Good day, and welcome to the Bain Capital Specialty Finance Third Quarter Ended September 30, 2023, Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katherine Schneider. Please go ahead.

Thanks, Seiko. Good morning, everyone, and welcome to the Bain Capital Specialty Finance third quarter ended September 30, 2023, 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 Chief Executive Officer, Michael Ewald.

Thanks, Katherine, and good morning, and thank you everyone for joining us today on our earnings call. I’m joined 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, 2023 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 delivered strong third quarter results. Q3 net investment income per share was $0.55 driven by the continued benefits of higher interest rates across our portfolio. Our net investment income return represented an annualized yield of 12.6% on book value and covered our dividend by 131%. Q3 earnings per share were $0.52 driven by stable credit quality across our portfolio investments during the quarter. Our net income produced an annualized return on book value of 12.0%. These results led to another consecutive quarter of growth in our net asset value to $17.54, reflecting a 60 basis point increase from our $17.44 NAV as of June 30. 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 29, 2023. We believe our regular dividend amount represents an attractive yield for our shareholders at a 9.6% annualized yield on ending book value as of September 30. Our spillover income per share is approximately $0.79, or 1.9 times our quarterly regular dividend. We believe this is a healthy amount of undistributed income and provides for increased dividend and NAV stability. Our management team, alongside our board, continues to evaluate the potential for any additional distributions as we near the end of the year. Turning to the market environment, new…

Thanks, Mike. Good morning, everyone. I’ll start with our investment activity for the third quarter, and then provide an update on our portfolio. New investment fundings during the third quarter were approximately $110 million across 40 portfolio companies, including $52 million in 2 new companies and $57 million in add-ons to existing investments. Sales and repayment activity totaled approximately $103 million, resulting in a net-funded portfolio growth of $7 million quarter-over-quarter. This quarter, we remain focused on investing in first lien senior secured loans with 93% of our new investment fundings within first lien structures and 7% in equity investments. Our new investment fundings were comprised of a mix between new and existing companies, representing 48% and 52%, respectively. Across our new portfolio companies this quarter, we leveraged Bain Capital’s in-house industry knowledge and expertise. Our largest new investment was a first lien senior secured loan to Forward Slope, a provider of mission-critical software and surveillance solutions to the defense industry. We sourced this investment from a sponsor who has a value-oriented approach, which strong experience in aerospace and defense, and who valued our prior experience working with them in this sector. Aerospace and defense is our largest sector exposure and one that we continue to favor in the current environment, given it does not generally cycle with the macro-economy. Another notable new investment this quarter was the first lien senior secured loan and equity co-investment to HealthDrive, a provider of a comprehensive suite of on-site medical services to patients in skilled nursing facilities. While we have shied away from many of the healthcare position practice management roll-ups in recent years, we are now focused on finding attractive spots in the healthcare sector. Our investment thesis for HealthDrive centered on the solid fundamental industry dynamics, which are underpinned by non-discretionary…

Thank you, Mike, and good morning, everyone. I’ll start the review of our third quarter 2023 results with our income statement. Total investment income was $72.4 million for the 3 months ended, September 30, 2023, as compared to $75.7 million for the 3 months ended June 30, 2023. The decrease in investment income was primarily driven by a decrease in interest income as a result of lower interest income and other income. BCSF continues to benefit from high-quality sources of investment income, largely driven by contractual cash income across its investments. Interest income and dividend income represent 99% of our total investment income in Q3, with no prepayment-related income this quarter. Other income comprised only 1% of our total investment income. Total expenses for the third quarter were $36.1 million as compared to $35.7 million in the second quarter. Net investment income for the quarter was $35.6 million or $0.55 per share as compared to $38.9 million or $0.60 per share for the prior quarter. During the 3 months ended September 30, 2023, the company had net realized and unrealized losses of $1.8 million. Net income for the 3 months ended September 30, 2023, was $33.9 million or $0.52 per share. Moving over to our balance sheet, as of September 30, our investment portfolio at fair value totaled $2.4 billion and total assets of $2.6 billion. Total net assets were $1.1 billion as of September 30. NAV per share was $17.54, up from $17.44 at the end of the second quarter, representing a 0.6% increase quarter-over-quarter. The increase in our NAV was driven by the over earnings of our dividend, coupled with the relative stability and the value of our investments during the quarter. At the end of Q3, our debt-to-equity ratio was 1.22 times as compared to 1.33 times…

Thanks, Sally. In closing, we’re pleased to deliver another quarter of strong earnings from our shareholders demonstrated by high levels of net investment income that are well in excess of our dividend and modest NAV growth as our underlying borrowers continue to perform well. Bain Capital credit remains well positioned to execute on its direct lending strategy given our platform’s expertise, resources, and relationships that have been built on 25 years of experience investing in the core middle market. We remain committed to delivering value for our shareholders and thank you for the privilege of managing our shareholders’ capital. Seiko, please open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Arren Cyganovich with Citi. Please go ahead.

Thanks. Maybe you talk a little bit about the investing environment, you mentioned attractive characteristics today, you’re seeing wider spreads and lower leverage. Are you seeing any kind of pickup in activity from sponsors and what is your pipeline like these days for new investments?

Yeah. Thanks, Arren. Look, I think it kind of varies a little bit. Maybe not week-to-week or maybe month to month. We do continue to have busy months, not so busy months. Sponsors are definitely showing us things. There might be a little bit of going through the motions and just trying to see whether they can maybe pick up some value plays. But we’re not necessarily seeing a wholesale change from the current, I’d say, stable level. That’s still a little bit depressed from kind of pre-COVID, it’s only 2021. But it’s – I’d qualified as fine, not great from a deal-flow perspective.

Okay. And how does it look from an international perspective versus the U.S.?

It’s still pretty balanced right now. I’d definitely say last year we were in 2022, we were more U.S. heavy, more Europe heavy in 2021, but I’d say this year we’re probably a little bit more balanced, with Australia and New Zealand being a smaller piece and that just kind of being steady. So I don’t think there’s any notable differences between the two markets right now.

Okay. Thank you.

Thank you. Our next question comes from Paul Johnson with KBW. Please go ahead.

Yeah, good morning. Thanks for taking my question. I was just wondering if you can kind of comment on, I guess, the EBITDA growth trends that you’re seeing in your portfolio, I guess both domestically as well as internationally. I know it’s kind of hard to generalize maybe all of international, but just in general kind of Europe versus U.S., what’s been the performance like in the portfolio?

Sure. So performance has been quite strong across both markets, referring to U.S. and Europe probably. I do think top-lines have held in, particularly in the industries we’ve selected to invest in. And so as we noted, 95% of our portfolio is in line with our original underwrite and most of those original underwrites, include some sort of EBITDA growth and 15% to 20% sort of CAGRs on the EBITDA line. So we’ve seen much of the portfolio perform in line with that sort of 15% to 20% year-over-year EBITDA growth, but that’s largely driven by, again, the sectors we’ve chosen to invest in and we’ve really been able to shy away from any more cyclical sectors that might not show the same amount of growth in this type of market environment.

Thanks for that. And just kind of generally, I guess, what are your thoughts on where the portfolio or where the BDC is today from a leveraged standpoint, I believe we’re around 1.2 times kind of gross levels as of the third quarter, within obviously the target range that you guys run with. But just kind of given the uncertainty running into next year, potentially the higher for longer scenario, do you guys have any thoughts around where you’d like leverage to be in the BDC?

Sure. So I do look at the net level more specifically when I think about where we’re running our leverage, which is at 1.12 times, which is really right in that center of the range. I do think given the market environment, the fact that interest rates are likely to be higher for longer, operating at the lower end of our leveraged range, while we wait for new deal activity to pick up, and as Ewald commented earlier, the pipeline to get a little bit better than good and go back to great. I think – we think about bringing the leverage back up, but in the near-term I do think we probably trend for the lower end of our range, so that we have dry powder to take advantage of future market opportunities.

Thanks for that. That’s helpful. And last one from me. Was there anything specific driving, I guess, the credit, the internal credit rating sort of increased during the quarter, this big jump and then, rated to category from 91% to 95%? Was that due to any sort of markups or markdowns or any sort of activity in the portfolio that drove that?

It was really driven by two companies that we had previously had on our watchlist. They were companies that had been impacted by COVID and were really recovering, took a few years to recover back to pre-COVID earnings levels. And so it was really two companies that performed better that were taken off the watchlist that drove that change.

Got it. Appreciate it. Thanks. That’s all for me.

Thank you, Paul.

Thank you. The next question is from Derek Hewett with Bank of America. Please go ahead.

Good morning, everyone. Could you talk a little bit about the mechanics of the incentive fee, since it declined on a quarter-over-quarter basis and should we expect it to normalize like prospectively? Thank you.

Yeah, thanks for the question. I think we talked about that on the last couple of quarters’ calls, because of the lower levels of incentive fees versus prior. We had our COVID quarter that dropped off and the mechanics of the fee caused this kind of lower incentive level, but should go back to normal in the next 1 or 2 quarters. quarters. So I would expect the run rate to be a bit higher than that.

Okay. Thank you for that. And then in regards to the dividends, you’re significantly over earning it. If you adjust for the lower incentive fee, you’re still materially over earning the dividend. What are your thoughts on an additional increase in the core dividend versus or potentially implementing kind of a supplemental formulaic type of special dividend?

Yeah. That’s something that we talk about often. We’ve talked about with our management team and our board, obviously, the spillover gives us some good NAV stability, but we do have this ability to either do a possibly an additional dividend or increase the dividend, both of those things are being considered.

Okay. Thank you. That’s all for me.

Thank you. [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Michael Ewald for closing remarks.

Great. Thanks, Seiko. I just wanted to thank everyone again for your time today, and we certainly appreciate your continued support, and look forward to bringing you more news around executing our middle market investing strategy through BCSF in the future. Hope everyone has a good day. Thanks, again.

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.