Bain Capital Specialty Finance - Earnings Call - Q1 2021

Transcript

Speaker 0

Good morning, everyone. Welcome to the Bain Capital Specialty Finance First Quarter Ending in 03/31/2021 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Kathryn Schneider, Director of Investor Relations. Please go ahead.

Speaker 1

Thanks, Emily. Good morning, everyone, and welcome to the Bain Capital Specialty Finance First Quarter Ended 03/31/2021 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 both Specialty Finance and any unauthorized broadcast in any form is strictly prohibited. Any forward looking statements made today do not guarantee future performance and results may differ materially. These statements contain current management expectations, which include risks and uncertainties, which are identified in the Risk Factors section of our page that could cause actual results to differ materially as indicated. Bain Capital Specialty Finance assumes no obligation to update any forward looking statements unless required to do so by law. Lastly, Tasker Pharma will future results.

So with that, I'll turn the call over to our Chief Executive Officer, Michael Ewald.

Speaker 2

Thanks, Catherine, and good morning all and thank you for joining us on our earnings call. I'm joined today by Mike Boyle, our President and our Chief Financial Officer, Sally Dorness. I'll start with an overview of our first quarter ended 03/31/2021 results and then provide some thoughts on our investment performance, the overall market environment as well as our positioning. Thereafter, Mike and Sally will discuss our investment portfolio, credit quality and financial results in greater detail. As Catherine mentioned yesterday after market close, we delivered strong first quarter results to our shareholders.

Q1 net investment income per share was $0.34 driven by solid net investment income earned by our portfolio investments. Our net investment income covered our dividend by 100%. Q1 earnings per share were zero four nine dollars driven by net gains across our investment portfolio largely driven by the continued improvement in the performance of our borrowers and broad based spread tightening. Net asset value per share as of March 31 was $16.69 representing a 0.9% increase from our NAV as of December 31. As we've observed improving credit metrics across our portfolio, we've been pleased to deliver a continued gradual recovery in our NAV per share to our shareholders.

We also demonstrated improving credit metrics throughout our through our low non accrual rates. In fact as of March 31, the company had no investments on non accrual status, reflecting solid credit quality across our diversified loan portfolio. Subsequent to first quarter end, our Board declared a second quarter dividend equal to $0.34 per share and payable to record date holders as of 06/30/2021. This represents an 8.1% annualized yield on ending book value as of March 31. On February 25, we closed our joint venture partnership with Pantheon through the International Senior Loan Program or ISLP.

This program as you may recall is focused on investing in middle market direct lending opportunities across Europe and Australia. These are two markets in which Bain Capital Credit and its private credit group in particular has a long standing presence and strong track record of investing as we have a global footprint with local teams focused on providing financing solutions to middle market companies. As we discussed with our shareholders at length during last quarter's earnings call, the ISLP provides BCSF with three key benefits. First, enhanced balance sheet flexibility to expand our global capabilities as non U. S.

Dollar investments count against 30 non qualifying asset bucket. Second, higher portfolio yields to drive greater net investment income for our shareholders as we estimate BCSS investment in ISLP will produce a low double digit yield. And finally, greater capacity to continue to invest in new senior secured loan opportunities to drive net investment income accretion as BCSF contributed existing investments from its balance sheet to ISLP. While we are still early in our formation of the ISLP, we are very pleased to demonstrate progress in achieving higher portfolio yield to our shareholders as our overall yield increased by approximately 30 basis points quarter over quarter to 7.6% of amortized cost. Our goal is to achieve at least an 8% portfolio yield as we've been focused on driving higher net investment income for our shareholders.

Over time, we believe this can be attained in a number of ways such as rotating out of lower yielding investments into higher yielding investments as some of those loans repay, growing our interest in the ISLP if we continue to find attractive investment opportunities outside of North America and identifying new middle market loan opportunities at attractive spread levels. Importantly, we seek to accomplish this by retaining a focus on first lien loans and remaining disciplined in our credit selection. Turning now to the market environment. During the first quarter, our private credit platform including BCSF was very active in terms of new investment activity. We witnessed the M and A market open back up in 2021 driven by a more constructive economic backdrop sponsors as they sought to accomplish add on acquisitions for growth activities as well as find new platform investments.

Our market tends to be reliant on M and A activity given our focus on sponsor back lending. We believe our long standing presence in this market which has led to a large number of incumbency positions is a significant competitive advantage for us as we continue to invest with existing companies which we know well. Furthermore, our flexible capital base allows us to offer a full suite of solutions for borrowers. This often results in us investing with companies longer through different ownership and segments of the capital structure depending on where we identify the best risk adjusted return. We also saw a significant amount of new investment activity out of Europe this quarter as half of our new portfolio companies were sourced from our offices in London and Dublin.

On the liability side, the institutional unsecured debt markets were also robust during the first quarter driven by strong investor demand levels. In February, the company received an investment grade rating of Baa3 from Moody's, which enabled us to take advantage of issuing unsecured debt in a historically low interest rate environment. So in March, the company issued $300,000,000 of 2.95% unsecured notes maturing in March 2026. We are very pleased with our execution level as a debut issuer in this market. We believe this was a reflection of our demonstrated credit performance across our diversified portfolio, largely consisting of first lien loans, as well as the broader Bain Capital platform, including the breadth of our resources, capabilities and expertise, which benefit the company.

We believe this notes issuance fortifies our balance sheet and we look forward to being an ongoing issuer in this market in the future. I'll now turn the call over to Mike Boyle, our President to walk through our investment portfolio in greater detail. Thanks, Mike. Good morning, everyone. I'll kick it off with our investment activity for the first quarter and then provide an update on our portfolio.

Q1 new investment fundings were $384,000,000 in 26 portfolio companies, including $143,000,000 in five new companies, 132,000,000 to ISLP and $108,000,000 in 20 existing companies. Sales and repayment activity totaled $549,000,000 driven by $320,000,000 of investments that were contributed to the ISLP. The remaining $229,000,000 were comprised of broad based repayment and sale activities across our investments. As Mike mentioned earlier during the call, new investment levels were high during the first quarter amid a backdrop of strong M and A activity. We were active lending to new platforms through our strong sponsor relationships as well as lending to existing borrowers through our incumbency advantage.

The majority of our new commitments were comprised of first lien loan opportunities. The weighted average yield on new investments was approximately 8.2% as compared to the weighted average yield of 7.2% across our sales and repayments. As a result, the quarter as a result, the yield at amortized cost on our total investment portfolio increased by approximately 30 bps quarter over quarter. We were also active investing with European borrowers as our flexible and global capital base enables us to reach the unique financing needs across our wide pipeline of borrowers. Our largest new investment in the first quarter was sourced through our London office to a market leading software and hardware developer headquartered in Germany.

Our pre existing relationship with the sponsor and track record of investing in prior European investments alongside them gave us the experience and direct access required to lead this deal. We structured a first lien unit tranche investment at an attractive spread and discount alongside of sponsors we believe to be high quality. Leading this transaction enabled us to earn syndication income as we brought in another partner. Turning to the investment portfolio. At the end of the first quarter, the size of our investment portfolio at fair value was $2,300,000,000 diversified set of 101 portfolio companies operating across 29 different industries.

We continue to favor companies within the core of the middle market for borrowers with between $25,000,000 and $75,000,000 of EBITDA. This is demonstrated by the portfolio's median EBITDA of $43,000,000 This is a segment of the market that we continue to find attractive investment opportunities and tends to be less competitive than the upper middle market, which competes with broadly syndicated loans given greater borrower size. Our investments consist largely of first lien loans to sponsor backed middle market businesses. As of March 31, 82% of the investment portfolio at fair value was invested in first lien debt, 5% in second lien debt, 7% in equity interest and 6% in the ISLP. The ISLP's investment portfolio at fair value was $320,000,000 comprised of investments in 18 portfolio companies operating across 10 different industries.

100% of the investment portfolio was invested in senior secured floating rate loans including 87% in first lien and 13% in second lien loans. Moving on to portfolio credit quality trends. Credit metrics at our borrowers were stable quarter over quarter. The median leverage through our investment was 5.2 times, a modest improvement from 5.3 times as of December 31. Within our internal risk rating scale, we witnessed stable to improving trends.

87% of our portfolio at fair value was comprised of risk rating one and two investments. While this was in line with the prior quarter, the portfolio experienced an upgrade in the percentage of investments at fair value moving from a risk rating two to one with the risk rating one being the highest rating in terms of positive credit performance. Risk rating three investments comprised 13% of our portfolio at fair value and there were no classified as a risk rating four as of March 31. The number of investments rated three or four was reduced from 15 to 12 quarter over quarter. Our risk rating one and two investments have a weighted average fair value mark of 98.5% reflecting a continued gradual improvement of approximately 1% from the prior quarter.

Our risk rating three investments have a weighted average fair value mark of 84% of par, which was flat from the prior quarter. These investments largely comprise first lien loans with borrowers operating industries that have been more impacted by the pandemic. While we have observed improving financial trends and sufficient liquidity runway across the vast majority of these companies, we currently expect the back half of 2021 or 2022 recovery as the broader economic environment resumes more normalized activity. Based on our current fair valuations, we believe our portfolio still has the potential for NAV appreciation. Our portfolio in our view is comprised of high quality companies with demonstrated value propositions and it is still our current expectations to recognize a par repayment for the majority of these investments.

Non accrual investments declined quarter over quarter. As of March 31, we had no investments on non accrual status as we exited the one de minimis position that was previously on non accrual. Sally will now provide a more detailed financial review.

Speaker 1

Thank you, Mike and good morning everyone. I'll start the review of our first quarter twenty twenty one results with our income statement. Total investment income was $49,800,000 for the three months ended 03/31/2021 as compared to $48,300,000 for the three months ended 12/31/2020. The increase in investment income was primarily due to an increase in prepayment related income and other income. Total net expenses for the first quarter were $27,700,000 as compared to $26,400,000 in the fourth quarter.

The increase was primarily driven by higher incentive fees, partially offset by lower interest and debt financing expenses. Our advisor waived a portion of its base management fee demonstrating our continued alignment of interest with our shareholders and supporting the regular dividend level. We believe the company is well positioned to drive higher net investment income over time for our shareholders without the need for fee waivers. Net investment income for the quarter was $22,200,000 or $0.34 per share as compared to $21,900,000 or $0.34 per share for the prior quarter. During the three months ended 03/31/2021, the company had net realized and unrealized gains of $9,600,000 GAAP income per share for the three months ended 03/31/2021 was $0.49 per share.

Moving over to our balance sheet. As of March 31, our investment portfolio at fair value totaled $2,300,000,000 and total assets of $2,500,000,000 Total net assets were $1,078,000,000 dollars as of March 31. NAV per share was $16.69 as compared to $16.54 at the end of the fourth quarter, representing a 0.9% increase quarter over quarter. Our gains were attributed to net realized and unrealized gains across the portfolio. While we have recovered a large portion of the net unrealized losses on our investments over the course of the past four quarters, we believe there is still the potential for a further gradual recovery based on the current fair valuations across our investments.

At the end of Q1, our debt to equity ratio was 1.26 times compared to 1.37 times at the end of Q4. Our net leverage ratio, which represents principal debt outstanding less cash was 1.15 times at the end of Q1 as compared to 1.3 times at the end of Q4. Our net leverage ratio was in line with our stated target range of between one times and 1.25 times. As Mike mentioned earlier during the call, the ISLP closed during the first quarter. The company contributed $317,000,000 of investments at fair value in exchange for a 70.5% ownership stake in the JV.

As of March 31, BCSF's investment in ISLP was $129,000,000 representing approximately 6% of BCSF's total portfolio. Turning to our capitalization and liquidity. During the quarter, we issued $300,000,000 of 2.95% unsecured notes maturing in March of twenty twenty six, increasing the percentage of unsecured debt in our capital structure to 33%, up from 10% as of year end. We believe this is a significant improvement to strengthening the company's financial flexibility and capital structure. The proceeds of our notes offering were primarily used to repay our revolving credit facilities.

In March, we repaid a full outstanding we repaid in full outstanding commitments under the company's revolving credit facility with Goldman Sachs and terminated this facility which was scheduled to mature in April of twenty twenty two. This secured facility had a spread of 300 basis points as compared to the March 2026 unsecured notes issuance which we were able to obtain a spread of two forty basis points given the historically low interest rate environment. We continue to have access to our JPMorgan revolving credit facility and our advisor loan. Available liquidity consisting of cash and undrawn capacity on our credit facilities was $398,000,000 against our $217,000,000 of undrawn investment commitments. This represents coverage of 1.84 times as of March 31.

For the three months ended 03/31/2021, the weighted average interest rate on our debt outstanding was 3.2% consistent with the rate during the prior quarter. As of 03/31/2021, the company was in compliance with all terms under its secured credit facilities. With that, I will turn the call back over to Mike for closing remarks.

Speaker 2

Thanks, Sally. In closing, were very pleased to deliver another solid quarter of earnings to our shareholders. We believe the company is off to a strong start here at the beginning of the year and that we're well positioned to capitalize on new investment opportunities to drive higher earnings to our shareholders. We appreciate our shareholders' support managing your capital and we look forward to continuing to work hard throughout the remainder of the year. Emily, if you could please open the line up for questions.

Thanks.

Speaker 0

We will now begin the question and answer Our first question comes from Finian Osha from Wells Fargo Securities. Please go ahead.

Speaker 2

Hi, thanks. Good morning. A couple of questions on the ISLP. It looks like that got off to a quick start, but it's still under levered I think and it was a partial quarter. Can you remind us of the leverage target and what's the sort of run rate ROE as of threethirty one?

Sure. So the leverage target for the ISLP is leverage target that's stated for BCFF overall. So between 11.25% net leverage is what we're targeting over time. The ROE for the program, one levered at that level should be in the 12% to 13% range. But because we are operating slightly under levered as you noted when we set up the ISLP, we're running closer to 9% or 10% ROEs as of March 31.

Okay. And should we expect I think it looks like there was some interest income. Should we expect an uptick in dividend income starting this quarter? Yes, that's right. And we've talked a little bit about the strength of our European pipeline in prepared remarks, but I would continue to reiterate that our balance across the globe are driving really interesting deal flow.

And I would expect the deals coming in through that channel to really tick up here in the coming quarters to drive that increase in dividend income out of the ISLP over time. Okay. Thanks. And then for the assets, what was the breakdown of incumbent portfolio drop ins versus sell downs from your new origination this quarter for the ISLP portfolio? Sure.

So the ISLP portfolio for what we did in Q1 were all incumbent dropdown position. Starting in Q2 and going forward, there will be new originations that will get allocated to that program. But given the program was just set up in February, Q1 was all incumbent sales into that structure. Okay. That's all for me.

Thank you. Thanks.

Speaker 0

Our next question comes from Ryan Lynch of KBW. Please go ahead.

Speaker 3

Hey, good morning guys. Thanks for taking my questions. The first one I had was just on your you kind of talked about your opportunities in the international markets being much stronger than here domestically. I think you said half of your deals were international this quarter. Can you maybe just compare and contrast how the international market obviously depends on which country we're talking about.

But just from a high level, how do those markets compare from a competitive standpoint compared to The U. S. Market just because it feels like The U. S. Markets have come back basically give or take to where pre COVID levels were?

How has that been from an international standpoint? Sure. Just high level what I would

Speaker 2

say is probably the most comparable market especially from a competitive standpoint in Europe versus The U. S. Would be The U. K. It's probably one where a lot of folks that might even be U.

S.-based might occasionally try to do deals. And it's probably the longest standing market in terms of looking like The U. S. From a sponsor backed M and A perspective. As a result, what you'll see is we tend to while we have an active business there, we're obviously based in London.

We tend to do some deals in The Nordics. We like the Benelux countries. The company that Mike highlighted in his remarks is actually a German company. So we're trying to not only stay away from The U. K, but certainly what we're finding better risk adjusted return because of potentially less competition, because of maybe less sophistication in some of the more peripheral markets of Europe versus rather than The UK.

It's not to say Germany is obviously peripheral market because it's a huge economy. But again having that local presence there and having native language speakers of all different countries in our offices actually really helps there as well. So again I'd say U. K. Probably looks most like The U.

S. And then each of the other countries is definitely very distinct and different.

Speaker 3

Okay. Understood. That's helpful. And then as far as balance sheet capital management at this point with the formation of the JV, looks like you guys delevered your balance sheet as you guys wanted to. At this point at this leverage level, is this where we should kind of think about you guys operating going forward?

Speaker 2

Yes. That's right. So we've highlighted that we're focused on a net leverage range between one and one in the quarter. I think where we ended the quarter at 1.15 times was kind of hitting the nail on the head of what we're looking for in terms of operations in the future. We did highlight in prepared remarks that our goal is to get our asset yields from the mid-7s up into 8% or 8% plus range.

And I think that's a critical part of increasing the income potential of BCFF.

Speaker 3

Okay. And on that last point you just mentioned with increasing the yields in your portfolio. I know you mentioned growing the JV rotating some assets on your balance sheet as well. As far as The U. S.

Middle market lending is going, how would you say that yields in your kind of core target markets are coming in today versus your current portfolio yield?

Speaker 2

Yes. So in The U. S, I'd say the yields have been fairly consistent to your point where we are almost back to pre COVID level. So a key part of really increasing the yield in the portfolio is as you noted, JVs and continued allocations into markets outside of The U. S.

Do view The U. S. As an important core earner for BCSF and we think new investment opportunities should be able to drive yields in that 7.5%, 8% range. But the real way that we're able to pick up spread here is through international markets and things like joint ventures.

Speaker 3

Okay. Understood. That's all from me. I appreciate the time this morning.

Speaker 2

Thanks, Ryan. This

Speaker 0

concludes the question and answer session. I would now like to turn the conference back over to Michael Ewald for closing remarks.

Speaker 2

Thanks Emily. Again, we're very happy and pleased with the performance of the company here in the first quarter. We do think it sets us up very well for the remainder of the year and we look forward to speaking with you after the end of the second quarter. Thanks very much.

Speaker 0

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.