Earnings Labs

Bain Capital Specialty Finance, Inc. (BCSF)

Q2 2024 Earnings Call· Wed, Aug 7, 2024

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Transcript

Operator

Operator

Please stand by. Your program is about to begin. [Operator instructions]. Good day, everyone, and welcome to today's Bain Capital Specialty Finance Second Quarter Ended 2020 June 30, 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask a question. [Operator instructions]. It is now my pleasure to turn the conference over to Miss Katherine Schneider. Please go ahead.

Katherine Schneider

Analyst

Thank you, Marjorie. Good morning and welcome, everyone, to the Bain Capital Specialty finance second quarter ended June 30, 2024 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 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.

Michael Ewald

Analyst

Thanks, Katherine, and good morning, everyone, and thank you for joining us here on our earnings call. I'm joined today by Mike Boyle, our President, and our Chief Financial Officer, Amit Joshi. In terms of the agenda for the call, I'll start with an overview of our second quarter ended June 30, 2024 results and then provide some thoughts on our performance, the overall 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 questions at the end. So starting with yesterday after market close, we delivered solid second quarter results. Q2 net investment income per share was $0.51 as we continued to benefit from high base rate interest rates across our portfolio. Our net investment income return represented an annualized yield of 11.6% on book value and covered our regular dividend by 121%. Q2 earnings per share were $0.45 or an annualized return on equity of 10.2% as credit fundamentals remain healthy across our entire portfolio. As of June 30, our net asset value per share was $17.70, unchanged from the prior quarter-end. Subsequent to quarter-end, our board declared a third quarter dividend equal to share and payable to record date holders as of September 30, 2024. The board also declared an additional dividend of $0.03 per share for shareholders of record as of June 30 as we 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, which we believe represents an attractive yield for our shareholders. Turning now to the market environment, we continue to see healthy transaction levels during the second quarter, driven by both refinancing and new…

Mike Boyle

Analyst

Thank you Mike and good morning everyone. I'll start with our investment activity in the second quarter and then provide an update on trends in our portfolio. New investments made during the second quarter were $307 million into 77 portfolio companies, including $143 million into eleven new companies and $164 million in incremental funding to existing companies. Sales and repayment activity totaled approximately $474 million in the quarter, although 271 million of the sale activity was into our joint ventures. All of this activity resulted in a net harvesting of our investments of $167 million quarter-over-quarter. Our new fundings were split between new and existing portfolio companies as we leveraged our long standing relationships with private equity sponsored sponsors, who valued our industry expertise to help them grow and execute on their longer term business plans. This quarter, we remain focused on investing in first lien senior secured loans with 86% of our new new fundings into first lien structures. 9% of our investment activity was into investment vehicles, which included an additional contribution to the senior loan program. Sales and repayment activity across the portfolio was elevated relative to prior periods as we continued to ramp our joint venture investment into the SLP, which has been producing attractive return on equities for our shareholders with an inception-to-date return of about 16%. Turning now to the investment portfolio, at the end of the second quarter, the size of our investment portfolio at fair value was approximately $2.2 billion across a highly diversified set of 154 portfolio companies operating across 32 industries. Our portfolio primarily consists of investments in first Lien senior secured loans, given our focus on downside management and investing in the top of the capital structure. As of June 30, 63% of the investment portfolio at fair value…

Amit Joshi

Analyst

Thank you, Mike and good morning everyone. I'll start the review of our second quarter 2024 results with our income statement. Total investment income was $72.3 million for the three months ended June 30, 2024, as compared to $74.5 million for the three months ended March 31, 2024. The decrease in investment income was primarily driven by the decrease in other income. Our investment income continues to benefit from high quality sources of investment income, largely driven by contractual cash income across its investments. Interest income and dividend income represented 96% of our total investment income in Q2. Total expenses before taxes for the second quarter was $38 million as compared to $39.5 million in the first quarter. Net investment income for the quarter was $33.1 million or $0.51 per share, as compared to $34 million or $0.53 per share for the prior quarter. During the three month ended June 30, 2024, the company had a net realized and unrealized losses of $4 million. Net income for three months ended June 30, 2024 was $29.1 million or $0.45 per share. Moving over to our balance sheet, as of June 30, our investment portfolio at fair value total $2.2 billion and total assets of $2.4 billion. Total net assets were $1.1 billion as of June 30. NAV per share was $17.70, unchanged from $17.70 at the end of first quarter. As we demonstrated, strong NII over earning our dividend, coupled with stable credit quality across our portfolio. At the end of Q2, our debt to equity ratio was 1.03times as compared to 1.19 times for the end of Q1. Our net leverage ratio, which represents principal debt outstanding, less cash and unsettled rates was 0.095 times at the end of Q2 as compared to 1.09 times at the end of Q1.…

Michael Ewald

Analyst

Thanks Amit. And so, in closing here, we are pleased to deliver another quarter of attractive earnings for our shareholders with NII well in excess of our dividend and stable NAV, as our underlying borrowers continue to perform we'll. 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 plus years of experience investing in the core metal market. We remain committed to delivering value for our shareholders through producing attractive ROEs. And thank you for the privilege of managing our shareholders capital. Marjorie, please open the line for questions.

Operator

Operator

Thank you very much. [Operator instructions]. We'll take our first question from Derek Hewett from Bank of America.

Derek Hewett

Analyst

Good morning, everyone. I'm not sure if you addressed this in your opening comments, but could you talk about the 20 basis point increase in the overall portfolio yield seems to be an outlier relative to what we were seeing this earnings season?

Michael Ewald

Analyst

Sure. Thanks for the question, Derek. A key component of the increased yield is the fact that we sold a number of our investments down into the senior loan program joint venture. As a reminder, that's a joint venture that's intended to hold many of the lower yielding assets off balance sheet, rather than keeping them on our balance sheet, and give us the flexibility to operate seamlessly in a market where spreads are tightening. And so really, that optimization of assets between the balance sheet and the SLP is a key part of what drove that increase in the yields quarter-over-quarter. Because as a reminder, both the SLP and our balance sheet focus on those first lien investments that are, we're in a market where there is some spread tightening, as we noted in our remarks. But we think we've set up a structure that works really well for this type of market environment.

Derek Hewett

Analyst

Okay. And then, in terms of the, of interest coverage, did you mention what interest coverage was for the second quarter?

Michael Ewald

Analyst

We did not highlight that specifically across the portfolio, but it is still more than 2x, when we look at the median interest coverage across the portfolio. And we've run, as we've talked about in prior quarters, a number of stress tests, really looking at prolonged interest rates, floating rate up at this level, as well as interest rate improvement from here or increase from here, excuse me. And that we feel like anything that has any meaningful interest coverage degradation is in our risk rating three and four basket. So I think the results of our interest rate sensitivities on the asset by asset basis are reflected in both the marks and the risk ratings of the portfolio.

Derek Hewett

Analyst

Okay, thank you for that. And then my last question is just pick income. It's about 8% of total investment revenue. Right now it's only up about 1% quarter-over-quarter. But at what level would you start to get a little bit concerned about pick and then kind of, how would you characterize it? Is it kind of structured into the, was it structured into the original investment, or was this is the pick mainly related to amendments and other credit deterioration issues?

Michael Ewald

Analyst

Sure. So the vast majority of the pick really comes from structures in the original investment thesis, and those come from opportunities where we were more junior in the capital stack. So on occasion, we are, we are doing a more second lean or kind of pick junior capital investment. And so we do have a large portion of the pick comes from those original underwritten pick streams. There are some situations where we're doing amendments and adding pick to the portfolio as well, in terms of getting increased yield on an underperforming company. But again, the majority really comes from the original underwritten investment that we're making.

Operator

Operator

Thank you. [Operator instructions]. We'll next move to Paul Johnson from KBW.

Paul Johnson

Analyst

Yes, good morning. Thanks for taking my questions. I'm curious, for the loans that go into the JV, do any of those loans, given that the tick is kind of an option, the underwriting thesis, do, are any of those loans in the either the JVs tick loans and are you able to kind of characterize how much of the income side of those JVs is currently?

Michael Ewald

Analyst

Sure. So the pick level of the joint ventures is very low. Those are not structurally picked loans that end up being traded down into those down into the ISLP or the SLP. So I would note that the interest income that's picked in both joint ventures is very, very low, particularly lower than compared to what's on balance sheet.

Paul Johnson

Analyst

That's helpful. And then just on the performance of the JVs, I was wondering if you can kind of maybe talk to high level how those are performing non accruals and such. They've been obviously performing very well for you so far, but I look at 18% trailing return on the SLP fund. That's obviously a very strong return for any kind of JV. So you just kind of talk to that. What's, what's really driven that strong performance?

Michael Ewald

Analyst

Sure. So starting with the SLP, I would say non accruals have been lower than what we've seen on our balance sheet and so they are closer to kind of one and a half to 2% versus the, versus the 3% of our risk rating threes and fours on balance sheet. So it is a very healthy portfolio in the SLP. And that, again, is driven by the fact that those assets are lower risk, lower spread originated in North America. And so that has been a very healthy portfolio to-date. In terms of the ISLP, where we are focused on international exposures, we've seen a slight uptick in non accruals, but again, still in line with what we're seeing on balance sheet. We've seen that trailing return out of the ISLP has been about 12% since inception, reflecting the fact that there is solid underlying credit health there. We have seen a couple of new non accruals, or one in particular, new nonaccrual, come up in the ISLP that has not yet defaulted or had a covenant breach. But we are keeping our eye on what the ultimate outcome will be for that investment and so some of the decrease in the ISLP mark this quarter was actually from that one new non-accrual, held primarily in the ISLP because it is a loan in the UK. But even in spite of that one name on non-accrual, we're still seeing that strong performance in the ISLP continuing.

Paul Johnson

Analyst

Got it. That's very helpful commentary. And then just kind of in terms of like, the relative value currently spreads have obviously come in very meaningfully in the US middle market. Do you have any kind of preference in terms of relative value between kind of the international market versus the United States?

Michael Ewald

Analyst

Yes. Thanks, Paul. Look, I think at this point they're still pretty equivalent. It certainly doesn't change, really day-to-day or week-to-week. It's more kind of quarter-to-quarter. We obviously have seen some rate cutting happen in Europe already, which we haven't seen in the US, so we're certainly mindful of that. But from an overall creditworthiness perspective, things like relative spreads, when you account for currency hedging, when you think about leverage levels, when you think about competitive positioning of the underlying portfolio companies, I'd say today it's pretty equivalent between US and Europe, and Australia has always just been kind of a steady fiveish percent plus or minus contributor.

Operator

Operator

Thank you. And I'd like to turn the call back over to our speakers for any additional or closing remarks.

Michael Ewald

Analyst

Great. Thanks, Marjorie. And thanks, everyone, again for your time today and your attention as we went through our second quarter results here. We look forward to speaking with you again once we've got our third quarter results ready to go. Thanks again and have good days.

Operator

Operator

This concludes today's program. Thank you for your participation. You may now disconnect at anytime.