Bain Capital Specialty Finance - Earnings Call - Q2 2025

Executive Summary

• BCSF delivered solid Q2 with NII per share of $0.47 and GAAP EPS of $0.37; NII covered the regular dividend by 112%, while NAV/share dipped slightly to $17.56 on modest net losses.
• Results vs S&P Global consensus: EPS (NII) beat ($0.47 vs $0.44) and revenue beat ($71.0m vs $67.9m); prior quarter had a revenue miss and EPS beat, and Q4 2024 was a clean beat on both metrics. Primary EPS Consensus Mean and Revenue Consensus Mean values marked with asterisks are from S&P Global.
• Origination environment remained competitive but stable; new Q2 originations carried >580 bps average spread and leverage ~4.7x; 93% of new fundings were first-lien, helping sustain attractive NII despite spread compression.
• Capital actions support forward earnings stability: dividend maintained at $0.42 plus $0.03 additional for Q3; pro forma gross D/E fell to ~1.22x after a July CLO refinancing at attractive AAA pricing (150–155 bps), enhancing funding flexibility.

What Went Well and What Went Wrong

• What Went Well

  • Strong earnings quality and dividend coverage: NII/share $0.47 (112% coverage of regular dividend), NII yield on book value 10.7%. CEO: “solid second quarter results driven by high net investment income… diversified portfolio remains healthy with low non-accruals”.
  • Attractive new origination economics despite competition: weighted average spread on Q2 new originations >580 bps; portfolio yield stable at 11.4% (amortized cost and FV) versus 11.5% in Q1.
  • Liability optimization: refinanced 2019 CLO post-quarter with strong AAA levels (150–155 bps), lowering pro forma gross D/E to ~1.22x; positions balance sheet ahead of 2026 maturities.

• What Went Wrong

  • Modest NAV decline: NAV/share decreased $0.08 q/q to $17.56, driven by net realized/unrealized losses of $6.9m in the quarter.
  • Expense and liability costs ticked higher: total expenses rose to $39.3m (from $33.7m in Q1) and weighted average interest rate on debt increased to 4.9% (from 4.8%).
  • Slight uptick in non-accruals: five companies on non-accrual; non-accruals rose to 1.7% of cost (0.6% FV) vs 1.4% (0.7% FV) in Q1, though still low versus peers.

Transcript

Speaker 4

Today, and welcome to the Bain Capital Specialty Finance second quarter ended June 30, 2025 earnings conference call. Currently, all phone lines are in a listen-only mode. Later, there'll be an opportunity to ask questions during a question and answer session. You may register to ask a question at any time by pressing the star then one on your telephone keypad. Please be advised today's program is being recorded. It is now my pleasure to turn the program over to Katherine Schneider, Investor Relations. You may begin.

Speaker 1

Thank you, Aaron. Good morning and welcome everyone to the Bain Capital Specialty Finance second quarter ended June 30, 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 Chief Executive Officer, Michael Ewald.

Speaker 0

Thanks, Katherine, and good morning to everyone. Thank you for joining us on our earnings call here today. I'm joined by Mike Boyle, our President, and our Chief Financial Officer, Amit Joshi. In terms of agenda for the call, we'll stick a little bit with past practice here. I'll start with an overview of second quarter results and then provide some thoughts on our performance, the current 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. Yesterday, after market close, we delivered solid second quarter results. Q2 net investment income per share was $0.47, representing an annualized yield on book value of 10.7%. Notably, our net investment income continues to demonstrate strong dividend coverage for our shareholders, exceeding our regular dividend payout by 12%.

Q2 earnings per share were $0.37, reflecting an annualized return on book value of 8.3%. Our results were driven by strong levels of interest income earned from our middle market borrowers and largely stable credit performance across our portfolio. Our net asset value per share was $17.56, down slightly $0.08 per share from the prior quarter end. Subsequent to quarter end, our board declared a third quarter dividend equal to $0.42 per share, payable to record date holders as of September 16, 2025. The board also declared an additional dividend of $0.03 per share for shareholders of record as of September 16, 2025, as we had 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.

Turning to the market, we witnessed increased market volatility at the beginning of the second quarter as a result of higher tariffs that the market feared would lead to a lower economic growth backdrop in the U.S. This caused a temporary pause in new deal volume activities across the market as investors sought more clarity and then resumed to more normalized levels throughout the quarter, fueled by greater market optimism. Against this backdrop, Bain Capital's private credit group navigated the challenging market conditions by sticking to our core competency and longstanding presence in the middle market. Our scale and longstanding presence in this segment of the market allowed us to source attractive investment opportunities for our investors despite a lower level of broader M&A activity in the market. In fact, during Q2, BCSF's gross originations were $530 million, up 73% year over year.

We remained selective in our underwriting approach and continued to favor middle market size companies within the core segment of the market. To source these new investment opportunities, we benefited from Bain Capital's platform advantage through our sourcing relationships that benefit from our deep industry expertise and that distinguishes our platform from other competing lenders. Our incumbency advantage allows us to remain active by supporting existing companies through add-on activities and our broader private credit group platform that has flexible capital to invest across the capital structure, from which BCSF benefits to source a greater and wider set of investment opportunities. While the market environment remains competitive with spread compression continuing more broadly, we believe Bain Capital remains well positioned to navigate this dynamic. The weighted average spread of our new originations during Q2 was over 580 basis points, demonstrating our ability to drive alpha for our investors.

Our disciplined capital base allows us to pick our spots in areas of the market that we find most attractive versus competing against other segments of the market that may exhibit greater spread compression and less favorable documentation terms. In doing so, this has allowed us to produce attractive levels of net investment income for our shareholders while remaining focused on protecting our downside. Credit quality and fundamentals continue to be healthy across our portfolio. Investments on non-accrual represent 1.7% and 0.6% at amortized cost and fair value, respectively, as of June 30th. We saw a slight uptick in non-accruals this quarter, driven by one new name added. Our non-accrual rate, though, continues to be low relative to the broader BDC sector average based on first quarter results, as we do not have full comparable Q2 data for our peers yet.

Looking ahead, we know dividend coverage has been a recent topic on investor minds in light of tightening market spreads, the potential for a lower interest rate environment, and higher liability costs with low fixed-rate debt structures maturing. We wanted to take a moment to discuss our performance and future levers of growth. First, we would remind our investors that we set our dividend policy at an attractive level for shareholders and at a rate that can be earned throughout multiple market environments. As a reminder, our regular dividend rate at book value is 9.5% annualized. In more recent periods, our NII dividend coverage has been strong, both in Q2 and thus far this year for the first half of 2025, at 112% and 115%, respectively.

Our level of spillover income differentiates us versus other BDCs with $1.43 per share of spillover income, which is equal to over three times our regular dividend level. We also have nearly $0.10 per share of undistributed income from our joint venture investments that can contribute to higher NII levels in the future, as we've been over-earning the distributions paid to BCSF through these entities in recent quarters. Bain Capital has also demonstrated consistently strong credit performance. While we exhibited a modest NAV decline this quarter, our annualized ROE for the first six months of 2025 is 9.4% and approximately 11% in each of the prior two calendar years in 2024 and 2023. Taking all of this together, we've demonstrated attractive performance for our shareholders. Relative to where our current trading levels are versus book value, we believe our stock offers a compelling opportunity.

At BCSF's current market price as of yesterday's close, our dividend yield, inclusive of our regular and special dividend, represents a 12.2% annualized yield. We believe this is an attractive level for investors on both an absolute and relative value basis across the BDC sector. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail. Mike.

Speaker 2

Thanks, Michael, and good morning, everyone. I'll start with our investment activity for the second quarter and then provide an update in more detail on our portfolio. New investment fundings during the second quarter were $530 million in 94 portfolio companies, including $242 million into 12 new companies and $273 million in 81 existing companies, as well as $15 million into our Senior Loan Program. Sales and repayment activity totaled approximately $502 million, resulting in net investment fundings of $27 million quarter over quarter. Our new investment fundings were split between new and existing portfolio companies, with new investment fundings representing 46% of our total fundings versus 54% to existing companies, as our incumbency advantage allowed us to remain active with existing companies.

This quarter, we've remained focused on investing in first lien senior secured loans, with 93% of our new fundings within first lien structures, 3% into our investment vehicles, 3% into preferred and common equity, and 1% into subordinated debt. As Michael Ewald highlighted earlier on our call, our Q2 originations to new companies benefited from attractive spreads with our weighted average spread of over 580 basis points over floating rate. Leveraging terms continue to be favorable, with weighted average leverage across these new originations at 4.7 times. We remain focused on structuring new loans with documentation containing financial covenants and having majority control positions in the vast majority of our investments. This allows us to drive eventual outcomes at our discretion if needed. Turning now to the investment portfolio.

At the end of the second quarter, the size of the portfolio at fair value was approximately $2.5 billion across a highly diversified set of 185 portfolio companies operating across 29 different industries. Our average position to a single portfolio company is approximately 50 basis points, given the diversity of the overall portfolio. Our portfolio primarily consists of first lien senior secured loans, given our focus on downside management and investing at the top of capital structures. As of June 30th, 63% of the investment portfolio at fair value was invested in first lien debt, 1% in second lien debt, 4% subordinated debt, 7% in preferred equity, 9% in equity and other interests, as well as 16% across our joint ventures, including 10% in the International Senior Loan Program and 6% in our Senior Loan Program.

In both of these programs, the vast majority of our underlying investments consist of first lien loans. On a look-through basis, including our exposure within our joint ventures, our first lien exposure is 84%. We would also note that our 9% equity interests are comprised of a diverse number of equity co-invests and select equity investments that were made at the time of originations and not the results of restructuring investments. As of June 30th, the weighted average yield on the investment portfolio at amortized cost and fair value was 11.4% and 11.4%, respectively, as compared to 11.5% and 11.5%, respectively, as of March 31st, 2023. We are pleased to demonstrate these stable yields in light of a broader market spread compression. 93% of our debt investments bear interest at a floating rate, positioning the company favorably in today's higher interest rate environment.

Moving over to portfolio quality trends, our credit fundamentals remain healthy. We saw stable trends within our internal risk rating scale quarter over quarter. Risk rating one and two investments, which indicate that the company is performing in line or better than expectations relative to our initial underwrite, total 95% of the portfolio as of June 30th, consistent with our prior quarter end. Risk rating three and four or underperforming investments comprise 5% of our portfolio at fair value. These investments on our watchlist have been relatively stable, and we've not seen any meaningful change from higher tariff impacts across the portfolio. Investments on non-accrual represented 1.7% and 0.6% of the total investment portfolio at amortized cost and fair value, respectively. As of June 30th, this is compared to 1.4% and 0.7%, respectively, as of March 31st.

As Michael Ewald highlighted earlier, the increase in non-accruals was driven by one company added this quarter. Amit will now provide a more detailed financial review.

Speaker 3

Thank you, Mike. Good morning, everyone. I'll start the review of our second quarter results with our income statement. Total investment income was $71 million for the three months ended June 30, 2025, as compared to $66.8 million for the three months ended March 31, 2025. The increase in investment income was driven by an increase in average investment balance of the portfolio, higher effective yields on the existing debt portfolio, and an increase in the 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 94% of our total investment income in Q2. PIK income represents approximately 11% of our overall investment income.

The vast majority of our PIK income is derived from investments that were underwritten with PIK, with only a small portion of our PIK income related to amended or restructured investments. Total expenses before taxes for the second quarter were $39.3 million, as compared to $33.7 million in the first quarter. The increase in expenses was driven by greater incentive fees and interest in debt financing expenses. Net investment income for the quarter was $30.6 million or $0.47 per share, as compared to $32.1 million or $0.50 per share for the prior quarter. During the three months ended June 30, 2025, the company had net realized and unrealized losses of $6.9 million. Net income for the three months ended June 30, 2025 was $23.7 million or $0.37 per share.

Moving to our balance sheet, as of June 30, our investment portfolio at fair value totaled $2.5 billion and total assets of $2.8 billion. Total net assets were $1.1 billion as of June 30, 2025. NAV per share was $17.56, a decrease of $0.08 per share from $17.64 at the end of the first quarter. As of June 30, approximately 62% of our outstanding debt was in floating rate debt and 38% was in fixed rate debt. For the three months ended June 30, 2025, the weighted average interest rate on our debt outstanding was 4.9%, as compared to 4.8% as of the prior quarter end. The weighted average maturity across our total debt commitment was approximately 3.9 years at June 30, 2025. At the end of Q2, our debt-to-equity ratio was 1.37 times, as compared to 1.27 times from the end of Q1.

Our net leverage ratio, which represents principal debt outstanding less cash and unsettled trades, was 1.2 times at the end of Q2, as compared to 1.17 times at the end of Q1. Our gross leverage ratio was higher at the end of Q2 due to higher cash levels on our balance sheet at the end of the quarter. Subsequent to quarter end on July 2, we refinanced our middle market CLO debt, which decreased the principal of the debt from $352.5 million to $150.6 million. Pro forma for this transaction, the gross debt-to-equity ratio was reduced to 1.22 times. Liquidity at quarter end was strong, totaling $796 million, including $592 million of undrawn capacity from our revolving credit facility, $174.5 million of cash and cash equivalent, including $136.9 million of restricted cash and $29 million of unsettled trades, net of receivables and payables of the investments.

With that, I'll turn the call back over to Michael Ewald for the closing remarks.

Speaker 0

Thanks, Amit. In closing, we are pleased to deliver another quarter of attractive risk-adjusted returns, demonstrating our consistent long-term performance to generate value for our shareholders. Bain Capital's private credit group platform remains well positioned to navigate the current market environment as we continue to execute our longstanding strategy of investing in the middle market to drive attractive return for our investors over the long term. Aaron, please open the line for questions.

Speaker 4

Certainly. At this time, if you would like to ask a question, please press the star, then one on your telephone keypad. You may withdraw your question at any time by pressing star, then two. Again, it is star, then one to register for a question. We will take our first question from Tal Johnson with KBW. Your line is open.

Good morning. Thanks for taking my question. On the securitization refinancing, I believe it was the 2019-1 CLO that you mentioned. It sounds like you refinanced that. I'm just curious why or what kind of drove that decision. I mean, that looks like it's probably the most attractively priced securitization you have in the debt stacks. Is there an opportunity to refinance there at a higher cost? What drove that decision?

Speaker 3

Thanks. Thanks for your question. I would say, yes, it was pretty attractive from a pricing perspective. Our prior CLO securitization was with a weighted average cost of around 185 basis points, and we were able to access the market, which was pretty attractive. Our AAA tranche, we were able to issue around $150 million to $155 million range. It was pretty attractive from a pricing perspective. At the same time, I would say our 2019-1 CLO basically was up from an investment period perspective. We were evaluating it from that perspective anyway. The market provided us an opportunity, and the pricing made sense.

Got it. That makes sense. Just on the origination activity this quarter, obviously, you guys were pretty active with new originations. How would you characterize the activity for the quarter? Was this mostly new company originations, a lot of existing, and in a quarter where you saw, for the most part, reduced kind of activity across the space and reduced M&A activity? Just wondering what drove the higher than average origination?

Speaker 0

Yeah, thanks, Paul. There are a couple of factors I think that drove that. One is the core middle market where we play didn't exhibit as much of a pullback from activity as, you know, as one observed in that larger segment of the market. The second thing is we've been particularly focused across the private credit group in terms of expanding our reach into the market. You know, what we realize is as many strong relationships as we have, there's just still a lot more folks that we quite frankly don't know in the middle market. We've really broadened our sponsor outreach and developed a number of new relationships across the market. If you look at the stats, it's not quite 50/50, but it's roughly 50/50 from a new platform perspective versus add-on activity. It certainly hasn't just been driven by our incumbency advantage. That's certainly very helpful.

We also, as I said, continue to expand looking for new opportunities as well because the incumbent level of activity may wax and wane over time.

Got it. That makes sense. Are those investments that can eventually be sold down into the joint ventures? As you potentially want to make some room on the balance sheet, how do you typically manage that? Do you directly originate into the joint ventures?

They are investments that could ultimately get dropped down into our joint ventures. That's primarily driven by the fact that they're almost all first lien debt that fit well into the joint ventures if we decide to move them in future quarters.

Okay, great. Those are all the questions for me. Thank you very much.

Thanks, Paul. Thank you.

Speaker 4

If you'd like to ask a question, please press the star, then one on your telephone keypad. We'll pause for any additional questions to queue. Again, that is star, then one.

Speaker 0

Great. Thanks everyone for the time today and for joining us on our earnings call. We appreciate the continued interest in BCSF and support of us as well. We'll look forward to speaking to you in future quarters about upcoming results. Thanks very much.

Speaker 4

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