Bain Capital Specialty Finance, Inc.

Greetings and welcome to the Bain Capital Specialty Finance second quarter 2019 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sloan Bolin, Investor Relations. Please go ahead.

Good morning. Last night we issued our second quarter earnings press release and investor presentation, copies of which are available on Bain Capital Specialty Finance Investor Relations website. Following our remarks today, we will hold a question and answer session for analysts and investors. This call is being webcast and a replay will be available on our website. This call and the webcast are property of Bain Capital Specialty Finance and any unauthorized broadcast in any form is strictly prohibited. Any forward-looking statements made today do not guarantee future performance, and actual results may differ materially. These statements are based on current management expectations, which include risks and uncertainties, which are identified in the risk factors section of our annual report in Form 10-K. That could cause actual results to differ materially from those indicated. Bain Capital Specialty Finance assumes no obligation to update any forward-looking statements at this time, unless required to do so by law. Lastly, past performance does not guarantee future results. And with that, I'll turn the call over to our President and Chief Executive Officer, Michael Ewald.

Good morning, and thank you for joining us for our second quarter 2019 earnings call. As Sloan mentioned, this is Michael Ewald, and today I'm joined by our Vice President and Treasurer, Mike Boyle, and our Chief Financial Officer, Sally Dornis. I'm going to start with a brief overview of the quarter that both Mike and Sally will further detail in a minute. At the end of the second quarter, the BCSF portfolio represented $2.4 billion invested across 30 different industries and 123 portfolio companies, with a current weighted average yield of 8.0%. Excluding the impact of the ABCS balance sheet consolidation, for the quarter we originated $403 million of new investments. Year-to-date, our new originations total $679 million. As of June 30th, approximately 88% of our portfolio is invested in what we refer to as first dollar risk and is made up of traditional first lien loans. Credit in our portfolio remains very strong and there remain zero non-accruals in our portfolio, a hallmark of our cautious approach to current market conditions. We're also pleased to announce that our board declared a third quarter dividend of 41 cents per share. That dividend will be payable on October 30th, 2019 to stockholders of record on September 30th, 2019. I'd now like to spend some time speaking to how our portfolio composition has changed since we've brought the investments in our interiors joint venture, ABCS, onto the fund's balance sheet. First, it's important to again highlight the rationale for executing on the consolidation. Consolidating the assets and liabilities of our interest in the JV onto our balance sheet removes our equity interest in ABCS from the 30% non-qualifying basket of our assets, a threshold that has limited our investment activity in the past, and places these qualifying assets onto our balance sheet. Our non-qualifying assets went from 25.8% of the portfolio at March 31st to 10.6% at June 30th. Freeing up this capacity allows us the ability to grow other investment opportunities that would fall into the 30% bucket. In particular, we intend to continue to invest in deals sourced by our European and Australian offices, improving the geographic diversity of the portfolio, and we may continue to expand into other strategic partnerships within the direct lending realm. Both of these initiatives within this basket, we believe, will provide attractive risk-adjusted returns for investors. Second, Bain Capital Specialty Finance has exempted relief from the SEC, allowing us to invest alongside other funds and other accounts managed by Bain Capital Credit. Following the consolidation of our interest in the JV, other Bain Capital Credit funds and accounts will be able to invest alongside each other. Given the success of the program, $1 billion in total investments since inception, in our view of where we see attractive risk-adjusted return, we believe the ability to speak for larger hold sizes, prior to consolidating the joint venture, we could speak for loans of up to $350 million, will allow us to lead some bigger deals while still influencing terms and economics. Finally, this transaction is fee neutral for our shareholders. We have and will continue to waive management fees on the incremental assets acquired in conjunction with the ABCS JV consolidation throughout 2019. Importantly, we remain very active alongside Antares in sourcing, structuring, diligencing, and closing Unitronge investments together, and our pipeline for additional deals remains very active. I would also like to note that the ABCS balance sheet consolidation has also impacted our leverage profile. The portfolio at quarter end comprised a ratio of 1.49 times debt to equity. Despite being at the upper end of our previously stated 1 to 1.5 times range, we are comfortable with our current positioning. First, though we harbor some concerns about economic cycle risk broadly, we have focused the fund on first dollar risk and defensible industries, specifically the types of investments which warrant relatively higher leverage. Second, we have confidence in our underwriting process, which has constructed a portfolio with zero non-accruals to date. an investment horizon that spans almost three years. Finally, we have confidence in our and Bain Capital Credit's broader experience and track record in the middle market, including managing our investments through multiple market cycles. Furthermore, we don't believe that being at the upper end of our range will hinder future performance of the fund. Given our relatively young portfolio, we have historically not experienced much churn. However, that churn has picked up noticeably over the last few quarters. Given our robust origination capability, We have not seen any quarter of overall portfolio contraction since our inception and intend to continue that track record. In fact, churn often allows us to accelerate some fee income in the form of original issue discount, or OID, which we have not yet amortized. And replacement origination allows us to initiate additional such fee income in the first place. Both actions are therefore accretive to shareholders. Before I turn the call over to Sally and Mike to go through our financial results and investment activity, let me comment briefly on the market environment for direct lending. We have seen similar trends as other market participants and observers, such as Refinitiv. Overall market, middle market new issuance was up quarter over quarter, but 2019 second quarter still lagged in volume versus 2018s. Despite this relatively muted activity level, we saw favorable lender-friendly trends in pricing, leverage, and other terms. For example, the spread of our newly originated deals are, on average, 75 basis points higher than that of our exited portfolio companies. Over 80% of our new investment activity in the quarter was in the form of new leveraged buyout activity rather than recapitalizations, which often happen at a lower spread, or dividend transactions, meaning that they featured a significant amount of cash equity contributed behind us in the capital structure. We've also seen a continued uptick in the popularity of Unitranche financings, which bodes well for our ABCS product, especially in light of the ability to write larger checks after the consolidation of the JV onto our balance sheet. Sally will now provide a more detailed financial review.