Q2 2021 Bain Capital Specialty Finance Inc Earnings Call
[music].
Good day and welcome to the Bain capital Specialty Finance second quarter ended June 30 of 2021 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Katherine Schneider Investor Relations. Please go ahead.
Thanks Ali.
And welcome to the Bain capital Specialty Finance second quarter ended June 30, after 2021 conference call.
Yesterday after market closed we issued our earnings press release on Investor presentation of our quarterly results a copy of which is available on Bain capital specialty finance at Investor Relations Web site.
Following our remarks today, we will hold a question and answer session for analysts and investors.
This call is being webcast and a replay will be available on our website that's.
On this call and webcast are property of Bain 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 actual results may differ materially.
These statements are based on current management expectations, which include risks and uncertainties, which are identified in the risk factors section of our form 10-Q that could cause actual results to differ materially from those indicated.
Bain capital specialty finance 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.
With that I would like to turn the call over to our Chief Executive Officer, Michael Ewald.
Per share and table the record date holders as of September 32021.
This represents an 8% annualized deal on ending book value as of June 30th.
During the second quarter, we witnessed favorable macroeconomic trends as financial markets continue to rally notwithstanding inflationary pressures as economies slowly reopened.
Spreads on the broadly syndicated loan market continue to tighten for larger companies, while spreads within the direct lending market were relatively stable quarter over quarter and largely back to pre COVID-19 levels.
These market conditions drove strong levels of sponsored loan volume in the middle market driven by increased LBO and add on activities.
Against this backdrop, we continued to execute on our middle market direct lending strategy consistent with our longstanding tenants of our approach.
Our balance sheet was well positioned going into the second quarter as a result of the sequential improvements that we've made in recent past quarters to better position the company to take advantage of investing in attractive new lending opportunities.
Q2, gross originations were $213 million down from the first quarter of 2021 volumes of $384 million, but higher than Q4.2020 levels of $173 million.
Our originations during the second quarter were relatively split between commitments to new portfolio companies and commitments to existing companies through our incumbency advantage across the Bain capital credit platform.
This platform's focus remains on the core of the middle market, which we define as companies between 25 and $75 million EBITDA.
The median EBITDA of our new originations in Q2 was approximately $43 million consistent with our overall median of $42 million.
We continue to favor this segment of the market as these are scaled middle market companies with diversified end market revenue streams.
Lack access to the broadly syndicated loan market due to their size.
We benefit from an illiquidity premium in this market segment and are able to structure securities that provide us with strong lender controls such as financial covenants.
We believe the Bain capital credit platform has significant competitive advantages in this segment of the market given our long standing presence there.
It's entrenched with our deep sourcing relationships and curated over 2 decades.
Furthermore, Bain capital Credit's global team and resources allow us to source a wider funnel of opportunities and remain selective in the investment opportunities that we pursue on behalf of BCS.
In fact throughout the year and continue during the second quarter, we have seen robust activity out of our European offices.
We found many of these investment opportunities to be increasingly attractive relative to opportunities sourced through our north American offices, given a seemingly higher level of euphoria in the U S that has driven spreads here tighter.
These trends allow us to increase the size.
Of our loan portfolio within the international senior loan program or <unk>, which is our joint venture focused on direct lending opportunities to European and Australian borrowers.
Quarter over quarter <unk> investment portfolio at fair value grew by 23%.
Our investment in the <unk> has the potential to drive our earnings higher for our shareholders over time as we grow that portfolio.
Turning to our capitalization, we ended the second quarter and net leverage ratio of 1.2 times, which reflects the midpoint of our target net leverage ratio.
Between 1 and 125 times.
We believe the company is on a strong financial footing to take advantage of new high.
New yield accretive investment opportunities to grow earnings even while remaining disciplined in our credit selection.
Subsequent to quarter end, we optimize the company's liability structure through repurchasing $37.5 million on the company's $150 million 8.5% notes due 2023.
We were able to take advantage of an opportunity to reduce a portion of the company's 2023 notes on a discounted price to our make whole premium prior to maturity.
Looking forward, we remain focused on making continued improvements to our liability structure over time and believe the company has a stronger balance sheet than ever before we are fortifying it through diverse and flexible financing structures.
I will now turn the call over to Mike Boyle, our presidents to walk through our investment portfolio in greater detail.
Thanks, Mike I'll start with our investment activity for the second quarter, and then provide an update and more detail on our investment portfolio.
Q2, new investment fundings were $213 across 32 portfolio companies, including $111 million in 8 new companies at $102 million in.
In 24 existing companies sales.
Sales and repayment activity totaled $258 million.
Our new portfolio originations were comprised of a diversified set of middle market borrowers across a broad range of industries, such as business services automotive and health care and Pharmaceuticals are Q2 originations benefited from Bain capital Credit's global sourcing capabilities as over 60% of our new originations can you portfolio comes.
<unk> were sourced from our offices in Europe and Australia.
Our largest new investment commitment during the quarter was the first lien unitranche loan at LIBOR, plus 700 basis points with a 100 basis point floor to an incumbent portfolio of company, we have been invested in since 2019.
We were the lead lender on this deal and had a compelling opportunity to upsize, our loan which is structured with call protection and strong lender controls through tight covenant package.
The company is a manufacturer of flow control products used in transportation delivery and storage of liquefied petroleum gas industrial gases and liquefied natural gas we.
We believe this is an attractive investment due to our view of the company's stable recession resilient business profile recurring revenue from a large installed base and attractive unlevered free cash flow.
Turning to the investment portfolio.
At the end of the second quarter the size of our investment portfolio at fair value was $2.3 billion.
Across a highly diversified set 104 portfolio companies operating across 28 different industries.
Our investments consist largely of first lien loans to sponsor backed middle market businesses as of June 30th 81 per cent of the investment portfolio at fair value was invested in first lien debt, 5% in second lien debt, 1% on subordinated debt, 7% in equity interest and 6% in the international.
Senior loan program or <unk>.
<unk> investment portfolio at fair value as of June 30 was approximately $395 million comprised of investments in 21 portfolio companies operating across 12 different industries.
100% of the investment portfolio was invested in senior secured floating rate loans, including 89% first lien, 11% second lien.
We were pleased to demonstrate growth in the size of <unk> investment portfolio quarter over quarter, driven by our platform's ability to source and identify attractive new investment opportunities outside of the U S.
Our portfolio yield was relatively stable quarter over quarter as of June 32021, the weighted average yield on the investment portfolio at amortized cost and fair value were 7.5% and 7.7% respectively.
As compared to 7.6% and 7.8% respectively as of March 31.2021.
We discussed with our shareholders during last quarter's call. We remain focused on improving the yield of our total portfolio to an 8% yield target, while maintaining our focus on senior secured loans.
Yeah.
Moving on to portfolio quality trends.
Credit metrics at our borrowers were stable quarter over quarter. The median leverage through our investment was 5.3 times as compared to 5.2 times as of March 31.
Portfolio on median EBITDA was relatively unchanged as well at $42 million.
Within our internal risk rating scale. We are pleased to report the credit quality trends improved 89% of our portfolio at fair value was comprised of risk rating, 1 and 2 investments with the risk rating of 1 being the highest risk weighting in terms of positive credit performance the percentage of the portfolio.
What percentage of the portfolio was up 87% as of the prior quarter right.
Yeah.
We're spending 3 investments comprised of 11% of our portfolio at fair value down from 13% as the prior quarter end.
Notably the number of companies in this bucket were reduced from 12 to 9 quarter over quarter at 3 portfolio companies were upgraded to a rating to on positive company performance and an anticipated par exit for 1 of these borrowers there continues to be no investments classified as risk rating for our lowest risk rating in terms of credit quality.
Our risk rating, 1 and 2 investments have a weighted average fair value Mark of 98, 5% of par, reflecting a continued gradual improvement of approximately 70 basis points from the prior quarter.
Our risk rating 3 investments have a weighted average fare volume on fair value Mark of approximately 85% of par up from the prior quarter on valuations at 82% of par.
As we have discussed with our shareholders in previous quarters. These investments comprise borrowers operating in industries that have been more impacted by the pandemic, such as consumer transportation Aerospace and defense and select business services.
The improvement in fair valuations across these investments quarter over quarter reflect our observations of positive financial trends across the vast majority of these companies. However, we still believe it is appropriate to take a measured approach to be its fair valuations as economies are fully reopening and these companies adjust back to normalized levels as a result, we bill.
Our portfolio is still has potential for NAV appreciation as we believe these are high quality companies with demonstrated value propositions.
Non accrual trends within our portfolio were favorable as this metric was stable quarter over quarter.
As of June 30, we had no investments on non accrual status for the second consecutive quarter.
Sally will now provide a more detailed financial review.
Thank you, Mike and good morning, everyone on.
I'll start the review of our second quarter 2021 results with our income statement.
Total investment income was $46.5 million per the 3 months ended June 32021, as compared to $49.8 million per the 3 months ended March 31, 2021 day.
A decrease in investment income is primarily due to a decrease in other income and prepayment related income.
Total net expenses for the second quarter were $24.6 million as compared to $27.7 million from the first quarter.
The decrease was driven by an increase in incentive fee waiver by the advisor, partially offset by higher interest and debt financing expenses.
During the quarter, our advisor ways, both a portion of its base management fee and incentive fee demonstrating our continued alignment of interest with shareholders and supporting the regular dividend level.
The company is regular dividend level at 34 cents per share equates to an annualized yield of 8% on equity.
We believe this is an attractive distribution level on a set at a rate that can be maintained over various market environments.
Our focus remains on driving higher net investment income over time for our shareholders without the need for fee waivers. We believe that we have a pathway to demonstrating this overtime.
Net investment income for the quarter with $21.9 million or <unk> 30 per cent per share as compared to $22.2 million or 34 cents per share for the prior quarter.
During the 3 months ended June 30th 2021, the company had net realized and unrealized gains of $20.5 million. The largest unrealized gains were seen across industries that had been more impacted by the pandemic, reflecting our gradual recovery across these companies.
The company's net realized gains on investments are driven by a realized gain on our small preferred equity co investment to flow control group and we made a long time.
On site, our Unitranche loans.
You realize that 2.6 times multiple on our equity capital in Boston.
GAAP income per share for the 3 months ended June 30th 2021 was <unk> 66 per share.
Moving over to our balance sheet as of June 30th our investment portfolio at fair value.
Totaled $2.3 billion and total assets of $2.4 billion.
Total net assets were $1 billion $98 million as of June 30th.
NAV per share was $17, 1 as compared to $16.69 at the end of the first quarter, representing a 1.9% increase quarter over quarter.
Our gains were attributed to net unrealized gains across the portfolio.
At the end of Q2, our debt to equity ratio was 1.2 times compared to 1.26 times at the end of Q1, our net leverage ratio, which represents principal debt outstanding less cash was 112 times at the end of Q2 as compared to 1.15 times at the end of Q1.
Our net leverage ratio was in line with our stated target range of between 1 and 1.5 times.
Turning to our capitalization and liquidity available liquidity, consisting of cash and Undrawn capacity on our credit facility was $428 million against our $213 million of Undrawn investment commitments. This.
This represents coverage of 2 times as of June 30 up from 184 times as of March 31st.
For the 3 months ended June 30th 2021, the weighted average interest rate on our debt outstanding was 3.2% consistent with the rate during the prior quarter.
As of June 32021, 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 Ali and closing we were pleased to deliver another strong quarter of earnings and NAV growth to our shareholders driven by the improving credit quality trends across our diversified portfolio of middle market borrowers.
We also demonstrated on our platforms ability to consistently source attractive new middle market direct lending opportunities on a global basis.
We believe our stock valuation continues to offer our shareholders a compelling investment opportunity as we are a diversified performing portfolio largely first lien loans and are well positioned to capitalize on new opportunities to increase stockholder value over time.
We thank you for the privilege of managing our shareholders' capital and remain focused on doing so prudently.
Holly Please open the line for questions.
Thank you if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again, Thats star 1 to ask a question, we'll now take our first question from Finian O'shea from Wells Fargo Securities. Please go ahead.
Hi, Thank you.
Michael just a question on your some of your introductory remarks on on inflation input inflation such as labor.
Being a challenge lingering challenge.
In the recovery.
Can you talk about how.
Yeah.
Perhaps.
Acute that is and a lot of these.
For probably for middle market companies, and how perhaps threatening it it would be if it continues like.
Is it is the current <unk>.
Backdrops something that.
A lot of.
Your companies and your underwriting.
Is it something you need to really reverse it needs to be transitory for everything to.
To work or do you think that.
Generally these companies will be okay, even if.
The okay.
But current conditions prevail for awhile.
Hey, thanks.
Great question, because it's certainly been a lot in the press as well around labor there.
And I think the issues around inflationary and quite frankly, just the availability of labor had been really the biggest and service industries.
I think restaurants for example, and that's not necessarily a sector, where we're particularly overweight by any stretch of imagination. So for us things like business services, where it's more.
Technical labor, we haven't seen quite that same level of labor shortage. So I think within our portfolio anyway, the labor issue hasn't been.
The bigger 1 is as you might think given again the prevalence you're seeing across.
Okay. Thank you and then Inc.
Michael or Sally.
Could you give an update on the outlook for the the 8.5% sub notes I think those.
Still.
Our eligible for call sometime next year, but just any update on your thinking and address and hopefully improving that that part of the capital structure.
Yeah.
Sure and thanks for the thanks for the question. So we were able to purchase about $30.37 $5 million.
$150 million tranche.
Subsequent to quarter end at a discount to the make whole premium so that is a nice improvement in reducing that debt tranche I think will be a positive impact on earnings going forward.
Those notes are callable in summer of 2022, and so we will opportunistically look to continue to take down those notes to the extent it's possible, but if not we were we were pleased that those notes were short dated when we put them in place.
And so we would anticipate that they would come out at the next call day.
Yeah.
Great. That's all for me thank you.
Thanks Krish.
And just as a reminder, it is star 1 for any questions. Our next question comes from Ryan Lynch from <unk>. Please go ahead.
Hey, good morning, guys and thanks for taking my questions.
The first question I had was just on the ISO P. Obviously you guys are you talked about having nice.
Opportunities in the European market and that by itself. He had had had meaningful growth in this portfolio I'm just curious.
Can you guys also cash.
And would you guys also hold loans the international loans directly on your balance sheet.
Or depending on the size obviously of the law.
Loans that you guys are committing to or do all international loans go directly into balance.
Hi, It's L b.
Yeah.
Sure. Thanks for the question Ryan.
So currently the <unk> is about 6% of the investment portfolio. Then we also have about 10% of incremental non U S holdings that are sitting on our balance sheet. So we do have the ability to hold loans both in the international senior loan program as well as on balance sheet.
As we've discussed before having that international senior loan program up and running driving 12% to 13% yield really has has helped and we will continue to help the yield profile of the overall portfolio and so we are thoughtful of that debt.
That yield increase that comes with the ice up and Thats a key part of why we plan to grow and focus most of the growth on <unk>.
Versus growing the loans on balance sheet.
Okay. Thank you.
Makes complete sense and then as you know.
There is the markets have come back.
On pretty they're pretty robust at this point, both kind of at the pre COVID-19 level.
Levels, but there's also a significant deal activity just as we look to the second half of the year.
The outlook for the economy as it is.
Fairly good.
What are the goals that you all see for free.
For BCS asset.
What do you guys want to see the BC accomplishing in the back half of the year.
Yeah. So 1 of the key goals that we're focused on is really driving up the yield of the investment portfolio up from the mid sevens up towards 8%.
Which we think puts us in a position to earn and potentially out are in the 34 cent dividend over time.
And we plan to do that while maintaining our focus on first lien debt and that's a critical part of why we've really expanded it open the funnel to make sure. We're both capitalizing on opportunities in the U S. But also abroad.
And also have some incremental opportunity to do second lien second lien loans on the portfolio right now we've been at this at the lower end of our potential allocation to the SEC.
Lean loans.
And we think there's meaningful room to grow that to grow that basket. If we do feel like the economy is truly turning around and we're able to find good risk return in some second lien loans condition.
Yeah.
Okay understood and then just 1 last 1.
You guys. Obviously the portfolio continued to have some nice gains this quarter.
But in your prepared commentary you talked about you're still taking a measured approach approach to your fair value and there is there still some potential for additional NAV appreciation.
Over time.
Given that commentary or that commentary that you gave.
What does that assume as a base line.
<unk>.
The outlook from the U S economy or specific portfolio of companies are you are you assuming a continued gradual recovery a sharper recovery some bumps on the road.
What is the economic backdrop or company specific backdrop debt that you guys are using to when you made those prepared remarks.
Sure. So we're I would say, it's definitely a gradual slow gradual recovery. If you think about our risk rating 3 is so the companies and industries that are most impacted.
The economic dislocation here over the last year. Those are marked at an average price of 85 cents on the dollar.
We do think all of those will ultimately ultimately receive par and they are all first dollar risk and capital structure.
So we do feel they are well insulated from.
A choppy recovery if in case, we see that going forward. We do think that as we continue to turn more cards over here in recent history. We do think there is a stronger a possibility of a.
On a more robust recovery than the gradual recovery, we're modeling with those markets, but we did want to take a relatively measured approach given we are still in an uncertain world with with new risks coming as other risks are fading away.
Okay.
Understood.
Those are all my questions I appreciate the time this morning.
Great. Thanks, Ryan.
Well now move to our next question from Derek Hewett from Bank of America. Please go ahead.
Good morning, everyone, where given the strong growth in the <unk> during the second quarter I believe it was rough over in excess of 20% on.
Are you seeing significant growth opportunities in the back half of this year and.
If so are there any sort of growth limitations.
From your capital partner.
Sure. So we are and thanks, Eric for the question.
We are continuing to see good growth opportunities there as we think the European and Australian economies across Europe, as well as Australia are presenting lots of interesting investment opportunities right now the ISO piece about 6 per cent of the portfolio.
We have our investment partner in that joint venture is also anticipated upsizing that to take advantage of the opportunities through the rest of the year and beyond and we do think closer to a 10%.
Holding is is reasonable and something that could be achieved both with incremental capital for <unk> as well as from that from the partner in that joint venture.
Okay, Great and then in terms of of an investment going.
Being housed in the <unk> versus just on balance sheet, what is the distinction there.
Sure. So the majority of the plan is over time for the majority of investments to get put in the in the ISO P. If they're not in the U S and so.
It really is a question on the investment mix in the ISO P and making sure we're targeting the right leverage level and as a reminder, in the ISO piece, we are focused on.
Running between 1 and 1.5 turns of leverage and so we are on.
We are managing that over time and contributing assets to make sure we're achieving those double digit return profiles on the ice hockey.
Okay, and what is the leverage in <unk> right now at FERC.
Sure. It's about 1.1 times at quarter on 1.1, Okay Yep.
Alright, that's all for me thank you.
Thanks, Doug.
And just as a reminder, it is star 1 for any telephone questions Star 1 lapolla for just a moment to allow everyone an opportunity to HQ.
It appears there are no further telephone questions. So I'd like to pass back to Michael <unk> for any final or closing remarks.
Thanks, Lee and thanks for the spring.
The results for second quarter.
Moving forward to providing you.
I guess ex range.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.
[music].
Yeah.
Okay.
[music].