Bain Capital Specialty Finance , Inc. (NYSE: NYSE:) reported a stable third-quarter performance in its latest earnings call on October 30, 2024. The company highlighted an increase in net investment income per share to $0.53, yielding an 11.9% annualized return and covering dividends by 126%. The net asset value per share rose slightly to $17.76. Gross originations surged, and the company’s investment portfolio maintained a strong credit quality. Bain Capital declared a total fourth-quarter dividend of $0.45 per share, with a special dividend included, and expressed confidence in the continued deal flow and credit discipline for the forthcoming periods.
Key Takeaways
- Net investment income per share at $0.53, with an annualized return of 11.9%.
- Earnings per share stood at $0.51, reflecting an 11.5% annualized return on equity.
- Net asset value per share increased to $17.76, a 0.3% rise from the previous quarter.
- Fourth-quarter dividend declared at $0.45 per share, including a special dividend.
- Gross originations reached $413 million, showing significant year-over-year growth.
- Solid portfolio credit quality with low non-accrual investments at 1.1% of the total portfolio.
- Total (EPA:) assets reported at $2.5 billion, with net assets of $1.1 billion.
Company Outlook
- Anticipates ongoing deal flow into 2025, driven by private equity activity and potential lower interest rates.
- Plans to address $300 million in bonds maturing in early 2026 through market access and increased credit facility.
Bearish Highlights
- Slight decrease in the percentage of the investment portfolio performing in line or better than expectations, from 97% to 96%.
- The debt-to-equity ratio increased to 1.14 times.
- A slight uptick in the number of companies rated three and four, indicating a minor deterioration in credit quality.
Bullish Highlights
- The median EBITDA of borrowers was $33 million, with new investments yielding a weighted average of 10.7%.
- A realized gain of $2.8 million from the exit of the investment in BlackBrush, finalized above par value.
Misses
- No specific misses were highlighted in the summary provided.
Q&A Highlights
- Management discussed the disciplined investment strategy and focus on maintaining credit quality.
- Addressed structural relative value, with a focus on the less attractive demand for PIK optionality in Europe compared to the U.S.
- Expressed optimism about sourcing new lending opportunities and maintaining credit discipline.
In summary, Bain Capital Specialty Finance’s third-quarter results demonstrated a strong financial and operational position, with robust earnings and a stable credit outlook. The company remains well-prepared to navigate the future market environment, with strategic plans in place for upcoming financial obligations and a focus on disciplined investment to drive continued growth.
InvestingPro Insights
Bain Capital Specialty Finance’s (NYSE: BCSF) solid third-quarter performance is further supported by recent data from InvestingPro. The company’s market capitalization stands at $1.09 billion, reflecting its significant presence in the specialty finance sector. BCSF’s P/E ratio of 8.46 suggests that the stock may be undervalued relative to its earnings, which aligns with the company’s reported strong net investment income.
One of the most striking InvestingPro Tips is that BCSF “pays a significant dividend to shareholders.” This is corroborated by the impressive dividend yield of 10.22%, which is particularly noteworthy given the company’s recent declaration of a $0.45 per share dividend for the fourth quarter, including a special dividend. This high yield is likely to be attractive to income-focused investors.
Another relevant InvestingPro Tip indicates that the stock is “trading near its 52-week high,” with the price at 97.74% of its 52-week high. This suggests that the market is recognizing BCSF’s strong performance and positive outlook, as discussed in the earnings call.
The company’s profitability over the last twelve months, as highlighted by InvestingPro, is consistent with the reported earnings and net asset value growth. With a revenue of $294.26 million in the last twelve months and a 100% gross profit margin, BCSF demonstrates its efficiency in generating returns from its investments.
For investors seeking more comprehensive insights, InvestingPro offers additional tips and metrics that could provide a deeper understanding of BCSF’s financial health and market position. Currently, there are 5 more InvestingPro Tips available for BCSF, which could offer valuable perspective for those considering an investment in this specialty finance company.
Full transcript – Bain Capital Specialty Finance Inc (BCSF) Q3 2024:
Operator: Good day, everyone, and welcome to today’s Bain Capital Specialty Finance Third Quarter Ended September 30, 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask a question during the question-and-answer session. [Operator instructions] 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 today’s program over to Katherine Schneider with Investor Relations.
Katherine Schneider: Thank you, Britney, and good morning, everyone, and welcome to the Bain Capital Specialty Finance third quarter ended September 30, 2024 conference call. Yesterday, after market closed, we issued our earnings press release and investor presentation of our quarterly results, a copy of which is available on Bain Capital specialty Finances Investor Relations Website. Following our remarks today, we will hold a question-and-answer session for analysts and investors. This call is being webcast and a replay will be available on our website. This call and webcast are property of Bain Capital specialty finance and any unauthorized broadcast in any form is strictly prohibited. Any forward-looking statements made today do not guarantee future performance, and actual results may differ materially. These statements are based on current management expectations, which include risks and uncertainties, which are identified in the Risk Factors section of our Form 10-Q that could cause actual results to differ materially from those indicated. Bain Capital Specialty Finance assumes no obligation to update any forward-looking statements at this time unless required to do so by law. Lastly, past performance does not guarantee future results. So, with that, I’d like to turn the call over to our CEO, Michael Ewald.
Michael Ewald: Thanks, Katherine, and good morning, and thanks to all of you for joining us here today on our earnings call. I’m joined today by Mike Boyle, our President; and our Chief Financial Officer, Amit Joshi. In terms of the agenda for the call, I’ll start with an overview of our third quarter ended September 30, 2024 results and then provide some thoughts on our performance, the overall market environment and our positioning. Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail. As usual, we’ll also leave some time for questions at the end. So yesterday after market close, we delivered strong third quarter results. Q3 net investment income per share was $0.53 as we continue to benefit from high base interest rates across our portfolio. Our net investment income return represented an annualized yield of 11.9% on book value and covered our regular dividend by 126%. Q3 earnings per share were $0.51, or an annualized return on equity of 11.5% as credit fundamentals remained healthy across our portfolio. As of September 30th, our net asset value per share was $17.76, an increase of 0.3% from the prior quarter end. Subsequent to quarter end, our Board declared a fourth quarter dividend equal to $0.42 per share and payable to record date holders as of December 31, 2024. The Board also declared an additional dividend of $0.03 per share for shareholders of record as of December 31st, as we had previously announced back in February. This brings total dividends for the fourth quarter to $0.45 per share, or a 10.1% annualized rate on ending book value as of September 30th, which we believe represents an attractive yield for our shareholders. Turning now to the market environment. During the third quarter, we continued to see active deal flow with increased transaction levels, driven by both M&A and new LBO activity as volumes return to levels comparable to historical periods. Based on current market conditions, we would expect these trends to continue into 2025, supported by the large amount of private equity dry powder, pressures for private equity sponsors to return capital back to their investors, and a likely lower interest rate environment from the higher levels seen in recent years. Our private credit group’s long-standing presence in the middle market, combined with our strong focus and expertise across myriad industries, enables us to generate an attractive deal pipeline while remaining highly selective in our investments. Gross originations during Q3 were $413 million, up 278% year-over-year and approximately 35% from Q2 levels of $307 million. This quarter, our platform was particularly active providing capital in new platforms that we sourced from our sponsor relationships who value the specialized industry expertise that Bain Capital Credit brings as a source of differentiation versus other lenders. While the private credit market continues to experience significant growth as many private lenders have moved up-market, we continue to see attractive opportunities to source and underwrite investment opportunities in the core middle market and serve as a value-added capital provider and business partner to growing businesses. We value this segment of the market given its stable size premium and installation to large market volatility. Across our direct originations to new platforms during the third quarter, the median EBITDA of our borrowers was approximately $33 million, consistent with our core borrower EBITDA focus of between $25 million and $75 million. Relative value remains attractive on new investments within this segment of the market. While we have seen some recent spread compression across the broader market this year, terms and structure continue to be attractive. The weighted average yield on Q3 investments to new companies was 10.7%, with a median leverage levels of 4.5 times on these new originations. We continue to place a heavy emphasis on investing in structures which benefit from strong lender controls through credit agreement documentation, containing financial covenants and having controlled positions among lender groups. 96 of our — 96% of our Q3 originations to new companies were structured with documentation containing financial covenants tied specifically to management’s forecasts, and we have majority control positions in nearly 87% 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 of our investing strategy. Moving on to credit quality. Our portfolio companies continued to exhibit strong fundamental performance in the current market environment. Leverage statistics across our borrowers remain healthy at 4.8 times overall based on our portfolio company median levels. Interest coverage also remained solid across our portfolio at approximately 1.7 times at quarter end despite continued elevated base rates. Investments on non-accrual remain low across the portfolio, which is 1.1% of the total portfolio at fair value. Credit risk rating trends were also stable during the quarter with only a small percentage of our portfolio underperforming and on our watch list. We believe our strong record — track record of solid company performance is a testament to being capital disciplined and highly selective underwriting process. Lastly, at the end of the third quarter, our gross and net leverage ratios for BCSF were 1.14 times and 1.09 times, respectively, which falls in the middle of our target leverage ratio of 1.0 times to 1.5 times and position us well with ample dry powder to capitalize on new investment opportunities in the current environment. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail. Mike?
Mike Boyle: Thanks, Michael, and good morning, everyone. I’ll start with our investment activity for the third quarter and then provide an update on our current portfolio. New fundings during the third quarter were $413 million into 83 portfolio companies, including $331 million into 16 new companies and $82 million into 67 existing companies. Sales and repayment activity totaled approximately $248 million, resulting in net investment funding of $165 million in the quarter. This quarter, we remained focused on investing in first lien senior secured loans with 97% of our new investment fundings in first lien structures and 3% in preferred or common equity. As Michael highlighted earlier in the call, new investments made in the quarter were 80% to new portfolio companies and 20% to existing or incumbent companies. We added 16 new companies this quarter, which led to an improvement in our single name company diversification to 159 different companies in the current portfolio. In making new investments, we leverage Bain Capital’s deep industry expertise across a wide range of sectors, including industries, such as hotel, gaming and leisure, aerospace and defense and business services. Our sponsor relationships often value Bain Capital’s knowledge base across a wide spectrum of industries, including specialized industries, which enable us to be a value-added partner to private equity sponsors through multiple cycles. Turning now to our current investment portfolio. At the end of the third quarter, the size of our portfolio at fair value was approximately $2.4 billion across a diversified set of 159 companies operating across 31 industries. Our portfolio primarily consists of first lien senior secured loans, given our focus on downside management and investing in the top of the capital structure. As of September 30, 63% of the portfolio at fair value was invested in first lien debt, 3% in second lien debt, 2% in subordinated debt, 7% in preferred equity, 9% in equity and other interest and 15% across our joint ventures including 10% in the ISLP and 6% in the SLP. The vast majority of our underlying investments within both of these joint ventures are first lien loans. As of September 30, the weighted average yield of the investment portfolio at amortized costs was 12.1% as compared to 13.1% as of June 30. This decline in yields was partially driven by the decrease in base rates, which contributed about 38 basis points to this yield decline, but it was primarily driven by the decrease in dividends from our aviation portfolio and our joint ventures. It’s worth noting that the spread on our debt investments remained relatively constant quarter-over-quarter from 663 basis points over SOFR in Q2 to 653 basis points over SOFR in Q3. 91% of our debt investments bear interest at a floating rate, which positions the company favorably today’s higher interest rate environment. Moving now to portfolio credit quality trends. Our fundamentals remain healthy. As highlighted earlier, portfolio company fundamentals exhibited solid trends with a median net leverage across our portfolio of 4.8 times at quarter end versus 4.7 times in the prior quarter. Credit quality trends within our internal risk rating scales were also stable quarter-over-quarter. Risk rating one and two investments, which indicates that the company was performing in line or better than expectations totaled 96% of our portfolio as of September 30, as compared to 97% in the prior quarter. Risk rating 3 and 4 are underperforming investments comprise just 4% of our portfolio at fair value. Investments on non-accrual represented 1.9% and 1.1% of the total investment portfolio at amortized cost and fair value, respectively, as of September 30. This is compared to 1.2% and 1.0%, respectively, as of June 30. Lastly, we would highlight the performance across our aggregate 120-plus companies within our underlying joint ventures continue to perform well and consistent with our broader portfolio. I’ll now turn the call over to Amit, who will provide a more detailed financial review.
Amit Joshi: Thank you, Mike, and good morning, everyone. I’ll start the review of our third quarter 2024 results with our income statement. Total investment income was $72.5 million for 3 months ended September 30, 2024, as compared to $72.3 million for the 3 months ended June 30, 2020. The increase in investment income was primarily driven by an increase in other income. Our investment income continues to benefit from high-quality source of investment income, largely driven by contractual cash income across its investments. Interest income and dividend income represented 92% of our total investment income in Q3. Total expenses before taxes for the third quarter were $37.5 million, as compared to $38 million in the second quarter. Net investment income for the quarter was $34 million or $0.53 per share, as compared to $33.1 million or $0.51 per share for the prior quarter. During the 3 months ended September 30, 2024, the company had net realized and unrealized losses of $900,000. Net income for 3 months ended September 30, 2024 was $33.1 million or $0.51 per share. Moving over to our balance sheet. As of September 30, our investment portfolio at fair value totaled $2.4 billion and total assets of $2.5 billion. Total net assets were $1.1 billion as of September 30, 2024. NAV per share was $17.76, an increase of $0.06 per share or a 0.3% increase from $17.70 at the end of second quarter, as we demonstrated strong NII overearning of our dividend, coupled with stable credit quality across our portfolio. At the end of Q3, our debt-to-equity ratio was 1.14 times as compared to 1.03 times for the end of Q2. Our net leverage ratio, which represents principal debt outstanding less cash and unsettled rate was 1.09 times at the end of Q3, as compared to 0.95 times at the end of Q2. As of September 30, approximately 54% of our outstanding debt was in floating rate debt and 46% in our fixed rate debt. Our debt funding continues to benefit from low fixed rate debt structures. For the 3 months ended September 30, 2024, the weighted average interest rate on our debt outstanding was 5.1% as compared to 5.1% as of the prior quarter. The weighted average maturity across our total debt commitment was approximately 4.5 years at September 30, 2024. Liquidity at quarter end totaled $562 million, including $501.3 million of undrawn capacity on our revolving credit facility, $59.8 million of cash and cash equivalents, including $29.3 million of restricted cash and around $600,000 of uncertain trade net of receivables and tables of investment. Subsequent to quarter end, our Board declared a fourth quarter 2024 dividend equal to $0.42 per share and a special dividend, as previously announced, of $0.03 per share, bringing total Q4 dividend to $0.45 per share. Both dividends are payable on January 31, 2025, to stockholders of record date on December 31, 2024. As a reminder, our Board declared a total of $0.12 per share additional dividend driven by our strong over-earning in 2023. These special dividends have been paid out in installments of $0.03 per share per quarter throughout the year. We currently estimate that our spillover income totaled approximately $113 per share, representing over two times of our quarterly regular dividend. 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 the closing remarks.
Michael Ewald: Thanks, Amit. In closing, we are pleased to deliver another strong quarter of attractive earnings for our shareholders with NII well in excess of our dividend and steady NAV growth as our underlying borrowers continue to perform well. We believe the company remains well positioned to source new middle-market lending opportunities, given our own dry powder, global footprint and deep industry expertise, while remaining disciplined in our credit selection. As always, we thank you for the privilege of managing our shareholders’ capital. Britney, please open the line for questions.
Operator: [Operator Instructions] We will take our first question from Paul Johnson with KBW. Your line is now open.
Paul Johnson: Yeah. Thanks. Good morning. Thanks for taking my question. I’d just like to kind of maybe get a sense of just within the portfolio yield decline this quarter, 100 basis points or so quarter-over-quarter. What was kind of the interplay of the decline in yield sort of due to some sort of lower reset on the base rates versus spread impression? It sounded like in your comp spreads were actually fairly stable quarter-over-quarter. So I just kind of like to get a sense of what’s driving the yield decline this quarter.
Michael Ewald: Sure. Thanks for the question, Paul. So as we noted, about 38 basis points of that yield decline was driven by lower base rates. There was another about 10 basis points that was driven by the decrease on spreads on the credit assets in the portfolio. So fairly stable, as you noted, as we spoke about in our prepared remarks. The biggest step down in yield was really driven by the dividend income that was earned in BCSF quarter-over-quarter. So about $6.1 million was earned in Q3 versus about $8.2 million earned in the prior quarter. And that also was really driven by both our aviation investment called GAIL where we did not distribute all of the earnings there. We decided to invest some in the fleet of planes. And so that drove some of the step down as well as a slight step down in some of the dividends earned from our joint ventures. So it was primarily just driven by those dividends, not actual degradation in the spread of the assets that we’re originating.
Paul Johnson: Got it. I appreciate that. That’s really helpful. And then — how do you guys think about — I mean, your pipeline, I mean, in terms of spreads and where that’s shaping up to kind of the average spread in the portfolio at this point? It seems like M&A from what you’re seeing at least is picking up — do you expect there to be some more spread compression in the portfolio as the portfolio turns into next year?
Michael Ewald: Okay. Thanks Paul. Look, I think a lot of the spread compression has kind of played out during the course of this year. I think what we’re seeing now is a lot more bifurcation in spreads based on the quality of the credit, which is certainly helpful to see. So I think the well bank sponsor with an A+ credit, you might still see some spread compression there, but the sort of more average deal or the sponsor that hasn’t gotten as much coverage or maybe lenders having left our core middle market and gone upmarket leaves a little bit more room for us to operate. I think there will still see, spreads hang in pretty similar to the numbers that we saw this quarter.
Paul Johnson: Thanks for that. And then, I mean, in terms of the private credit premium, yield premium to the syndicated markets, I mean, how do you guys think about the international private credit market. I mean, do you see that market as potentially a little bit more insulated with the premium that private credit gets over the bank syndicated market just due to more competition in the middle market here in the U.S.? Or I’m just curious, if there’s any kind of relation between the two?
Michael Ewald: Yeah. I’d say a couple of things. One is, we’re still seeing a 150, 200 basis point spread, at least in the U.S. between our assets and the more typical broadly syndicated loan market. That same relationship doesn’t necessarily exist in Europe, just because, neither of the markets, quite frankly, neither the syndicated market nor the private credit market is as developed over there, so it’s harder to kind of benchmark one versus the other. What I would say, though, is in today’s environment from a relative value perspective spreads are fairly similar right now between U.S. and Europe. The caveat, I would give you is that, in the U.S., you’re seeing some of this pressure on some PIK optional interest, especially in the larger cap market. We’re not seeing as much in our core middle market. You are seeing that pressure in Europe, in the core middle market. And so, if you’re thinking like-for-like, the spreads are the same, but there’s a demand for PIK optionality in Europe that makes Europe marginally less attractive for those particular deals. So at this point, it’s less about pricing relative value and more about structure relative value when we weigh U.S. versus Europe.
Paul Johnson: Thanks for that. That’s an interesting dynamic there. And then just on the credit quality, there was a little bit of deterioration, and just within your credit ranking, the credit scoring of investments. I mean there’s 11 companies rated three and four this quarter versus eight last quarter. There was a small increase in non-accruals. So what was the driver of, I guess, the number of companies rated three and four? Is that just the company is going on non-accrual? Or is there — is there any more there?
Michael Ewald: Yeah. I highlighted its still quite idiosyncratic. So there are some companies that are — it’s not necessarily going on non-accrual. It’s just companies that are going on our watch list. First performances under the original underwrite, but I noted there’s — it’s not concentrated in any industry or really anything that’s been pulling through. It has still been quite idiosyncratic in the — that small percentage of our portfolio that’s risk rating three and four.
Paul Johnson: Got it. Thanks. And then just last one for me real quick. The $2.8 million small realized net gain or realized gain in the portfolio this quarter. Was there anything in particular that drove that? Was there an exit of any investments?
Michael Ewald: Yes. So it was the exit of an investment called BlackBrush, which was in the restructuring that happened during COVID that we finally completed the sale and exit well above our par value and we took the keys there. So it was that legacy exit from that company called BlackBrush.
Paul Johnson: Got it. Thanks. That’s for me, and congrats on a good quarter.
Michael Ewald: Thank you, Paul.
Operator: [Operator Instructions] And we will take our next question from Derek Hewett of Bank of America. Your line is open.
Derek Hewett: Good morning everyone and congrats on the good quarter. Could you talk about your plans to address the $300 million of bonds that mature in early 2026? Are you going to use your credit facility to take care of that maturity? Are you interested in tapping the unsecured market again later on next year?
Amit Joshi: Yes. I mean, we are prudently talking to all our banking partners. We are in continuous dialogue with them. And I would say, our intend to be to access the market in 2025. As you highlighted, we have two unsecured, which will mature in 2026. So we definitely will access the market. But at the same time, as you saw, we did increase our revolving facility. So between those two will prudently manage our liability.
Derek Hewett: Thank you.
Operator: [Operator Instructions] It appears we have no further questions in the queue. I’ll turn the program back over to Michael Ewald for any additional or closing remarks.
Michael Ewald: Thanks, Whitney, and thanks again to all of you for joining us on our call today. Again, we’re very pleased with the results of the third quarter, and we look forward to bringing you more news at the end of next quarter. Hope everyone has a good day. Thanks.
Operator: Thank you. This does conclude today’s program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.
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