Bain Capital Specialty Finance Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 6, 2025

Key Takeaways

  • Positive Sentiment: Net investment income of $0.47 per share in Q2 (10.7% annualized) covered the regular dividend by 12%, and the Board declared a combined $0.45 Q3 dividend (9.5% regular plus special), annualized 10.2%.
  • Positive Sentiment: Gross originations rose 73% year-over-year to $530 million in Q2, with a weighted average spread of 580 bps as the firm deepened its focus on first-lien middle-market loans.
  • Negative Sentiment: Net asset value per share declined $0.08 in the quarter to $17.56, reflecting modest downward mark-to-market adjustments.
  • Neutral Sentiment: Credit quality remained stable, with non-accruals representing 1.7% of amortized cost (0.6% of fair value), below the broader BDC sector average.
  • Positive Sentiment: Refinancing of the 2019 CLO reduced the AAA tranche cost from ~185 bps to 150–155 bps, lowering pro forma gross debt-to-equity to 1.22×.
AI Generated. May Contain Errors.
Earnings Conference Call
Bain Capital Specialty Finance Q2 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, and welcome to the Bain Capital Specialty Finance Second Quarter Ended 06/30/2025 Earnings Conference Please be advised today's program is being recorded. It is now my pleasure to turn the program over to Kathryn Schneider, Investor Relations. You may begin.

Speaker 1

Thank you, Aaron. Good morning, and welcome, everyone, to the Bain Capital Specialty Finance Second Quarter Ended 06/30/2025 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 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.

Speaker 1

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 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, task performance does not guarantee future results.

Speaker 1

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

Speaker 2

Thanks, Kathryn, and good morning to everyone. Thank you for joining us on our earnings call here today. I'm joined by Mike Boyle, our President and our Chief Financial Officer, Amit Joshi. In terms of agenda for the call, we'll stick a little bit with past practice here. I'll start with an overview of second quarter results and then provide some thoughts on our performance, the current market environment and our positioning.

Speaker 2

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 closed, delivered solid second quarter results. Q2 net investment income per share was $0.47 representing an annualized yield on book value of 10.7%. Notably, our net investment income continues to demonstrate strong dividend coverage for our shareholders, exceeding our regular dividend payout by 12%.

Speaker 2

Q2 earnings per share were $0.37 reflecting an annualized return on book value of 8.3%. Our results were driven by strong levels of interest income earned from our middle market borrowers and largely stable credit performance across our portfolio. Our net asset value per share was $17.56 down slightly $08 per share from the prior quarter end. Subsequent to quarter end, our Board declared a third quarter dividend to $0.42 per share payable to record date holders as of 09/16/2025. The Board also declared an additional dividend of $03 per share for shareholders of record as of 09/16/2025, as we had previously announced back in February.

Speaker 2

This brings total dividends for the third quarter to $0.45 per share or a 10.2% annualized rate on ending book value as of June 30. Turning to the market, we witnessed increased market volatility at the beginning of the second quarter as a result of higher tariffs that the market feared would lead to a lower economic growth backdrop in The U. S. This caused a temporary pause in new deal volume activities across the market as investors sought more clarity and then resumed to more normalized levels throughout the quarter fueled by greater market optimism. Against this backdrop, Bain Capital's private credit group navigated the challenging market conditions by sticking to our core competency and longstanding presence in the middle market.

Speaker 2

Our scale and longstanding presence in this segment of the market allowed us to source attractive investment opportunities for our investors despite a lower level of broader M and A activity in the market. In fact, during Q2, BCSF's gross originations were $530,000,000 up 73% year over year. We remain selective in our underwriting approach and continue to favor middle market size companies within the core segment of the market. To source these new investment opportunities, we benefited from Bain Capital's platform advantage through our sourcing relationships that benefit from our deep industry expertise and that distinguishes our platform from other competing lenders. Our incumbency advantage that allows us to remain active by supporting existing companies through add on activities and our broader private credit group platform that has flexible capital to invest across the capital structure from which BCSF benefits to source a greater and wider set of investment opportunities.

Speaker 2

While the market environment remains competitive with spread compression continuing more broadly, we believe Bain Capital remains well positioned to navigate this dynamic. The weighted average spread of our new originations during Q2 was over five eighty basis points, demonstrating our ability to drive alpha for our investors. Our disciplined capital base allows us to pick our spots in areas of the market that we find most attractive versus competing against other segments of the market that may exhibit greater spread compression and less favorable documentation terms. In doing so, has allowed us to produce attractive levels of net investment income for our shareholders while remaining focused on protecting our downside. Credit quality and fundamentals continue to be healthy across our portfolio.

Speaker 2

Investments on non accrual represent 1.70.6% in amortized cost and fair value respectively as of June 30. We saw a slight uptick in non accruals this quarter driven by one new name added. Our non accrual rate though continues to be low relative to the broader BDC sector average based on first quarter results as we do not have full comparable Q2 data for our peers yet. Looking ahead, we know dividend coverage has been a recent topic on investor minds in light of tightening market spreads, the potential for a lower interest rate environment and higher liability costs with low fixed rate debt structures maturing. We wanted to take a moment to discuss our performance and future levers of growth.

Speaker 2

First, we would remind our investors that we set our dividend policy at an attractive level for shareholders and at a rate that can be earned throughout multiple market environments. As a reminder, our regular dividend rate at book value is 9.5% annualized. In more recent periods, our NII dividend coverage has been strong both in Q2 and thus far this year for the 2025 at 112115% respectively. Our level of spillover income differentiates us versus other BDCs with 1.43 per share of spillover income, which is equal to over three times our regular dividend level. We also have nearly $0.10 per share of undistributed income from our joint venture investments that can contribute to higher NII levels in the future as we've been over earning the distributions paid to BCSF through these entities in recent quarters.

Speaker 2

Bain Capital has also demonstrated consistently strong credit performance. While we exhibited a modest NAV decline this quarter, our annualized ROE for the first June of twenty twenty five is 9.4% and approximately 11% in each of the prior two calendar years in twenty twenty twenty four and 2023. Taking all this together, we have demonstrated attractive performance for our shareholders. Relative to where our current trading levels are versus book value, we believe our stock offers a compelling opportunity. At BCSF's current market price as of yesterday's close, our dividend yield, inclusive of our regular and special dividend, represents a 12.2% annualized yield.

Speaker 2

We believe this is an attractive level for investors on both an absolute and relative value basis across sector. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail. Mike?

Speaker 3

Thanks, Michael, and good morning, everyone. I'll start with our investment activity for the second quarter and then provide an update in more detail on our portfolio. New investment fundings during the second quarter were $530,000,000 in 94 portfolio companies including $242,000,000 into 12 new companies and $273,000,000 in 81 existing companies as well as $15,000,000 into our senior loan program. Sales and repayment activity totaled approximately $5.00 $2,000,000 resulting in net investment fundings of $27,000,000 quarter over quarter. Our new investment fundings were split between new and existing portfolio companies with new investment fundings representing 46% of our total fundings versus 54% to existing companies as our incumbency advantage allowed us to remain active with existing companies.

Speaker 3

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

Speaker 3

Turning now to the investment portfolio. At the end of the second quarter the size of the portfolio at fair value was approximately $2,500,000,000 across a highly diversified set of 185 portfolio companies operating across 29 different industries. Our average position to a single portfolio company is approximately 50 basis points given the diversity of the overall portfolio. Our portfolio primarily consists of first lien senior secured loans given our focus on downside management and investing at the top of capital structures. As of June 30, 63% of the investment portfolio at fair value was invested in first lien debt, 1% in second lien debt, 4% subordinated debt, 7% in preferred equity, 9% in equity and other interests, as well as 16% across our joint ventures, including 10% in the international senior loan program and 6% in our senior loan program.

Speaker 3

In both of these programs, the vast majority of our underlying investments consist of first lien loans. And on a look through basis, including our exposure within our JVs, our first lien exposure is 84%. We would also note that our 9% equity interests are comprised of a diverse number of equity co invests and select equity investments that were made at the time of originations and not the results of restructuring investments. As of June 30, the weighted average yield on the investment portfolio at amortized cost and fair value was 11.411.4% respectively as compared to 11.511.5% respectively as of 03/31/2025. We are pleased to demonstrate these stable yields in light of a broader market spread compression.

Speaker 3

93% of our debt investments bear interest at a floating rate positioning the company favorably in today's higher interest rate environment. And moving over to portfolio quality trends, our credit fundamentals remain healthy. We saw stable trends within our internal risk rating scale quarter over quarter. Risk rating one and two investments which indicate that the company is performing in line or better than expectations relative to our initial underwrite totaled 95% of the portfolio as of June 30 consistent with our prior quarter end. Risk rating three and four or underperforming investments comprised 5% of our portfolio at fair value.

Speaker 3

These investments on our watch list have been relatively stable and we've not seen any meaningful change from higher tariff impacts across the portfolio. Investments on non accrual represented 1.70.6% of the total investment portfolio and amortized cost and fair value respectively. As of June 30 this is compared to 1.40.7% respectively as of March 31. As Michael Leewald highlighted earlier the increase in non accruals was driven by one company added this quarter. Amit will now provide a more detailed financial review.

Speaker 4

Thank you, Mike. Good morning, everyone. I'll start the review of our second quarter results with our income statement. Total investment income was $71,000,000 for the three months ended 06/30/2025, as compared to $66,800,000 for the three months ended 03/31/2025. The increase in investment income was driven by increase in average investment balance of the portfolio, higher effective yields on the existing debt portfolio and an increase in the other income.

Speaker 4

The quality of our investment income continues to be high as the vast majority of our investment income is driven by contractual cash income across our investments. Interest income and dividend income represented 94% of our total investment income in Q2. PIK income represents approximately 11% of our overall investment income. The vast majority of our PIK income is derived from investments that were underwritten with PIK with only a small portion of our PIC income related to amended or restructured investments. Total expenses before taxes for the second quarter were $39,300,000 as compared to $33,700,000 in the first quarter.

Speaker 4

The increase in expenses was driven by greater incentive fee and interest and debt financing expenses. Net investment income for the quarter was $30,600,000 or $0.47 per share as compared to $32,100,000 or $0.50 per share for the prior quarter. During the three months ended 06/30/2025, the company had a net realized and unrealized losses of 6,900,000.0 Net income for the three months ended 06/30/2025 was 23,700,000.0 or $0.37 per share. Moving to our balance sheet, as of June 30, our investment portfolio at fair value totaled 2,500,000,000.0 and total assets of $2,800,000,000 Total net asset was $1,100,000,000 as of 06/30/2025. NAV per share was $17.56 a decrease of $08 per share from $17.64 at the end of first quarter.

Speaker 4

As of June 30, approximately 62% of our outstanding debt was in floating rate debt and 38% was in a fixed rate debt. For the three months ended 06/30/2025, the weighted average interest rate on our debt outstanding was 4.9% as compared to 4.8% as of the prior quarter end. The weighted average maturity across our total debt commitment was approximately three point nine years at 06/30/2025. At the end of Q2, our debt to equity ratio was 1.37 times as compared to 1.27 times from the end of Q1. Our net leverage ratio, which represents principal debt outstanding less cash and unsettled rate was 1.2 times at the end of Q2 as compared to 1.17 times at the end of Q1.

Speaker 4

Our gross leverage ratio was higher at the end of Q2 due to higher cash levels on our balance sheet at the end of the quarter. Subsequent to quarter end, on July 2, we refinanced our middle market CLO debt, which decreased the principal of the debt from $352,500,000 to $150,600,000 Pro form a for this transaction, the gross debt to equity ratio was reduced to 1.22 times. Liquidity at quarter end was strong totaling $796,000,000 including $592,000,000 of undrawn capacity from our revolving credit facility, 174,500,000.0 of cash and cash equivalents, including $136,900,000 of restricted cash and $29,000,000 of unsettled rate, net of receivables and payables of the investments. With that, I'll turn the call back over to Mike Ewald for the closing remarks.

Speaker 2

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

Operator

Certainly. And we will take our first question from Tal Johnson with KBW. Your line is open.

Speaker 5

Good morning. Thanks for taking my questions. On the securitization refinancing, I believe it was the 2019 middle market securitization that you mentioned. So sounds like you refinanced that. I'm just curious why or what kind of drove that decision?

Speaker 5

I mean, that looks like it's probably the most attractively priced securitization you have in the debt stacks. Or is there opportunity to refinance there at a higher cost? Or what's the what what drove that decision?

Speaker 4

Thanks thanks for your question. I would say, yes, it was pretty attractive from a pricing perspective. Prior CLO securitization was within weighted average cost of around 185 basis points, and we were able to access the market, which was pretty attractive. And as AAA tranche, we were able to issue around 150, 155 range. So, it was pretty attractive from a pricing perspective.

Speaker 4

At the same time, I would say our twenty nineteen-one CLO basically was up from an investment period perspective. So, we were evaluating it from that perspective anyway. So, the market provided us an opportunity and the pricing made sense.

Speaker 5

Got it. That makes sense. And then just on the origination activity this quarter, obviously, it's you guys are pretty active with new originations. I mean, how would you characterize the activity for the quarter? Was this mostly new company originations, a lot of existing?

Speaker 5

And I guess in a quarter where you saw for the most part reduced kind of activity across the space and reduced M and A activity. Just wondering kind of what drove the higher than average origination?

Speaker 2

Yeah, thanks Paul. There's a couple of factors I think that drove that. One is the core middle market where we play didn't exhibit as much of a pullback from activity as unobserved in that larger segment of the market. The second thing is we've been particularly focused across the private credit group in terms of expanding our reach into the market. You know, we realize that as many strong relationships as we have, there's still a lot more folks that quite frankly don't know in the middle market.

Speaker 2

And so we've really broadened our sponsor outreach and and and developed a number of new relationships across the market. If you look at the stats, it's it's not quite fifty fifty, but it's roughly fifty fifty from a new new platform perspective versus add on activity. So it certainly hasn't just been driven by our incumbency advantage. That's certainly very helpful. But we also, as I said, continue to expand looking for new opportunities as well because the incumbent level of activity may wax and wane over time.

Speaker 5

Got it. That makes sense. And are those investments that can eventually be sold down into the JVs as you potentially want to make some room on the balance sheet? How do you typically manage that? Do directly

Operator

originate into the JV?

Speaker 3

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

Speaker 5

Okay. Great. Those are all the questions for me. Thank you very much. Thanks, Paul.

Speaker 5

Thank you.

Operator

We'll pause for any additional questions to queue. Again, is star then one.

Speaker 2

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

Operator

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

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