Bain Capital Specialty Finance, Inc. (BCSF) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Bain Capital Specialty Finance First Quarter ended March 31, 2025 Earnings Conference Call. [Operator Instructions]. 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 the conference over to Katherine Schneider, Investor [Technical Difficulty]. Please go ahead.

Thanks, Nicky. Good morning, and welcome to the Bain Capital Specialty Finance First Quarter ended March 31, 2025 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 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 Ewald.

Thanks, Katherine, and good morning, and thanks to all of you for joining us here on our earnings call. I'm also joined today by Mike Boyle, our President; and our Chief Financial Officer, Amit Joshi. As usual, in terms of agenda for the call, I'll start with an overview of our first quarter results and then provide some thoughts on our performance, the current market environment and our positioning. Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail. As usual, we'll also leave some time for questions at the end. So yesterday after we closed, we delivered [Technical Difficulty] first quarter results. Q1 net investment income per share was $0.50, representing an annualized [Technical Difficulty] yield on book value of 11.3%. Our net investment income was well in excess of our regular dividend with 119% dividend coverage. Q1 earnings per share [Technical Difficulty] were $0.44, reflecting an annualized return on book value of 10.0%. Our results were driven by high interest income earned from our middle market borrowers and stable credit performance across our portfolio. Our net asset value per share was $17.64 down $0.01 per share from the prior quarter end. Subsequent to quarter end, our Board declared a second quarter dividend equal to $0.42 per share payable to record of date holders as of June 16, 2025. The Board also declared an additional dividend of $0.03 per share for shareholders of record as of June 16, 2025, as we previously [Technical Difficulty] [ announced in ] February. [Technical Difficulty] Total dividends for the second quarter to $0.45 per share or a 10.2% annualized return on ending value as of March 31, which we believe represents an [Technical Difficulty] attractive yield for our shareholders [Technical Difficulty] the market. The first quarter was [Technical Difficulty] a busy start to the year beginning in January, while volumes then trended [Technical Difficulty] throughout the quarter [Technical Difficulty] on increased volatility and uncertainty experienced across the broader market. Middle market direct lending volumes continue to see [Technical Difficulty] compression amid high levels of competition, which were steepest across the upper and larger end of the market. We're certainly not immune to increased competition within the core part of the market, although we seek to be disciplined capital providers when we underwrite new capital structures, price, the risk we take, the reward we receive. In Q1, BCSF's gross originations were $277 million, down 31% year-over-year. We remain selective in our underwriting approach and continue to [Technical Difficulty] within the core part of the market. The median [Technical Difficulty] weighted average EBITDA [Technical Difficulty] borrowers during the quarter were approximately $23 million and [Technical Difficulty] [ $3 million ], respectively. The weighted average spread on our first lien originations was over 140 basis points. Many of the core tenants that we value in [Technical Difficulty] our direct lending strategy [Technical Difficulty] higher spreads [Technical Difficulty], stronger lender controls through credit documentation containing financial [Technical Difficulty] and having majority control positions within a small lender group are much more [Technical Difficulty] in this segment of the market. Notably, these are attributes that we believe are increasingly important during periods of greater volatility. So 97% of our Q1 originations to new companies were structured with documentation containing financial covenants tied to management's forecasts and majority control positions in over 78% of these debt tranches, allowing us to drive eventual outcomes at our discretion. These statistics are consistent with our broader portfolio showing our continued focus on these core tenants. Credit quality and fundamentals continue to be solid across our portfolio. Investments on nonaccrual represented 1.4%, 0.7% in amortized cost and fair value as of March 31. [Technical Difficulty] $823 million of total available liquidity across undrawn capacity on our revolving credit facility, cash, and net settled. We ended the first quarter at a net leverage ratio of 1.17x, which falls within our target leverage ratio on a net basis of 1.0 to 1.25x and positions us with ample dry powder in the current environment. Following the U.S. government tariff announcement in early April, we performed a portfolio review to identify potential individual [Technical Difficulty] exposure to higher tariffs. While there is still uncertainty around the timing and height of eventual tariffs, given the fluid situation and ongoing developments, only a small portion of BCSF's portfolio companies were estimated to have direct tariff exposure. This limited exposure to exogenous factors identified by our team aligns with various facets of our investment strategy, including a focus on the core middle market, asset light, high free cash flow businesses, domestic manufacturing and favoring certain industries such as software, health care, business services and financial services. Notably, our aerospace and defense investments are not expected to have high direct impacts from tariffs as our exposure within this segment includes service providers and manufacturers with overwhelmingly domestic customer bases and supply chains. While it is still too early to assess the longer-term impact of tariffs on the broader economy, we remain focused on the potential downstream effects of these and other current administration policies that could drive inflation higher, lower economic growth and lead to a potential recessionary environment. Bain Capital's private credit group has over 25 years of experience and is well equipped to navigate the current environment as our professionals have successfully navigated multiple market cycles and periods of disruptions in the past, and we remain focused on prudently managing our portfolio. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail.

Thanks, Michael. Good morning, everyone. I'll start with our investment activity for the first quarter and then provide an update in more detail on our portfolio. New fundings during the first quarter were $277 million into 89 portfolio companies, including $140 million in 13 new companies, $134 million in 75 existing companies and $2 million into our senior loan program. Sales and repayment activity totaled approximately $246 million, resulting in net investment fundings of $31 million quarter-over-quarter. Our fundings were split with 51% of total fundings made to new portfolio companies versus 49% to existing companies. This quarter, we remained focused on investing in first lien senior secured loans with 90% of our investments made into first lien structures, 9% in subordinated debt and 1% into equity. Investments made in the quarter continued to favor defensive industries such as health care, high-tech and business services. For our select investments within auto and capital equipment sectors, we provided capital to service-oriented companies within these end markets or manufacturers with domestic footprints. Turning to the investment portfolio. At the end of the first quarter, the size of our portfolio at fair value was $2.5 billion across a diversified set of 175 companies operating across 29 different industries. We have continued to increase our single name portfolio diversification with name count up from 153 companies 1 year ago and 108 companies at the beginning of 2020. Our portfolio primarily consists of investments in first lien senior secured loans, given our focus on downside management and investing in the top of capital structures. As of March 31, 64% of the investment portfolio at fair value was invested in first lien debt, 1% in second lien debt, 3% subordinated debt, 7% in preferred equity, 9% in equity and 16% across our joint ventures, including 10% in our international senior loan program and 6% in our senior loan program. As a reminder, the vast majority of the underlying investments within our joint venture structures are first lien loans. As of March 31, 2025, the weighted average yield of the investment portfolio at amortized cost and fair value was 11.5% and 11.5%, respectively, as compared to 11.7% and 11.8%, respectively, as of December 31, 2024. This decrease in yields was primarily driven by a decrease in reference rates as well as spreads across our portfolio, 93% of our debt investments bear interest rate -- bear interest at a floating rate, positioning the company favorably in today's higher rate environment. Moving on to portfolio credit quality trends. Our credit fundamentals remained healthy. We saw largely stable trends within our internal risk rating scale quarter-over-quarter. Risk rating 1 and 2 investments comprised 95% of our portfolio as of March 31, indicating that these companies are performing in line or better than the expectations we set at our underwrite. Risk rating 3 and 4 or underperforming investments comprised just 5% of our portfolio at fair value. Investments on nonaccrual represented 1.4% and 0.7% of the total investment portfolio at amortized cost and fair value, respectively, as of March 31, and this compares to 1.3% and 0.2%, respectively, as of December 31. I will also highlight that performance across our aggregate 100-plus companies within our underlying joint ventures continue to perform well, consistent with our broader portfolio. I'll turn it now to Amit, who will provide a more detailed financial review.

Thank you, Mike, and good morning, everyone. I'll start the review of our first quarter results with our income statement. Total investment income was $66.8 million for the 3 months ended March 31, 2025, as compared to $73.3 million for the 3 months ended December 31, 2024. The decrease in investment income was driven by a decrease in average investment balance of the portfolio as a new origination funded towards the back half of the quarter, lower portfolio yields and decrease in other income. The quality of our investment income continues to be high as vast majority of our investment income is driven by contractual cash income across our investments. Interest income and dividend income represented 96% of our total investment income in Q1. PIK income is also low at just under 10% of our overall investment income. Notably, the vast majority of our PIK income is derived from investments that were underwritten with PIK versus from amendment or restructured investments. Total expenses before taxes for the first quarter was $33.7 million as compared to $38.4 million in the fourth quarter. The decrease in expenses was primarily driven by lower incentive fee resulting from our 3-year look-back feature on our incentive fee hurdle rate. Net investment income for the quarter was $32.1 million or $0.50 per share as compared to $33.6 million or $0.52 per share for the prior quarter. During the 3 months ended March 31, 2025, the company had net realized and unrealized losses of $3.6 million. Net income for 3 months ended March 31, 2025, was $28.5 million or $0.44 per share. Moving to our balance sheet. As of March 31, our investment portfolio at fair value totaled $2.5 billion and total assets of $2.6 billion. Total net assets were $1.1 billion as of March 31. NAV per share was $17.64, a slight decrease of $0.01 per share from $17.65 at the end of fourth quarter. In January, we issued $350 million of unsecured notes maturing in March 2030 at a spread of 190 basis points. We swapped these notes to floating notes at SOFR plus 190 basis points, which is close to parity with our weighted average spread on our floating rate debt of 187.5 basis points. We believe our liability structure is well positioned in the current environment with no debt maturities this year. Our unsecured note issuance during the first quarter positioned us well in advance of our first unsecured debt maturing in March of 2026. As of March 31, approximately 59% of our outstanding debt was in floating rate debt and 41% was in fixed rate debt. For the 3 months ended March 31, 2025, the weighted average interest rate on our debt outstanding was 4.8% as compared to 5.1% of the prior quarter end. The weighted average maturity across our total debt commitment was approximately 4.2 years at March 31, 2025. At the end of Q1, our debt-to-equity ratio was 1.27x as compared to 1.22x from the end of Q4. Our net leverage ratio, which represents principal debt outstanding less cash and unsettled rate was 1.17x at the end of Q1 as compared to 1.13x at the end of Q4. Liquidity at quarter end was strong, totaling $823 million, including $699 million of undrawn capacity on our revolver facility, $94 million of cash and cash equivalents, including $55.6 million of restricted cash and $30.3 million of unsettled rate net of receivables and payables of investments. We currently estimate that our spillover income totaled approximately $1.41 per share, representing over 3x of our quarterly regular dividend. With that, I'll turn the call back over to Mike Ewald for the closing remarks.

Thanks, Amit, and thank you, Mike, as well. In closing, we are pleased to deliver a strong start to the year for our shareholders with our Q1 2025 results. Looking ahead, we believe our portfolio and balance sheet are well positioned to navigate potentially increasing periods of liquidity ahead -- volatility ahead, excuse me. And our investment team is equipped with deep expertise having invested across multiple market cycles across our long history. We remain committed to delivering value for our shareholders by providing attractive returns on equity and prudently managing our shareholders' capital. Nicky, please open the line for questions. Thanks.

Thank you. [Operator Instructions]. And we'll take our first question from Paul Johnson with KBW.

Just on the later fundings that you mentioned in the quarter and the lower sort of interest income, I guess, quarter-over-quarter. Is there any way to quantify that, I guess, in terms of like how much funded kind of late in the quarter and kind of when approximate timing?

Sure. Thanks for the question, Paul. So it was somewhat backdated in terms of new fundings. But what I would point you to is just the spread calculation and yield calculation across the entire portfolio. So we are still generating about an 11.5% yield across the book and new originations, as Ewald noted in his remarks, were made at about 540 basis points spread over base rates. So we do feel quite good that the earnings yield is still quite stable. But I do note your point that some of the fundings were back weighted into the quarter.

And Paul, look, if it's helpful, too [Technical Difficulty] that spread, the 540 plus that we had last quarter was down about 10 basis points over the prior quarter. So decline, but certainly not what we have seen earlier.

And that spread, is that just a straight coupon spread? Or does that include any kind of adjustment for like amortized income?

It is spread. Yes. Yes.

I mean on an average, right? Our spread [Technical Difficulty].

Got it. And then maybe just kind of talking about -- or sorry, going into just the realized losses this quarter. Can you just kind of talk about, for example, forming machine industries, what was kind of the resolution there, if that's what drove the loss or if there was any other things in that it drove realized losses this quarter and how you're able to drive to such a quick solution there?

Sure. Yes, we did have 2 names that were on nonaccrual that we exited in the quarter, Atlas, which is that forming machine products as well as Ambridge, which was a second lien investment that we made. Both of them were situations where our restructuring teams worked with the company and the other participants in the capital structure to drive to a resolution. And in both of those situations, we either sold the position to another lender in the group or just completely exited the position with the sale of the company. So both of those were -- had been on nonaccrual for quite a reasonable period of time when we were doing work through the restructuring. And in both situations, we feel like we optimized our value on the exit. In Atlas, we were both in the first lien and second lien. And in Ambridge, we were a second lien holder there. And both of those, we did recover a reasonable value here over the life of the hold north of $0.50 across both of those investments. So it was the strong work of our restructuring team that did drive us to exit both of those investments here in the first quarter.

Got it. And that's in the exit mark, $0.50, the recovery there, was that below the fourth quarter mark? Was there any sort of additional markdown from that? Or was that pretty much in line from last quarter?

That was in line with last quarter's mark.

[Operator Instructions]. We will move next with Finian O'Shea with Wells Fargo Securities.

I wanted to ask about the ATM. It looks like you tapped that in the quarter, just seeing what your posture will be there if this will sort of continue to dribble out as they say? And if so, will you also be buying back stock below book going forward?

Thanks, Fin. Look, we -- it is on the ATM [Technical Difficulty] to first. It's [Technical Difficulty] opportunistic, if it makes sense to [Technical Difficulty], but as you certainly appreciate the entire [Technical Difficulty] segment traded down [Technical Difficulty] right around the time that we announced it. So we did not end up tapping into that again. It is something that is open, it's available, but I think it's going to be dependent on how we're trading. And on your question around buybacks, we do sell that program [Technical Difficulty] that we put in place, I guess, probably back 4 years ago now. It's something that we evaluate versus the alternative of continuing to use that capital -- equity capital to invest in the market. As you know, we haven't tapped that before, but that is something that is available to us if we think that, that is the [Technical Difficulty] of capital.

Can you talk about dividend coverage and the SOFR curve like sort of what level would it be the next Fed cut or something more that would put you underneath?

I would say -- yes, at this point, based on our projection, right? And again, in an environment where we believe rates will continue to stay higher, we don't see in foreseeable future that we need to revisit our current dividend. As we have highlighted, our regular dividend is $0.42, and we have been declaring additional supplemental dividend. So we don't foresee in near term any need for us to revisit our dividend. At the same time, as we highlighted, we do have good amount of spillover income as well, which we'll continue to evaluate as we look at our dividend policy.

[Operator Instructions]. And there appear to be no further questions at this time. I will turn the call back to management for closing remarks. Actually, we are showing another question comes from the line of Derek Hewett with Bank of America.

Just a question on the look back. If the -- if credit kind of stabilizes, at current levels, when should the full incentive fee kick back in? Will it be in the second quarter? Or will it be some time later?

We do expect that from second quarter onwards, it should stabilize. There are some nuances with look back because there is a payment component too. So it does create some volatility in future as well. But we do expect that significant amount of impact around COVID and all has already been accounted for. So we do expect from Q2, it should be more stabilized.

And it appears that we have no further questions at this time. I will turn the call back to management for closing or additional remarks.

Thanks a lot, Nicky, and thanks again to everyone on the phone for your time and attention today. We look forward to speaking with you again next quarter. Thanks.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.