BCSF - Earnings call transcript Q3 2020 | Bain Capital Specialty Finance, Inc.

Due to licensing restrictions, you must log in to view earnings call transcripts.

Operator

Good morning, and welcome to the Bain Capital Specialty Finance Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Katherine Schneider. ahead. go Please

Katherine Schneider

earnings morning, is Specialty Good of welcome the Finance’s a website. issued to Yesterday, of Relations investor Thanks, quarterly Investor on our conference everyone, Bain call Capital results, our company the Finance market of quarter release for Bain and after presentation which Irine. copy close, and press available the XXXX. Specialty third Capital

not uncertainties, and materially. management call a statements based could These risks a hold future will assumes law. to and those Following and Specialty our Finance Capital our any is for Form forward-looking do are update which strictly Any in XX-Q required guarantee and our time being investors. so we Specialty form include no Bain obligation broadcast to webcast, and property prohibited. on Factors to materially performance, remarks Capital of available forward-looking question-and-answer This call webcast replay cause which do results by statements results analysts unless be will identified actual differ Finance, This section on at made are of that expectations, statements differ unauthorized is today, website. any are Bain any may current actual in indicated. this Risk the from and today

Officer, to Lastly, past Executive performance call Ewald. the turn like to With guarantee over President future I’d does Chief Michael not that, our and results.

Michael Ewald

an the thoughts Treasurer; results our morning. Chief of us quarter portfolio Boyle, joined and Officer, Mike And and our the Katherine. today Thanks, company’s market. our morning this and performance, start third provide Dornaus. and overall and I’ll Financial Vice for to positioning good I’m our President some with Sally our on you on overview everyone, earnings call thank joining by

greater results Mike and and credit discuss in Sally our will portfolio, detail. financial investment quality Thereafter,

Earnings $X.XX income quarter. the by to appreciation to We $X.XX per by solid net our results per in portfolio. investment are have pleased by Net shareholders share investment driven earned was share delivered portfolio as third driven investment were investment income unrealized financial strong net of reflecting X.X% our XX as share the losses asset per of reversal NAV the increase portion in from of $XX.XX, first September June to quarter. recognized value a of was XX. our the due Net our in the

the During witnessed that from across quarter, portfolio markets. benefited spread the we third the credit tightening

of result We as to decline a the meaningful QX the pleased are experienced of recapture a see in of NAV COVID-XX. portfolio

high a par. upside there the portfolio portfolio, company potential of spreads embedded stable, to loans are and remained Given unrealized repaid the losses at our quality is believe of nature as still we performance in our significant recapture our greater and portion remaining

of to of as value percentage average year-end. XX.X% compared September at XX, investment weighted portfolio average fair a As of at as market mark, fair the XX.X% weighted our a total par of value

we addition, income balance deleveraging continued to delivering our In to demonstrate in shareholders. progress net investment sheet, our stable while meaningful

down from repayments principal from the increase assets times significantly attributed end and QX, our sales was quarter this the of ratio during As the was XX, X.XX net was times. quarter. times activity leverage with to of X.XX QX our our it as leverage net Decline the X.XX of together par where of end in down ratio and September in

the balance strength sheet. result of of the we company’s have this a As deleveraging, improved significantly

to to investment X.X withstand second, leverage on greater periods better cushion volatile have new yield range the ahead. current grow take times. our we to remains accretive the potential opportunities company asset any portfolio, Based earnings. advantage of have target First, position we And X

range. middle in about just of now the that We’re

high operating should market maintaining also while asset significant within foreseen comfortable exposure conditions given are portfolio, change. We there, coverage the our

as and exhibited and following result liquidity about improve quality credit as quarter, We’ve trends improving continue cash the portfolio. in and our credit by third borrowers at observed flow the the During trends importantly a to more hold believe revenue, clarity our valuations of current XX% cutting action is activity true The and average economic to investments to loan these normalized measurements approximately in continue year. cost we earlier the environment. value of this

attract For our believe management pre-COVID-XX. within sponsors levels being able portfolio, have observed inability example, we active at to that minority existed portfolio valuations equity investments to to We new similar our our come advisor. portfolio in overall trends sponsors non-accrual is and are of reflected significant resources companies to our and a solutions our risk These with amenable rating reflection the improvements rates. of

X.X% in down of from three of fair the was a investment successful fair a of portfolio just XX% higher in September cost portfolio of bucket at of XX, total either QX. rating the declined as quarter-over-quarter Non-accruals being non-accrual the new result the risk value of of a non- at As our and no XX% prior of both four or as end and value one resolution total investments added to accruals. of status

with premiums improved and EBITDA, and from economics today. us leverage, and In the such deal company allows advantage of existing have compensate in risks and volumes take of demonstrated incumbency low history to rebound advantage capitalizing sponsors benefiting market benefit acquisition the existing a portfolio tuck-in systemic period and to recovery. clean corporate service to such in Following borrowers further backs in however, lingering an higher the order continued new to unemployment, an uneven especially performance near-term while the and rebounded us activity. slow the economy, new underwriting environment, of as in from increased seek of economic documentation, lower In receptivity on strategies. with industries for given we in in as remain lender investments a activity been QX we middle our a transaction focused on QX, sponsor This cautious risk

funding During all activity the our investment was existing third to new quarter, of borrowers.

payable that less our interest believe is high industries income. to net income important beginning represents will XX, to new to quarter of value as company contractual this and earnings company. on opportunities is level are discuss to tied we’ll core also date consumption. transactions or represents in of companies of current September share platform the XX. income to to X.X% record is an This our that December fourth advantage Sally fourth We comprised Subsequent And this of the book of and environment. quarter of XXXX. are for favoring the of dividend believe than PIK It income ending well-positioned declared equal in current as $X.XX investment Based We take on see quarter-end, holders further. and largely beyond. is note dividend we Board consumer total our expand continue defensive interest quality a cash income. the such annualized per to attributes the X% payment-in-kind yield the portfolio, to sustainable market investment less opportunities

as original levels, portfolio deal to more activity increase Vice our of to flow to and our turn walk activity dividend will providing detail. including discount, President to Mike company and income level acceleration Providing As normalizes Treasurer Boyle, fees, support with M&A now should investment normalized I through current in the sales strategy. up greater related our through incremental and back repayment the begins to the well. OID further pick issue call pre-payment over

Mike Boyle

credit with it on investment everyone. quality morning, activity our and I’ll provide portfolio. an quarter, this our of then off take Good Mike. the Thanks, update

the were repayment companies, XX existing Sales companies. totaled downs with million fundings all quarter into across fundings $XX driven our of investment to new $XX portfolio by activity our portfolio. New million pay in and

delay During facilities. revolvers of the to and see continue draw quarter, we net repayments

$XXX secured investment fair facilities environment. of across against undrawn of on third times. portfolio diversified is X.X over At companies closer million quarter, our two to approximately set the facilities is Our our health investment given operating portfolio and the across the demonstrated is quarter, sequential of in September revolving was the reflection our the profiles positioned undrawn company a value coverage of our At of across past current of and as end XX% normalized billion liquidity representing end believe of credit this these quarters. industry. We highly strong improvement cash XXX We utilization at of the size of $XXX our well liquidity, at the had $X.X consisting approximately significant the defensive the portfolio believe of third the of levels a companies XX. commitments, million capacity

Our in significant amendments. resulting average fair investment The up size diversification. from is QX less at than following X% yield average recent value, of total at X.X% of the increased due portfolio with spread weighted portfolio X.X%, to the as costs amortized

loans investments million. $XX the consist lien market median EBITDA largely with businesses of to sponsored-backed first Our of middle

debt, lien XX, was and than The September lien debt, lien last at X% of comprised first invested value investment in debt. equity fair portfolio the interest. first X% portfolio subordinated remaining X% in X% in including of was second out of As debt XX% less

companies middle-market streams and favor comprised portfolio within investments companies documentation tied and with revenue to operate to the The manage largely middle maintenance is portfolio to top are Furthermore, of XX% to structures, debt This resiliency. covenants industries the of our a both evidence less we’re able which downside loan diversified within consumption. our within in line our market. risk. over are sectors have we financial places continue strong benefit companies from our in us strong core position have We These that defensive that effective of rights. consumer control

include industries and defense, industries line healthcare. – top technology, Our and top aerospace our

a in lien investments our three investments recovery us as have two, the as we rating rating three line limited the XX.X% at to our risk. that portfolio fair mark secured four. to senior path the Within portfolio on risk impacts average have exposure value from underlying of an quarter most XX% expectations. their of of rating portfolio debt. companies or end at our of an end some our Within compared classified our value XX% was informed of XX% This experiencing remaining The top weighted portfolio of believe well we value and We than was severe risk downside four, of one experienced comprised view our or and XX% first par capital better of scale, to our impact or performing are three minimizes proposition continue pandemic. was industries the over have par have these and of places These the a investments, structure time. classified fair companies year understood risk mark of rating investments The of risk debt internal XXXX. the as to the average pandemic. ratings that indicating at

the September As these fair our of and expectation on over And is mark XX, rating three it of four repayment time. of average recognized par. investments weighted value of investments the had a par our risk XX% majority

quality. earlier status mentioned during new Mike the reflecting no stable during As non-accrual call, to added QX, credit were overall investments

XXX total status, more representing costs detailed of was our and of one a both XX, provide will investments on value. September investment of financial portfolio As fair review. X.X% Sally the non-accrual now

Sally Dornaus

morning, you, for the of investment XX, months our million Thank Total by was with start three quarter and a in XXXX, $XX.X third and ended months primarily three was review ended XX, investment compared results the our for XXXX due good $XX.X investment size repayment September June everyone. driven Mike, million income the income decrease I’ll income The of sales as to activity. statement. the in XXXX. portfolio to reduction the

structuring in licensable the the over quality the Our consists recognize investment this for of approach upfront. fees or take in opposed less We income contractual income taking XX. or the our best income PIK than We share amortizing prior of to majority X% was borrowing the for million million new primarily levels quarter. as commitment by per in attributes. believe fees income. to as financing income, as total $X.XX of class quality compared by The income represented as Total accounting income were second paying months declined. in these interest interest September on to of comprised conservative our or interest a lower cash ended $XX $XX.X income decrease million $X.XX the of LIBOR third given expenses our quarter. the is fees debt and per loan, share Payment-in-Kind the quarter high to for our investments three $XX.X quarter quarter or compared and expenses average as was million driven is Net for the $XX.X investment

across mark of value broad-based XXXX. investment our as XX% weighted attributed our portfolio tightening quarter-over-quarter the portfolio decreased partially performance for quarter, average by to This increased portfolio This largely financial and approximately September offset was to companies. XX, fair due COVID-XX to investment spread certain on

are which processes, each in believe valuation As of illiquid quarter. market of additional especially review during employee prior we’ve periods being third-party for of call, discussed provide provider investments on our framework reviewed best-in-class by we valuation increased nearly a layers independent these We earnings volatility. all robust an

September million. During the realized and share. months the ended for the months GAAP ended per gains net three XXXX, XXXX per three XX, income company September unrealized had XX, share was of $XX $X.XX

balance our onto sheet. Now

to of September $X.X to end XX, X.XX representing equity compared was $XX.XX the totaled of times of increase to of QX, our assets compared of value billion the of X.XX our share $XX.XX As at times and as second million $X.X at end billion. net as the quarter-over-quarter. a at the quarter, QX. NAV At per ratio debt X.X% assets was $X,XXX end XX. were investment total portfolio fair Total September

the We at times times QX. leverage the of net less these principal as August, are to at to we represents was significant to the X.XX amended BCSF end quarter-over-quarter. improvements QX, facility X.XX sheet reduce payable outstanding XXX. to of balance our ratio, Our In from which down our credit believe end the XXX enhancing spread bps strength compared favorably revolving debt cash of

to reduced position September capital of of unsecured while sheet, given unsecured of these costs, meaningful retaining outstanding facilities of comprised Over debt our would structures for large periods larger borrowing given amount company as structure provide. the CLO the and portion outstanding available These in the debt a become was portion still of structures as and XX. Over debt improve liquidity. durability stronger greater size a securitization of also facility time, half We principal our total that overall the a to balance we benefits our provide like of volatility. these the structures with see unused

to months XX, as three the decline was our that average XXXX, three to months The XX. on the was ended for occurred X.X% September the X.X% compared resets June For quarter. LIBOR interest attributed debt the weighted ended during rate outstanding

had million As of of credit cash and aggregate September XX, $XX cash equivalents of its capacity million company $XXX under XXXX, the facility. and

terms As was facilities. over all under will secured the company to closing Mike of XX, September for XXXX, with the compliance call credit that, I back in turn With remarks.

Michael Ewald

we this market to quarter, closing, challenging strong shareholders delivered the In to are Sally. earnings our notwithstanding pleased backdrop. Thanks, still

its capital balance take current new then We Our work like to support produce us opportunities for of open We sheet. team value, well the and strength line also in investment of to improved while that, questions. opportunities our investments positioned please new With the from returns. the is continues identifying the given believe to risk protect existing these appreciate our shareholders trusting and to hard I’d shareholder monitoring operator your on the adjusted attractive focusing manage environment. company the advantage attractive to

Operator

you. Thank

is We Wells now from begin of session. will first Instructions] O’Shea question-and-answer question Finian [Operator Fargo the Our Securities.

Finian O’Shea

any yielding Thanks morning. in environment. higher you strategies. the in would that, and top line you good growing question. engage willing my of there drive top and can this market Hi, identify BDC able for yields line kind Michael, context today. what is Or Do style the taking – opportunity on backed talk you for are you the any out to yield in about

Michael Ewald

Thanks question, Sure. for Fin. the

have think market in So of some of has has first is going continue opportunities number that line, there seen and the do increase – yield our been which increase We quarter-over-quarter. capture basis both we portfolio tell XX in the the on some to widening forward unitranche to point in by of yield the already seen spread been top in the our securities. – can lien there we

yield which we will increase can we primarily on focus think still. strategy, we So that

of subordinated opportunities there always do, what is do that we be but increase debt a will believe small well. we portion second lien lien to from as Second yield going debt and forward

Finian O’Shea

in you’re was is or and kind pipeline looking that well? the I all spread – as origination first now, the looking assume spreading of lien. are It What at yield is sort reemerges, mostly at ballpark of newer as you

Michael Ewald

Sure.

have – kind pandemic. basis XX say from kind points between I in and the spreads all of would XX XX widened points before So basis of

ramp think there’s and do we context opportunity debt. in continued lien the so total X% And unitranche first to in return

Finian O’Shea

unsecured follow Would – Okay, from goal reduce be the does a then BDC. to Sally helpful. the even And that CLO a like indicate on that more that’s or would just debt of on comments stool? for replace being or components kind you the that like three the would it legs

Sally Dornaus

that a it’s when efficient is Yes, figure out, go to way we so lot most through to those think we use that, facilities. the just

certainly approach unsecured be but think balanced the And some increase would have of so I plan portion. facilities, to all the between our to

Finian O’Shea

Okay. all everybody. Thank Very well, you, me. And that’s it’s helpful. for

Operator

question Ryan Lynch next from is of Our KBW.

Ryan Lynch

Hey, taking my Thanks morning. questions. for good

activity have or to to point, the are the place as past. up. First spring is your thought this out back okay has and for summer given the good point, and the deploy looking guys one, leverage investments – your At now of you even the At done balance keep push you looking pick guys given to job getting which market been new aimed, you Or balance and kind market continue activity you downturn, grow obviously this leverage over of in guys, your is just extremely kind you of you guys leverage. of as is a and months to grow targeted in the worked a the were middle have your right potentially to deleverage slow starting guys capital that here lower sheet. range leverage to sheet

Michael Ewald

now. you as point it’s I the range to out good Look, our we’re remarks, in mentioned still And as Ryan. X.XX X.X, at Thanks, X question. is a

is deals. of So the net isn’t certainly a doing there we’re any of from middle barring There in perspective. kind new

it. on We’d found is are the we’re picked activity deal. actively we’ve do Clearly, bidding be certainly lot a to deals. I of deals, happy up, seeing right we also think

seeing proverbially because open people it’s say, have there’s for from we – business, them So not being very while. not have I us. There’s not of certainly matter up a of are. gone some lot deals I’d a been a away or think much pent for that

out there’s willing some requests And we quality the haven’t better some meet amount of so the aggressive and And of out in companies been of marketplace. those just action to fair a ran there.

state here, the going concerned coming I the a what’s I the cetera. et still with winter little mentioned, As into we’re the think economy about, bit virus of on

cautious, think have that so happy right fairly that. be the or if we been And we find to in deal, lead I to we’d participate

The I is would flip haven’t activity, point coin other much the because of too, activity, seen that much is repayment make there hasn’t been side right. market as general we that

expect here well. in into as we that going next year So and pick to up quarter fourth would the

So to further it within about if further think our well. would new reduce will you make investments if range, giving leverage that room you as our us

So from target, it’s a That say that a makes I’d bit moving of perspective. sense.

Ryan Lynch

helpful. Yes. for about non-accrual? the status just on was come Can just investment was previously with was that what that outcome talk talk that that restructure, happened Certainly. Can is you that accrual back just was investment? that an on about energy That’s – Blackbrush what you did that

Mike Boyle

Sure.

first that We quarter restructure reinstated did where a business. investment incremental business. we to debt were the over that So originally on the lien lender we

first own. So that less a we leveraged, there lien is new

original of us that well there. a drive the positioning think incremental as recover we’ll business. that from We investment, own equity where will do to as our some We return now also the place

that to So we’re focused our on distress restructuring the with over we the third and over pleased Capital, the move Bain and the of off to of non-accrual it team quarter. of quarter course amendment help

Ryan Lynch

the the you you’re just dividend, dividend. And feel think that last level I that, Okay. one said guys with current you the comfortable on of then one

some up. You commentary on gave market picks activity as

future income, You Obviously, there’s markdowns, potential be as which non-accrual. sizeable guys OID credit the portfolio. greater some also Also repayments, in of and have a our are risk the yields pretty your investments that well we’re for expect in which currently helps to higher pandemic, portfolio issues higher helpful. some in us on increases the which will midst in which your spreads has marketplace, of

being some of So level guys the uptake about made would of or with future? issues factoring that you some current comment comfortable level increased in in the credit are day-to-day you non-accruals the or and

Michael Ewald

I as there’s say wouldn’t across necessarily uptake got I anything seen, we’re necessarily get companies the portfolio worse looking Yes, I healthier some continue think over don’t quarter. I mean an there. to the we’ve think and holistically

companies So well. that a think second portfolio have end our of stabilized as I the And weren’t the which being. in those did you time number at fine as think quarter, things the amongst companies of of the performing positioned amendments we remember, we some for

that So overly forward. any increases us concerns going there’s about potential that, nothing

I cash health the pointed as make The Sally also well. think the our actually too income portfolio, of is to majority other out income, vast of I there PIK and point our that’s income the speaks to is out, pointed right.

Ryan Lynch

Okay, understood. Those my this appreciate questions. are the I time morning. all

Michael Ewald

Ryan. Thanks,

Operator

Bank question from Hewett of America. Derek is next Our of

Derek Hewett

was Good driving portfolio maybe And Sally, other morning, with of the what already a everyone. were for basis. What questions factors to have basis improvement there point cost resolution do it looking I’m at did or that Most involved? yield. in on that addressed, – non-accrual XX were the my but

Sally Dornaus

with portfolio we but beneficial had of a us. quarter we well certainly momentum of to that, as in there the it our second were as combination floors during our LIBOR some positive Yes, saw things where is some quarter, the

So it was – yes, things. combination it’s of a

Derek Hewett

floors percentage And and Okay. of what is average has LIBOR the portfolio what floor? the

Sally Dornaus

Average, Mike, that. you have

Mike Boyle

Sure.

X% XX% and has those LIBOR floors of about at So the portfolio floors are

Derek Hewett

Okay, you. great. Thank

Mike Boyle

Thank Derek. you,

Operator

question next of Credit from Our is Suisse. [indiscernible]

Unidentified Analyst

guys. good morning, Hi,

what quarters event of of I for of about the dry of during was the to help little your is net to a due mentioned to But through those powder know We’ve you out mean, you defensive uncertainty. guys your leverage, it in and level that but will had you I longer investment your already feel question the asked repayments I we declines you and net have how lowering stance your declines. to watch of obviously be wanted think investment the other would growth, I about the see factors a are guess which ask but time need the differently. and prudence portfolio? some two that XXXX, conservative just for? there kind

Michael Ewald

mean, army the terms concerned about of we’re I market in the look, I we’re broadly Yes, environment. in being think because I conservative, think conservative

think we’re I actually in what balance good from very a a place perspective. sheet

I within like to forced because we like we’re our I leverage our don’t well concerned level. think So feel be target its being when conservative, level, was about

So definitely are we looking at there.

The some other point I would make that right. been repayments, is in terms you’ve of revolver something seen actually it’s repayments of

revolvers saw well. we huge the quarter and paid So those the quarter, third draw the over a of as of second have first the down at some over end back quarter been

So too haven’t we a full-scale through control type into transactions, of what I from flown yet. necessarily seen wouldn’t that change repayment that some is perspective. read just hasn’t the repayments much portfolio Again, of the

that’s that today, investment. invest again, taken perspective have where We positions higher I further from risk some did, up will expect yielding then be well. quarter certainly to anything today and we out, fourth to what we compelling make done in We sure potentially a think, to the which happy as that for see frankly haven’t we’d quite more entire be reward in frees just capital if of but out now investments, there

Unidentified Analyst

me. from it Got much. so it. you That’s Thank

Operator

Instructions] [Operator

Michael Ewald

no questions. thank everyone to Great, well, again hearing time for We today. want further their

meantime, you months lot. you in speaking the with forward a Thanks up to free look to do So so. Otherwise, or – speak feel else in to I comes again appreciate out. another reach we’ll please three the Anything questions.

Bain Capital Specialty Finance (BCSF) 6 Nov 202020 Q3 Earnings call transcript