Q3 2021 Bain Capital Specialty Finance Inc Earnings Call

Good day and welcome to the Bain capital Specialty Finance third quarter ended September 30th 'twenty 'twenty. One earnings Conference call. Today's conference is being recorded and at this time I'd like to turn the conference over to Katherine Schneider Investor Relations.

Please go ahead ma'am.

Thanks, Emma good morning, and welcome everyone.

Yesterday after market closed we issued our earnings press release and Investor presentation of our quarterly results a copy of which is available on Bain capital specialty Finance Investor Relations website.

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.

This call and the 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 of future results.

With that I'd like to turn over the call to our Chief Executive Officer, Michael Ewald.

Thanks, Kathryn and good morning to all of you and thanks for joining us on our earnings call here today I'm also joined by Mike Boyle, Our President and our Chief Financial Officer, Sally Daunt Us all.

I'll start with an overview of the results of our third quarter ended September 32021, and then provide some thoughts on the overall market environment and our relative positioning.

Thereafter, Mike and Sally will discuss our investment portfolio and financial results in greater detail.

So beginning with our third quarter results Q3, net investment income per share was 34.

Our net investment income covered our dividend level by 100 per cent for another consecutive quarter and were pleased that our NII and dividend coverage was not reliant on fee waivers by the advisor this quarter as a result of the progress that we've made over the past year in growing our NII earnings power.

Net asset value per share was $17 three as of September 30th.

This increase of approximately 10 basis points from our NAV as of June 30th.

Subsequent to quarter end, our board declared a fourth quarter dividend equal to 34 cents per share payable to record date holders as of December 31 2021.

This represents an 8% annualized yield on ending book value as of September 30.

So during the quarter, we continue to see high volumes of new loan originations in the middle market driven by a favorable macro environment backdrop.

And elevated sponsored M&A activity Q.

Q3, gross originations were $286 million, approximately 35% higher than Q2 gross origination volumes.

Portfolio also continued to exhibit a healthy amount of sales and repayment activity totaling $255 million and in line with prior quarter.

As a result of this activity our net investment activity totaled $31 million.

While the current market environment remains competitive vcs that benefits from Bain capital Credit's private credit group platform, which has a track record of investing in the middle market for over 20 years and has developed long standing relationships with our global sourcing partners over at this time.

Our team has further augmented with a greater resources of the broader Bain capital platform as we utilize a deep industry expertise within Bain capital Credit's industry research team to uncover companies in niche industries, and can leverage insights and relationships across the firm, providing us with a competitive edge when performing diligence.

Bain Capital's global platform has allowed <unk> to maintain its selectivity and discipline, when choosing which new investment opportunities to underwrite.

Recently, we view the relative value as being more attractive in Europe, given the frothiness of the U S market, leading to higher levels of investing activity out of our European offices.

Trends that persisted throughout the year and continued here into the third quarter with approximately two thirds of our new originations being comprised of companies domiciled outside of North America.

Having a local team there and a longstanding presence across two offices in Europe has allowed us to uncover leading players in their niche markets, where we are finding more attractive relative risk return trade offs.

Importantly, our underwriting standards have not diminished despite the increased competition space.

100% of our new originations.

New companies during the quarter benefited from financial covenants, which is consistent with our overall portfolio. We're about 95% of our debt investments also have covenants.

Similarly, our credit quality trends remain stable company performance for the vast majority of our portfolio has been better than expected in 2021, and we have not witnessed a second wave of defaults or amendments as demonstrated by their again being no investments on nonaccrual status as of quarter end.

Turning now to our liabilities, we've remained hard at work on improving our liability structure.

During the quarter, we repurchased 25% of our 150 million eight 5% notes as we were able to take advantage of an opportunity to reduce a portion of this relatively expensive debt at a discounted price to our make whole premium prior to maturity.

It allowed us to reduce the weighted average interest rate on debt outstanding to 3.0% an improvement of approximately 20 basis points quarter over quarter.

It is also worth mentioning that the remaining 112 and a half a million dollars of this debt matures in 2023 and <unk>.

Our non call period expires in June 2022, representing an opportunity to further reduce our aggregate weighted average cost of debt.

Subsequent to quarter end, we continue to enhance the right side of our balance sheet. As we took advantage of low treasury rates and strong investor demand levels in the institutional unsecured debt markets.

In October the company issued $300 million of investment grade, 2.55% unsecured notes maturing in October 2026.

These notes are 40 basis points tighter than the 295% March 'twenty 'twenty six notes that we issued earlier this year.

Pro forma for this issuance unsecured debt represents approximately 53% of the company's debt outstanding as of September 30th.

A significant improvement from 30% as of September 30th.

And one which enhances the companys balance sheet flexibility.

We continue to look for ways to further optimize our financing flexibility and costs in order to drive earnings accretion for our shareholders.

I will now turn the call over to Mike Boyle, our president to walk through our investment portfolio in greater detail.

Thanks, Mike Good morning, everyone.

I'll start with our investment activity for the third quarter, and then provide an update on our portfolio.

Q3, new fundings were $286 million across 39 portfolio companies.

<unk> $229 million, and 10, new company $46 million and 28 existing companies and $11 million in the I S. L. P.

Sales and repayment activity totaled $255 million.

As Mike highlighted earlier during the call our new investment activity this quarter benefited from Bain capital Credit's global sourcing capability.

Proximately, 65% of our new originations were sourced from our offices in Europe.

Our largest new investment commitments during the quarter was an investment sourced from our London office.

The company and it is an Israel based global provider of an odd move broadcasting technology for news and sports reporters our ability to win this investment was driven by the early insights and knowledge, we were able to obtain through leveraging Bain capital credit industry research team in the broadcasting sector.

These early insights were very valuable in our diligence at the outset of our investment in the company and our ongoing relationship with the management team enables us to successfully retained our financing incumbency as the company was recently sold to another private equity buyer during the quarter.

Given the higher levels of investing activity from our European offices, we increase the size of our investment to the international senior loan program or I S. L. P. During the quarter.

As of quarter end I S. L. P represents the company's largest investment at six 1% of the total portfolio at fair value.

An increase from the prior quarter end at five 7%.

The company earned approximately 10% annualized return on this investment during the third quarter well. This is in line, but on the lower end of our double digit return objective. We estimate this to improve in the coming quarters based on the continued ramp up the portfolio.

The company's total equity commitment to the ice L. P. Also allows for this investment to grow over time with the potential to drive greater net investment income the B C. S F.

Turning to the investment portfolio at the end of the third quarter the size of our investment portfolio at fair value was $2 $4 billion across a highly diversified set of 105 companies operating across 29 different industries.

Our investments largely comprised of first lien loans to sponsor backed middle market businesses.

At September 30th 80% of the investment portfolio at fair value was invested in first lien debt, 5% in second lien debt, 1% subordinated debt, 8% in equity interest and 6% in the international senior loan program.

Portfolio yields were relatively stable quarter over quarter.

As of September 30th 2021, the weighted average yield of the investment portfolio at amortized cost and fair value were seven 5% and seven 6%, respectively as compared to $7 five and seven 7% respectively as of June 32021.

We remain focused on improving the yield of our total portfolio to an 8% yield target, while maintaining our focus on senior secured loans.

Moving on to portfolio credit quality trends.

Credit metrics at our borrowers were stable quarter over quarter. The median leverage through our investment was five one times.

Movement from five three times as of June 30th.

The portfolio of media EBITDA was $45 million highlighting our focus on the core middle market.

This is a market segment that we continue to favor, which you can win deals based on sponsor relationships and due diligence capabilities rather than solely competing on pricing and terms.

Within our internal risk rating scale credit quality trends were stable, 90% of our portfolio at fair value was comprised of risk rating one into investment.

With the risk rating, one being the highest risk rating in terms of positive credit performance.

The percentage of the portfolio was modestly up from 89% as the prior quarter end.

Risk rating three investments comprised 10% of our portfolio at fair value down from 11% as the prior quarter end driven by a reduction in the number of companies due to positive underlying credit performance.

There continues to be no investments classified as a risk rating for our lowest risk rating in terms of credit quality.

Our risk rating one into investments had a weighted average fair value Mark of approximately 99 cents on the dollar reflecting a continued gradual improvement of approximately 40 basis points quarter over quarter.

Our risk rating three investments have a weighted average fair value Mark of approximately 84, that's the par and this was relatively flat to prior quarter end valuations at 84, 5% of par.

Well a handful of these companies have had to amend forecast again due to the impacts of the Delta variance. We continued to see strong sponsor support for these COVID-19 rebound Lane and importantly liquidity has not been an issue.

Many of these companies are starting to see demand return and adjust to more normalized levels. We continue to believe these investments have the potential to contribute to lab appreciation as we expect our original investment thesis for Megan attack.

Nonaccrual trends within our portfolio were favorable as this metric was stable quarter over quarter as of September 30th we had no investments on non accrual status.

Sally will now provide a more detailed financial review.

Thank you, Mike and good morning, everyone.

The review of our third quarter 2021 results with our income statement.

Total investment income was $49 $5 million for the three months ended September 30th 2021.

As compared to $46 5 million for the three months ended June 30th.

Increase in investment income is primarily due to an increase in prepayment related income and other income.

Total net expenses for the third quarter were $27 8 million compared to $24 6 million in the second quarter the.

The increase was driven by an increase in investment advisory fees as a result of no fee waivers by the adviser during the quarter.

As we have discussed with our shareholders in previous quarters, we have been focused on driving higher net investment income without the need for fee waivers to cover a regular dividend.

This quarter, we are very pleased with our ability to achieve best for our shareholders given our continues okay.

The net investment income for the quarter with $21 $8 million or 34 cents per share.

That's a 21 $9 million or 34 cents per share for the prior quarter.

During the three months ended September 30th 2021 the company had net realized and unrealized gains of $1 6 million, including Port point $1 million net gains across investment.

And $2.5 million realized loss.

Loss from the partial extinguishment of or even a half percent in 2023 now.

This one time impact is offset by the improvement to our financing costs.

Yes.

GAAP income per share for the three months ended September 30 of 2021 what 36 cents per share.

Number two our balance sheet as of September 30th our investment portfolio at fair value totaled $2.4 billion in total assets of $2.5 billion.

Total net assets were one plant.

$1 billion as of September 30th.

NAV per share was $17.03 as compared to $17. One at the end of the second quarter, representing a 0.1% increase quarter over quarter.

Gains were attributed to broad based net gains across the portfolio and partially offset by the realized loss from the extinguishment on our debt as mentioned earlier.

At the end of Q3, our debt to equity ratio with 1.23 times compared to 1.20 times at the end of Q2, our net leverage ratio, which represents principal debt outstanding less cash with 1.15 times at the end of Q3 as compared to 1.12 times at the end of Q cool.

Net leverage ratio continues to be in line with our stated target range of between one and one five times.

Turning to our capitalization and liquidity available liquidity, consisting of cash and undrawn capacity on our credit facility with $355 million against our 225 million of Undrawn investment commitments.

This represents coverage at 1.6 times as of September 30th as compared to two times as of June 30th.

Pro forma as of as of September 30th Brown, or our October 'twenty 'twenty six notes offering our coverage it back to over to time.

For the three months ended September 30th 2021 the weighted average interest rate on our debt outstanding with great percent, an improvement from three 2% at the prior quarter end driven by our notes repurchase.

As Mike mentioned earlier, our team remains focused on ways to further improve the cost of our liabilities structure in order to drive value for our shareholders.

As of September 30th 2021 the company was in compliance with all terms under our secured credit facility with that I will turn the call back over to Mike for closing remarks.

Thanks Ali we were very pleased to have demonstrated some progress our shareholders. This quarter through higher interest income and in improving our liability structure in order to drive higher earnings.

We believe the company remains well positioned to source, new middle market lending opportunities, given our global footprint and deep industry expertise, while remaining disciplined in our credit selection.

As always we thank you for the privilege of managing our shareholders' capital.

I'm. Please open the line for questions. Thanks.

Certainly if you'd like to ask a question you can do so now by pressing star one on your telephone.

Star one if you'd like to ask a question.

We will now take our first question from Paul Johnson from Keefe Bruyette <unk> Woods. Please go ahead. Your line is open.

Yeah. Good morning, guys. Thanks for taking my questions.

Right.

Coupled but.

Curious on the the repurchase of the 8.5% bonds during the quarter good.

A good opportunity to be able to buy those back at a discount as you said is that more of a one off opportunity.

Type of thing that you took advantage of or is that something you think you would like to look at potentially doing again in future quarters prior to that non call period.

Yeah.

Yeah. Thanks for the question. So we are always looking to opportunistically buy back that more expensive debt in our capital structure. So we do we will try to be opportunistic going forward, but it's hard to say exactly what we'll be able to do between the Allen Edmonds the non call us up in the summer of 2022.

Okay.

And then just on the kind of a broad question, but on the sponsor activity, obviously, you know across the space.

Heightened repayments in gist.

Very robust activity have.

Have you seen that carryover into the fourth quarter as well and do you think that's something you would expect to kind of just continued to play out as it is right now over the next couple of quarters.

Okay.

Yeah look I, certainly think that the fourth quarter is shaping up to be a fairly busy here as well and not just because of the economic recovery, but also.

Turns around whether taxes are increasing in some sellers trying to eventually get ahead of that by by year end.

Quarter be fairly busy as well.

Got you.

And.

Obviously, the the are the.

International.

Deal sources that you have is obviously helped quite a bit and be able to produce a lot of.

The opportunities for you at a time when when competition is at its highest here in the U S. But I'm curious as time goes on and in that.

It is an attractive place for you to invest there or do you expect to see or maybe are you, possibly already seeing.

Competition.

Pick up in those markets as well and potentially make it harder to find.

Opportunities in Europe, or do you still see that as a you know.

Maybe a less traveled space versus its U S counterparts.

Yeah look it's a good question and I think what I'd point you to is Europe.

Europe, certainly isn't just one monolithic market honestly right. So I would say there's different pockets, where the competition has picked up you know we've had an office open they're focused on middle market direct lending since 2007, and so we've got a long standing presence there I'd tell you. The the UK market. For example is probably the easiest in which to compete.

For let's say American players looking to move over there at St language illegal origin, it's really easy to understand its easy trip et cetera.

So I'd say that market sure I think with that we're seeing some more signs of.

Increased competition, there, but theres a whole lot of other regions, Benelux and Nordics et cetera that are are still robust travel today, and we think it's going be a little harder to break into those markets also just because they're smaller so it really depends on which.

Which particular country or region, you're looking at within Europe.

Sure got it appreciate it. Thank you for taking my questions. That's all for me today.

Okay. Thanks.

As a reminder, if you would like to ask a question. Please press star one on your telephone now. Thank you. We will now take our next question from Fin O'shea from Wells Fargo Securities. Please go ahead. Your line is open.

Hi, guys good morning.

Can you go over again.

<unk>.

Versus U S breakdown this quarter.

And and.

And how much you dropped into the <unk>.

<unk>.

Yes.

Sure. So so we highlighted about 65% of our net new original or new originations were.

We're out of Europe.

And so we ended up dropping some assets down into the ISO piece of the ISO P position size went from five 7% up to six 1%, but the overall European exposure is sitting at about 19% of the portfolio.

Between the combination of loans sitting in the <unk> as well as ones sitting directly on our balance sheet are made outside of the U S. So we are in a position where we have ample room to grow both within the <unk> as well as as well as on our balance sheet relative to the 30% basket.

That can constrain assets outside of the U S.

But you were you decided did you make some decisions.

Not.

Fully grow the I S. L. P was all of that.

Non U S origination keep some of it on the core balance sheet.

More than normal.

Or is.

Sure.

Every quarter, we go through and look at loans sitting on the balance sheet versus the ISO P vis vis that 30% basket yield optimization in the portfolio and so we have chosen to stay at that 19% level between the I S. L. P.

And on balance sheet loan, but I would anticipate that we would continue to move loans into that I S. L. P program as we seek to manage the <unk>.

30% test.

The opportunities that we see across Europe.

Yeah.

Okay and then.

Looks like the <unk> return.

<unk> went up.

From what correct me, if I'm wrong, it looks like a pretty similar portfolio size does it did the earnings go up.

And in some way for the ISO P or where you.

Just retaining earnings earlier.

Yeah sure. So the earnings have gone up because leverage there is targeted to run between one and one and a quarter similar to the leverage level at.

Vcs up overall and when we originally structured the ISO P. We were at the lower end of that leverage range and as we dropped some assets and we actually increased the leverage which which drove the yields up.

Across the <unk> complex.

Okay. That's all for me thanks, so much.

Great. Thank you said.

Thank you.

As a final reminder, please press star one if you'd like to ask a question.

There are currently no questions in the queue I will turn the call back to your host.

Great well again, thanks, everyone for joining us today and as I said, we're very pleased with the performance for this past quarter and we'll look forward to bringing you more news next quarter. Thanks, very much have a good day.

Ladies and gentlemen that will conclude today's conference you may now all disconnect.

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