Bain Capital Specialty Finance Inc. Q1 2023 Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Bain capital Specialty Finance first quarter ended March 31st 2023 earnings Conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time during this call we require them.
Mediate assistance. Please press star zero for the operator, this call's being recorded on Wednesday may 10th 2023, I would now like to turn the conference over to Katherine Schneider. Please go ahead.
Thanks, Colin good morning.
Everyone and welcome to the Bain capital Specialty Finance first quarter ended March 31, 2023 conference call.
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 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.
Bank 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'd like to turn the call over to our CEO Michael <unk>.
Thanks, Catherine good morning, and thanks to all of you for joining us today on our earnings call.
I'm also joined here today by Mike Doyle, our President and our Chief Financial Officer, Sally Donuts.
I'll start with an overview of our first quarter ended March 31, 2023 results and then provide some thoughts on our performance.
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 delivered strong first quarter results.
Q1, net investment income per share was <unk> 50, driven by high levels of investment income earned from our portfolio during the quarter.
Our net investment income return represented an annualized yield of 11, 5% on book value and covered our dividend by 132%.
Net investment income per share was up 35% quarter over quarter and 47% year over year.
The significant growth in our NII was driven by the continued benefits of higher interest rates greater dividend income earned from our joint ventures as these investments have grown over time and higher other income.
Q1 earnings per share were <unk> 45, driven by stable credit quality across our portfolio of investments during the quarter.
Our net income produced an annualized return on book value of 10, 5%.
Net asset value per share as of March 31 was $17 37.
Reflecting a 0.5% increase from our $17 29 NAV.
As of December 31.
Subsequent to quarter end, our board declared a second quarter dividend equal to 38 cents per share and payable to record date holders as of June 32023.
This represents an eight 8% annualized yield on ending book value as of March 31.
We believe the company is well positioned to continue to generate net investment income in excess of our regular dividend rate as demonstrated by our strong out earnings during Q1.
Our spillover income per share was approximately 44.
Which we believe is a healthy amount of undistributed income and provides for increased dividend stability.
Our management team alongside our board continues to evaluate potential increases to the dividend rate versus retaining excess earnings while taking a thoughtful approach under various future interest rate and macroeconomic scenarios.
Turning now to the market environment, we observed lower levels of new activity in the middle market, driven by lower LBO and M&A volumes and increased market volatility stemming from the commercial bank challenges during the quarter.
Following these events banks in general are likely to be more risk averse and pull back from lending activities, which can create a greater opportunity set for private lenders like us as borrowers value certainty of capital, especially during periods of increased market volatility.
Against this backdrop, we continued to execute on our long standing strategy of sourcing and underwriting middle market investment opportunities.
The majority of our new investment fundings were to existing portfolio companies versus new companies benefiting from incumbency advantage, we enjoy across our portfolio.
We continue to observe favorable terms and structures for newly originated loans as compared to prior loan vintages.
The weighted average spread on our new portfolio company first lien debt investments was 677 basis points, which produced a weighted average yield of 11, 7% when factoring in current base rates and amortization of original issue discounts.
Our private credit group platform takes a global approach to source new middle market investments are.
Our long standing global presence provides us with a large pipeline of investment opportunities and we remain selective regarding the ones that we choose to pursue based on the relative attractiveness of each new investment.
In recent years, our investment activities have ebbed and flowed in and out of Europe .
In 2021, and we view the market in Europe to be increasingly attractive given the increased competitiveness in the U S markets. While Conversely, we slowed our investing activities in Europe last year, given increased volatility and broader recessionary concerns that took hold in that region earlier than elsewhere.
Today, our view of relative value between Europe , and the U S is back on parity.
During the first quarter, our new investments the companies were comprised of approximately two thirds to north American borrowers and one third to European borrowers.
Having that global footprint enhances and further diversifies our deal flow of opportunities to identify attractive risk adjusted returns for our shareholders.
Our portfolio of companies continue to perform well and have proven to be defensive thus far in light of the macro headwinds related to inflationary pressures and the high interest rate environment.
This has been demonstrated by the stable credit quality metrics across our portfolio, including a decline in our non accrual investments with no new investments added to non accrual status during the quarter and watch list investments remaining relatively stable quarter over quarter.
At quarter end, we only had two companies on non accrual status, representing 0.6% of the portfolio at fair value.
We believe is one of the lowest levels in the entire BDC sector.
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 first quarter, and then provide an update and more detail on our portfolio.
New fundings during the first quarter were $308 million across 52 portfolio companies, including $116 million in six new company $157 million.
45 existing companies and $35 million in the senior loan partnership.
Sales and repayment activity totaled approximately $285 million.
<unk> and net funded portfolio growth of $23 million quarter over quarter.
As a result of these activities the size of our investment portfolio was relatively stable.
Our new investing activity for the first quarter was comprised of fundings to new portfolio companies and existing companies with the vast majorities of our new investments and first lien structures.
New fundings, excluding our investments in joint ventures were comprised of approximately 43% to new businesses and.
57% to existing businesses.
As Mike highlighted earlier in the call we were active with existing portfolio companies. This quarter, given the slowdown of new LBO and M&A activities in the broader middle market.
Turning to the investment portfolio at the end of the first quarter the size of our portfolio at fair value was $2 4 billion across our highly diversified set of 138 companies operating across 30 different industries.
Our portfolio primarily consists of investments in first lien senior secured loans, given our focus on downside management and investing in the topic of capital structures.
As of March 31, 66% of the investment portfolio at fair value was invested in first lien debt.
4% in second lien debt, 2% in subordinated debt, 3% in preferred equity.
11% in equity and other interests and 14% across our joint ventures.
<unk>, 10% in the <unk> and 4% in <unk>.
As we have highlighted to our shareholders in previous quarters. The decline in our stated first lien exposure has come down given the growth of our investment vehicles.
Importantly, 95% of the underlying investments held in the investment vehicles consisted of first lien loans, resulting in a look through first lien exposure of 82% the portfolio.
We remain focused on investing in debt structures that provide us with strong lender control.
93% of our debt investments are structured with documentation containing financial covenant tied to management forecast.
And we have majority control positions and 80% of our debt tranches, allowing us to drive eventual outcomes at our discretion.
As of March 31, 2023, the weighted average yield of the portfolio at amortized cost and fair value were 12, 3% and 12, 5%, respectively as compared to 11, 4% and 11, 6% respectively as of December 31, two.
2022.
The increase was primarily driven by higher reference rates on our loans.
Our portfolio yields are also meaningfully higher on a year over year basis, and up approximately 440 basis points year over year.
While the primary increase to our yields over this period has been from reference rates, we have seen modest spread widening across our portfolio as we have been originating new loans in recent quarters at higher spreads.
The weighted average spread on our total debt investments is approximately 670 basis points.
Up approximately 20 basis points from one year ago.
94% of our debt investments bear interest at a floating rate positioning the company favorably as interest rates have continued to rise beyond reference rate floors across our loan.
Yeah.
During the quarter, we continued to execute on our investment strategies within our joint ventures on investing in senior secured middle market loans, we continue to see the benefits of higher interest rates flowing through the JV as nearly all of our investments are floating rate loans.
Our JV investments represented 14% of our overall portfolio.
Fair value, including 10% in the <unk> and 4% in SLP.
During the quarter, our investment in the <unk> increased from a 2% position size to nearly 4%.
We demonstrated.
<unk> performance on our JV is in line with our target expectations.
Over the trailing 12 quarters <unk> generated an annualized income return on equity of 11%.
And the MLP generated an annualized income return on equity of 20%.
Our investment in the MLP can grow over time, as we identify attractive investment opportunities driving the potential for incremental earnings growth for the company.
Yeah.
<unk> investment portfolio at fair value as of March 31 was approximately $672 million comprised of investments in 39 portfolio companies operating across 18 different industries.
96% of the investment portfolio wasn't senior secured floating rate loans, including 94% in first lien, 3% in second lien and 3% and equity interest.
As of March 31, <unk> investment portfolio at fair value was approximately $685 million comprised of investments in 53 portfolio companies operating across 23 different industries.
100% of the investment portfolio was invested in senior secured loans, including 97% in first lien and 3% and secondly.
Moving onto portfolio credit quality trends, they were stable quarter over quarter.
Within our internal risk rating scale, 91% of our portfolio at fair value as of March 31 was comprised of risk rating, one and two investments, indicating that the company was performing in line or better than expectations relative to our initial underwriting.
Risk rating three investments comprised 8% of our portfolio at fair value. These investments reflect the companies that have been impacted by inflationary impacts and rising interest rates.
We remain focused on watching these companies closely.
Risk rating for investments comprise less than 1% of our portfolio at fair value and include two portfolio companies on nonaccrual.
No new investments were added to nonaccrual during the quarter.
Overall, we believe our credit fundamentals remain solid our median leverage attachment point is four 9% as of March 31 down from five 1% as of December 31.
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 2023 results with our income statement.
Total investment income was $74 7 million for the three months ended March 31st 2023, as compared to $62 4 million for the three months ended December 31st 2022.
Increase in investment income was primarily driven by the benefit of rising interest rates across our large portfolio of senior secured floating rate loans.
ACS that has high quality sources in investment income largely driven by contractual cash income or profit.
Interest income and dividend income represented 93% of our total investment income in Q1 with prepayment related income representing less than 1%.
Other income comprised 7% I'm sorry.
Total investment income that was driven by certain onetime fees on newly origination.
And kind of pick income remains low at 6% of our total and up anytime.
Total expenses for the first quarter were $42 million as compared to $37 3 million in the fourth.
The increase in expenses was driven by higher interest and debt financing expenses due to higher base rates on our floating rate debt structures and greater incentive fee.
Net investment income for the quarter was $32 $2 million or <unk> 50 per share as compared to $24 2 million or <unk> 37 per share for the prior quarter.
During the three months ended March 31, 2023, the company had net realized and unrealized losses of $2 $9 million.
Net income for the three months ended March 31st 2023, with $29 $3 million or <unk> 45 per share.
Moving over to our balance sheet as of March 31, our investment portfolio at fair value totaled $2 $4 billion and total assets of $2 6 million.
Total net assets were $1 1 billion as of March 31.
NAV per share was $17 37 up from $17 29 at the end.
The fourth quarter.
Representing a 50 basis point increase quarter over quarter.
The increase in our NAV was driven by the out earning our dividend coupled with the relative stability in the value of our investments during the quarter.
At the end of Q1, our debt to equity ratio was 186 times relatively unchanged from the end of Q4.
Our net leverage ratio, which represents principal debt outstanding of cash was one nine times at the end of Q1 as compared to 1.14 times at the end of Q4.
We are comfortable operating in the middle of our net target leverage ratio between one and one five times.
We remain focused on the continued execution of our financing strategy for the company, which focuses on durable and long term capital structures.
As of March 31, approximately 58% of our outstanding debt and floating rate debt and 42% in fixed rate debt.
During the first quarter, our adviser loan matured at the end of March.
This was a three year loan that Bain capital credit provided to Bcf, that's carrying a significant elevated period of volatility in 2020.
Looking ahead.
<unk> does not have any debt maturities until 2026, and the weighted average maturity across our total debt commitments with five years at March 31 2023.
Liquidity at quarter end included $185 million of Undrawn capacity on our revolving credit facility.
$1 million of cash and cash equivalents, including $51 million of restricted cash and $36 million of entitle change net of receivables and payables.
For the three months ended March 31 2023.
Weighted average interest rate on our debt outstanding was 5% as compared to four 3% as of the prior quarter end.
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, a lot Sally.
Before we close we wanted to highlight that we believe UCSF stock price offers a very compelling value to shareholders.
And we believe a higher valuation should be warranted in the market.
Based on our current dividend yield UCSF stock is yielding 13% on a portfolio of largely first lien senior secured floating rate loans.
Bain capital credit brings 25 years of experience investing in the middle market and has demonstrated solid credit quality with low losses, and non accrual rates since our inception.
As we mentioned earlier during our prepared remarks, we believe the company is well positioned to generate strong levels of net investment income in excess of our dividend as we demonstrated this quarter with our earnings are well exceeding consensus expectations.
We remain confident and committed to delivering value for our shareholders through producing attractive ROA and.
And thank you for the privilege of managing our shareholders' capital.
Colin Please open the line for questions.
Thank you, ladies and gentlemen, we will now conduct a question and answer session. If you'd like to ask a question. Please press star followed by one on your telephone keypad, if you'd like to withdraw. Your question. Please press star followed by two if you're using a speaker phone. Please lift the handset before pressing any keys one moment for your first question.
Okay and your first question comes from Finian O'shea from Wells Fargo. Please go ahead.
Hi, everyone. Good morning the.
First.
Question on the joint venture returns does.
That improvement.
Sort of reflect a run rate or was there any.
Any one off type item or change in district policy for example that elevated the returns this quarter.
So there is a slight a slight increase driven by new origination activities for those for those joint ventures. So there is no origination fees that do flow through and help improve the economics as.
As we look at the MLP return for example at 20%.
Say the run rate is in the high teens and there was a couple of hundred basis points of improvement driven by those.
Origination fees.
But we do continue to think going forward that we'll be able to generate those teens level returns from the joint ventures.
Thanks, guys that's helpful.
Can you remind us the.
As the origination function.
Independent.
From <unk>.
The CSF or is it a material amount of it.
Dropdowns.
And if so what.
What percent of your or number amount of your exits this quarter were dropdowns to jb's.
Sure. It's a good question. So the majority of the originations are dropdowns from the Dcs that balance sheet. So if you look at our sales and repayment number for this quarter about 60% of that activity was dropping assets down into the joint ventures.
Is that.
Yeah.
Newer stuff or older stuff or a mix.
It's primarily newer newer assets that are originated.
Okay. Thanks.
And can you touch on the.
The.
Idea for the <unk>.
<unk> addition to the sub notes.
It did.
It didn't look like that portfolio grew.
Too much at least in the context of how much more money was put in so.
What was the idea there.
Sure. So the investments that <unk> makes in the S&P is a combination of sub notes and common equity and so when we're contributing incremental.
Incremental assets and increasingly exposure it'll be it will be a pro rata strip of both those sub notes and equity and that helps to drive card income through both interest income on the subordinated notes, but that dividends that are routinely paid out through the equity.
Okay.
So capital structure was constant.
And <unk>.
Leverage is I guess is coming.
Coming down a little bit effectively given that sort of.
Equity in practice do I have that right.
Yes, that's the right way to think about it.
Okay.
And I guess just final question for me. Thank you I know you've asked a few.
As to the sort of closing remarks on the stock not.
Sure.
Trading.
Close enough to book or the industry can you.
Give us an update on your thought on share repurchases.
Sure and it's certainly something that we are.
Evaluate on a constant basis, and we kind of look at how much value is there in terms of NAV accretion or otherwise in terms of buying.
Shares below NAV versus how much can we generate from investing in today's market environment.
As you'll know to date, we have not made any share repurchases, but it is something we continue to evaluate with our board.
Yeah.
Thanks, so much thanks.
Thanks, Dan.
Yeah.
Ladies and gentlemen, as a reminder, should you wish to ask a question. Please press star followed by one.
Okay and there are no further questions at this time I will turn it back actually one just popped in okay. We have a question from Derek Hewett from Bank of America. Derek. Please go ahead.
Good morning, everyone I hopped on a little late.
But could you talk about the incentive fee and when it will begin to normalize given the look back deferrals.
Okay.
Okay.
Thank you.
Okay. There are no further questions at this time I'll turn it back to Michael.
Great. Thanks, Paul and again, thanks, everyone for joining the call today. We appreciate you taking time out of your busy mornings here to listen to us and certainly takes if theres any more questions. Please do reach out and we look forward to bringing you more news on our on our efforts in the future. Thanks very much bye bye.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.