Bain Capital Specialty Finance Inc (BCSF) 2025 Q2 法說會逐字稿

Good day and welcome to the Bain Capital Specialty Finance second-quarter ended June 30, 2025, earnings conference call.

(Operator Instructions) Please be advised, today's program is being recorded.

It is now my pleasure to turn the program over to Katherine Schneider, Investor Relations. You may begin.

Thank you, Aaron. Good morning and welcome, everyone, to the Bain Capital Specialty Finance second-quarter ended June 30, 2025, 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 in the webcast is 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 Chief Executive Officer, Michael Ewald.

Thanks, Katherine, and good morning to everyone. Thank you for joining us on our earnings call here today. I'm joined by Mike Boyle, our President, and our Chief Financial Officer, Amit Joshi.

In terms of agenda for the call, we'll stick a little bit of past practice here. I'll start with an overview of second-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 your questions at the end.

So, yesterday after the market closed, we delivered solid second-quarter results. Q2 net investment income per share was $0.47, representing an annualized yield on book value of 10.7%. Notably, our net investment income continues to demonstrate strong dividend coverage for our shareholders, exceeding our regular dividend payout by 12%.

Q2 earnings per share were $0.37, reflecting an annualized return on book value of 8.3%. Our results were driven by strong levels of interest income earned from our middle market borrowers and largely stable credit performance across our portfolio. Our net asset value per share was $17.56, down slightly $0.08 per share from the prior quarter end.

Subsequent to quarter end, our Board declared a third-quarter dividend equal to $0.42 per share, payable to record date holders as of September 16, 2025. The Board also declared an additional dividend of $0.03 per share for shareholders of record as of September 16, 2025, as we had previously announced back in February.

This brings total dividends for the third quarter to $0.45 per share, or a 10.2% annualized rate on ending book value as of June 30.

Turning to the market, we witnessed increased market volatility at the beginning of the second quarter as a result of higher tariffs that the market feared would lead to a lower economic growth backdrop in the US. This caused a temporary pause in new deal volume activities across the market as investors sought more clarity and then resumed to more normalized levels throughout the quarter, fueled by a greater market optimism.

Against this backdrop, Bain Capital's private credit group navigated the challenging market conditions by sticking to our core competency and long-standing presence in the middle market. Our scale and long-standing presence in this segment of the market allowed us to source attractive investment opportunities for our investors despite a lower level of broader M&A activity in the market.

In fact, during Q2, BCSF's gross originations were $530 million, up 73% year over year. We remain selective in our underwriting approach and continue to favor middle market-sized companies within the core segment of the market.

To source these new investment opportunities, we benefited from Bain Capital's platform advantage through our sourcing relationships that benefit from our deep industry expertise, and that distinguishes our platform from other competing lenders.

Our incumbency advantage that allows us to remain active by supporting existing companies through add-on activities. And our broader private credit group platform adds flexible capital to invest across the capital structure from which BCSF benefits to source a greater and wider set of investment opportunities.

While the market environment remains competitive with spread compression continuing more broadly, we believe Bain Capital remains well positioned to navigate this dynamic. The weight average spread of our new originations during Q2 was over 580 basis points, demonstrating our ability to drive alpha for our investors.

Our discipline and capital base allows us to pick our spots in areas of the market that we find most attractive versus competing against other segments of the market that may exhibit greater spread compression and less favorable documentation terms. In doing so, this has allowed us to produce attractive levels of net investment income for our shareholders while remaining focused on protecting our downside.

Credit quality and fundamentals continue to be healthy across our portfolio. Investments on non-accrual represent 1.7% and 0.6% at amortized cost and fair value, respectively, as of June 30.

We saw a slight uptick in non-accruals this quarter driven by one new name added. Our non-accrual rate though continues to be low relative to the broader BDC sector average based on first quarter results as we do not have full comparable Q2 data for our peers yet.

Looking ahead, we know dividend coverage has been a recent topic on investor minds in light of tightening market spreads, the potential for a lower interest rate environment, and higher liability costs with low fixed rate debt structures maturing. We wanted to take a moment to discuss our performance and future levers of growth.

First, we would remind our investors that we set our dividend policy at an attractive level for shareholders and at a rate that can be earned throughout multiple market environments. As a reminder, our regular dividend rate at book value is 9.5% annualized.

In more recent periods, our NII dividend coverage has been strong both in Q2 and thus far this year for the first half of 2025 at 112% and 115% respectively.

Our level of spillover income differentiates us versus other BDCs with $1.43 per share of spillover income, which is equal to over 3 times our regular dividend bubble.

We also have nearly $0.10 per share of undistributed income from our joint venture investments that can contribute to higher NII levels in the future as we've been overearning the distributions paid to BCSF through these entities in recent quarters.

Bain Capital has also demonstrated consistently strong credit performance. While we exhibited a modest NAV decline this quarter, our annualized ROE for the first six months of 2025 is 9.4% and approximately 11% in each of the prior two calendar years in 2024 and 2023.

Taking all of this together, we have demonstrated attractive performance for our shareholders. Relative to where our current trading levels are versus book value, we believe our stock offers a compelling opportunity.

At BCSF's current market price as of yesterday's close, our dividend yield, inclusive of our regular and special dividend, represents a 12.2% 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 Boyle, our President, to walk through our investment portfolio in greater detail. Mike.

Thanks, Michael, and good morning, everyone. I'll start with our investment activity for the second quarter and then provide an update in more detail on our portfolio.

New investment fundings during the second quarter were $530 million in 94 portfolio companies, including $242 million into 12 new companies and $273 million in 81 existing companies, as well as $15 million into our senior loan program.

Sales and repayment activity totalled approximately $502 million resulting in net investment fundings of $27 million quarter over quarter. Our new investment fundings were split between new and existing portfolio companies, with new investment fundings representing 46% of our total fundings versus 54% to existing companies, as our incumbency advantage allowed us to remain active with existing companies.

This quarter, we remain focused on investing in first lien senior secured loans with 93% of our new fundings within first lien structures, 3% into our investment vehicles, 3% into preferred and common equity, and 1% into subordinated debt.

As Michael Ewald highlighted earlier on our call, our Q2 originations to new companies benefited from attractive spreads with our weighted average spread of over 580 basis points overflowing rates. Leverage in terms continue to be favorable with weighted average leverage across these new originations at 4.7 times.

We remain focused on structuring new loans with documentation containing financial covenants and having majority control positions in the vast majority of our investments. This allows us to drive eventual outcomes at our discretion if needed.

Turning now to the investment portfolio, at the end of the second quarter, the size of the portfolio at fair value was approximately $2.5 billion across a highly diversified set of 185 portfolio companies operating across 29 different industries.

Our average position to a single portfolio company is approximately 50 basis points, given the diversity of the overall portfolio. Our portfolio primarily consists of first lien senior secured loans given our focus on downside management and investing at the top of capital structures.

As of June 30, 63% of the investment portfolio at fair value was invested in first lien debt; 1% in second lien debt; 4% subordinated debt; 7% in preferred equity; 9% in equity and other interests, as well as 16% across our joint ventures, including 10% in the international senior loan program and 6% in our senior loan program.

In both of these programs, the vast majority of our underlying investments consist of first lien loans, and on a look-through basis, including our exposure within our JVs, our first lien exposure is 84%.

We would also note that our 9% equity interests are comprised of a diverse number of equities co-invests and select equity investments that were made at the time of originations and not the results of restructuring investments.

As of June 30, the weighted average yield on the investment portfolio at amortized cost and fair value was 11.4% and 11.4% respectively, as compared to 11.5% and 11.5% respectively as of March 31, 2025. We were pleased to demonstrate these stable yields in light of a broader market spread compression. 93% of our debt investments bear interest at a floating rate, positioning the company favorably in today's higher interest rate environment.

And moving over to portfolio quality trends, our credit fundamentals remain healthy. We saw stable trends within our internal risk rating scale quarter over quarter. Risk rating one and two investments, which indicate that the company is performing in line or better than expectations relative to our initial underwrite, totalled 95% of the portfolio as of June 30, consistent with our prior quarter end.

Risk rating three and four are underperforming investments comprise 5% of our portfolio at fair value. These investments on our watch lists have been relatively stable, and we've not seen any meaningful change from higher tariff impacts across the portfolio.

Investments on non-accrual represented 1.7% and 0.6% of the total investment portfolio and amortized cost and fair value respectively. As of June 30, this is compared to 1.4% and 0.7% respectively as of March 31.

As Michael Ewald highlighted earlier, the increase in non-accruals was driven by one company added this quarter. Amit will now provide a more detailed financial review.

Thank you, Mike. Good morning, everyone. I'll start the review of our second quarter results with our income statement. Total investment income was $71 million for the three months ended June 30, 2025, as compared to $66.8 million for the three months ended March 31, 2025.

The increase in investment income was driven by increase in average investment balance of the portfolio, higher effective yields on the existing debt portfolio, and an increase in the other income. The quality of our investment income continues to be high as the vast majority of our investment income is driven by contractual cash across our investments.

Interest income and dividend income represented 94% of our total investment income in Q2. Peak income represents approximately 11% of our overall investment. The vast majority of our income is derived from investments that were underwritten with pick with only a small portion of our pick income related to amended or restructured investments.

Total expenses before taxes for the second quarters were $39.3 million as compared to $33.7 million in the first quarter. The increase in expenses was driven by greater incentive fee and interest and debt financing expenses. Net investment income for the quarter was $30.6 million or $0.47 per share, as compared to $32.1 million or $0.50 per share for the prior quarter.

During the three months ended June 30, 2025, the company had a net realized and unrealized losses of $6.9 million. Net income for the three months ended June 30, 2025, was $23.7 million or $0.37 per share.

Moving to our balance sheet as of June 30, our investment portfolio at fair value total $2.5 billion and total assets of $2.8 billion. Total net asset was $1.1 billion as of June 30, 2025.

NAV per share was $17.56, a decrease of $0.08 per share from $17.64 at the end of the first quarter. As of June 30, approximately 62% of our outstanding debt was in floating rate debt, and 38% was in a fixed rate debt.

For the three months ended June 30, 2025, the weighted average interest rate on our debt outstanding was 4.9% as compared to 4.8% as of the prior quarter end. The weighted average maturity across our total debt commitment was approximately 3.9 years at June 30, 2025.

At the end of Q2, our debt-to-equity ratio was 1.37 times as compared to 1.27 times from the end of Q1. A net leverage ratio, which represents principal debt outstanding less cash and unsettled rate was 1.2 times at the end of Q2 as compared to 1.17 times at the end of Q1.

Our gross leverage ratio was higher at the end of Q2 due to higher cash levels on our balance sheet at the end of the quarter. Subsequent to quarter end on July 2, we refinanced our middle market CLO debt, which decreased the principal of the debt from $352.5 million to $150.6 million. Pro forma for this transaction, the gross debt to equity ratio was reduced to 1.22 times.

Liquidity at quarter end was strong, totalling $796 million including $592 million of undrawn capacity from a revolving credit facility, $174.5 million of cash and cash equivalent, including $136.9 million of restricted cash and $29 million of unsettled rate, net of receivables and payables of the investments.

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

Thanks, Amit. In closing, we are pleased to deliver another quarter of attractive risk adjusted returns, demonstrating our consistent long-term performance to generate value for our shareholders.

Bain Capital's private credit group platform remains well positioned to navigate the current market environment as we continue to execute our long-standing strategy of investing in the middle market to drive attractive return for our investors over the long term.

Aaron, please open the line for questions.

(Operator Instructions) Paul Johnson, KBW.

Good morning. Thanks for taking ourt questions. On the securitization was saying, I believe it was the 2019 middle market securitization that you mentioned. So it sounds like you refinanced that.

I'm just curious why or what drove that decision. I mean that looks like it's probably the most attractively priced securitization you have in the debt stacks or is there opportunity to refinance there at a higher cost or what drove that decision?

Thanks for your question. I would say yes, it was pretty attractive from a pricing perspective. Our prior CLO securitization was with weighted average cost of around 185 basis points, and we were able to access the market, which was pretty attractive and our AAA transfer we were able to issue around 150, 155 range. So it was pretty attractive from a pricing perspective.

At the same time, I would say 2019 that's when CLO basically was up from an investment period perspective, so we were evaluating it from that perspective anyway, so the market provides us an opportunity, and the pricing made sense.

Got it. That makes sense. And then just on the origination activity this quarter. Obviously, it's you guys are pretty active with new originations. I mean, how would you characterize the activity for the quarter with this?

Mostly new company originations, a lot of existing and I guess in a quarter where you saw, for the most part, reduced activity across the space reduced M&A activity, just wondering what drove the higher-than-average origination.

Yeah. Thanks, Paul. There's a couple of factors I think that drove that. One is the core middle market where we play didn't exhibit as much of a pullback from activity as one observed in that larger segment of the market.

The second thing is we have been particularly focused across the private credit group in terms of expanding. Our reach into the market, we realize as many strong relationships as we have, there's still a lot more folks that we quite frankly don't know in the middle market.

And so, we've really broadened our sponsor outreach and developed a number of new relationships across the market. If you look at the stats, it's not quite 50/50, but it's roughly 50/50 from a new platform perspective versus add-on activity So, it certainly hasn't just been driven by our incumbency advantage.

That's certainly very helpful, but we also, as I said, continue to expand, looking for new opportunities as well because the incumbent level of activity may wax and wane over time.

Got it. That makes sense. And are those investments that can eventually be sold down into the JVs as you actually want to make some room on the balance sheet or how do you typically manage that? You directly originate into the JV?

They are investments that could ultimately get dropped down into our joint ventures, and that's primarily driven by the fact that they're almost all first lien loans that fit well into the joint ventures if we decide to move them in future quarters.

Okay. Great. Those are all the questions for me. Thank you very much.

Thanks, Paul.

Thank you.

(Operator Instructions)

Great. Well, thanks everyone for the for the time today and for joining us on our earnings call. We appreciate the continued interest in BCSF and support of us as well. We'll look forward to speaking to you in future quarters about upcoming results. Thanks very much.

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