Q3 2025 Bain Capital Specialty Finance Inc Earnings Call

Speaker #1: At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session.

Speaker #1: Please note today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Katherine Schneider, with Investor Relations.

Speaker #1: Please go ahead.

Speaker #2: Thanks, Chloe. Good morning, everyone, and welcome to the Bain Capital Specialty Finance, third quarter ended September 30th, 2025, conference call. Yesterday, after market close, we issued our earnings press release and investor presentation of our quarterly results.

Speaker #2: 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.

Speaker #2: This call is being webcast, and a replay will be available on our website. This call and the webcast are the property of Bain Capital Specialty Finance, and any unauthorized broadcast in any form is strictly prohibited.

Speaker #2: 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 that are identified in the risk factor section of our Form 10-Q that could cause actual results to differ materially from those indicated.

Speaker #2: 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.

Speaker #2: So with that, I'd like to turn the call over to our CEO, Michael

Speaker #2: Ewald: Thanks, Katherine, and good morning. And thank you.

Speaker #3: Thank you all for joining us on our earnings call here today. Before continuing with our regular programming, we do want to take a moment just to recognize anyone on the call who has served or is currently serving in our armed services.

Speaker #3: We genuinely appreciate your service and want to recognize you today on Veterans Day. Thank you. I'm joined today by Mike Boyle, our President, and our Chief Financial Officer.

Speaker #3: I met Joshi as usual in terms of the agenda for the call. I'll start with an overview of our third quarter results, and then provide some thoughts on our performance, the current market environment, and our positioning.

Speaker #3: Thereafter, Mike and Amit will discuss our investment portfolio, and financial results in greater detail. And we'll leave some questions, some time for questions at the end.

Speaker #3: Yesterday, after market close, we delivered another quarter of solid results for the third quarter ended September 30th. Q3 net investment income per share was $45.

Speaker #3: Representing an annualized yield on book value of 10.3% and exceeding our regular quarterly dividend by 7%. Q3 earnings per share were $0.29, reflecting an annualized return on book value of 6.6%.

Speaker #3: Our net asset value per share was $17.40, a decline of 16 cents per share from the prior quarter end. This modest decline in our NAV this quarter was primarily due to a markdown on one of our loans that was idiosyncratically driven and not reflective of any broader credit issues apparent across our broader portfolio.

Speaker #3: 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 16th, 2025.

Speaker #3: The board also declared an additional dividend of $0.03 per share for shareholders of record as of December 16, 2025, as we previously announced in February.

Speaker #3: This brings total dividends for the fourth quarter to 45 cents per share or a 10.3% annualized rate on ending book value as of September 30th.

Turning to our outlook on earnings and dividend coverage in light of market expectations for a lower interest rate environment ahead.

First, as a reminder, when we increased our regular dividend level throughout 2022 and 2023, we set our dividend policy at an attractive level for shareholders between 9% and 10%, and to a level that we believe could be earned throughout multiple market environments.

Since then, we've been operating with meaningful net investment income dividend coverage.

We provided excess income that has been distributed to our shareholders via supplemental dividends and also increased retained earnings, driving healthy spillover income. This is equal to 1.46 cents per share, or three times our regular dividend level.

Our Q3 net investment income has come down relative to Peak levels in Prior periods, largely due to the decrease in base rates, but notably still exceeds our regular dividend level.

In the current environment. We believe we can maintain our regular 42 Cent per share dividend.

The company has several earnings levers to potentially offset headwinds next year from a lower rate environment and our fixed-rate debt maturities in 2026. Beginning in March,

These future growth. Levers include

Higher earnings from select joint venture and abl Investments through the senior Loan program, SLP and Legacy, corporate lending, as our current dividend payout from those structures has been lower relative to their run rate earnings potential.

second higher levels of prepayment related income and other income is New, m&a, Deal volumes increase,

And finally, leveraging our private credit group platforms, we focus on the core Middle Market to drive attractive spreads on new investments. We also select to invest in junior debt investments, as our flexible capital in today's market environment can be a valuable tool for Middle Market borrowers.

Taking all of this together, with the solid credit performance that we've demonstrated over the years, we believe the company is well-positioned to continue driving attractive results for our shareholders.

Furthermore, we believe our current stock price valuation offers a compelling opportunity relative to our credit fundamentals.

At bcss current market price. As of yesterday's, close our dividend yields inclusive of our regular and special dividend for Q4. Represents a 13% annualized yield

We believe this is an attractive level for investors. On both an absolute and relative value basis across the BDC sector.

I will now turn the call over to Mike boil our president to walk through our Investment Portfolio in Greater detail. Mike.

Thank you, Mike and good morning, everyone.

I will start with our investment activity for the third quarter and then provide an update and more detail on our portfolio.

New investment funding, during the third quarter were 340 million into 101, portfolio companies, including 124 million in 14, new companies, 210 million in 86, existing companies, and 6 million into our SLP.

Sales and repayment activity totaled approximately $296 million, resulting in net investment funding of $44 million quarter over quarter.

Our new investment funding was comprised of 36% for new companies and 64% for existing portfolio companies.

Firstly, senior secured loans, continue to comprise the vast majority of our new Investments presenting 89% of our new investment fundings.

And the remaining 11% was comprised of 3% into second lean loans, 1% in subordinated debt.

5% in preferred income in equity and 2% in our investment vehicles.

We remain selective in our underwriting approach and continue to favor, Middle Market size, companies within the core Middle Market.

While the market environment remains competitive with spread compression, continuing in the broader Market, We Believe Bank Capital remains, well, positioned to Source New Opportunities, given our platform's breath at scale and longevity in the core Middle Market.

As Michael Ewald highlighted earlier, the weighted average spread of our Q3 originations to new companies was approximately 500 to 50 basis points.

We were also particularly active this quarter in providing add-on capital to existing portfolio companies.

which resulted in a weighted average spread across all of our originations in the quarter of 610 basis points over base rates,

Our new investments during the quarter continued to favor defensive industries such as healthcare and pharmaceuticals, aerospace and defense, and wholesale.

Turning to the Investment Portfolio, at the end of the third quarter, the size of our portfolio. At fair value was approximately 2.5 billion across. A highly Diversified set of 195. Portfolio companies operating across 31 different Industries

Our portfolio primarily consists of investments in first lien, senior secured loans. Given our focus on downside management and investing at the top of capital structures.

4% of the Investment Portfolio. At fair value was invested in first lean debt. 1% in second, lean debt 4% subordinated, debt. 6% in preferred Equity 9% in equity, and other interests, and 16% across our joint ventures, including 9% in the islp and 7% in the SLP.

Both of which have underlying Investments primarily consisting of firstly loans.

As of September 30th 2025 the weighted average yield on the Investment Portfolio at amortized cost. And fair value was 11.1% and 11.2% respectively as compared to 11.4% and 11.4% respectively, as of June 30th, 2025 the decrease in yields was primarily driven by a decrease in reference rates across our portfolio as 93% of our debt Investments. Be fair interest at a floating rate.

Moving on to portfolio. Credit quality Trends credit fundamentals, remain healthy median. Net leverage across our Borrowers is 4.7 times as of quarter end down from 4.9 times as of the prior quarter end

Media and ebit off was 46 million and which was relatively unchanged from the prior quarter end.

Watch list Investments as a percentage of our overall portfolio have remained stable quarter over quarter as indicated by our internal risk rating scale. These Investments include our risk rating, 3 and 4 Investments, which comprised 5% of fair value, our underlying poor filler companies. Within this category have also remained stable, we have not seen a large, migration of any new names down the credit risk rating scale.

Investments on non-accrual represented, 1.5% and 0.7% of the total Investment Portfolio at amortized cost and fair value respectively, as of September 30th, this is in compared to 1.7% and 0.6% respectively as of June 30th.

Turning it now to Emit, who will provide a more detailed financial review.

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

Total investment income was $57.2 million for the three months ended September 30, 2025, as compared to $71 million for the three-month period ended June 30, 2025. The decrease in investment income was primarily driven by a decrease in other income from lower activity levels during the quarter.

The quality of our investment income continues to be high, as the vast majority of our investment income is driven by contractual cash income across our investments.

Interest income and dividend income represented. 98% of our total investment income in Q3

Take income represents 11% of our total investment income in Q3 notably. The vast majority of our take income is derived from investments that were underwritten with P. Only a small portion of our pay income is related to amended or restructured investment.

Total expenses before taxes for the third quarter were $37.2 million, compared to $39.3 million in the second quarter. The decrease in expenses was driven by a lower incentive fee, resulting from our three-year look back on our incentive fee hurdle, as well as lower interest and debt fee expenses.

Net investment income for the quarter was 29.2 million or 45 cents per share as compared to 30.6 million or 47 cents per share for the prior quarter.

During the three-month period ending September 30, 2025, the company reported net realized and unrealized losses of $10.5 million.

As my highlighted earlier, our net losses, this quarter was primarily driven by 1 of our portfolio company investment and not broad-based across our portfolio.

Net income for the 3-month ended. September 30th 2025 was 18.7 million or 29 cents per share.

Moving over to our balance sheet, as of September 30th, our Investment Portfolio, at fair value, total 2.5 billion and total asset of 2.7 billion.

Total net assets was 1.1 billion as of September 30th 2025.

Nap per share was 17.40, cents a decrease of 16 cents per share from 17.56 cents at the end of second quarter.

As of September 30th, approximately 60% of our outstanding debt was floating rate. Debt. And 40% was in fixed rate debt.

Was 4.8% as compared to 4.9% as of the prior quarter end, the weighted average maturity across our debt investment was approximately 3.4 years at September 30th 2025.

At the end of Q3, our debt to equity ratio, was 1.33 times as compared to 1.37% from the end of Q2, our net leverage ratio which represents principal debt outstanding less cash and unsettled trade was, 1.23 times at the end of Q3 as compared to 1.2 times at the end of Q2.

Liquidity at quarter end was strong totaling 570 million, including 457 million of undrawn capacity. On our revolving credit facility, 86.8 million of cash and cash equivalent, including 26.2 million of restricted, cash and 26.5, million of unsettled trade, net of receivables and tables of investment.

With that, I'll turn the call back over to Mike Ewald for closing remarks.

Thanks so much. Uh, in closing, we are pleased to deliver another quarter of attractive net investment income and healthy credit fundamentals across our Middle Market borrower portfolio.

In Capital Credit brings over 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.

We remain committed to delivering value for our shareholders. By providing attractive Returns on equity, and prudently managing our shareholders capital.

Chloe, please open the line for questions.

Certainly at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad,

You may withdraw yourself from the Queue at any time by pressing star 2.

Again, that is star and 1.

And we'll take our first question from finneon OSHA with Wells. Fargo Securities. Your line is open.

Uh, hey everyone. Good morning.

Uh Michael can you talk about to what extent? The push for more spreads, leverage, off balance sheet, leverage Etc. Um to what extent that brings on more risk.

And the sort of the sort of change in say, expected loss rate on the go forward. Thanks.

Sure. Um, so I do think, you know, running in line with our, uh, on balance sheet, leverage ratio, between 1 and 1 and a quarter. Um, is is what we continue to focus on doing. And so we don't have a particularly heavy Reliance on off-balance sheet. Leverage, both of our um, joint ventures. Do use Leverage, The islp is levered about 0.8 times to 1. Um, and the SLP is, is levered slightly more than that. But is, is a smaller position. So I think prudently managing to that, on balance sheet, leverage, um, ratio Target is, is 1 thing that we, we do focus on. And I think that is a key part of the risk return, uh, equation that we're we're doing for bcsf, uh, in terms of loss, rates going forward. Um, I do think as we've noted on the call, there are idiosyncratic losses that come across any portfolio. Um, but the fact that we have a very Diversified um set of companies, almost 200 companies in bcsf puts us in a position where any individual or

Loss won't drive a meaningful impact on the overall performance of the BDC. So, I think that the focus on balance sheet, leverage, and then pairing that with diversification is a key part of why we're able to drive the risk-return that we've been delivering in DCSS.

I think helpful. Um, I just want to follow up on the aircraft. What? Um it looks like a little bit of a

Bark there. This quarter. Correct. Me if I'm wrong, just seeing what sort of

Going on, if it's airplane values or whatnot. And then

It aircraft high level given. That's a

A, you know, strength differentiator for being. Is this something you could expand?

Say in a, a good asset or 30% bucket of friendly way, um, into more of the portfolio or or say lever, those Vehicles more safely. Um, a a comment on that. Thanks.

There. Um, we do think underwriting hard assets is an important um, important part of of what we do in a big differentiator for bcsf. We've done that in aviation. We've also done that through Legacy corporate lending which is an asset uh an asset based um financial company that we've supported and grown. And so I do think um we are out there, finding interesting opportunities across the asset backed market and we'll continue to have that be um a substantial part of the portfolio. I wouldn't expect me to full growth from here but I think um, some stability from that.

Segment adds good diversification and is something we'll continue to find new investments in.

Yeah, thanks so much.

Thank you, Finn.

And once again, for your questions, that is star and 1 on your telephone keypad, we'll move next to Paul Johnson with KBW.

The line is open.

Yeah, good morning. Thanks for taking my questions.

Um,

so knee, um, earnings just without the look, back would obviously be a little bit lower. It was about 3 cents this quarter.

um,

I understand I mean it looks like fee and dividend comes also a little bit lighter, this quarter, just quarter over quarter.

Um, but if I kind of do the math on just the incentive fee, or essentially the full incentive fee coming back in, that’s roughly like 60 to 70 basis points on ROE. Plus, you have roughly about half of your debt stack that’s going to have to reprice.

Um, pretty significantly higher next year. So that's probably, you know, another, you know, call it 50 basis points or so of an ROE hurdle that's just kind of coming in from the incentive fee and refinancing. So I guess the things that you guys kind of identified in terms of, um,

What makes you you know confident about the earnings coverage? Uh of the dividend? I mean is do you think that that um should be kind of able I guess to exceed, you know those items?

Uh, yeah, the yes we do. Expect as as both Mike's highlighted. I think we have different levels to pull from our perspective and we have digged into account, some of the points, which have highlighted about our debt coming for for refinancing next year. Of course, we did Issue a debt earlier this year, but, but we totally appreciate that. They will be done at a different level, which will put some pressure, but

As my highlighted earlier, the levers, which we have should be able to keep us uh, above our regular dividend in terms of needing those thresholds along with that. As we highlighted, we do have decent cushion from a spillover income perspective too which is healthy as well. So among all of that we we feel comfortable,

Got it, okay.

and then, I guess,

Like the financing um within the joint ventures and and the cllo um at this point you think there's any potential room to extract uh any Improvement there at this point? Most of those uh financing arrangements are pretty Tapped Out.

Uh, we are continuously having discussions with our banking Partners. So to your point, I would say yes, as as spreads on the asset side, have continued to tighten, uh, we have been managing our liabilities as well appropriately. So my my short answer would be. Yes, we are continuously looking at them as you highlighted, some of them do have uh, lock in periods uh from that perspective. But but again, as we have continued to grow, we have been having active dialogues. So, in some cases, you have already done that like, in in 1 of our joint venture joint venture islp. We did refinance the debt at at a much tighter spread so that's again, something which will continue to do as we continue to look at those ports.

4 years.

Got it. Thanks for that. And then last 1 for me, was just the junior Capital opportunities that you mentioned. Is that something that you're seeing now? Or is it just something I guess? You know, because you you've been able to do that in the past that that's

Just, I guess 1 of the levers that's available. If, you know opportunities, come through the funnel.

Um, platform which has about 20 billion or so of AUM of which bcsf is 2 and a half. Um, you know, billion of that across, that, that, that entire platform. Uh, again, Junior capital is something that we've done for over 25 years and that's something that we can lean into when appropriate when there's a need for flexible Capital. You know, we're cautious about just taking more risk for the sake of taking more risk. It's more that in today's market, where base rates, still coming down, have stayed elevated. Um, there does seem to be an interesting air pocket and some companies, uh, Capital structures where you can, um, charge a little bit more without taking some undue risk. Um, unfortunately sometimes that does come with pick income, um, uh, but, uh, it is something that we can find, uh, where we can find some pretty interesting opportunities and, and have done so and continue to do so.

Okay, thank you very much. That's all for me.

Thanks Paul.

And once more for your questions, that is star and 1, we'll pause another moment.

And it does appear that there are no further questions at this time. I would now like to hand the call back to Michael Ewald for any additional or closing remarks.

Thanks, Chloe, and thanks again, everyone, for your time and attention today. We certainly appreciate your continued support of BCSF and look forward to speaking with you again soon. Thanks.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful afternoon.