Greetings, and welcome to the Bain Capital Specialty Finance Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sloane Bowen [ph] with Investor Relations. Please go ahead.

Good morning. Last night, we issued our second quarter earnings press release and investor presentation, copies of which are available on Bain Capital Specialty Finance 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 annual report and Form 10-K 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.And with that, I'll turn the call over to our President and Chief Executive Officer, Michael Ewald.

Good morning, and thank you for joining us for our second quarter 2019 earnings call. As Sloane mentioned, this is Michael Ewald. And today, I'm joined by our Vice President and Treasurer, Mike Boyle; and our Chief Financial Officer, Sally Dornaus.I'm going to start with a brief overview of the quarter that both Mike and Sally will further detail in a minute. At the end of the second quarter, the BCSF portfolio represented $2.4 billion invested across 30 different industries and 123 portfolio companies, with a current weighted average yield at 8.0%. Excluding the impact of the ABCS balance sheet consolidation, for the quarter we originated $403 million of new investments. Year-to-date, our new originations totaled $679 million. As of June 30, approximately 88% of our portfolio is invested in what we refer to as first dollar risk and is made up of traditional first lien loans. Credit in our portfolio remains very strong, and there remain 0 nonaccruals in our portfolio, a hallmark of our cautious approach to current market conditions. We're also pleased to announce that our Board declared a third quarter dividend of $0.41 per share. That dividend will be payable on October 30, 2019, to stockholders of record on September 30, 2019.I'd now like to spend some time speaking to how our portfolio composition has changed since we brought the investments in our Antares joint venture, ABCS, on to the fund's balance sheet. First, it's important to again highlight the rationale for executing on the consolidation. Consulting the assets and liabilities of our interest in the JV on to our balance sheet removes our equity interest in ABCS from the 30% nonqualifying basket of our assets, a threshold that has limited our investment activity in the past and places these qualifying assets on to our balance…

Thank you, Mike, and good morning, everyone. Before highlighting our second quarter results, I would like to provide everyone a summary of the ABCS transaction that occurred during the second quarter.As previously announced, on April 30, we completed the ABCS transaction, where the company received our proportionate share of all ABCS assets, which represented 44.7% of ABCS. The distribution of assets comprised of 25 senior secured Unitranche loans with a fair value of $919 million and cash of $3.2 million. The company also entered into a new facility agreement with JPMorgan, where we incurred $577.5 million of JPMorgan debt. The transaction resulted in a net increase in investments of $572.5 million. In connection with the transaction, we recorded $4.9 million in dividend income for the month of April and for the remaining two months of the quarter revenue generated from the ABCS investments is recognized as interest income on our consolidated statement of operations.With that, I would like to discuss our overall second quarter 2019 results. Our net investment income was $21.2 million or $0.41 per share for the second quarter of '19, which was consistent with the first quarter of 2019 of net investment income of $21.2 million or $0.41 per share. Our GAAP earnings per share for the three months ended June 30, 2019, was $0.37 per share compared to $0.76 per share for the three months ended March 31, 2019.The quarter-over-quarter decrease was due to net unrealized depreciation of $8.4 million, offset by net realized gains of $6.4 million. Total expenses for the quarter, net of waivers, increased $10.8 million to approximately $29.4 million in the second quarter compared to $18.6 million in the first quarter. Our expenses increased primarily due to the first full quarter of interest and fee expense related to our Citi credit facility,…

Thanks, and good morning, everyone. I'll kick it off with an update on the credit quality of our portfolio and also provide more detail on our originations this quarter.As of June 30, the fair value of our investment portfolio was $2.4 billion, diversified between 123 portfolio companies operating in 30 different industries. 99% of the fair value of these investments is performing in line or ahead of our underwriting case, split between our performance ratings of 1 and 2. We are pleased to report that we have had no nonaccruals since the inception of BCSF in 2016 and have no nonaccruals in the portfolio as of the end of the second quarter. Our investments are primarily comprised of first lien senior secured loans, which represent 87% of the portfolio. The weighted average yield of these investments is 8%, which we believe offers attractive risk return, given our focus on the first dollar of risk in capital structures.The median EBITDA of the companies in our portfolio is $57 million, with the median leverage level of 4.8x. 84% of our investments contain financial maintenance covenant. Recently, we have been favoring more defensive sectors as we construct our investment portfolio, including high-tech, health care and aerospace and defense. We believe that the sum product of these variables creates a portfolio that is well positioned to withstand any future market volatility. 98.5% of our investments are floating rate. This is matched with the 100% floating rate liability structure, which was put in place to mitigate the impact of interest rate fluctuations on our profitability.Shifting now to second quarter originations; we invested approximately $403 million, including 14 new portfolio companies. During the same period, we had approximately $378 million of repayments and sales. This growth origination pace demonstrates our continued view that their attractive investment…

Thanks, Mike. Before we conclude the call with questions, I'd like to welcome our two new independent board members, Amy Butte and Clare Richer. Both Amy and Clare are distinguished professionals with extensive knowledge of financial services businesses as well as Board roles. Their experience and expertise will provide us valuable insight as we continue to grow the platform.To conclude, we had another solid quarter executing on our core middle market investment strategy and remain very well positioned to continue driving shareholder value. Our investment in portfolio construction decisions remain well informed by the experience of the many investment and operating professionals of Bain Capital Credit who have navigated multiple market cycles. As always, I would like to thank our investors for their continued support, and we look forward to seeing you at conferences and in meetings during the fall.I also like to thank all of you for your time today. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from Doug Harter with Crédit Suisse.

This is actually Sam Choe on for Doug. Thank you for the color on investing in defensible industries, namely those in aerospace and defense. I mean we've seen recent escalation in the trade war between U.S. and China, and we also seen it globally between Korea and Japan. I was just wondering because I'm seeing some exposure in like transportation, cargo if there are certain areas in your portfolio that could potentially have credit issues. I know you don't have any nonaccruals, but just wondering if there are areas you are constantly monitoring.

Sure, good question there. And certainly something that takes up a fair amount of our investment committee deliberations these days in terms of what any given company's exposure might be to global trade wars in general, but certainly, China tariffs are very front of mind right now. In general, most of the middle market companies with which we deal tend to be fairly domestic-oriented, either domestic to the U.S. or domestic to their respective countries overseas. There are certainly situations, more on the manufacturing side, where we can see some components coming in from Chinese suppliers. What we're seeing there is people are being pretty active in terms of trying to find alternative countries from which to source those components.And generally speaking, those components still make up a particularly large part of the cost bar overall for those manufacturing companies. So while it's certainly something that we're looking at, we haven't seen either in the past nor going forward a whole lot of impact to our particular portfolio companies.

Great, that's helpful. And then my second question was, you guys mentioned last quarter with the on-boarding of the ABCS, we would see some fee waivers, and we did. I guess I was just thinking -- we were kind of expecting a little bit higher on that. And so just wanted color on how you're thinking about management fees and kind of being shareholder-friendly and managing that? Just color on that would be great.

Sure. And look, maybe we take a step back here and just kind of think about our high-level plans because I think that will address how we think about waivers as well. As we've started the BCSF and obviously are now several years into it, our goal really, I suppose, it is really threefold. One is we want to curate an attractive portfolio of assets, which means highest credit quality. And I think we've certainly done that. And -- of appropriately weighted risk return assets, so take into account company, industry macro factors and then do that all with an efficient capital structure, i.e., cheap, flexible and as long dated as possible.So in today's environment, both from a competitive BDC perspective and also from the perspective of other income-yielding assets, we think an 8% plus dividend yield on book value is certainly compelling. Currently, we're obviously waiving some fees, management and/or incentive depending on the quarter to get there, albeit sequentially, it's certainly less quarter-on-quarter in terms of what we needed to waive to get there. And certainly, past performance is not a guarantee of future results as Sloane indicated in his opening remarks, but there's certainly a pattern there of us waiving fees to get to the point where we're generating that dividend that we think is attractive. And our goal overall is to generate, call it, a 9% plus yield on our assets. We're obviously at 8% today, to avoid the need for waivers long term. I can't tell you whether that's next quarter or two quarters, three quarters from now, but that's certainly what our goal is. And we believe we have a path to get there without sacrificing any of the hallmarks I mentioned earlier.And both on the asset and the liability side, there's a few different things that we're working on. And clearly, when we have something to announce, we obviously will. But nothing else. We hope that we've exhibited a methodical, prudent and consistent behavior over the past several quarters as a public company, but even as a private BDC prior to that. So overall, our goal here is to generate an attractive return and as you said that it requires some fee waivers, we've shown in the past that we're happy to do that.

Our next question comes from Ryan Lynch with KBW.

Kind of following up on the question regarding fee waivers and the dividend and the earnings potential. I mean if I look at your portfolio today, it's 99% floating rate assets, you have zero non-accruals and then you also have some fee waivers with the collapse in the Antares JV onto your balance sheet. That's all occurred this quarter. You guys put up $0.41 -- the dividend is $0.41. So it seems that earnings right now today are just in line with the dividend with fee waivers and doesn't really take into account any sort of items that could go wrong and potentially impact earnings as far as nonaccruals or the direction that LIBORs move. So just wanted to know, get some more color, I guess, on how you plan on increasing earnings potentially to that? You said kind of that 9% operating ROE or your commitment to sort of formalize and commit to waiving fees necessary to support the dividend going forward?

Sure. So I think as Mike highlighted on the last answer, we are focused on continuing to increase the yield in the portfolio. Right now, it's at 8%, but we are targeting 9% plus. And our newer rates, originations in the quarter move us in that direction. We've exited investments. We're 75 basis points lower in spread than the new investments we made over the quarter. So we do feel we're continuing to invest prudently, but be able to add some incremental yield to the portfolio. And as we think about fee waivers, we are -- we did reduce the few waivers in Q2 relative to Q1, and we think that we'll continue to evaluate wavering those fees when it comes to supporting the dividend, whether it's for any sort of nonaccrual or LIBOR changes. We do think there is flexibility while we can still support that $0.41 dividend.

And then my follow-up question this quarter. It looked like one of your slides had the portfolio companies this quarter dropped down to 123 from 133 in the prior quarter, so I was just kind of surprised to see the number of portfolio companies owned go down by 10, where we saw significant growth in the actual overall portfolio. So can you just talk about that dynamic there and why that occurred?

Sure. So we have been exiting some lower-spread investments and some of those investments come with some liquidity. And so about half of the sales and repayments over the quarter were us selling loans into the secondary market. And many of those loans were smaller positions or more diversified positions in the portfolio. So that's why the investment count came down. We do think that between 100 and 125 companies is likely to be our targeted range as we think about the overall portfolio construction. And so we -- so this 123 for this quarter, we think, is likely to be in line with expectations going forward from an investment count perspective. We do still think there's material diversification with that investment count. And so we are -- we do still believe that benefit of diversification still exists similarly as it did last quarter.

Our next question comes from Chris York with JMP Securities.

So the questions on the dividend I think largely been asked and doubt we'll get much more color on whether the dividend is sustainable. But the question to you this morning is on origination of new investments. So what was the yield on nonqualified assets in the quarter? And then what is the yield spread of nonqualified assets on the balance sheet today versus qualified assets?

Sure. So right now, I would say there isn't a meaningful differential between the yield of qualifying versus nonqualifying assets, given the mix of first lien securities is quite comparable and our -- the 10% European nonqualifying assets relative to those assets that are qualifying currently. So the new assets that we originated were about at a yield of LIBOR plus about 560 in the quarter. The assets that we originated just -- if we just isolate the assets in the nonqualifying basket, it was about LIBOR plus 550. So it was in line with the overall origination pace. We do think, as Mike highlighted earlier, that there is some potential for us to increase the yield of the overall portfolio with strategic partnerships that are non-qualifying, but that's something that will play through over coming quarters.

Got it. So if that spread differential is actually 10 basis points tighter in nonqualified assets today, what should we expect maybe from a modeling purpose going forward in that spread differential as that seems to be a focus for some of your interest income growth?

Sure. So in terms of going forward, I mean, we're not going to give specific guidance on what yield profile will look like in the nonqualifying basket, but to the extent we do see some strategic partnership opportunities. We think those overall yields could be north of 10%. And so as we see those potentially come online and think about modeling going forward, there is some component of that basket that we think will generate 10% plus yield.

Great. If I could just ask one accounting question. How much of the dividend from controlled portfolio companies in the quarter was either onetime or a return of capital? As it just seems the $5.1 million is a little bit higher than what I would have expected for the month of April and your proportionate share of the ownership?

Can you repeat just the beginning of your question? I got the tail-end of it, but not the beginning of it.

Yes. So the $5.1 million of controlled portfolio dividend income seems to be a little bit higher than what I would have modeled?

Yes, okay. So -- yes, so part of that was just 1 month of ABCS. So as you remember, that transaction went through on April 30. So we had a month there where it was still treated as in the old structure. And so that 1 month of it was ABCS, so that was like $4.8 million and the rest of it is related to an investment we have that is a controlled affiliate. So none of it was a return of capital. That was the second part of your question.

Got it, okay. So that $4.8 million just relative to the previous quarter was just higher on a monthly basis, which is fine. I was just curious.

Yes.

Our next question comes from Finian O'Shea with Wells Fargo Securities.

First question, just going through the portfolio slides, observing the Antares collapse impact. One of the charts that stands out was the control percentage. I thought that would have gone up more. Is this maybe understated given that Antares has a large portion of these loans too? Or are these more broadly held, so having thought that yours and Antares' control would have been pretty universal in that portfolio?

Yes. Thanks, Fin. For the effective loan voting control, bar chart, which I'm guessing you're referring to, the use of effective there was meant to indicate that there was always -- excuse me, on a look-through basis. So it included us having effective voting control on the ABCS assets where the Unitranche -- the ABCS Unitranche was the only security as well.

And then does the adviser to the BDC or the now consolidated joint venture, retain any upfront economics prior to allocation?

No.

So one more follow-up, if I may. What typical level of upfront fee do you receive? And can you remind us, does -- do you account for this entirely as OID? Or do you have some interpretation of an in-between where some is booked as fee income and some as a yield enhancement OID?

No. We generally try to keep it simple. And the vast majority is on all of our investments. Any upfront fees are structured as OID, which makes it obviously very transparent and that all flows through onto the fund's balance sheet directly. So shareholders benefit from that. And there's no seasoning or selling or anything else like that, that takes place, or where there is something skimmed. And if there are situations where there might be a structuring fee, an origination fee or something that for every reason is put into place at the get-go, all those fees also flow through the income statement of the fund. So all those benefits accrue the shareholder. We and the adviser get paid through the management fee and the incentive fee, and that's really it.

Sure. And just on the level again, do you -- is it typically 1 point?

Yes, sorry about that. Yes, it's typically about two points. It can range, I'd say, probably from one to like three, but it's typically around two points. So we typically be buying our securities at around $0.98 on the dollar.

Our next question comes from Arren Cyganovich with Citi.

You had mentioned that given the size and seasoning of the portfolio you the expect kind of churn to increase. How much of that do you have control over though? I guess it's the area that I'd be curious about. Usually, with most of these kind of direct originated, you don't generally have control, the sponsor does. So how do you deal with knowing what's coming through to you each quarter?

Yes. And thanks for the question, Arren. It is the sponsor who will have control of these exits. And so when there are -- when we are in a healthy credit market and these businesses are growing, we do tend to see an average churn in the portfolio, given the weighted average life is two to three years. So it is really the sponsors that do have that control, and we're in a position to react when a sponsor is looking to refinance or exit a capital structure. In this last quarter, I did mention we did have about half of that exit activity was through sales in the secondary market. So there are times when we can sometimes sell on to the market. But that -- the portion of the portfolio where there is that type of liquidity is quite low, given where we sit today.

There are no further questions. I would like to turn the floor over to Mike Ewald for closing comments.

Great. Well, thanks, everyone, for your time and attention and questions today. We, again, are very happy with the performance of the fund in the second quarter, and we'll look forward to reporting out next quarter's results in about three months or so. Thanks very much.

This concludes today's conference. Thank you for your participation.