Bain Capital Specialty Finance - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 net investment income per share was $0.52, with total investment income of $73.3M; earnings per share were $0.34 and NAV per share declined modestly to $17.65 from $17.76, reflecting a markdown largely tied to Aimbridge Hospitality that was later exited slightly above the quarter-end mark.
• Management highlighted record 2024 originations ($1.7B) and strong NII coverage of the regular dividend (124% for the year), and declared 2025 additional dividends totaling $0.12 ($0.03 per quarter) alongside a $0.42 regular Q1 2025 dividend; dividend record and payment dates were accelerated to occur in the same month going forward.
• Spreads have largely stabilized: Q4 new direct originations carried ~SOFR + 560 bps (about 20 bps tighter vs Q2’s ~580 bps), with median leverage of ~4.4x; weighted average portfolio yields declined versus Q3 primarily on base-rate moves and lower dividend income.
• Liquidity and liability positioning improved with a $350M 5.95% unsecured note due 2030 (swapped to floating at SOFR + 190 bps), pro forma total liquidity of ~$817M, and net leverage of 1.13x, within the target range; debt-to-equity rose to 1.22x QoQ.
• S&P Global consensus EPS/revenue estimates were unavailable at time of analysis; estimate comparison to Wall Street consensus cannot be assessed this quarter [GetEstimates error].

What Went Well and What Went Wrong

What Went Well

• Consistent earnings power: “Q4 net investment income per share was $0.52… Our NII covered our regular dividend by 124% during the full year,” underscoring durable income generation and shareholder returns.
• Record originations and selective underwriting in core middle market: “Our broader platform and BCSF originated over $6 billion and $1.7 billion, respectively… we remain selective… weighted average spread ~560 bps and median leverage 4.4x”.
• Strengthened liability structure and ample liquidity: $350M notes due 2030 (swapped to floating); pro forma liquidity of ~$817M with net leverage 1.13x mid-range of target, reducing refinancing risk ahead of 2026 maturities.

What Went Wrong

• EPS down QoQ on markdowns: Q4 earnings per share fell to $0.34 from $0.51 in Q3, driven primarily by a markdown in Aimbridge Hospitality, which also contributed to the NAV decline; Aimbridge was exited post-quarter slightly above the mark.
• Portfolio yields down vs Q3: weighted average yields fell to 11.7%/11.8% (amortized cost/fair value) from 12.1%/12.1%, predominantly due to lower base rates and reduced dividend income from aviation/JVs.
• Investment fundings netted to only $42.7M despite gross activity, as repayments/sales matched much of the deployment, modestly tempering asset growth QoQ.

Transcript

Operator (participant)

Please stand by, your program is about to begin. Good day, everyone, and welcome to the Bain Capital Specialty Finance fourth quarter and fiscal year-ended December 31st, 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during a question-and-answer session. To register to ask a question, you may do so by pressing the star and one on your touchstone telephone. Please note today's call may be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Katherine Schneider. Please go ahead, ma'am.

Katherine Schneider (Head of Investor Relations)

Thanks, Erica. Good morning, everyone, and welcome to the Bain Capital Specialty Finance fourth quarter and year-ended December 31st, 2024 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-K 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. Good morning, and thanks to all of you for joining us here on our earnings call this morning. 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 fourth quarter and 2024 full-year 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. Yesterday, after market close, we delivered strong fourth quarter and full-year 2024 results. Q4 net investment income per share was $0.52, representing an annualized yield on book value of 11.8%. Our net investment income continued to be well in excess of our regular dividend, with 124% dividend coverage.

Q4 earnings per share were $0.34, reflecting an annualized return on book value of 7.8%. For the full year, 2024 net investment income per share was $2.09, equal to an 11.8% return on equity. Our NII covered our regular dividend by 124% during the full year. 2024 earnings per share were $1.85, representing a total return on equity of 10.9%. Our annual net earnings continued to exceed our dividend payout for the fourth consecutive year, demonstrating our consistently strong credit performance. Our results were driven by high-quality interest income earned from our middle market borrowers and that stable credit performance across our portfolio during the fourth quarter and throughout the year. Our net asset value ended the year at $17.65 per share, down from $17.76 from the previous quarter and up from $17.60 as of Q4 2023, reflecting the underlying portfolio strength.

We also paid out record dividends to our shareholders during the year, totaling $1.80 per share for 2024, an increase of 13% from 2023's dividends. Subsequent to quarter end, our board declared a first quarter dividend equal to $0.42 per share to record date holders as of March 17th, 2025. We very much value the dialogue and feedback from our existing shareholders when considering our dividend framework and setting an appropriate and attractive dividend level, including in a higher interest rate environment like we've experienced the past two years. As our 2024 earnings continue to produce strong levels of net investment income in excess of our regular dividend amount, our board declared additional dividends to shareholders totaling $0.12 per share for 2025 to be distributed in four consecutive quarterly payments of $0.03 per share per quarter, consistent with our approach last year.

In conjunction with feedback from our shareholders, our board also approved the change in the record date and payment date timing of our quarterly dividend, such that the record date and payment date will occur during the same month. This will accelerate the payment of our dividend by approximately 30 days each quarter compared to our prior cadence. This change has no material impact on our financial results. First quarter dividends are payable on March 31st, 2025, to stockholders of record as of March 17th, 2025. Including both the regular and additional dividend, total dividends for the first quarter are $0.45 per share, or a 10.2% annualized rate on ending book value as of December 31st, which we believe represents an attractive level for our shareholders.

Turning now to the market, 2024 was marked by a more active year of middle market loan volumes, although broader M&A activity still remains subdued. Despite this backdrop, both our private credit group platform and BCSF had their highest levels of calendar year originations. In 2024, our broader platform and BCSF originated over $6 billion and $1.7 billion, respectively, which were more than double 2023 volumes. Nonetheless, we remain selective in our underwriting approach and, importantly, continue to see attractive terms on the core middle market. Many of the base tenets that we value for direct lending activity are much more attainable within the segment of the market, in our view, and Bain Capital's long-standing presence and scale in this market segment positions us well.

We favor attributes such as higher spread premiums and stronger lender controls through credit agreement documentation containing financial covenants, and we also seek out investments where we can and have control positions by being the majority holder within a tighter lender group. Across our new direct originations to platforms during the fourth quarter, the median EBITDA of our borrowers was approximately $36 million. While we have seen some recent spread compression, terms and structure continue to be attractive with a weighted average spread of approximately 560 basis points, bringing the yield to 10.2% and median leverage levels of 4.4x on these new originations. We also remain focused on investing in debt structures that provide us with strong lender controls.

Nearly 100% of our Q4 originations to new portfolio companies were structured with documentation containing financial covenants tied to management's forecast, and we have majority control positions in nearly 80% of these debt charges, allowing us to drive eventual outcomes at our discretion. These statistics are consistent with our broader portfolio and exhibit our continued focus on these core tenets. Credit quality and fundamentals continue to be strong across our portfolio. Investment on non-accrual decreased quarter-over-quarter and represented 1.3% and 0.2% at amortized cost and fair value, respectively, as of December 31st. Since BCSF's inception in 2016, our average non-accrual rates have remained low at approximately 1% of cost, demonstrating the consistency of our long-term performance. These averages are below the BDC sector current and long-term averages of approximately 4%.

Pick income is also less than 10% of our overall investment income, and notably, the vast majority of our pick was structured at the outset of the investment versus being the result of later amendment activity. Lastly, we remained active with the right-hand side of our balance sheet in 2024 and thus far into 2025. In Q2 2024, we strengthened our liability structure by increasing the commitments and attracting new lenders to our evolving credit facility while also extending the maturity date. Earlier this year, the company issued $350 million of unsecured notes maturing in March 2030 at a spread of 190 basis points, bringing the all-in coupon to 5.95%. We swapped these notes to floating at SOFR plus 190 basis points, which is close to parity with the weighted average spread on our floating rate debt of 187.5 basis points as of December 31st.

We are pleased to see strong investor demand levels for this paper in the institutional debt markets and, as a result, benefited from a tight new issue spread. This debt issuance positions us well ahead of our debt maturities in 2026. Our overall liquidity is strong with $870 million of total available liquidity across undrawn capital on our revolving credit facility, cash, net settled trades, and pro forma for our recent unsecured notes issuance. At the end of the fourth quarter, our gross and net leverage ratios were 1.22x and 1.13x, respectively, which falls in the middle of our target range of 1.0x-1.25x on a net basis.

With the outlook for increased M&A activity in 2025, we are optimistic for middle market loan volumes to increase as well, and we believe we are well positioned in the current market environment to execute on these opportunities and drive further value for our investors. I'll 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 fourth quarter and then provide an update in more detail on our portfolio. New fundings during the fourth quarter were $547 million in 88 portfolio companies, including $317 million into 15 new companies and $230 million into 73 existing companies. Sales and repayment activity totaled approximately $505 million, resulting in net investment fundings of $42.7 million quarter-over-quarter. For the full year, fundings were $1.7 billion and more than double our volumes in 2023. Total sales and repayment activity for the year were $1.5 billion. As a result of this activity, the size of our total investment portfolio increased 6% year-over-year. Our new investing activities for the fourth quarter and full year were comprised of a mix of fundings to new portfolio companies and existing portfolio companies.

During the fourth quarter, new investment fundings to new portfolio companies represented 58% of total fundings versus 42% to existing companies. For the full year, 62% were to existing portfolio companies and 38% to new companies. In 2024, our platform benefited from its strong sponsor relationships to source new investments and our incumbency advantage from our existing portfolio companies to help them grow. During the quarter, we remained focused on investing in first lien senior secured loans, with 95% of our new investment fundings into first lien structures, 1% into subordinated debt structures, and 4% in preferred and common equity. Turning now to the investment portfolio. At the end of the fourth quarter, the size of our portfolio at fair value was approximately $2.4 billion across a highly diversified set of 168 portfolio companies operating across 30 different 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 capital structures. As of December 31st, 64% of the investment portfolio at fair value was invested in first lien debt, 1% in second lien debt, 2% in subordinated debt, 7% in preferred equity, 10% in equity and other interests, and 16% across our joint ventures, including 10% in the ISLP and 6% in the SLP, both of which the vast majority of our underlying investments in those joint ventures are first lien loans. As of December 31, 2024, the weighted average yield on the investment portfolio at amortized cost and fair value were 11.7% and 11.8%, respectively, as compared to 12.1% and 12.1%, respectively, as of September 30th, 2024.

This decline in yields was primarily driven by a decrease in base rates and, to a lesser extent, spread compression from our new investments. 92% of our debt investments bear interest at a floating rate, positioning the company favorably in today's higher interest rate environment. Moving on to portfolio credit quality trends, our credit fundamentals remain healthy. Median net leverage ratios were 4.8x across our borrowers, unchanged from the prior quarter end and year end 2023. The median EBITDA across our portfolio companies was $40 million as of December 31st. We saw stable trends within our internal risk rating scale quarter-over quarter. Risk rating one and two investments, which indicate the company was performing in line or better than expectations relative to our initial underwrite, totaled 96% of the portfolio as of December 31st, no change from the prior quarter end.

Risk rating three and four are underperforming investments, comprised 4% of our portfolio at fair value. Investments on non-accrual represented 1.3% and 0.2% of the total investment portfolio at amortized cost and fair value, respectively, as of December 31st, a decrease from 1.9% and 1.1%, respectively, as of September 30th. We did add one name to non-accrual this quarter and wrote down this position to a level consistent with our expected recovery. The Amber Hospitality second lien loan was impacted by meaningful company underperformance within the third-party hotel management industry, and this was the primary driver of BCSF's modest NAV decline in the fourth quarter. Subsequent to quarter end, we exited this name slightly above the fair value mark as of December 31. Given the substantial diversity in the portfolio, underperformance of any individual portfolio company has a minimal impact on the performance of the portfolio overall.

Subsequent to quarter end, we did exit this name slightly above the fair value mark as of December 31st. We would also mention that performance across our 100+ companies within our underlying JVs continued to perform well, consistent with our broader portfolio. Amit will now provide a more detailed financial review.

Amit Joshi (CFO)

Thank you, Mike, and good morning, everyone. I'll start the review of our fourth quarter 2024 results with our income statement. Total investment income was $73.3 million for the three months ended December 31st, 2024, as compared to $72.5 million for the three months ended September 30th, 2024. The increase in investment income was primarily driven by an increase in the investment portfolio size, which was partially offset by a decrease in portfolio yield driven primarily by the lower base rates. 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 94% of our total investment income in Q4. Total expenses before taxes for the fourth quarter were $38.4 million, as compared to $37.5 million in the third quarter.

Net investment income for the quarter was $33.6 million, or $0.52 per share, as compared to $34 million, or $0.53 per share for the prior quarter. Net investment income for the full year 2024 was $2.09 per share. During the three-month end date December 31st, 2024, the company had net realized and unrealized losses of $11.5 million. Net losses were primarily driven by our markdown in Amber Hospitality, which Mike mentioned earlier. Net income for the three months ended December 31st, 2024, was $22.1 million, or $0.34 per share. Moving over to our balance sheet, as of December 31st, 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 December 31st. NAV per share was $17.65, a slight decrease of $0.11 per share from $17.76 at the end of the third quarter.

At the end of Q4, our debt-to-equity ratio was 1.22x, as compared to 1.14x from the end of Q3. Our net leverage ratio, which represents principal debt outstanding, less cash, and unsettled trades, was 1.13x at the end of Q4, as compared to 1.09x at the end of Q3. As of December 31st, approximately 57% of our outstanding debt was in floating rate debt and 43% in fixed rate debt. For the three months ended December 31st, 2024, the weighted average interest rate on our debt outstanding was 5.1%, unchanged from prior quarter end. The weighted average maturity across our total debt commitment was approximately 4.3 years at December 31st, 2024.

Based on our current debt outstanding and assuming holding base rates constant, we do not expect our recent unsecured note issuance to materially impact the weighted average interest rate on our debt outstanding as the notes issued near parity to our borrowing on our secured facility. We converted our fixed rate exposure on new issuances to floating rate at SOFR+ 190 basis points. Liquidity at quarter end totaled $520 million, including $412.3 million of unborrowed capacity on our revolving credit facility, $99.1 million of cash and cash equivalents, including $45.5 million of restricted cash, and $8.3 million of unsettled trade, net of receivables and payables of investment. Pro forma for the note issuance, total liquidity is $870 million. Given the company's strong earnings throughout the year, we out-earned the dividend paid in 2024, resulting in an increase in our undistributed taxable income, or spillover income.

We currently estimate that our spillover income totaled approximately $1.36 per share at year end, reflecting an increase of $0.49 per share from the 2023 levels and currently represents over 3x our quarterly regular dividend. As Mike highlighted earlier, our board declared an additional 2025 dividend totaling $0.12 per share to be distributed in four equal consecutive quarterly payments as a result of the company's spillover income expansion in 2024. Overall, we believe having a strong and meaningful amount of undistributed income is beneficial to the stability of our dividend through varying market conditions, and we will continue to monitor our undistributed earnings against prudent capital management considerations. With that, I'll turn the call back over to Mike Ewald for closing remarks.

Michael Ewald (CEO)

Thanks, Amit, and thanks, Mike, as well. In closing, we're pleased with the execution of our investment strategy on behalf of our shareholders during the fourth quarter and throughout 2024. We demonstrated attractive levels of investment income earned across our portfolio and stable credit quality across our middle-market borrowers. As we look forward into 2025, we believe we're well-positioned to capitalize on attractive growth opportunities. We remain committed to delivering value for our shareholders by producing attractive returns on equity, and thank you for the privilege of managing our shareholders' capital. Erica, please open the line for questions. Thanks.

Operator (participant)

Certainly. As a reminder at this time, if you would like to ask a question, it is the star and one on your touchstone telephone. We'll go first to the line of Finian O'Shea with Wells Fargo. Please go ahead.

Finian O'Shea (Analyst)

Hey, everyone. Good morning. Thanks. Can you talk about, Michael, the sort of real-time spread dynamic, deployment and spread dynamics, how much it's sort of stabilized, perhaps, or still tightening? And then what level the core middle market gets you as a premium to large market now versus historically?

Mike Boyle (President)

Sure. Thanks for the question, Finn. If we look at the fourth quarter originations, we were originating at a spread over SOFR of about 560 basis points, and that's about 20 basis points tighter than where we were on our Q2 originations, which was about 580 basis points over SOFR. The spread tightening that we saw over the course of the last two years has stabilized quite a bit as we look at the numbers and what we're able to originate today.

If we think about that as a premium versus the larger market, we do think it commands a 50-75 basis point premium on the spread basis for originating at similar leverage levels to companies north of $100 million of EBITDA, which, again, is why we've doubled down in this core middle market, because we do think the lender controls we get, as Mike highlighted, we get financial maintenance covenants across all the deals that we do, but also the spread levels we think really highlight the premium that we're able to get in our market segment.

Finian O'Shea (Analyst)

That's helpful. Thanks. Just to clarify, the fourth quarter, I think you said 460 or 480?

Mike Boyle (President)

460.

Finian O'Shea (Analyst)

560.

Mike Boyle (President)

Sorry. 560.

Finian O'Shea (Analyst)

Sorry about that. It's been a lot of earnings. How does that compare to the, say, term sheets you submitted last week? Just understanding the fourth quarter, that was probably those were committed in the second and third quarter, right?

Mike Boyle (President)

Sure. Yeah. I'd say it's pretty similar. I'd say we're in the 525-550 level for term sheets, depending on the credit risk underlying. We do think much of the spread tightening that marked a year ago, the course of 2023, we saw a whole lot of spread tightening. I think 2024, particularly Q2 through Q4 and what we're seeing now, has been fairly stable.

Finian O'Shea (Analyst)

Okay. What's like, is there a meaningful difference on a new LBO or platform, a real new money opportunity versus follow-on? When M&A comes back, and whichever one is waiting for, and you have all this clean, well-capitalized new paper, is the stuff that fits in that box really much tighter in blending things down, if you follow?

Michael Ewald (CEO)

Yeah. Hey, Finney, it's Mike Ewald. Look, I think, generically speaking, those sorts of deals might be on the lower end of what Mike was talking about, maybe those are the 525 deals and some of the add-on activities, some of the deals that were originated earlier, so that might be the 550 or 575. If you think about one of your questions was historical context as well. Clearly, the end of 2022, beginning of 2023, were, at least in my career of over 25 years of doing this, were the highest spreads that we'd ever witnessed. Something in the 500s, be it 500 for a top-notch crystal clean company with no EBITDA adjustments, 550, 575 for the more regular way deal, those are really levels that we saw in 2017, 2018, 2019, and that's kind of what we're back to today.

While there's been a lot of hand-wringing over spread compression, I think we're pretty much in line today with more historical averages.

Finian O'Shea (Analyst)

Great. Awesome. Thanks so much.

Michael Ewald (CEO)

Thanks, Finn.

Operator (participant)

Thank you. That is the star and one to ask a question. Star and one.

Michael Ewald (CEO)

Great. It doesn't look like there are any other questions at this point. Thanks again for everyone's time today. We certainly appreciate your continued support and look forward to speaking again next quarter. Do please feel free to reach out in the meantime with any questions, and certainly have a great weekend. Thanks.

Operator (participant)

We'd like to thank everybody for their participation on today's conference. Please feel free to disconnect your line at any time.