about whether it's a 2020 phenomenon of I think what what we're observing is that there was definitely of spike in and returns in 20th 20, that's come back down, but it's still higher today than it was pre COVID-19. So we are suddenly benefiting from that whether that's new normal.
Wait and see but certainly it's been a strong Margaret from the letter of perspective within that that core middle market segment, when we play.
Okay, great. Thank you and.
Just to follow a I'm looking at your press release on the Moody's rating. This morning, Oh, congrats on that by the way I assume you want about it.
That would until about a third of your that stack will go on secured and you'll be looking to do something soon again my assumption she should we expect something.
You know <unk>.
Like a four of 500 million dollar offering that would.
Take out your current more expensive notes or or something smaller that would begin to the ladder it out and and.
And bring that outcome.
The further down the line.
Yeah the person.
Well you know what we've talked about.
Certainly of it over the of course, the the last year is wanting to increase the and take care of part of our line. The line is actually I, we did that a little bit obviously in the middle of the last year. The I T reading and certainly the first step in that process and refined the market conditions, mainly attack of right now so.
So the eight and I think that'd be led.
I expect something.
Something in line Manhattan.
HM.
Okay, Great. That's all for me. Thank you.
The next question comes from Ryan Lynch with K B W.
Please go ahead.
Hey, good morning, following up on the on since last question regarding kind of the the the unsecured notes.
You know does this change the way you take the voucher eight and a half per cent 2023 knows I mean, I believe that that those of redeemable any time, but the key remind us I don't remember recall, what the price you would be on those would be of a routine. So can you remind us.
What the price of it would be at the those if you. If you did redeem those now in in any thoughts on on on kind of of replacing of those high cost of nose.
Sure. So those notes are callable at par starting summer of 2022. So we are always looking at the opportunities to potentially refinance those out recognizing that we are still in a non call period. There. So it is math wrong, we're always looking at in evaluating.
Okay.
And then on your Jasey.
One question about that you mentioned the the low double digit Guild is that of yoga you guys expect to achieve right on the gates on the on the formation of it or is that something that you will achieve overtime as it as it fully ramps off and if that's not gonna be the the the the the yield kind of of right out of the day.
The darker formation, what would you expect to generate you know kind of day, one and then and then ran back up to the to the low double digits.
Sure. So Ryan Thanks for the question. We are very excited about the I S. L. P and we thank the double digit yields or something that will be achieved overtime I'd say on day, one probably closer to kind of 11 per cent of yields and that steps up to 12 of.
13 per cent yield as we continue to originate into international markets and and generate incremental fee income and and have repayments et cetera. So we are on the double digits on day, one, but we do expect I continue ramp to the double digits as we operate that program.
What kind of.
And then could you provide a little bit of background on line, what how does the lending opportunities compare in Europe, and Australia on and of course, those could be different themselves, but but how would those opportunities per.
Pair to opportunities today, and the U as in terms of leverage spreads terms on on those deals you're looking at.
Yeah, <unk> I would think about it in in a few different ways. You know one is just from a company size perspective, you know get them of focus on that the core middle market companies of $25 million to $75 million leave it you could find yourself blending of of 30 40 million dollar company in the U S that my uhm dominate the Tri state area around New York, but not.
The particular relevant to its overall industry, whereas that company might be the the the the <unk> the country champion of Norway. For example, right. So uhm. If you think about the size company reinvest and there are a lot of opportunities like that abroad for sure the.
The the second point I would make is that the markets function differently Uhm International Let me do here you know health care for example, it could be more regulated and the European country, where capacity end of constrain pricing is much more stable for different services like radiology for example, and so we might be more.
I'm inclined to invest in the company like that in Germany, then it would be in the U S where pricing of the competed down you got the actual company level. So I think there's there's those two just generic yeah. What is the company that look like questions and then the the third point with which is what you're really asking around in terms of conditions, yeah like the that can certainly change of.
All the time doesn't change the week to week, but of changes you know quarter to quarter on certainly year to year I'd say currently Europe is probably from the yield perspective marginally lower than the U S. Although marginally of higher from an O I D perspective.
Australia is probably marginally of higher from the spread perspective, the about the same from an O. A D perspective, so that again that the snapshot today that could totally change over time, but you know, we certainly hedge everything back two U S dollars of nice things, we actually have a multi currency revolver set up for that J V to help mitigate some of those ethics issues.
There as well.
Okay I've got a.
A couple of color on backdrop on on those different markets.
Thanks for taking my questions and congrats on the the nice quarter and especially the the investment great right and that should be I think really really helpful for your guys business.
Thank you I appreciate that.
Again, if you have a question. Please press Star then one.
Great well it sounds like there's no more questions. We certainly thank everybody for their time intention of this morning of any questions reach out yeah, certainly feel free or any of the questions come help certainly feel free to reach out you know where to find us that's really on the on being capital of BBC Dot com as well. So thanks again for the time and we look forward to speaking with you again soon.
<unk>.
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