Earnings call transcript Q4 2022

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Operator

Greetings and welcome to the Bain Capital Specialty Finance Fourth Quarter and Fiscal Year Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Katherine Schneider Investor Relations. ma'am. ahead go Please

Katherine Schneider

earnings morning of quarter welcome XXst, and after Capital year-end Investor issued call. Good of Finance's investor Specialty quarterly Specialty are our XXXX Bain available Finance Yesterday and our we close, fourth year a market website. release everyone Rana. and to presentation copy and results, Capital conference press which Thanks Relations ended Bain December on

analysts today, remarks a will and investors. we for our Following question-and-answer hold session

and a our form webcast any will be and This webcast on being call in of is and replay made available Specialty website. the any is prohibited. unauthorized broadcast Finance call This strictly Bain are property Capital

These include not Risk management today materially statements Any XX-K from those statements future risks forward-looking results based materially. do cause guarantee expectations, of differ which section on that the and current in and could are identified actual actual uncertainties which performance Form made our are Factors results differ indicated. may to

Capital law. Specialty unless so assumes do any update to required this to by statements obligation at forward-looking time Bain no Finance

Lastly past not performance future results. does guarantee

with So, like the Ewald. turn over our I'd Chief Michael Officer to to Executive call that,

Michael Ewald

everyone our morning and here Good you Katherine. us Financial thank Officer, on Chief our you, Thank Mike Boyle, joining earnings for I'm today. President; call and with our Sally Dornaus.

our ended an I'll on fourth overall XXXX the XXst, December year and environment, of results start provide and and overview thoughts performance, with quarter our market then some our positioning.

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

book an investment equating value annualized average income on Beginning per with share to net our of X.X%. $X.XX, results, yield QX was

during covered quarter. income fourth our Our the net by dividend XXX% investment

average of equating per return annualized book share were to an QX earnings value XX.X%. $X.XX on

XXXX XXXX, return equity. our the net equal basis return a share was to income on X.X% $X.XX, points This up on from XXX NII equity. investment full per over was year For

Consistent We $X.XX, were across earnings middle investment Earnings an but full credit the covered for XXXX portfolio believe share on exceeded equity portfolio, attractive of market. our with return for XXXX also Our X.X% a per metric XXX% annual payout net for representing earnings, by our generated experience of performance testament the income levels a Credit's for during our dividend the only XXXX. this year. dividend and year. consecutive total NII of our of to our year second overall important a measuring investing is Bain Capital is in our not net

demonstrated and realized gains the driven portfolio interest earned performance credit by as overall returns year. strong market Our high-quality by and income net full quarter and borrowers during were our unrealized fourth both from middle our across

strength. the asset portfolio the XXXX, per of $XX.XX reflecting ended share, quarter the net and $XX.XX from from previous value at up QX Our $XX.XX year as from up

beneficial XXXX a amount We income second are the especially the year healthy our the believe a We performance dividend. strong is spillover pleased in $X.XX. share year. our of and period with of stability half greater that undistributed this to during end, market volatility the estimate of that approximately throughout income we is per At occurred of

of X.X% our XX, share per of December Board quarterly to as X% an second of shareholders share record increased the book quarter, regular or on to This value $X.XX For XX. by consecutive March per $X.XX dividend yield annualized represents of approximately our XXXX. as

by regular of XX% the a by level higher dividend increased generated driven income the interest by company. our we On basis, year-over-year levels being

current based yield represents, on Our QX annualized an regular BCSF's XX.X% levels. trading dividend

the BDC sector. a and believe compelling basis this We both is level for relative value investors absolute very on an across

of of secured highly diversified comprised Our first investment senior portfolio portfolio notes. lien floating a largely is rate

value debt XX% capital fixed-rate maturing of Furthermore, over of quality credit of a contractual performing of in are rates solid that over are low loans their position by we XX% pursuant interest to at as terms. is comprised fair currently outstanding reflected XXXX. health non-accrual low-cost liabilities structure paying in with are investments portfolio our strong our The debt our

quarter times of right in X.XX X.XX on a with current We times fourth the net investments to range powder leverage and ended target between ratio with our providing times dry the additional of middle new X.X the us of in environment. capitalize

tighter prior recent to in higher and spreads structures. loan seeing vintages market favorable documentation compared years, are we overall more As

disciplined we're prior will a the We mindful potential risks and companies. within having rates through high important set, increasingly of approach ahead. believe we be high slow-growth middle middle market While investing a economic and see experience interest market inflation also returns to cycles investment for compelling opportunity backdrop several navigate

of XX senior market Credit years Capital has over and investing history. experience middle in long-standing consistent leadership that the has Bain remained our

service current Given backdrop, we focus our on debt and coverage the cash portfolio market have free heightened our metrics. company's flow

on our value that we alignment near-term value This maximize on companies can watch preserve get liquidity equity downside our ahead private and arise looking identify of on For issues are that important preservation to potential so are with focusing any list, scenario. in our may management. is and especially any sponsors outcome early to we and ahead problems

positions directly control eventual management's to have tranches debt of we XX% financial XX% investments direction. with are majority drive our documentation tied our forecast debt our in structured in containing of us to outcomes allowing covenants and

allows industry sector to strong industries performers expected team uncover companies Credit's deeper across niche are the continues and verticals Bain and over expertise to provide coming us be that Capital us even many to years. research with

on cycle that cyclical be insulation capital and in structures companies for us and susceptibility a may deep industry looking that with in may equity are avoid Recently be We allow to digging we acutely been impacted to believe this we higher-default inflationary new expertise will and volatility. have pressures uncover that investments. meaningful investments increasingly resilient to sectors sectors. in less avoid to focused further important businesses industries We have remain to more importantly more have rational

to the turn will I portfolio Mike in our President our investment through detail. greater Boyle, now call to walk over

Mike Boyle

Good on update detail our everyone. fourth activity we with Michael. start morning, Thanks, our more then provide the and portfolio. and for I'll investment quarter an

the during investment New new existing million XX million in $XXX in companies, portfolio across XX companies million in including $XXX $XX and companies, the fourth were ISLP. $XXX five fundings million quarter

million, totaled repayment resulting net portfolio funded activity and approximately $XX Sales $XXX in growth quarter-over-quarter. of million

investment For Total the were sales $X.X full year the repayment billion. for year, fundings were billion. activity $X.X and

our We grow ability target with were size, investment our range. modestly our within pleased leverage staying while portfolio net to

quarter comprised of companies. portfolio companies activity were investing new for fundings and new the to existing full Our portfolio and fourth new mix of year a

joint approximately XX% and to comprised excluding of investments new our XX% ventures were to existing During the companies year, our new companies. investment fundings, in

existing advantage borrowers across incumbency an middle us whom Our to with capital provides of market our relationship. existing large add-on have we provide with borrowers portfolio ability to

fourth XXXX, new benefited we the In companies to that higher lien during was investments average approximately originated basis spreads first the our from XXXX. ago which spread higher QX on we new year originations XXX originations. market to points, compared XXX was as lien weighted first new our quarter, points in On basis one

levels as to add-backs. tight coverage flow limit particularly documentation but spreads leverage only on loans underwrite and loans seen on We lenders charge covenant cash EBITDA first to decrease around are have and yields, leverage free on we we lien new levered definitions Not levels focused maintaining also fixed at ratios. structuring and new higher remain are able focused

different the XX fourth the companies size at portfolio investment value investment Turning across highly industries. the XXX was quarter, end of of to At portfolio across operating billion portfolio. of set a fair our $X.X the diversified

We continue to lien maintain secured our focus structures. on first senior

joint in value fair over As or lien the our worth equity. first XX, highlighting portfolio this lien It secured XX% debt, first in invested December ventures, largely or have of XX% debt, the investments common that is at lien past overall subordinated in percentage while ventures, down vehicles the was second over and joint investment which investment comprised of senior XX% come of to first XX% lien X% is loans. preferred attributed of in year, or

was higher are across at basis points. higher on rates XXX as debt interest a bear This company XX% and investments the and to and at on rates yield These as beyond the meaningfully to of favorably XX.X% December XXXX, our driven our by respectively, portfolio XX.X% was As as year-over-year XX, XX.X% interest basis investment and cost XXXX. compared of a continued XX, also September have average fair rate the positioning primarily weighted up floors approximately amortized of reference value rise our reference loans. increase deals on respectively rate XX.X% floating the loans.

During strategies our on throughout investing execute secured middle joint our and continue senior XXXX, to ventures the within quarter of market loans. we in investment

floating are flowing rates as the our of JVs We investments rate of continue interest see almost benefit loans. to through all our higher

value, At performance year-end, income our XX% XX.X% XXXX. equity, and at of line XX.X% in return our in annualized of and of overall strong an investments course JV portfolio expectation. QX generated target our with the on represented over ISLP generated fair

annualized invested XX portfolio approximately portfolio value investments secured was loans, SLP companies, interest. operating and of in investment second X% at December floating in $XXX of including XXXX. income in of equity XX.X% rate fair XX.X% an in comprised XX.X% investment industries. senior return XX% equity lien in portfolio lien, the first X% different was ISLP's QX on and generated in XX, of as million across XX

markets venture focused which on ISLP across As Capital in a and presence Credit is a both Bain long-standing investing our and joint investing reminder, has Australia, our within. experience Europe

we greater While our of than our the throughout underlying companies Europe portfolio US, has feel XXXX of volatility the across health about diversified portfolio. market experienced good

health in which been services, high-tech largest versus business industries resilient sectors care sector and companies companies, industrial-focused more include Our and exposures, pharmaceutical Europe. have

XX XX, lien across of December X% within industries. portfolio loans secured XXX% companies approximately the investment portfolio, fair and portfolio in of investments second including in was first XX% $XXX in of lien. million, SLP's As value comprised senior different of at XX investment

risk stable than two comprised to our quality better relative investments, initial to indicating trends, rating was of of credit portfolio performing December Within on they risk line our portfolio or that internal our were fair rating XX, quarter-over-quarter. and expectations the in one XX% as underwriting. value of was at scale, company Moving

[indiscernible] as We rising portfolio costs chain inflationary three fair these impacted disruptions, is value. higher supply pressures remain pressures, at from freight creating rates. reflect have watching our on been interest X% resulting companies by closely. wage of comprised investments as well focused and investments companies that These

near-term currently However, not defaults. or we do restructurings anticipate

nonaccrual. our at fair for and credit three rating X% our investments, than across comprised portfolio on our remain portfolio. Risk included solid portfolio less of the believe companies Overall, we value fundamentals

is leverage as of XX. September X.X times down of median Our December as X.X from portfolio times XX,

the of where and strong travel observed The our BCSF asset performance. of strength the trends, stable value continued aviation as benefited from have well credit net portfolios as we fundamental

review. will financial Sally, a provide now more detailed

Sally Dornaus

months the start quarter compared XXXX investment of statement. I'll income everyone. investment loans. to September interest morning, XXXX senior Total $XX.X The ended months good ended and XXXX. rate review rates, our $XX.X primarily secured, Mike was million, our portfolio rising income three you, income million driven benefit XX, increase Thank large was December for floating of in by three results, as with fourth our the of across the the for XX,

expenses for increase fourth company. The quarter. was return million quarter to greater million as by $XX.X Total $XX.X the were net compared fees, by a higher driven third in due the cumulative to expenses incentive the earned in

hurdle trailing net pre-incentive incentive fees our unrealized the cumulative our we of and whether measure against investment realized calculating a return a income, our purposes rate net reminder, period. or capital against three-year As for over losses net

volatility While of the our fee proper incentive provides can believe alignment of especially with our market shareholders, this us periods with periods we elevated stream, volatility. during this create within

compared quarter to for million or was income the quarter. the share $X.XX for $XX.X investment prior as or $X.XX $XX.X per Net million share per

higher earned income Our three-year total was future. net return due quarters to the investment look incentive given quarter from prior lower back during our fees

NII of approximately impact QX share. have been the Excluding $X.XX per back, would the look

Net the full per for share. investment per income XXXX share $X.XX was year

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

balance our sheet. to over Moving

as our at increase end XX, quarter-over-quarter. value XX. fair billion December the up third was X.X% $X.X portfolio investment a December from of quarter, Total share total of assets assets of $XX.XX, As $XX.XX $X.X per representing totaled of $X.X billion at the NAV billion. and net were

that Our generated quarter was net related X.XX At fourth the our driven end debt-to-equity from investments to by primarily NAV times, ratio the performance. increase was unchanged of QX, of travel-related during gain QX. strong the end

compared times X.XX principal cash QX was net X.X Our to end debt as ratio of QX. leverage outstanding which end of at times less the the represents at

increased Credit continued company's our we doubled this We $XXX size reflecting the quarter, to from strengthen to in the improve our And course million. efforts million, During continued the size funding of up than facility and of structure. over XXXX, $XXX Facility Sumitomo balance the profile. sheet more to further liability our

Agency Subsequent rating investment-grade to Bond Kroll quarter or stable BBB outlook. of end, KBRA and assigned Rating company we an announced the

agencies. are to ratings investment-grade now rating and pleased regarded We have from three well-known

Our structure large portion periods with of to allocation. outstanding provide in capital the rate withstand financial debt is our company with greater durable debt a unsecured ahead. greater flexibility These fixed of volatility structures

rate income XX, our December company within across The positioned portfolio is interest well fixed rate. debt debt benefit floating portfolio outstanding XX% our and of its given of XX% higher floating approximately of As large loans. from to rate at

could that a share. basis our earnings quarterly point rates by holding December approximately calculate in of XXX As all increase $X.XX we constant, per increase else XX,

provides detail our various XX-K in on sensitivity rates. to interest further Form Our changes

and capacity million. compares Available liquidity approximately on to our This facilities commitments. consisting of undrawn cash undrawn investment was million credit of $XXX $XXX

December end. rates The outstanding debt X.X% was the as weighted three compared is the floating driven SOFR average months quarter XX, For the as interest rate X.X% increase our XXXX, of by on prior structures. rate debt to higher on our ended

closing turn I Mike remarks. back to for will that the With over call

Michael Ewald

across Thanks, and and investment Sally. during while behalf middle our mitigating execution were the our In the of credit risk of our income borrowers closing, XXXX. demonstrated pleased We portfolio the fourth and high of earned our performance with levels investment quarter possible. across wherever strong of on entirety attractive market strategy we shareholders

value managing into look our volatility XXXX, attractive forward We equity well on opportunities. is of returns and we delivering our for committed producing to the remain strong ahead you that we As by shareholders' shareholders we to portfolio periods footing our capital. capitalize believe of are to navigate on and growth thank positioned greater to attractive on privilege

line the open please Operator, for questions.

Operator

Thank you.

conducting We first question-and-answer with be now will Instructions] Our [Operator from Cyganovich comes Arren session. a question Citi.

Arren Cyganovich

you talk the they're bit their and wondering costs inflationary of could about a companies any I your was if dealing of other how of with health little rising Thanks. portfolio impacts interest and businesses? the

Mike Boyle

Sure. Happy to talk through it.

to companies on has really focused the we in Xx focused interest outlook that sort any into across are mark the down default. any from closer coverage. risk which portfolio. earnings strong portfolio highlight we been in on the names although portfolio that one X.Xx rising avoiding is that did and we're think been fall where actually quarter three remarks making the interest ratios rates the interest sure indicates across or rating where our of of we leverage also So for are around that overall X.Xx baskets our the coverage X.Xx average coverage in north companies net before, of on of which that I was Xx near-term the the We've We've continued focusing those interest still portfolio restructuring come are down we've of historically and

well overall quite although much more companies a has been have been So environment. it challenged performing

Michael Ewald

I'd if up an from guess pleased constant, have which Arren, certainly margins hold to I able of our but portfolio been and perspective, surprised we've increase add there. order themselves extent their And prices in not gross to to the also inflationary that been companies actually up to

that overall, inflationary keep is profitability just well they've that of seeing consequence negative well. a the pretty going perspective spiral from right? course, as But Of kind performed of actually

Arren Cyganovich

I today, going of maybe deal activities lower. more the in Obviously, probably forward? lender-friendly origination outlook seems your imagine And Thanks. environment. but it also originations about terms would What's just much

Michael Ewald

Yeah.

activity I definitely is think lower. deal

portfolio. churn on see continue the longer, in see the we to that, strength said add-on acquisitions they're equity investments Having some some bolt-on continue I their sales muted if in and private the where holding to front to sponsors we think are meantime. trying

but on muted that So be already always ball, you'll deal last XXXX new XXXX, second half saw crystal remarks completely right? so in on that year a in our LBO the stats seen to active would the some especially add-on But of It's is although we happened to more the the I perspective hard imagine in new that in than both going slowdown a are front, have look front. from anyway we filings and our also

Arren Cyganovich

right. Got Thank it. All you.

Mike Boyle

Sure.

Operator

you. Thank

Please Paul ahead, next with Our Johnson question sir. KBW. comes go from

Paul Johnson

forward Yes, the and in that distressing portfolio good curve provide terms test, I coverage along morning. with your where on Thanks your something with Arren's little anything interest lines? you of sense, perhaps any portfolio portfolio extreme for with you companies taking like got of even have question. or or those guess, bit, something in guys more my falls Adding guess, my conducted question can of a terms I of that sort

Mike Boyle

Sure.

So coverage is adjustments, test they portfolio in the as a a for we're run if What more which curves, we today's across do both coverage -- are are plus, important rating are rates, an number decay a rates through X% understand interest fall tests that's that overall. factor that snap there but interest percentage stress forward in decay actually of and when risk X, prolonged would time so And of fairly went rapid our our overall portfolio environment. immediately health our still some a interest into risk four. small what SOFR doing rate of ratings also done have names And period happen. we've run rate our of one to

we the the portfolio. So feel of run tests, that about say, stress do yes, we to but health is quite good

portfolio. the like stress tests, that some are on on adequately down, covered do but times perspective about still run we an We we feel we're portfolio. the of LTM across coverage in -- coverage today's interest if As based we said, coming rate these interest I of two see

Paul Johnson

for Thanks color that. that. on the Appreciate it. Got

just and that be so. and Another large a the about sector question has sort there, you you fairly Just your can just have I big for aerospace your percentage obviously or massive attractive of so. or generally That's on would you provide I'm probably any in defense the things over be, That sector whether current wondering industry, color had, portfolio? a your to how changes there year thoughts feel been of guys industry more guys. last XX% around guess, undergone interesting. portfolio some you find of kind I you

Michael Ewald

Sure.

of So, separately for I place take that's mean, days, defense been defense spending. good if when has likely arguably about that backdrop you the these kind that's and the steady. side a on certainly think break a pieces bit up little it pretty to And that you geopolitical and concerns, the be

aerospace components took a and of also leasing we like and the little you and parts that that. lot a exposure And side, if but been from of bit took MAX the little focus There's hit On a widgets, pieces quite has a that certainly bit COVID. from the aircraft frankly on hit a on more there, will. in more XXX It grounding. things

COVID, seen considerably. also pretty However, certainly the that And up bounce back again. you've of travel orders coming back you've out now seen XXX pick MAX

on And commercial again. a pretty right from platforms so the We've perspective that growing pick demand think ones. seen up we we're the aerospace considerably

place actually think we today. a pretty be so And to it's interesting

Paul Johnson

kind for $X.X sort level Yeah. you're if give you had I helpful. would Or Thanks. fee of line The incentive any guess, with, of able can what of last be it anywhere I'm just one. to a next quarter, quarter be That's any you in interesting. to expect provide wondering, million. smaller this we question sense if

Sally Dornaus

Yeah.

did our think talked I I calculation how quarter-over-quarter. a back this volatility bit I little look a of in So that our bit the quarter, causes And remarks, about works. think sometimes little

working. than a on based rate we be another expect we're I of would see although this quarter to I bit calculation the the have back So higher think we run coming how look

Paul Johnson

Appreciate. Thanks.

Michael Ewald

to if questions, do much. reach everyone's have course today. here. Great. Well, please forward the more any you other in updating no I it normal really questions. we out, looks like Thanks very there's and Certainly, look you appreciate time

Operator

concludes today's teleconference. This

time. this at lines participation. for your you your Thank disconnect may You

Bain Capital Specialty Finance (BCSF) 1 Mar 232022 Q4 Earnings call transcript