Q3 2024 Bain Capital Specialty Finance Inc Earnings Call

Speaker Change: Your program is about to begin. Should you require operator assistance during today's program? Please press star zero.

Speaker Change: Good day everyone and welcome to today's main capital specialty finance third quarter and it's September 30th, 2024, earnings conference call.

At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your telephone keypad.

Speaker Change: Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn today's program over to Kathryn Schneider with Investor Relations.

Kathryn Schneider: Thank you, Brittany, and good morning, everyone, and welcome to the Bain Capital Specialty Finance third quarter ended September 30, 2024 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 Finance's 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 webcast are property of Bain Capital Specialty Finance and any authorized 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 factor section of our Form 10-2 that could cause actual results to differ materially from those indicated.

Kathryn Schneider: 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 Ewald.

Michael Ewald: Thanks, Catherine, and good morning and thanks to all of you for joining us here today on our earnings call. I'm joined today by Mike Boyle, our President, and our Chief Financial Officer, Amit Joshi.

In terms of the agenda for the call, I'll start with an overview of our third quarter and its September 30, 2024 results, and then provide some thoughts on our performance, the overall market environment, and our positioning.

Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail. And as usual, we'll also leave some time for questions at the end.

Michael Ewald: So yesterday after market close, we delivered strong third quarter results. Q3 net investment income per share was $0.53, as we continued to benefit from high base interest rates across our portfolio.

Michael Ewald: Our net investment income return represented an annualized yield of 11.9% on book value and covered our regular dividend by 126%.

Michael Ewald: Q3 earnings per share were 51 cents, or an annualized return on equity of 11.5%, as credit fundamentals remained healthy across our portfolio.

Michael Ewald: As of September 30th, our net asset value per share was $17.76, an increase of 0.3% from the prior quarter end.

Michael Ewald: Subsequent to quarter end, our board declared a fourth quarter dividend equal to 42 cents per share and payable to record date holders as of December 31st, 2024.

Michael Ewald: The Board also declared an additional dividend of three cents per share for shareholders of record as of December 31st, as we'd previously announced back in February.

Michael Ewald: This brings total dividends for the fourth quarter to $0.45 per share, or a 10.1% annualized rate on ending book value as of September 30th, which we believe represents an attractive yield for our shareholders.

Michael Ewald: Turning now to the market environment, during the third quarter we continued to see active deal flow with increased transaction levels, driven by both M&A and new LBO activity, as volumes returned to levels comparable to historical periods.

Michael Ewald: Based on current market conditions, we would expect these trends to continue into 2025, supported by the large amount of private equity dry powder, pressures for private equity sponsors to return capital back to their investors, and a likely lower interest rate environment from the higher levels seen in recent years.

Michael Ewald: Our private credit group's long-standing presence in the middle market, combined with our strong focus and expertise across myriad industries, enables us to generate an attractive deal pipeline while remaining highly selective in our investments.

Michael Ewald: Gross Originations during Q3 were $413 million, up 278% year-over-year, and approximately 35% from Q2 levels of $307 million.

Michael Ewald: While the private credit market continues to experience significant growth as many private lenders have moved up market, we continue to see attractive opportunities to source and underwrite investment opportunities in the core middle market and serve as a value-added capital provider and business partner to growing businesses.

Michael Ewald: We value this segment of the market given its stable size, premium, and insulation to large market volatility.

Michael Ewald: Across our origination's two new platforms during the third quarter, the median EBITDA of our borrowers was approximately $33 million, consistent with our core borrower EBITDA focus of between $25 and $75 million.

Michael Ewald: Relative value remains attractive on new investments within this segment of the market.

Michael Ewald: While we have seen some recent spread compression across the broader market this year, terms and structure continue to be attractive. The weighted average yield on Q3 investments to new companies was 10.7%, with the median leverage levels of 4.5 times on these new originations.

Michael Ewald: 96% of our Q3 originations to new companies were structured with documentation containing financial covenants tied specifically to management's forecasts and we have majority control positions in nearly 87% of these debt tranches allowing us to drive eventual outcomes at our discretion.

Michael Ewald: These statistics are consistent with our broader portfolio showing our continued focus on these core tenets of our investing strategy.

Moving on to credit quality, our portfolio companies continue to exhibit strong fundamental performance in the current market environment.

Leverage statistics across our borrowers remain healthy at 4.8 times overall based on our portfolio company median levels. Interest coverage also remains solid across our portfolio at approximately 1.7 times a quarter end despite continued elevated base rates.

Michael Ewald: Investments on non-accrual remain low across the portfolio with just 1.1% of the total portfolio at fair value.

Michael Ewald: Credit risk rating trends were also stable during the quarter with only a small percentage of our portfolio underperforming and on our watch list.

Michael Ewald: We believe our strong track record of solid company performance is a testament to Bain Capital's disciplined and highly selective underwriting process.

Michael Ewald: Lastly, at the end of the third quarter, our gross and net leverage ratios for BCSF were 1.14 times and 1.09 times, respectively, which falls in the middle of our target leverage ratio of 1.0 to 1.25 times, and position us well with ample dry powder to capitalize on new investment opportunities in the current environment.

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

Mike Boyle: Thanks Michael and good morning everyone. I'll start with our investment activity for the third quarter and then provide an update on our current portfolio.

Mike Boyle: New fundings during the third quarter were $413 million into 83 portfolio companies, including $331 million into 16 new companies and $82 million into 67 existing companies.

Michael Ewald: Sales and repayment activity totaled approximately $248 million, resulting in net investment funding of $165 million in the quarter.

Speaker Change: This quarter we remain focused on investing in first lien senior secured loans with 97% of our new investment fundings in first lien structures and 3% in preferred or common equity.

Speaker Change: As Michael highlighted earlier in the call, new investments made in the quarter were 80% to new portfolio companies and 20% to existing or incumbent companies.

Speaker Change: We added 16 new companies this quarter, which led to an improvement in our single name company diversification to 159 different companies in the current portfolio.

Speaker Change: In making new investments, we leverage Bain Capital's deep industry expertise across a wide range of sectors, including industries such as hotel gaming and leisure, aerospace and defense, and business services.

Speaker Change: Our sponsor relationships often value Bain Capital's knowledge base across a wide spectrum of industries, including specialized industries, which enable us to be a value-added partner to private equity sponsors through multiple cycles.

Michael Ewald: Turning now to our current investment portfolio, at the end of the third quarter, the size of our portfolio fair value was approximately $2.4 billion across a diversified set of 159 companies operating across 31 industries.

Michael Ewald: Our portfolio primarily consists of firstly in senior secured loans given our focus on downside management and investing in the top of the capital structure.

Michael Ewald: As of September 30th, 63% of the portfolio fair value was invested in first lien debt, 3% in second lien debt, 2% in subordinated debt, 7% in preferred equity.

Michael Ewald: 9% in equity and other interests, and 16% across our joint ventures, including 10% in the ISLP and 6% in the SLP.

Michael Ewald: The vast majority of our underlying investments within both of these joint ventures are first lien loans.

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Michael Ewald: As of September 30th, the weighted average yield of the investment portfolio at amortized costs was 12.1%.

Michael Ewald: as compared to 13.1% as of June 30th.

Michael Ewald: This decline in yields was partially driven by the decrease in base rates, which contributed about 38 basis points to this yield decline, but it was primarily driven by the decrease in dividends from our aviation portfolio and our joint ventures.

Michael Ewald: It's worth noting that the spread on our debt investments remain relatively constant quarter over quarter.

Michael Ewald: from 663 basis points over SOFR in Q2 to 653 basis points over SOFR in Q3.

Speaker Change: See you next time! Bye! Bye! Bye! Bye!

Michael Ewald: and many more. Thank you. Thank you. Thank you. Thank you.

Speaker Change: Ninety-one percent of our debt investments bear interest at a floating rate, which positions the company favorably in today's higher interest rate environment.

Speaker Change: and Michael Boyle. Thank you. Thank you.

Michael Ewald: Moving now to portfolio credit quality trends, our fundamentals remain healthy.

Michael Ewald: As highlighted earlier, Portfolio Company Fundamentals exhibited solid trends with a median net leverage across our portfolio of 4.8 times at quarter end versus 4.7 times in the prior quarter.

Michael Ewald: Credit quality trends within our internal risk rating scales were also stable quarter over quarter.

Michael Ewald: Risk rating 1 and 2 investments, which indicate that the company was performing in line or better than expectation, totaled 96% of our portfolios of September 30th, as compared to 97% in the prior quarter.

Michael Ewald: Risk Grading 3 and 4, or underperforming investments, comprise just 4% of our portfolio at fair value.

Michael Ewald: Investments on non-accrual represented 1.9% and 1.1% of the total investment portfolio at amortized cost and fair value respectively as of September 30th. This is compared to 1.2% and 1.0% respectively as of June 30th.

Michael Ewald: Lastly, we would highlight the performance across our aggregate 120 plus companies within our underlying joint ventures continue to perform well and consistent with our broader portfolio.

Speaker Change: I'll now turn the call over to Amit, who will provide a more detailed financial review.

Amit Joshi: Thank you, Mike, and good morning, everyone. I'll start the review of our third quarter 2024 results with our income statement.

Amit Joshi: Total investment income was $72.5 million for three months ended September 30, 2024 as compared to $72.3 million for the three months ended June 30, 2024. The increase in investment income was primarily driven by an increase in other income.

Amit Joshi: Our investment income continues to benefit from high quality source of investment income, largely driven by contractual cash income across its investments.

Michael Ewald: Interest income and dividend income represented 92% of our total investment income in Q3.

Michael Ewald: Total expenses before taxes for the third quarter were 37.5 million as compared to 38 million in the second quarter.

Michael Ewald: Net investment income for the quarter was $34 million or $0.53 per share as compared to $33.1 million or $0.51 per share for the prior quarter.

Michael Ewald: During the three-month-ended September 30, 2024, the company had net realized and unrealized losses of $900,000.

Michael Ewald: Net income for three months ended September 30, 2024 was $33.1 million or $0.51 per share.

Michael Ewald: Moving over to our balance sheet, as of September 30th, our investment portfolio at fair value total $2.4 billion and total assets of $2.5 billion.

Michael Ewald: Total net assets were $1.1 billion as of September 30, 2024.

Michael Ewald: NAF per share was $17.76, an increase of $0.06 per share, or a 0.3% increase from $17.70 at the end of second quarter, as we demonstrated strong NII over-earning of our dividend coupled with stable credit quality across our portfolio.

Michael Ewald: At the end of Q3, our debt to equity ratio was 1.14 times as compared to 1.03 times for the end of Q2.

Michael Ewald: A net leverage ratio, which represents principal debt outstanding less cash and unsettled trade, was 1.09 times at the end of Q3, as compared to 0.95 times at the end of Q2.

Michael Ewald: As of September 30th, approximately 54% of our outstanding debt was in floating rate debt and 46% in our fixed rate debt.

Michael Ewald: Our debt funding continues to benefit from low fixed rate debt structures.

Michael Ewald: For the three months ended September 30th, 2024, the weighted average interest rate on our debt outstanding was 5.1%, as compared to 5.1% as of the prior quarter end.

Michael Ewald: The weighted average maturity across our total debt commitment was approximately 4.5 years at September 30, 2024.

Michael Ewald: Liquidity at quarter-end total $562 million including $501.3 million of undrawn capacity on a revolving credit facility.

Michael Ewald: 59.8 million of cash and cash equivalent including 29.3 million of restricted cash and around 600,000 of unsettled trade net of receivables and tables of investment

Michael Ewald: Subsequent to quarter end, our board declared a fourth quarter 2024 dividend equal to $0.42 per share and a special dividend, as previously announced, of $0.03 per share, bringing total Q4 dividend to $0.45 per share.

Michael Ewald: Both dividends are payable on January 31st, 2025 to stockholders of record date on December 31st, 2025.

Michael Ewald: As a reminder, our board declared a total of 12 cents per share additional dividend driven by our strong over-earning in 2023.

Michael Ewald: These special dividends have been paid out in installments of $0.03 per share per quarter throughout the year.

Michael Ewald: We currently estimate that our spillover income total is approximately $1.13 per share, representing over two times of our quarterly regular debris.

Michael Ewald: We will continue to monitor our undistributed earning against student capital management considerations.

Speaker Change: With that, I'll turn the call back over to Michael Ewald for the closing remarks.

Speaker Change: Thank you. Thank you.

Michael Ewald: Thanks, Amit. In closing, we are pleased to deliver another strong quarter of attractive earnings for our shareholders with NII well in excess of our dividend and steady NAV growth as our underlying borrowers continue to perform well.

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

Michael Ewald: As always, we thank you for the privilege of managing our shareholders' capital. Brittany, please open the line for questions.

Brittany: Of course, at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 if you would like to ask a question. We will take our first question from Paul Johnson with KBW. Your line is now open.

Paul Johnson: The 100 basis points or so, quarter over quarter. What was kind of the interplay of the decline in yield sort of due to some sort of...

Paul Johnson: Lower reset on the base rates versus you know spread compression. It sounded like in your comments the spreads were actually fairly stable Quarter over quarter, so just kind of like get a sense of what's driving the yield decline

Speaker Change: Thank you for listening. Thank you.

Speaker Change: and many more. Thank you. Thank you.

Speaker Change: Sure. Thanks for the question, Paul. So as we noted, about 38 basis points of that yield decline was driven by lower base rates.

Speaker Change: There was another about 10 basis points that was driven by the decrease on spreads on the credit assets in the portfolio.

Speaker Change: So, fairly stable, as you noted, as we spoke about in our prepared remarks.

Speaker Change: The biggest step down in yield was really driven by the dividend income.

Michael Ewald: that was earned in BCSF quarter over quarter. So about 6.1 million was earned in Q3 versus about 8.2 million earned in the prior quarter. And that's also was really driven by both our aviation, our aviation.

Michael Ewald: investment called Gale where we did not distribute all of the earnings there. We decided to invest some into the Pleated Plains and so that drove some of the step down as well as a slight step down in some of the dividends earned from our joint ventures.

Michael Ewald: So it was primarily just driven by those dividends, not actual degradation in the spreads of the assets that were originating.

Speaker Change: how do you guys think about I mean the your pipeline I mean in terms of spreads and where that's shaping up to kind of the the average spread in in the portfolio at this point seems like M&A from what you're saying at least is picking up

Speaker Change: Do you expect, you know, there to be some more spread compression in the portfolio as the portfolio turns into next year?

Speaker Change: [inaudible] I'm sorry, I'm sorry, I'm sorry

Speaker Change: Thanks, Paul. Look, I think a lot of the spread compression has kind of played out during the course of this year. I think what we're seeing now is a lot more

Speaker Change: bifurcation in spreads based on the quality of the credit, which is certainly helpful to see.

Michael Ewald: So I think the well-banked sponsor with an A-plus credit.

Michael Ewald: average deal or the sponsor that hasn't gotten as much coverage or you know maybe lenders having left our core middle market and gone up market you leave a little bit more room for us to operate I think there will still see spreads hang in pretty similar to the numbers that we saw this quarter

Speaker Change: Thanks for that. And then, I mean, in terms of the private credit premium, yield premium, you know, to the syndicated markets,

Speaker Change: How do you guys think about the international private credit market? Do you see that market as potentially a little bit more insulated with the premium that private credit gets over the bank syndicated market?

Michael Ewald: due to more competition in the middle market here in the U.S., or I'm just curious if there's any kind of relation between the two.

Michael Ewald: Our assets and the more typical probably syndicated loan market

Speaker Change: That same relationship doesn't necessarily exist in Europe, just because neither the markets, quite frankly, neither the syndicated market nor the private credit market is as developed over there, so it's harder to kind of benchmark one versus the other. What I would say, though, is in today's environment from a relative value perspective,

Michael Ewald: Spreads are fairly similar right now between the U.S. and Europe.

Michael Ewald: interest, especially in the larger cap market. We're not seeing as much in our core middle market. You are seeing that pressure in Europe in the core middle market. And so if, you know, you're thinking like for like the spreads are the same, but, you know, there's a demand for pick optionality in Europe that makes your marginally less attractive.

Speaker Change: and their credit scoring of investments. I mean, there's 11 companies rated 3 and 4 this quarter versus 8.

Speaker Change: last quarter, there was a small increase in non-accruals. So what was the driver of just the number of companies rated 3 and 4? Is that just the companies going on non-accrual or is there any more there?

Speaker Change: Yeah, I'd highlight it's still quite idiosyncratic, so there are some companies that are, it's not necessarily going on non-accrual, it's just companies that are going on our watch list.

Speaker Change: for performance under the original underwrite, but I noted it's not concentrated in any industry or really any theme that's been pulling through. It has still been quite idiosyncratic in that small percentage of our portfolio that's risk rating three and four.

Speaker Change: Got it. Thanks. And then this last one for me real quick. The 2.8 million small realized net gain or realized gain in the portfolio this quarter, was there anything in particular that drove that? Was there an exit of any investments?

Speaker Change: and many more. Thank you. Thank you.

Speaker Change: Yeah, so it was the exit of an investment called Black Brush, which was a restructuring that happened during COVID that we finally completed the sale and exit at well above our par value, and we took the keys there. So it was that legacy exit from that company called Black Brush.

Speaker Change: Got it. Thanks. Thanks. That's all for me, and congrats on a good quarter.

Speaker Change: Thank you all.

Speaker Change: And once again, that is star and one. If you would like to ask a question, we will pause for just a moment to allow additional questions to queue.

Speaker Change: and many more. Thank you. Thank you.

Speaker Change: and many more. And I'm sure you'll be able to find them all. So, thank you for watching. I hope you enjoyed this video. If you did, please give it a thumbs up and subscribe to our channel. And I'll see you in the next video.

Speaker Change: and we'll take our next question from Derek Hewitt of Bank of America. Your line is open.

Derek Hewitt: Good morning, everyone, and congrats on the good quarter. Could you talk about your plans to address the $300 million of bonds that mature in early 2026? Are you going to use your credit facility to take care of that maturity? Are you interested in—

Speaker Change: tapping the unsecured market again later on next year.

Speaker Change: Yeah, I mean...

Speaker Change: We are prudently talking to all our banking partners, we are in continuous dialogue with them and I would say our intent would be to access the market in 2025, as you highlighted we have two

Speaker Change: Unsecured, which will mature in 2026.

Speaker Change: We definitely will access the market, but at the same time, as you saw, we did increase our revolving facility, so between those two, we'll prudently manage our liability.

Speaker Change: Thank you.

Speaker Change: and many more. Thank you. Thank you.

Speaker Change: Thank you. And once again, that is star and one if you would like to ask a question. And we'll pause for just an additional moment.

Speaker Change: and many more. Thank you. Thank you.

Speaker Change: It appears we have no further questions in the queue. I'll turn the program back over to Michael Ewald for any additional or closing remarks.

Michael Ewald: Thanks, Brittany, and thanks again to all of you for joining us on our call today. Again, we're very pleased with the results of the third quarter, and we look forward to bringing you more news at the end of next quarter. Hope everyone has a good day. Thanks.

Michael Ewald: and many more. Thank you. Thank you.

Michael Ewald: and many more. Thank you. Thank you.

Speaker Change: Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.

Speaker Change: Of course, the video was made for 설명 and teaching purpose only and are absolutely not authentic.