Q3 2022 Bain Capital Specialty Finance Inc Earnings Call
Good day and welcome to the Bain capital, especially how does she finance third quarter ended September 32022 earnings conference call.
Today's conference is being recorded and at this time I'd like to turn the conference over to Katherine Schneider from Investor Relations. Please go ahead.
Thanks, Cecilia good morning, and welcome everyone to the Bain capital Specialty Finance third quarter ended September 32022 conference call.
Yesterday after market close we issued our earnings press release and Investor presentation of our quarterly results a copy of which is available on Bain capital specialty finances 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 future results, so with that I'd like to turn the call over to our CEO Michael <unk>.
Thanks, Catherine good morning, and thank you all for joining us on our earnings call.
And again today by Mike <unk>, President and our Chief Financial Officer, Sally Donna.
Start with an overview of our third quarter ended September 32022 results.
And then provide some thoughts on our performance the overall market environment and our positioning.
Thereafter, Mike and Sally will discuss our investment portfolio and financial results in greater detail.
Yesterday after market close we reported third quarter net investment income per share of 53.
Driven by very strong levels of income earned from our portfolio investments during the quarter.
For Q3 net investment income return represented 12, 4% annualized yield on book value and covered our dividend by 156%.
This is the highest quarterly level of NII that we have earned since our inception.
The significant growth in our NII. This quarter was driven by the benefits of rising interest rates higher income related to fees earned on certain new originations and.
And greater dividend income related to an equity co investment pay off.
Our board has increased our regular quarterly dividend by approximately 6% or <unk> <unk> per share to <unk> 36 per share.
Shareholders of record as of December 31, 2022.
This represents an annualized yield of eight 5% on ending book value as of September 30.
And an 11% annualized yield at BCS apps current trading levels.
Over the course of the year, we have observed based rates, namely silver and LIBOR significantly increase.
As we have previewed with our shareholders. During prior earnings calls, we expected to see earnings growth during the second half of this year, given the timing lag of rate resets across our portfolio.
We are pleased to see this begin to contribute to higher earnings this quarter, and we are well positioned to benefit further from any future rate increases.
The increase in the regular dividend rate reflects our view of the Companys earnings power under various interest rate and economic scenarios.
Our board will continue to evaluate further dividend increases on a quarterly basis.
Net asset value as of September 30 was $16 98 per share.
The decrease of approximately 1% quarter over quarter.
Our NAV decline was primarily driven by net unrealized losses across our portfolio.
During the third quarter, we continue to observe high levels of market volatility in the broadly syndicated loan in public equity markets given concerns of slowing growth in the macro economy.
And a potential recessionary environment, we believe our portfolio is on strong footing to endure a more challenging market backdrop.
Across our portfolio. The median EBITDA of our company is just under $50 million. These.
These are companies that are big enough to matter in their ecosystem and have staying power.
Customers and suppliers will be demonstrably worse off if they cease operations.
In uncertain times like today. These are the types of companies that have multiple growth levers to pull to be nimble.
We have largely avoided smaller businesses as they tend to be less resilient during economic downturns.
Importantly, we demand and received strong documentation as 93% of our debt investments are structured with lender friendly terms, such as financial covenants tied to management's forecast.
This puts in place near term goalposts related to company financial performance, providing us with the seat early in any discussions to mitigate our potential risks in a downside scenario.
We also have majority control positions and 80% of our debt tranches, allowing us to drive eventual outcomes at our discretion.
Our middle market borrowers operate across a wide range of industry is driven by our long standing focus on investing in defensive industries as represented by our top exposures being aerospace and defense high Tech and business services.
We have been shying away from direct consumer facing industries that could experience more volatile demand during periods like today.
Lastly, the majority of our structures are in first lien senior secured loans supported by significant equity cushion provided by private equity sponsors behind our loans.
Our focus on sponsor backed companies provide them with the professional management capital and depth of personnel resources oversight and alignment necessary to guide them through the <unk>.
Choppy macroeconomic periods.
In the current environment, our portfolio companies continue to perform well and has proven to be durable thus far in light of the macro headwinds related to inflation inflationary pressures and higher interest rates.
We have not seen a wave of amendments across our portfolio of companies like we last saw in 2020 related to the COVID-19 pandemic.
Nor do we expect to during our forecast period.
Our portfolio management team has been focused on stress testing interest rates sensitivities across our investments to ensure sufficient cash flow coverage within our portfolio of companies.
We are pleased to see ample cushion for the vast majority of our companies and only very few names fall below one times interest coverage level and we've put these on our focus list.
Looking ahead, we believe we are well positioned to navigate the expected challenging economic and geopolitical times ahead.
Our platform of Bain capital credit is comprised of deep resources and expertise.
And over many market cycles going back to our inception in 1998, and we can and do tap into the broader bank capital network for additional support is needed.
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 and more detail on our portfolio.
New investment fundings during the third quarter were $433 million across 59 companies.
<unk> $270 million in nine new companies.
$107 million in 48 existing companies.
$1 million, and the <unk> and $15 million and the SLP.
Sales and repayment activity totaled approximately $397 million, resulting in net funded portfolio growth of $36 million quarter over quarter.
We believe the environment for middle market lenders has been increasingly attractive in recent history as we have been benefiting from improving economics and terms.
Given the increase in credit spreads and base rates not only are we able to underwrite new first lien loans at higher yields.
We have also seen leverage levels on new loans decrease as lenders focus on maintaining free cash flow and fixed charge coverage ratios.
Furthermore, we have used the current market as an opportunity to tightened document terms, particularly around covenant levels and EBITDA definition.
Our investing activity has been focused on underwriting new companies as well as add on activity for existing portfolio companies to complete an acquisition.
New LBO activity continues but at a lower level as sponsor still continue to show interest in the highest quality companies expected to perform over the current economic outlook overall.
Overall, we believe the current environment provides an attractive opportunity for lenders such as ourselves to be selective and pick our spots.
Turning to the investment portfolio.
At the end of the third quarter the size of our investment portfolio at fair value was $2 3 billion across a highly diversified set of 130 portfolio companies operating across 32 different industries.
Our portfolio company diversification has grown almost 25% on a year over year basis.
We continue to maintain our focus on first lien senior secured structures as of September 30th 70% of the investment portfolio at fair value was invested in first lien debt for.
<unk>, 4% in second lien debt.
2% subordinated debt, 3% in preferred equity.
9% and common equity interests and 12% across our joint ventures.
Including 10% from the international Senior loan program and 2% in the senior loan program.
Within our joint ventures over 96% of our underlying exposures are comprised of first lien senior secured loans.
As of September 32022, the weighted average yield on the investment portfolio at amortized cost and fair value for 10, 2% and 10, 6%, respectively as compared to eight 5% and eight 8% respectively as of June 32022.
The increase was primarily driven by higher reference rates on our loans.
94% of our debt investments bear interest at a floating rate positioning the company favorably as interest rates have continued to rise beyond the reference rate floors of our loans.
Investments in Europe totaled 17% of the portfolio at fair value as of September 30, compared to 16% in the prior quarter.
Although we have an increased focus on our portfolio companies operating across Europe , given macroeconomic headwinds this portfolio remains healthy given the underlying seniority of the loans as well as the sector mix with an emphasis on software and health care business model.
<unk> investment portfolio at fair value as of September 30 was approximately $623 million.
Price of investments in 34 portfolio companies operating across 15 different industries.
96% of the portfolio of first lien loans, 3% second lien and 1% equity interest.
As of September 30th Mlps investment portfolio at fair value was approximately $571 million comprised of investments in 51 portfolio companies operating across 22 different industries.
100% of this investment portfolio is invested in senior secured loans, including 96% in first lien and 4% in second lien.
Moving on to portfolio credit quality trends.
They were relatively stable quarter over quarter.
Within our risk rating scale, 90% of our portfolio at fair value as of September 30 was comprised of risk ratings, one and twos, indicating that the investment is performing in line or better than expectations relative to our initial underwriting.
Risk rating three investments comprised 8% of our portfolio at fair value.
During the third quarter, we placed one new portfolio company on nonaccrual status contributing to the modest uptick in risk rating four investments totaling just under 2% of the portfolio.
Overall, we believe our credit fundamentals remained solid across the portfolio. Our median leverage attachment point is five six times as of September 30 modestly up from five four times as of June 30th.
Sally will now provide a more detailed financial review.
Thank you, Mike and good morning, everyone I'll start the review of our third quarter 2022 results with our income statement.
Total investment income was $62 8 million for the three months ended September 32022, as compared to $52 4 million for three months ended June 30th.
Increase in investment income was primarily driven by the benefits of rising interest rates.
Some related to fees earned on certain new originations and greater dividend income.
Total expenses for the third quarter were $28 $7 million as compared to $25 $6 million in the second quarter.
Greece in expenses was driven by an increase in interest and debt financing expenses, given higher base rates, partially offset by a decrease in incentive fees.
Net investment income for the quarter was $34 1 million or <unk> 53 per share as compared to $26 7 million or <unk> 41 per share for the prior quarter.
Our net investment income covered our dividend by 156%.
During the three months ended September 32022, the company had net realized and unrealized losses of $23 1 million.
GAAP income per share for the three months ended September 30 was $7 10 per share.
Moving over to our balance sheet as of September 30, our investment portfolio at fair value totaled $2 3 billion.
And total assets of $2 5 billion.
Net assets were $1 1 billion as of September 30th.
NAV per share was $16 98 down from $17 16 at the end of the first quarter.
Representing a 1% decrease quarter over quarter.
At the end of Q3, our debt to equity ratio was one five times up from 114 times at the end of Q2.
We had a large receivable on our balance sheet at quarter end, which drove our leverage ratio to the wider end of our stated range of one to one five times.
Pro forma for this our debt to equity ratio would have been one seven times.
Our net leverage ratio, which represents principal debt outstanding less cash was one two times at the end of Q3 as compared to one seven times at the end of Q4.
During the quarter, we continue to improve our liability structure to increase the size of our sumitomo credit facility to $635 million up from $300 million.
In the current environment, we were pleased with our ability to attack new lenders in the facility as we increase the diversification of our lender group and we're able to hold the terms on our existing facilities constant.
In addition, we repaid the full principal amount outstanding of our $112 $5 million on our senior unsecured notes due in 2023.
The notes were repaid at par plus accrued and unpaid interest thereon.
<unk> interest rate on the note was eight 5%, which provided us an opportunity to lower interest expense and borrow through the increased capacity on our sumitomo facilities.
And so for a class 175.
We recognize the <unk> per share loss during the quarter due to the extinguishment of the debt related to unamortized expenses accrued the stated maturity date.
Our capital structure remains durable with a large portion of our outstanding debt and fixed rate unsecured debt obligation.
This structure provides the company with greater financial flexibility.
Sand greater periods of volatility ahead.
As of September 30 is approximately 56% of our outstanding debt was floating rate and 44% and fixed rate.
Against our portfolio of floating rate loans. The company is well positioned to benefit from higher interest income across our portfolio given the rise in rates.
As of September 30th holding all else constant we calculate that 100 basis point increase in rates could increase our quarterly earnings by approximately four cents per share.
Our Form 10-Q provides further detail on our sensitivity to various changes in interest rates.
Available liquidity, consisting of cash and Undrawn capacity on our credit facilities was approximately $311 million. This compares to $307 million of Undrawn investment commitments.
For the three months ended September 32022, the weighted average interest rate on our debt outstanding was three 7% as compared to three 2% as of the prior quarter and <unk>.
The increase was driven by higher sell through rates on our floating rate debt structures.
With that I will turn the call back over to Mike for closing remarks.
Thanks Ali we're pleased to deliver another strong quarter for our shareholders driven by the high levels of net investment income earnings.
Our portfolio is on strong footing to navigate more uncertain times ahead, given the underlying tenants of our portfolio construction.
We remain committed to delivering value for our shareholders, we are producing attractive Roe.
And thank you for the privilege of managing our shareholders' capital.
Will you. Please open the line for questions.
Thank you if you wish to ask a question at this time. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment again. Please press star one to ask a question we will now.
We'll take our first question from Paul Johnson from <unk>. Please go ahead.
Yes, good morning, guys. Thanks for taking my questions.
Congratulations on a nice beat this quarter I'm.
I'm just wondering how much of the EPS this quarter 53.
NOI how much of that was.
Just from one time items.
Sure. So about <unk> of that was from a onetime dividend coming out of one of our equity co investment.
Thats included in the.
Dividend line item and then investment income.
Beyond that there was another six which are basically commitment fees that we collected for.
For underwriting deals in the quarter, we do think that there will continue to be that other income that will generate.
In future quarters, but it will be variable based on the market environment.
Got it right.
I'm curious how much how does that compare I guess to kind of previous quarters in the past in terms of that.
Nonrecurring onetime dividend income coming from I guess, I'm, sorry, not the fee income coming from.
Net fees is was this quarter relatively higher than past quarters I'm just curious how that compares.
Yes, it's about in the middle of the range. If you look at the last four quarters.
So we've had some around $1 million, we've had some quarters like last quarter was closer to $8 million. So that $4 million range is kind of in the middle of what we've seen historically for connected please.
Okay. Thanks, I appreciate that.
And then.
Just on activity for the quarter and it was fairly active quarter.
Originations repayments for you guys.
Just curious what I guess.
Drove.
The higher level of activity this quarter, especially on the repayment side and do you expect that to.
<unk> I guess given your line of sight into the next quarter or so of activity would you expect that to continue.
Alright.
I would imagine that repayments will slow down in the portfolio over time, just given the given the macroeconomic backdrop what drove many of the repayments. This quarter were two things one of which was dropping some assets from our balance sheet down into the joint venture. So the <unk> Nf L. P.
We also some of the commitment fees or we're just talking about are actually related to deals that we underwrote and then syndicate it onto other players in the market. So that also flows through the sales and repayments line. So this quarter was much more driven by those two items as opposed to more traditional refinancings or.
Albeit fresh LBO activity that tends to drive repayments in a more normalized market.
Got it that makes sense.
That makes sense I appreciate that.
And then.
The on your portfolio I mean as far as your borrowers go in.
And your.
Still receiving a lot of incoming infer.
Information and updated forecast.
Hi, Thank you changing along with the environment.
I'm wondering if you could just kind of talk about the performance of your borrowers I know you mentioned that it's been quiet.
Good I guess as far as you've observed.
But.
Just I guess, how is interest coverage change.
Changing with the rates with the rate increases this quarter or the last few quarters and then as well.
Yes.
Yes, I guess, that's all just any kind of color on just the performance of these loans.
On top of that you mentioned on the call. There is a company that fell below one times interest coverage given the increase in I guess the performance three rated loans I'm wondering if that's the same loan and if you could make any comments on that company as well.
Yes, why don't I start and then Mike can jump into I mean generically the performance of our portfolio companies. As you point out has been pretty strong I think that thats based on that that we have.
Sought out more defensive industries I think that's been particularly helpful. I think the other thing I would point out is that we have been.
I guess pleasantly surprised that our companies have also been able to put push out price increases of their own in this inflationary environment and Thats helped.
Keep their gross margins are pretty stable.
From a topline perspective, again haven't really seen much deterioration yet.
We obviously haven't necessarily entered the recession, yet, but it's more of a fee to be focused in the BDC focus.
Which is where we'd be more concerned.
Mike I, just wanted to touch a little bit on the.
Interest rate sensitivity modeling that we've done, but we've definitely done more of a shock modeling perspective, rather than trying to take the existing so for curve and overlay that into our companies, we're looking more and more worst case scenarios.
Sure Yeah, so about 10% of the portfolio is in a risk rating three or four assets. Those are all situations, where when we're running interest rate sensitivities.
And looking at capital structures on cash flow coverage.
We are more concerned about about the ability of those companies to pay their interest in higher rate environments.
I would say risk rating three as we still felt comfortable but there is increased risk.
Net cash flow gets particularly tight.
What we were commenting on in the.
In the.
Interest coverage analysis with a few companies going below one times are situations, where we're running as Mike Ewald highlighted.
Shock scenario, where we have the interest rate step up base rates north of 5%.
So that's part of what's informing those risk rating three is where we are focused on making sure that.
That those companies are able to continue to pay their cash interest.
Thanks, I appreciate that very helpful.
That's all for me.
Great. Thank you <unk> you ask a question.
Thank you as a reminder to ask a question. Please press star one on your telephone keypad will pause for a moment everyone's signals.
As there are no further questions at this time I would like to turn the call back to your speakers for any additional or closing remarks.
Thanks, Cecilia and thanks, all of you for your time attention today, we do really appreciate your support and we look forward to talking to you again next quarter.
Good day.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.