Good day and welcome to the Bain Capital Specialty Finance Third Quarter Ended September 30, 2022 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Katherine Schneider from Investor Relations. Please go ahead.

Thanks, Cecillia. Good morning and welcome, everyone, to the Bain Capital Specialty Finance third quarter ended September 30, 2022, 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 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. Good morning and thank you all for joining us on our earnings call. I'm joined again today by Mike Boyle, our President; and our Chief Financial Officer, Sally Dornaus. I'll start with an overview of our third quarter ended September 30, 2022, results and then provide some thoughts on our performance, the overall market environment and our positioning. Thereafter, Mike and Sally will discuss our investment portfolio and financial results in greater detail. Yesterday, after market closed, we reported third quarter net investment income per share of $0.53, driven by very strong levels of income earned from our portfolio investments during the quarter. For Q3, net investment income return represented a 12.4% annualized yield on book value and covered our dividend by 156%. This is the highest quarterly level at NII that we have earned since our inception. The significant growth in our NII this quarter was driven by the benefits of rising interest rates, higher income related to fees earned on certain new originations and greater dividend income related to an equity co-investment payoff. Our Board has increased our regular quarterly dividend by approximately 6% or $0.02 per share to $0.36 per share, to shareholders of record as of December 31, 2022. This represents an annualized yield of 8.5% on ending book value as of September 30 and an 11% annualized yield at BCSF's current trading levels. Over the course of the year, we have observed base rates, namely SOFR and LIBOR, significantly increase. As we have previewed with our shareholders during prior earnings calls, we expected to see earnings growth during the second half of this year given the timing lag of rate resets across our portfolio. We are pleased to see this begin to contribute to higher earnings this quarter and we are well positioned…

Thanks, Mike. Good morning, everyone. I'll start with our investment activity for the third quarter and then provide an update in more detail on our portfolio. New investment fundings during the third quarter were $433 million across 59 companies, including $270 million in 9 new companies, $107 million in 48 existing companies, $41 million in the ISLP and $15 million in the SLP. Sales and repayment activity totaled approximately $397 million, resulting in net funded portfolio growth of $36 million quarter-over-quarter. We believe the environment for middle-market lenders has been increasingly attractive in recent history as we have been benefiting from improving economics and terms. Given the increase in credit spreads and base rates, not only are we able to underwrite new first lien loans at higher yields but we have also seen leverage levels on new loans decrease as lenders focus on maintaining free cash flow and fixed charge coverage ratios. Furthermore, we have used the current market as an opportunity to tighten document terms, particularly around covenant levels and EBITDA definition. Our investing activity has been focused on underwriting new companies as well as add-on activity for existing portfolio companies to complete add-on acquisitions. New LBO activity continues but at a lower level as sponsors still continue to show interest in the highest quality companies expected to perform over the current economic outlook. Overall, we believe the current environment provides an attractive opportunity for lenders such as ourselves to be selective and pick our spot. Turning to the investment portfolio. At the end of the third quarter, the size of our investment portfolio at fair value was $2.3 billion across a highly diversified set of 130 portfolio companies operating across 32 different industries. Our portfolio company diversification has grown almost 25% on a year-over-year basis. We continue to…

Thank you, Mike and good morning, everyone. I'll start the review of our third quarter 2022 results with our income statement. Total investment income was $62.8 million for the 3 months ended September 30, 2022, as compared to $52.4 million for the 3 months ended June 30. The increase in investment income was primarily driven by the benefits of rising interest rates, income related to fees earned on certain new originations and greater dividend income. Total expenses for the third quarter were $28.7 million as compared to $25.6 million in the second quarter. The increase in expenses was driven by an increase in interest and debt financing expenses, given higher base rates partially offset by a decrease in incentive fees. Net investment income for the quarter was $34.1 million or $0.53 per share as compared to $26.7 million or $0.41 per share for the prior quarter. Our net investment income covered our dividend by 156%. During the 3 months ended September 30, 2022, the company had net realized and unrealized losses of $23.1 million. GAAP income per share for the 3 months ended September 30 was $0.17 per share. Moving over to our balance sheet. As of September 30, our investment portfolio at fair value totaled $2.3 billion and total assets of $2.5 billion. Total net assets were $1.1 billion as of September 30. NAV per share was $16.98, down from $17.15 at the end of the first quarter, representing a 1% decrease quarter-over-quarter. At the end of Q3, our debt-to-equity ratio was 1.25x, up from 1.14x at the end of Q2. We had a large receivable on our balance sheet at quarter end which drove our leverage ratio to the wider end of our stated range of 1 to 1.25x. Pro forma for this, our debt-to-equity ratio would have…

Thanks, Sally. We are pleased to deliver another strong quarter for our shareholders, driven by the high level of net investment income earnings. We believe our portfolio is on strong footing to navigate more uncertain times ahead given the underlying tenants of our portfolio construction. We remain committed to delivering value for our shareholders reproducing attractive ROEs and thank you for the privilege of managing our shareholders' capital. Cecillia, please open the line for questions.

[Operator Instructions] And we will now take our first question from Paul Johnson from KBW.

Congratulations on a nice beat this quarter. I'm just wondering how much of the EPS this quarter, $0.53 NOI, how much of that was just from onetime items?

Sure. So about $0.06 of that was from a onetime dividend coming out of 1 of an equity co-investment. So that's included in the dividend line item in investment income. Beyond that, there's another $0.06 which are basically commitment fees that we collected for underwriting deals in the quarter. We do think that there will continue to be that other income that will generate in future quarters but it will be variable based on the market environment.

Got it. Right. I'm curious how much -- how does that compare, I guess, to kind of previous quarters in the past in terms of that nonrecurring onetime dividend income coming from, I guess -- I'm sorry, not dividend, the fee income coming from commitment fees? Was this quarter relatively higher than past quarters? I'm just curious how that compares.

Yes. It's about in the middle of the range if you look at the last 4 quarters. So we've had some -- around $1 million. We've had some quarters -- like last quarter was closer to $8 million. So that $4 million range is kind of in the middle of what we've seen historically for commitment fees.

Got it. And then just on activity for the quarter, it was a fairly active quarter both from the originations repayments for you guys. I'm just curious what I guess, drove the higher level of activity this quarter, especially on the repayment side and do you expect that to continue? I guess, given your line of sight into the next quarter or so of activity would you expect that to continue?

I would imagine that repayments will slow down in the portfolio over time just given the macroeconomic backdrop. What drove many of the repayments this quarter were two things, one of which was dropping some assets from our balance sheet down into the joint venture, so the ISLP and SLP. We also -- some of the commitment fees we're just talking about are actually related to deals that we underwrote and then syndicated on to other players in the market. So that also flows through the sales and repayments line. So this quarter was much more driven by those 2 items as opposed to more traditional refinancings or fresh LBO activity that tends to drive repayments in a more normalized market.

Got it. That makes sense, that makes sense. And then on your portfolio, I mean, as far as your borrowers go and I imagine you're still receiving a lot of incoming information and updated forecasts that are obviously changing along with the environment. And I'm wondering if you could just kind of talk about the performance of your borrowers? I know you mentioned that it's been quite good, I guess, as far as you've observed. But just, I guess, how is interest coverage changing with the rate increase this quarter or the last few quarters? And then as well -- yes, I guess that's all. Just any kind of color on just the performance of these ones. And then I guess on top of that, you mentioned on the call, there's a company that fell below 1x interest coverage. And given the increase in, I guess, the performance 3-rated loans, I'm wondering if that's the same loan and if you can make any comments on that company as well?

Yes. Why don't I start and then Mike can jump in, too. I mean, I think generically, the performance of our portfolio companies, as you pointed out, has been pretty strong. I think that's based on the -- that we have sought out more defensive industries. I think that's been particularly helpful. I think the other thing I would point out is that we have been, I guess, pleasantly surprised that our companies have also been able to push out price increases of their own in this inflationary environment and that's helped keep their gross margins pretty stable. And I think from a top line perspective, again, we haven't really seen much deterioration yet as we obviously haven't necessarily entered a recession yet but it's more of a B2B focus than a B2C focus which is where we'd be more concerned. Mike, I don't know if you want to touch a little bit on the interest rate sensitivity modeling that we've done but we've definitely done more of a shock modeling perspective rather than trying to take the existing SOFR curve and overlay that in more companies. We're looking more at worst-case scenarios.

Sure. Yes. So about 10% of the portfolio is in risk rating 3 or 4 assets. Those are all situations where when we're running interest rate sensitivities and looking at capital structures and cash flow coverage, we are more concerned about the ability of those companies to pay their interest in higher rate environments. I'd say risk rating 3 is we still feel comfortable but there is increased risk that cash flow gets particularly tight. What we were commenting on in the interest coverage analysis with a few companies going below 1x, are situations where we're running, as Mike Ewald highlighted, a shock scenario where we have the interest rate step up, base rates north of 5%. And so that's part of what's informing those risk rating 3s where we are focused on making sure that those companies are able to continue to pay their cash interest.

[Operator Instructions] As there are no further questions at this time, I'd like to turn the call back to your speakers for any additional or closing remarks.

Thanks, Cecillia and thanks all of you for your time and attention today. We do really appreciate your support and we look forward to talking to you again next quarter. Have a good day.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.