Bain Capital Specialty Finance - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid NII and stable credit: NII/share of $0.50 (119% coverage of the $0.42 regular dividend plus $0.03 additional) and NAV/share of $17.64 (down $0.01 QoQ) as credit quality remained healthy with nonaccruals at 1.4% of cost and 0.7% of fair value.
• Versus S&P Global consensus, BCSF beat on EPS ($0.50 vs $0.473*) but missed on total investment income ($66.84m vs $71.00m*), with revenue headwinds tied to lower portfolio yields (base rate declines), lower other income, and back‑half weighted fundings; management highlighted spreads around SOFR +540 bps and noted late-quarter fundings reduced interest income recognition.
• Dividend framework maintained: Board declared Q2 2025 regular dividend of $0.42 and the next $0.03 additional dividend installment; spillover/UTI estimated at ~$1.41 per share, >3x the quarterly regular dividend, underpinning payout stability.
• Balance sheet de-risked: $350m 5.950% notes due 2030 issued and swapped to SOFR+190 bps; no maturities in 2025; net leverage 1.17x within the 1.0–1.25x target, and liquidity ~$823m at quarter end, positioning the company for opportunity amid competition and macro volatility.

What Went Well and What Went Wrong

• What Went Well

  • Strong dividend coverage and disciplined underwriting in core middle market; CEO: “strong start to the year driven by high net investment income, stable net asset value and continued solid credit performance”.
  • Liability management: $350m 2030 unsecured notes swapped to floating at SOFR+190 bps, aligned with floating debt mix; no 2025 maturities.
  • Credit remained solid: nonaccruals low (1.4% cost/0.7% FV) and risk ratings stable; 93% of debt investments floating; portfolio yield at 11.5% despite modest decline.

• What Went Wrong

  • Revenue miss vs consensus as total investment income fell QoQ to $66.8m from $73.3m, driven by lower yields (base rates) and lower other/dividend income, compounded by late-quarter fundings.
  • Competitive pressure: management cited spread compression and heightened competition, particularly at the upper end; Q1 first-lien originations still >+140 bps spread, but down ~10 bps QoQ.
  • Slight uptick in nonaccrual FV ratio from 0.2% to 0.7% QoQ and modest realized/unrealized losses (-$3.6m) impacted GAAP EPS ($0.44).

Transcript

Operator (participant)

Good day, everyone, and welcome to the Bain Capital Specialty Finance First Quarter Ended March 31, 2025 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask questions by pressing the star and one on your telephone keypad. You may withdraw your question by pressing star two. Please note this call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Katherine Schneider, Investor Relations. Please go ahead.

Katherine Schneider (Head of Investor Relations)

Thanks, Nikki. Good morning and welcome to the Bain Capital Specialty Finance First Quarter Ended March 31, 2025 conference call. Yesterday, after market close, 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 factor 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. With that, I'd like to turn the call over to our CEO, Michael Ewald.

Michael Ewald (CEO)

Thanks, Katherine, and good morning, and thanks to all of you for joining us here on our earnings call. I'm also joined today by Mike Boyle, our President, and our Chief Financial Officer, Amit Joshi. As usual, in terms of agenda for the call, I'll start with an overview of our first quarter results and then provide some thoughts on our performance, the current market environment, and positioning. Thereafter, Mike and Amit will discuss our investment portfolio and financial results and great capital. As usual, we'll also leave some time for questions at the end. Yesterday, after close, we delivered the first quarter results. Q1 net investment income per share was $0.50, representing an annualized yield on book value of 11.3%. Our net investment income was well in excess of our regular dividend, with 119% dividend coverage.

Q1 earnings per share were $0.44, reflecting an annualized return on book value of 10.0%. Our results were driven by high-quality interest income earned from our middle market borrowers and stable credit performance across our portfolio. Our net asset value per share was $17.64, down one penny per share from the prior quarter end. Subsequent to quarter end, our board declared a second quarter dividend equal to $0.42 per share, payable to record date holders as of June 16, 2025. The board also declared an additional dividend of $0.03 per share for shareholders of record as of June 16, 2025, as we previously announced in February. The total dividends for the second quarter were $0.45 per share, or a 10.2% annualized return on ending value as of March 31, which we believe represents an attractive yield for our shareholders.

In terms of the market, the first quarter was a busy start to the year beginning in January, although volumes then trended upward throughout the quarter on increased volatility and uncertainty experienced across the broader market. Middle market direct lending volumes continued to see compression amid high levels of competition, which were steepest across the upper and larger ends of the market. We're certainly not immune to increased competition within the core part of the market, although we seek to be disciplined capital providers when we underwrite new capital structures, price the risk we take, the reward we receive. Q1, BCSF's gross originations were $277 million, down 31% year-over-year. We remained selective in our underwriting approach and continued to favor middle market companies within the core part of the market.

The median weighted average EBITDA of borrowers during the quarter was approximately $23 million and $3 million, respectively. The weighted average spread in our first lien originations was over 140 basis points. Many of the core tenets that we value in our direct work strategy, such as higher spread premiums, stronger lender controls through credit documentation containing financial commitments, and having majority control positions within a small lender group, are much more attainable in this segment of the market. Notably, these are attributes that we believe are increasingly important during periods of greater volatility. Ninety-seven percent of our Q1 originations to new companies were structured with documentation containing financial covenants tied to management's forecasts and majority control positions in over 78% of these debt tranches, allowing us to drive eventual outcomes at our discretion. These statistics are consistent with our broader portfolio, showing our continued focus on these core tenets.

Credit quality and fundamentals continue to be solid across our portfolio. Investments on non-accrual represented 1.4% and 0.7% of amortized cost and fair value, respectively, as of March 31. Overall liquidity drawn was $323 million of total available liquidity across undrawn capacity on our revolving credit facility, cash, and net settled trades. We end the first quarter at a net leverage ratio of 1.17 times, which falls within our target leverage ratio on a net basis of 1.0-1.25 times, and positions us well with ample dry powder in the current environment. Following the U.S. government's tariff announcements in early April, we performed a portfolio review to identify potential individual company exposure to higher tariffs. While there is still uncertainty around the timing and height of eventual tariffs, given the fluid situation and ongoing developments, only a small portion of BCSF's portfolio companies were estimated to have direct tariff exposure.

This limited exposure to exogenous factors identified by our team aligns with various facets of our investment strategy, including a focus on the core middle market, asset light, high free cash flow businesses, domestic manufacturing, and favoring certain industries such as software, healthcare, business services, and financial services. Notably, our aerospace and defense investments are not expected to have high direct impacts from tariffs, as our exposure within the segment includes service providers and manufacturers with overwhelmingly domestic customer bases and supply chains. While it is still too early to assess longer-term impacts of tariffs on the broader economy, we remain focused on the potential downstream effects of these and other current administration policies that could drive inflation higher, lower economic growth, and lead to a potential recessionary environment.

Bain Capital's private credit group has over 25 years of experience and is well equipped to navigate the current environment, as our professionals have successfully navigated multiple market cycles and periods of disruptions in the past, and we remain focused on prudently managing our portfolio. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail.

Mike Boyle (President)

Thanks, Michael. Good morning, everyone. I'll start with our investment activity for the first quarter and then provide an update in more detail on our portfolio. New fundings during the first quarter were $277 million into 89 portfolio companies, including $140 million in 13 new companies, $134 million in 75 existing companies, and $2 million into our senior loan program. Sales and repayment activity totaled approximately $246 million, resulting in net investment fundings of $31 million quarter over quarter. Our fundings were split with 51% of total fundings made to new portfolio companies versus 49% to existing companies. This quarter, we remained focused on investing in first lien senior secured loans, with 90% of our investments made into first lien structures, 9% in subordinated debt, and 1% into equity. Investments made in the quarter continued to favor defensive industries such as healthcare, high tech, and business services.

For our select investments within auto and capital equipment sectors, we provided capital to service-oriented companies within these end markets or manufacturers with domestic footprints. Turning to the investment portfolio, at the end of the first quarter, the size of our portfolio at fair value was $2.5 billion across a diversified set of 175 companies operating across 29 different industries. We have continued to increase our single-name portfolio diversification, with name count up from 153 companies one year ago and 108 companies at the beginning of 2020. Our portfolio primarily consists of investments in first lien senior secured loans, given our focus on downside management and investing in the top of capital structures.

As of March 31, 64% of the investment portfolio at fair value was invested in first lien debt, 1% in second lien debt, 3% in subordinated debt, 7% in preferred equity, 9% in equity, and 16% across our joint ventures, including 10% in our international senior loan program and 6% in our senior loan program. As a reminder, the vast majority of the underlying investments within our joint venture structures are first lien loans. As of March 31, 2025, the weighted average yield of the investment portfolio at amortized cost and fair value was 11.5% and 11.5%, respectively, as compared to 11.7% and 11.8%, respectively, as of December 31, 2024. This decrease in yields was primarily driven by a decrease in reference rates as well as spreads across our portfolio. 93% of our debt investments bear interest at a floating rate, positioning the company favorably in today's higher rate environment.

Moving on to portfolio credit quality trends, our credit fundamentals remained healthy. We saw largely stable trends within our internal risk rating scale quarter over quarter. Risk rating one and two investments comprised 95% of our portfolio as of March 31, indicating that these companies are performing in line or better than the expectations we set at our underwrite. Risk rating three and four are underperforming investments comprised just 5% of our portfolio at fair value. Investments on non-accrual represented 1.4% and 0.7% of the total investment portfolio at amortized cost and fair value, respectively, as of March 31. This compares to 1.3% and 0.2%, respectively, as of December 31. I will also highlight that performance across our aggregate 100-plus companies within our underlying joint ventures continued to perform well, consistent with our broader portfolio. I'll turn it now to Amit, who will provide a more detailed financial review.

Amit Joshi (CFO)

Thank you, Mike, and good morning, everyone. I'll start the review of our first quarter results with our income statement. Total investment income was $66.8 million for the three months ended March 31, 2025, as compared to $73.3 million for the three months ended December 31, 2024. The decrease in investment income was driven by a decrease in average investment balance of the portfolio as a new origination funded towards the back half of the quarter, lower portfolio yields, and a decrease in other income. The quality of our investment income continues to be high, as the vast majority of our investment income is driven by contractual cash income across our investments. Interest income and dividend income represented 96% of our total investment income in Q1. PIK income is also low, at just under 10% of our overall investment income.

Notably, the vast majority of our pick income is derived from investments that were underwritten with PIK versus from amendment or restructured investments. Total expenses before taxes for the first quarter was $33.7 million, as compared to $38.4 million in the fourth quarter. The decrease in expenses was primarily driven by lower incentive fee resulting from our three-year lookback feature on our incentive fee hurdle rate. Net investment income for the quarter was $32.1 million, or $0.50 per share, as compared to $33.6 million, or $0.52 per share for the prior quarter. During the three months ended March 31, 2025, the company had net realized and unrealized losses of $3.6 million. Net income for three months ended March 31, 2025, was $28.5 million, or $0.44 per share.

Moving to our balance sheet, as of March 31, our investment portfolio at fair value totaled $2.5 billion and total assets of $2.6 billion. Total net assets were $1.1 billion as of March 31. NAV per share was $17.64, a slight decrease of $0.01 per share from $17.65 at the end of the fourth quarter. In January, we issued $350 million of unsecured notes maturing in March 2030 at a spread of 190 basis points. We swapped these notes to floating notes at SOFR plus 190 basis points, which is close to parity with our weighted average spread on our floating rate debt of 187.5 basis points. We believe our liability structure is well positioned in the current environment, with no debt maturities this year. Our unsecured note issuance during the first quarter positioned us well in advance of our first unsecured debt maturing in March of 2026.

As of March 31, approximately 59% of our outstanding debt was in floating rate debt, and 41% was in fixed rate debt. For the three months ended March 31, 2025, the weighted average interest rate on our debt outstanding was 4.8%, as compared to 5.1% at the prior quarter end. The weighted average maturity across our total debt commitment was approximately 4.2 years at March 31, 2025. At the end of Q1, our debt-to-equity ratio was 1.27 times, as compared to 1.22 times at the end of Q4. Our net leverage ratio, which represents principal debt outstanding less cash and unsettled trade, was 1.17 times at the end of Q1, as compared to 1.13 times at the end of Q4.

Liquidity at quarter end was strong, totaling $823 million, including $699 million of undrawn capacity on our revolver facility, $94 million of cash and cash equivalent, including $55.6 million of restricted cash, and $30.3 million of unsettled trade, net of receivables and payables of investments. We currently estimate that our spillover income totaled approximately $1.41 per share, representing over three times our quarterly regular dividend. With that, I'll turn the call back over to Mike Ewald for the closing remarks.

Michael Ewald (CEO)

Thanks, Amit, and thank you, Mike, as well. In closing, we are pleased to deliver a strong start to the year for our shareholders with our Q1 2025 results. Looking ahead, we believe our portfolio and balance sheet are well positioned to navigate potentially increasing periods of liquidity or volatility ahead, excuse me. Our investment team is equipped with deep expertise, having invested across multiple market cycles across our line history. We remain committed to delivering value for our shareholders by providing attractive returns on equity and prudently managing our shareholders' capital. Nikki, please open the line for questions. Thanks.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw your question by pressing star two. Once again, to ask a question, please press the star and one on your telephone keypad. We will take our first question from Paul Johnson with KBW. Please go ahead. Your line is open.

Paul Johnson (VP)

Yeah, thanks for taking my questions. Just on the later fundings that you mentioned in the quarter and the lower sort of interest income, I guess, quarter over quarter, is there any way to quantify that, I guess, in terms of how much funded kind of late in the quarter and kind of when? Approximate timing?

Mike Boyle (President)

Sure. Thanks for the question, Paul. It was somewhat backdated in terms of new fundings. What I would point you to is just the spread calculation and yield calculation across the entire portfolio. We are still generating about an 11.5% yield across the book. New originations, as Ewald noted in his remarks, were made at about 540 basis points spread over base rates. We do feel quite good that the earnings yield is still quite stable. I do note your point that some of the fundings were backweighted into the quarter.

Michael Ewald (CEO)

Paul, if it's helpful too, that spread, the 540+ that we had last quarter was down about 10 basis points over the prior quarter. Decline, but certainly not what we have seen earlier.

Paul Johnson (VP)

Is that spread just a straight coupon spread, or does that include any kind of adjustment for amortized income?

Mike Boyle (President)

Its spread is just spread.

Amit Joshi (CFO)

Spread.

Mike Boyle (President)

Yeah.

Paul Johnson (VP)

Yeah. Got it. Okay. Thanks.

Amit Joshi (CFO)

I mean, on an average, right?

Paul Johnson (VP)

Got it. Okay. Thank you for that. Maybe just kind of talking about, or sorry, going into just the realized losses this quarter, can you just kind of talk about, for example, Forming Machine Industries? What was kind of the resolution there, if that's what drove the loss, or if there were any other things in there that drove realized losses this quarter and how you were able to drive to such a quick solution there?

Mike Boyle (President)

Sure. Yes, we did have two names that were on non-accrual that we exited in the quarter: Atlas, which is at Forming Machine Products, as well as Aimbridge, which was a second lien investment that we made. Both of them were situations where our restructuring teams worked with the company and the other participants in the capital structure to drive to a resolution. In both of those situations, we either sold the position to another lender in the group or just completely exited the position with the sale of the company. Both of those had been on accrual for quite a reasonable period of time when we were doing work through the restructuring. In both situations, we feel like we optimized our value on the exit. In Atlas, we were both in the first lien and second lien.

In Aimbridge, we were a second lien holder there. Both of those, we did recover a reasonable value here over the life of the hold, north of $0.50 across both of those investments. It was the strong work of our restructuring team that did drive us to exit both of those investments here in the first quarter.

Paul Johnson (VP)

Got it. In the exit mark, $0.50, the recovery there, was that below the fourth quarter mark? Was there any sort of additional markdown from that, or was that pretty much in line from last quarter?

Mike Boyle (President)

It was in line with last quarter's marks.

Paul Johnson (VP)

Thank you very much. That's all for me.

Mike Boyle (President)

Thank you.

Operator (participant)

Thank you. Once again, that is star and one for your questions. We will move next with Finian O'Shea with Wells Fargo Securities. Please go ahead. Your line is open.

Finian O'Shea (Director)

Hey, everyone. Good morning. I wanted to ask about the ATM. It looks like you tapped that in the quarter. Just see what your posture will be there, if this will sort of continue to dribble out, as they say. If so, will you also be buying back stock below book going forward? Thanks.

Michael Ewald (CEO)

Thanks, Fin. Look, it is on the ATM option first. It's meant to be opportunistic, if it makes sense, to tap it. Quick wrap issue. As you certainly appreciate, the entire B segment traded down recently right around the time that we announced it, so we did not end up tapping into that again. It is something that is open. It's available, but I think it's going to be dependent on how we're trading. On your question around buybacks, we do still have a program that we put in place, I guess, probably back four years ago now. It's something that we evaluate versus the alternative of continuing to use that capital, that equity capital, to invest in the market. As you know, we haven't tapped that before, but that is something that is available to us if we think that that is the resource of capital.

Finian O'Shea (Director)

Okay. Thanks. Can you talk about dividend coverage and the SOFR curve? Sort of what level would it be the next Fed cut or something more that would put you underneath?

Amit Joshi (CFO)

I would say at this point, yeah, at this point, based on our projection, right, and again, in an environment where we believe rates will continue to stay higher, we do not see in foreseeable future that we need to revisit our current dividend, as we have highlighted. Our regular dividend is $0.42, and we have been declaring additional supplemental dividend. We do not foresee in near term any need for us to revisit our dividend. At the same time as we highlighted, we do have a good amount of spillover income as well, which we will continue to evaluate as we look at our dividend policy.

Mike Boyle (President)

Okay. Thanks so much.

Operator (participant)

Thank you. Once again, that is star and one for your questions. We'll pause for another moment to allow any further questions to queue. There appear to be no further questions at this time. I will turn the call back to management for closing rem. Oh, actually, yeah, we are showing another question comes from the line of Derek Hewett with Bank of America. Please go ahead.

Derek Hewett (Senior Research Analyst)

Good morning, everyone. Just a question on the look-back. If credit kind of stabilizes at current levels, when should the full incentive fee kick back in? Will it be in the second quarter, or will it be sometime later? Thank you.

Amit Joshi (CFO)

We do expect that from second quarter onwards, it should stabilize. There are some nuances with look-back because there is a payment component too. It does create some volatility in future as well. We do expect that significant amount of impact around COVID and all has already been accounted for. We do expect from Q2, it should be more stabilized.

Derek Hewett (Senior Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. It appears that we have no further questions at this time. I will turn the call back to management for closing or additional remarks.

Michael Ewald (CEO)

Thanks a lot, Nikki. Thanks again to everyone on the phone for your time and attention today. We look forward to speaking with you again next quarter. Thanks.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may disconnect at any time.