Bain Capital Specialty Finance Inc (BCSF) 2025 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Bain Capital Specialty Finance third quarter ended september 30, 2025 earnings conference call. (Operator Instructions) 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. Please go ahead.

Thanks, Chloe. Good morning, everyone, and welcome to the Bain Capital Specialty Finance third quarter ended September 30, 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 thank you all for joining us on our earnings call here today. Before continuing with the regular programming, we do want to take a moment just to recognize anyone on the call who has served or is serving in our Armed Services. We genuinely appreciate your service, and I want to recognize you today on Veterans Day. Thanks.

I'm joined today by Mike Boyle, our President; and our Chief Financial Officer, Amit 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. Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail, and we'll leave some time for questions at the end.

Yesterday, after market close, we delivered another quarter of solid results for the third quarter ended September 30. Q3 net investment income per share was $0.45, 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%. Our net asset value per share was $17.40, a decline of $0.16 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.

Subsequent to quarter end, our Board declared a fourth quarter dividend equal to $0.42 per share and payable to record date holders as of December 16, 2025. 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. This brings total dividends for the fourth quarter to $0.45 per share or a 10.3% annualized rate on ending book value as of September 30.

During the third quarter, we saw new deal activity pick up across the middle market, driven by new LBO and M&A activity following greater clarity on tariffs and stability regarding economic indicators such as inflation and unemployment, both of which have remained elevated in the US but have not continued to accelerate. Against this backdrop, our private credit group continues to curate a strong pipeline of lending opportunities in the core middle market.

Our depth of industry expertise and collaboration across Bain Capital's global platform enables us to identify attractive investment opportunities in more specialized industries. Furthermore, our sponsors continue to view us as true business partners and value our ability to provide flexible capital solutions that support the financing and growth needs of their portfolio companies.

During Q3, BCSF gross originations were $340 million. We remain disciplined on terms and structure in our segment of the market with a weighted average spread on originations to new companies of approximately 550 basis points and weighted average leverage of 4.5 times.

The vast majority of these commitments were to first lien borrowers. Now to quickly address the credit market headlines in recent weeks, we do not have exposure to First Brands nor Tricolor. While these credit events have been broadly linked to the overall private credit market, they've occurred outside of the traditional direct lending segment. First Brands and Tricolor are large-cap companies versus Bain Capital's private credit group's focus within the core middle market. We favor this segment of the market due to its attractive characteristics, including greater loan tranche control, reduced lender consensus risk and the prevalence of covenanted structures that provide for stronger lender downside management.

We believe the bankruptcies of First Brands and Tricolor are idiosyncratic and do not believe that they reflect broader stress in the private credit market. However, these recent credit events reinforce the importance of our rigorous investment due diligence process, which incorporates scrutiny of off-balance sheet liabilities, collateral integrity and sources of liquidity and corporate governance. Our processes also include deploying third-party legal advisers to perform legal due diligence and seeking to ensure that our borrowers have reputable auditors and quality of earnings providers.

Finally, we also negotiate strict documentation for our loans, which includes not just financial covenants, but also broad reporting and inspection rights, all of which ensure we stay well informed about our portfolio companies' performance, trends and asset quality. While these are not new elements of our investment process, these recent credit events further support our emphasis on robust due diligence on every transaction we underwrite.

In fact, credit quality and fundamentals continue to be healthy across our portfolio. Investments on nonaccrual represented just 1.5% and 0.7% at amortized cost and fair value, respectively, as of September 30. Nonaccruals were relatively stable from the prior quarter end. Turning to our outlook on earnings and dividend coverage in light of market expectations for 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 of between 9% and 10% and to a level that we believed could be earned throughout multiple market environments. Since then, we've been operating with meaningful net investment income dividend coverage, which has provided excess income that has been distributed to our shareholders via supplemental dividends and also increased retained earnings, driving healthy spillover income equal to $1.46 per share or 3 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 $0.42 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 the structures has been lower relative to their run rate earnings potential.

Second, higher levels of prepayment-related income and other income as new M&A deal volumes increase. And finally, leveraging our private credit group platform's focus in the core middle market to drive attractive spreads on new investments. We also selectively 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 have 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 BCSF's current market price as of yesterday's close, our dividend yield, 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 Boyle, our President, to walk through our investment portfolio in greater detail. Mike?

Thank you, Mike, and good morning, everyone. I'll start with our investment activity for the third quarter and then provide an update and more detail on our portfolio. New investment fundings 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 fundings of $44 million quarter-over-quarter.

Our new investment fundings were comprised of 36% to new companies and 64% to existing portfolio companies. First lien senior secured loans continue to comprise the vast majority of our new investments, representing 89% of our new investment fundings. And the remaining 11% was comprised of 3% into second lien loans, 1% in subordinated debt, 5% in preferred and common equity and 2% in our investment vehicles. We remain selective in our underwriting approach and continue to favor middle market sized companies within the core middle market.

While the market environment remains competitive with spread compression continuing in the broader market, we believe Bain Capital remains well positioned to source new opportunities, given our platform's breadth, scale and longevity in the core middle market. As Mike Ewald highlighted earlier, the weighted average spread of our Q3 originations to new companies was approximately 550 basis points. We were also particularly active this quarter with 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 health care 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.

As of September 30, 64% of the investment portfolio at fair value was invested in first lien debt, 1% in second lien debt, 4% subordinated debt, 6% in preferred equity, 9% in equity and other interest 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 first lien loans.

As of September 30, 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 30, 2025. The decrease in yields was primarily driven by a decrease in reference rates across our portfolio as 93% of our debt investments bear interest at a floating rate. Moving on to portfolio credit quality trends. Credit fundamentals remain healthy. Median net leverage across our borrowers was 4.7 times as of quarter end, down from 4.9 times as of the prior quarter end.

Median EBITDA was $46 million, 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 three and four investments, which comprised 5% of fair value. Our underlying portfolio 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 nonaccrual represented 1.5% and 0.7% of the total investment portfolio at amortized cost and fair value, respectively, as of September 30. This is compared to 1.7% and 0.6%, respectively, as of June 30.

Turning 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 third quarter results with our income statement. Total investment income was $67.2 million for the three months ended September 30, 2025, as compared to $71 million for the three months ended June 30, 2025. The decrease in investment income was primarily driven by 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. PIK income represent 11% of our total investment income in Q3. Notably, the vast majority of our PIK income is derived from investments that were underwritten with PIK. Only a small portion of our PIK income is related to amended or restructured investment. Total expenses before taxes for the third quarter were $37.2 million as compared to $39.3 million in the second quarter. The decrease in expenses was driven by 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 $0.45 per share as compared to $30.6 million or $0.47 per share for the prior quarter. During the three months ended September 30, 2025, the company had a net realized and unrealized losses of $10.5 million. As Mike highlighted earlier, our net losses this quarter was primarily driven by one of our portfolio company investments and not broad-based across our portfolio. Net income for the three months ended September 30, 2025, was $18.7 million or $0.29 per share.

Moving over to our balance sheet. As of September 30, our investment portfolio at fair value totaled $2.5 billion and total asset of $2.7 billion. Total net asset was $1.1 billion as of September 30, 2025. NAV per share was $17.40, a decrease of $0.16 per share from $17.56 at the end of second quarter. As of September 30, approximately 60% of our outstanding debt was floating rate debt and 40% was in fixed rate debt. For the three months ended September 30, 2025, the weighted average interest rate on our debt outstanding 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 30, 2025. At the end of Q3, our debt-to-equity ratio was 1.33 times as compared to 1.37 times 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 equivalents, including $26.2 million of restricted cash and $26.5 million of unsettled trade net of receivables and payables of investments.

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

Thanks, Amit. In closing, we are pleased to deliver another quarter of attractive net investment income and healthy credit fundamentals across our middle market borrower portfolio. Bain Capital Credit brings over 25 years of experience investing in the middle market and has demonstrated solid credit quality with low losses and nonaccrual 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.

(Operator Instructions)

Finian O'Shea, Wells Fargo Securities.

Michael, can you talk about to what extent the push for more spreads, leverage, off-balance sheet leverage, et cetera? To what extent that brings on more risk and the sort of change in, say, expected loss rate on the go forward?

Sure. So I do think running in line with our on-balance sheet leverage ratio between 1 and 1.25 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 joint ventures do use leverage. The ISLP is levered about 0.8 times to 1 and the SLP is levered slightly more than that, but is a smaller position. So I think prudently managing to that on-balance sheet leverage ratio target is one thing that we do focus on. And I think that is a key part of the risk return equation that we're doing for BCSF.

In terms of loss rates going forward, I do think as we've noted on the call, there are idiosyncratic losses that come across any portfolio. But the fact that we have a very diversified set of companies, almost 200 companies in BCSF puts us in a position where any individual loss won't drive a meaningful impact on the overall performance of the BDC. So I think that 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're -- we have been delivering in BCSF.

That's helpful. I just want to follow-up on the aircraft. It looks like a little bit of a mark there this quarter. Correct me if I'm wrong, just seeing what sort of goes on if it's airplane values or whatnot. And then aircraft high level, given that's a strength differentiator for Bain, is this something you could expand, say, in a good asset or 30% bucket friendly way into more of the portfolio or say, lever those vehicles more safely.

Any comment on that?

Sure. So we did have a small write-down on some of our aircraft this quarter. But really, that's just looking to potential exit valuation of some of the aircraft that we do own and not reflecting a meaningful change in our underwriting thesis there. We do think underwriting hard assets is an important part of what we do and a big differentiator for BCSF. We've done that in aviation. We've also done that through Legacy Corporate Lending, which is an asset-based financial company that we've supported and grown.

And so I do think we are out there finding interesting opportunities across the asset-backed market, and we'll continue to have that be a substantial part of the portfolio. I wouldn't expect meaningful growth from here, but I think some stability from that segment adds good diversification and it's something we'll continue to find new investments in.

(Operator Instructions)

Paul Johnson, KBW.

So NII earnings just without the look back, would obviously be a little bit lower, it was about $0.03 this quarter. I understand, I mean, it looks like fee and dividend income is also a little bit lighter this quarter, just quarter-over-quarter. 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, 70 basis points on ROE plus you have roughly about half of your debt stack that's going to have to reprice pretty significantly higher next year.

So that's probably another, 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 what makes you confident about the earnings coverage of the dividend. I mean do you think that, that should be kind of able, I guess, to exceed those items?

Yes. Yes, we do expect. As both Mike highlighted, I think we have different levers to pull from our perspective. And we have baked into account some of the points which you have highlighted about our debt coming for refinancing next year. Of course, we did issue a debt earlier this year, but we totally appreciate that they will be done at a different level, which will put some pressure.

But as Mike highlighted earlier, the levers which we have should be able to keep us above our regular dividend in terms of meeting 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 feel comfortable.

Got it. Okay. And then I guess, like the financing within the joint ventures and the CLO at this point, do you think there's any potential room to extract any improvement there at this point? Most of those financing arrangements are pretty tapped out.

We are continuously having discussions with our banking partners. So to your point, I would say, yes, as spreads on the asset side have continued to tighten, we have been managing our liabilities as well appropriately. So my short answer would be, yes, we are continuously looking at them. As you highlighted, some of them do have lock-in periods from that perspective.

But again, as we have continued to grow, we have been having active dialogues. So in some cases, we have already done that, like in one of our joint venture ISLP, we did refinance the debt at a much tighter spread. So that's, again, something which we'll continue to do, as we continue to look at those portfolios.

Got it. And then last one for me was just the junior capital opportunities that you mentioned. Is that something that you're seeing now? Or is that just something, I guess, because you've been able to do that in the past that that's just, I guess, one of the levers that's available if opportunities come through the funnel.

Yes. Thanks, Paul. Look, the junior capital bit is part of the private credit group's calling card and has been for over 25 years as well. So as you know, we've got a much larger platform, which has about $20 billion or so of AUM, of which BCSF is $2.5 billion of that across that entire platform. 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.

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 though coming down have stayed elevated, there does seem to be an interesting air pocket in some companies' capital structures where you can charge a little bit more without taking some undue risk. Unfortunately, sometimes that does come with PIK income, but it is something that we can find -- where we can find some pretty interesting opportunities and have done so and continue to do so.

(Operator Instructions) 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.