Q1 2021 Bain Capital Specialty Finance Inc Earnings Call
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Hi, there is broadcast in any form is strictly prohibited.
Any forward looking statements made today do not guarantee future performance, an actual results may differ materially.
These statements are based on current management expectations, which include rest of uncertainties, which are identified and the risk factor section of our form 10-Q that could cause actual results to differ materially from those indicated.
Being capital specialty finance it seems no obligation to update on your forward looking statements at this time unless required to do so by law.
Lastly, past performance of not guarantee future adults.
So with that I'll turn the call over to our Chief Executive Officer, Michael you old.
Thanks, Catherine and and good morning, all and thank you for joining us on our earnings call I'm joined today by Mike Boil on President and our Chief Financial Officer Sally daughters.
I'll start with an overview of our first quarter ended March 31st 2021 results and then provide some thoughts on investment performance. The overall market environment as well as our positioning thereafter, Mike I'm Italian will discuss our investment portfolio credit quality and financial results in greater detail.
Is Catherine mentioned yesterday after market clothes, we delivered strong first quarter results to our shareholders. Two one net investment income per share was 34 cents driven by solid net investment income earned by our portfolio investments on.
Barnett investment income covered our dividend by 100 per cent.
Q on earnings per share or 49 cents driven by net gains across on investment portfolio largely driven by the continued improvement in the performance of our borrowers and broadbased spread tightening.
That at the value per share as of March 31st was $16.69, representing a 0.9 per cent increase from our NAV as of December 31st.
As we've observed improving credit metrics across our portfolio. We've been pleased to deliver a continued graduate work coverage and are now per share to our shareholders.
We also demonstrated improving credit metrics throughout our through our low non a cool rates in fact as of March 31st the company had no investments on non accrual status.
Being a solid credit quality across our diversify loan portfolio.
Subsequent to first quarter, and our board declared a second quarter dividend equal to 34 cents per share and payable to record date holders as of June 30th 2021.
This represents an 8.1 per cent annualized view on ending book value as of March 31st.
On February 25th we closed our joint venture partnership with Pantheon through the international Senior loan program or I S. L. P.
This program as you May recall is focused on investing in middle market direct lending opportunities across Europe, and Australia. These are two markets on which being capital credit and it's private credit group in particular has a longstanding presence on strong track record investing as we have a global footprint with local teams focused on providing finance and solutions to middle market companies.
As we discuss with our shareholders at length during last quarter's earnings call. The ice L. P provides vcs up with three key benefits.
It opened back up in 2021, driven by a more constructive economic backdrop with private equity sponsors as they sought to accomplish add on acquisitions for growth activities as well as find new platform investments.
Our market tends to be reliant on M&A activity, given our focus on sponsor bank lending.
We believe our long standing presence in this market, which has led to a large number of incumbency positions is a significant competitive advantage for us as we continue to invest with existing companies, which we know well.
Furthermore, our flexible capital base allows us to offer a full suite of solutions for borrowers.
This often results in us investing with companies longer through different ownership and segments of the capital strength.
I'm not sure depending on where we identify the best risk adjusted return.
We also saw a significant amount of new investment activity out of Europe. This quarter is half of our new portfolio of companies or source from our offices in London and Dublin.
On the liability side, the institutional unsecured debt markets were also robust during the first quarter driven by strong investor demand levels.
The activity.
We're active lending to new platforms through our strong sponsor relationships as well as lending to existing borrowers through our incumbency advantage.
The majority of our new commitments were comprised of first lien loan opportunities.
The weighted average yield on new investments was approximately 8.2 per cent as compared to the weighted average yield of seven two per cent across our sales in repayments.
As a result, the quarter that as a result, the yield that amortized costs on our total investment portfolio increased by approximately 30 bps quarter over quarter.
We were also active investing with European borrowers as are flexible in global capital base enables us to reach the unique financing needs across our wide pipeline of borrowers.
Our largest new investment in the first quarter was source through our London office to a market, leading software and hardware developer developer headquartered in Germany.
Pre existing relationship with a sponsor and track record of investing in prior European investments alongside them give us the experienced in direct access required to lead this deal.
[noise] restructured a first lien unitranche investment in an attractive spread and discounts alongside of sponsors we believe to be high quality <unk>.
Leading this transaction enabled us to earn syndication income as we brought in another Parker.
Turning to the investment portfolio at the end of the first quarter the size of our investment portfolio at fair value was $2.3 billion across the highly diversified set of 101 portfolio companies operating across 29 different industry.
We can continue to favor companies within the core of the middle market for borrowers with between $25 million and 75 million of EBITDA. This is demonstrated by the portfolios median EBITDA of $43 million. This is a segment of the market that we continue to find attractive investment opportunities and tends to be less competitive.
<unk> and the upper middle market, which competes with broadly syndicated loans given greater borrower side.
Our investments consists largely of first lien loans to sponsor backed middle market businesses.
As of March 31st 82% the investment portfolio share value was invested in first leaned day.
The I S. L. PS investment portfolio at fair value was $320 million comprised of investments in 18 portfolio companies operating across 10 different industries 100 per cent of the investment portfolio was invested in senior secured floats.
Right loans, including 87 per cent in first lane and 13 per cent and secondly loans.
Additions and it is still our current expectation is to recognize a par repayment from the majority of these investments.
Non accrual investments declined quarter over quarter as of March 31, we had no investments on non accrual status as we exited the one de minimis position that was previously on nonaccrual.
Sally will now provide a more detailed financial review.
Thank you, Mike and good morning, everyone I'll start the review of our first quarter 2021 results with our income statement.
Total investment income was $49 $8 million for the three months ended March 31 2021.
As compared to $48 $3 million for the three months ended December 31 2020.
The increase in investment income was primarily due to an increase in prepayment related income and other income.
Total net expenses for the first quarter were $27 $7 million as compared to $26 4 million in the fourth quarter. The increase was primarily driven by higher incentive fees, partially offset by lower interest and debt financing expenses.
Our adviser waived a portion of its base management fee demonstrating our continued alignment of interest with our shareholders and supporting the regular dividend level.
We believe the company is well positioned to drive higher net investment income overtime for our shareholders without the need for fee waivers.
Net investment income for the quarter was $22 2 million or <unk> 34 per share as compared to $21 $9 million or <unk> 34 per share for the prior quarter.
During the three months ended March 31, 2021, the company had net realized and unrealized gains of $9 $6 million.
GAAP income per share for the three months ended March 31, 2021 was <unk> 49 per share.
Moving over to our balance sheet as of March 31, our investment portfolio at fair value totaled $2 $3 billion on total assets of two and a half million dollars.
Total net assets were $1 $78 million as of March 31.
NAV per share was $16 69.
Share to $16 54 at the end of the fourth quarter, representing a <unk>, 9% increase quarter over quarter.
Our gains were attributed to net realized and unrealized gains across the portfolio.
Well, we have recovered a large portion of the net unrealized losses on our investments over the course of the past four quarters. We believe there is still that potential for further gradual recovery based on the current fair valuations across on investments.
At the end of Q1, our debt to equity ratio was 126 times compared to 137 times at the end of Q4.
Our net leverage ratio, which represents principal debt outstanding less cash with 1.15 times at the end of Q1 as compared to one three times at the end of Q4.
Our net leverage ratio was in line with our stated target range of between one times and one five times.
As Mike mentioned earlier during the call the I S. L. P close during the first quarter. The company contributed $317 million of investments at fair value in exchange for a 75% ownership stake in the JV.
As of March 31.
The assets investment in <unk> with $129 million, representing approximately 6%.
That's total portfolio.
Turning from a capitalization and liquidity during the quarter, we issued $300 million of two nine per too.
295% unsecured notes maturing in March of 2026, increasing the percentage of unsecured debt in our capital structure to 33% up from 10% as of year end. We believe this is a significant improvement to strengthening the company's financial flexibility on capital structure.
The proceeds of our notes offering were primarily used to repay our revolving credit facilities in March we repaid a full outstanding we repaid in full outstanding commitments under the Companys revolving credit facility with Goldman Sachs and terminated this facility, which was scheduled to mature in April of 2022.
The secured facility had a spread of 300 basis points as compared to the March 2026, unsecured notes issuance, which we were able to obtain a spread of 240 basis points given the historically low interest rate environment.
We continue to have access to our J P Morgan revolving credit facility and our advisor loans.
Available liquidity, consisting of cash and undrawn capacity on our credit facilities was $398 million against our $217 million of Undrawn investment commitments. This represents coverage of 184 times as of March 31st.
For the three months ended March 31, 2021, the weighted average interest rate on our debt outstanding was three 2% consistent with the rate during the prior quarter.
As of March 31, 2021, the company was in compliance with all terms under our secured credit facilities with that I will turn the call back over to Mike for closing remarks.
Thanks, Sally and closing we were very pleased to deliver another solid quarter of earnings to our shareholders. We believe the company is off to a strong start here at the beginning of the year.
And then we're well positioned to capitalize on new investment opportunities to drive higher earnings to our shareholders. We.
We appreciate our shareholders' support managing your capital and we look forward to continuing to work hard throughout the remainder of the year.
Emily if you could please open the line up for questions. Thanks.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your headset before pressing the keys to withdraw your question. Please press Star then two our first question comes from Finian O'shea from Wells Fargo Securities. Please.
Go ahead.
Hi, Thanks, good morning.
A couple of questions on the ISO piece.
Looks like that got off to a quick start.
But there's still.
Still under Levered, I think and it was a partial quarter.
Can you remind us of the leverage target and.
What's the sort of.
Run rate Roe.
So.
$3 31.
Sure. So the leverage target for <unk> is similar to the leverage target that we've stated for BCS up overall, so between one and one on a quarter net leverage is what we're targeting over time.
The Roe for.
For the for the program, one lever that that level should be in the 12% to 13% range.
But because we are operating slightly under Levered as noted when we set up the ISO P. We're running closer to nine or 10% Roe.
As of March 31.
Okay and should we should we expect I think it looks like there was some interest income how should we expect an uptick in dividend income.
Starting this quarter.
Yes, that's right and we've talked a little bit about the strength of our European pipeline in prepared remarks, but I would continue to reiterate.
We reiterate that our boots on the ground across the globe are driving really interesting deal flow and I would expect the deals coming in through that channel to really pick up here in the coming quarters to drive that that.
That increase in dividend income on the ISO P overtime.
Okay. Thanks, and then for the assets.
What was the breakdown.
Incumbent portfolio drop ins.
<unk>.
Sell downs from your new origination this quarter.
For the for the <unk> portfolio.
Okay.
Sure. So the ISO P portfolio for what we did in Q1 were all incumbent dropdown position.
Starting in Q2 and going forward, there will be new originations that will that will get allocated to that to that program.
Given the program was just set up in February Q1 was all was all incumbents.
Incumbent sales into that structure.
Yeah.
Okay. That's all from me thank you.
Thanks Vince.
Again, if you have a question. Please press Star then one and our next question comes from Ryan Lynch U K B W. Please go ahead.
Yeah.
Hey, good morning, guys. Thanks for taking my questions.
The first one I had was just on your kind of talked about.
Your opportunities in.
On the international markets being much stronger than than here domestically I think you said.
Of your deals.
Were international this quarter could you maybe just compare and contrast.
How does the international box, obviously, it depends on which country, we're talking about but just.
From a high level, how do those markets compare from a competitive standpoint compared to the U S market just because it feels like the U S markets.
Come back basically give or take to wear pre COVID-19 levels were.
How has that been from an international standpoint.
Sure.
Just high level, what I would say that probably the most comparable market, especially from a competitive.
Standpoint.
In Europe versus the U S would be the U K.
It's probably one where.
A lot of folks that might even be U S based might occasionally trying to do deals and it's probably the longest standing market in terms of looking like the U S from a sponsor backed M&A perspective.
As a result, what youll see is we tend to while we have an active business there and we are obviously based in London.
We tend to do some deals in the Nordics, we liked the Benelux countries. The company that Mike highlighted in his remarks, it was actually a German company.
So we're trying to stay.
Stay away from the U K, but certainly what we're finding.
Better risk adjusted return because of potentially less competition because of maybe less sophistication and some other more peripheral markets of Europe versus rather than from the U K, it's not to say, Germany is obviously peripheral market because its a huge economy.
But again, having that local presence there and having native language speakers are all different countries in our offices actually really helps there as well so.
And I would say U K pilots most of the U S. And then each of the other countries is definitely very distinct and different.
Okay.
That's helpful.
And then as far as balance sheet capital management at this point.
With the formation of the JV It looks like you guys Delever your balance sheet.
As you guys wanted to.
At this point at this leverage level is this where we should kind of think about you guys operating going forward.
Yeah, that's right. So we've highlighted that we're focused on our net leverage range between one and one on a quarter I think where we ended the quarter at $1. One five times was kind of hitting the nail on the head in terms of what we're looking for in terms of operations in the future.
Sure.
We did highlight in prepared remarks that our goal is to get our asset yields from the mid sevens up into 8% or 8% plus range and I think thats a critical part of increasing the.
The income potential of Bcf.
Okay and on that last point, you just mentioned, but with increasing the yields in your portfolio.
I know you had mentioned.
Growing there.
The JV.
Rotating some assets on your balance sheet as well.
As far as the U S middle market lending.
<unk>.
How would you say that that yields in your kind of core target markets.
Our covenant today versus your current portfolio yield.
Yes, so in the U S. I would say the yields have been fairly consistent to your point, where we are almost back to pre COVID-19 level.
So a key part of really increasing the yield on the portfolio is as you noted <unk> and continued allocations into.
Markets outside of the U S. We do view the U S is an important core earner for BCS F and we think new investment opportunities should be able to drive yields in that seven 5% to 8% range, but the real way that we're able to pick up spread here is.
The international markets and things like joint ventures.
Okay understood.
That's all from me I appreciate the time this morning.
Thanks, Brian.
This concludes the question and answer session I would now like to turn the conference back over to Michael <unk> for closing remarks.
Thanks, Emily and again, we're very happy and pleased with the performance of the company here in the first quarter. We do think it sets us up very well for the remainder of the year and we'll look forward to speaking with you.
After the end of the second quarter, thanks very much.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.