Bain Capital Specialty Finance, Inc.

Good morning and welcome to the Bank Capital Specialty Finance Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and then two. Please note, this event is being recorded. I would now like to turn the conference over to Catherine Schneider. Please go ahead.

Thanks, Irene. Good morning, everyone, and welcome to the Bain Capital Specialty Finance conference call for the third quarter of 2020. Yesterday, after market closed, the company 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 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 factor 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. With that, I'd like to turn the call over to our President and Chief Executive Officer, Michael Ewald.

Thanks, Catherine, and good morning to everyone, and thank you for joining us on our earnings call this morning. I'm joined today by Mike Boyle, our Vice President and Treasurer, and our Chief Financial Officer, Sally Dornis. I'll start with an overview of our third quarter results and provide some thoughts on our portfolio performance, the company's positioning, and the overall market. Thereafter, Mike and Sally will discuss our investment portfolio, credit quality, and financial results in greater detail. We are pleased to have delivered strong financial results to our shareholders in the third quarter. Net investment income was 33 cents per share, driven by solid net investment income earned by our investment portfolio. Earnings per share were 80 cents, driven by net appreciation in our investment portfolio due to the reversal of a portion of the unrealized losses recognized in the first quarter. Net asset value per share as of September 30th was $16.27, reflecting a 2.9% increase from our NAV as of June 30th. During the third quarter, the portfolio benefited from the spread tightening that we witnessed across credit markets. We are pleased to see a meaningful recapture of the NAV decline that the portfolio experienced in Q1 as a result of COVID-19. Given the high-quality nature of our portfolio, we believe there is still significant embedded upside potential in our portfolio to recapture a greater portion of the remaining unrealized losses as spreads and company performance remain stable and our loans are repaid at par. As of September 30th, our total investment portfolio had a weighted average fair value mark as a percentage of par of 95.7%, as compared to the weighted average fair market value of 98.5% at year end. In addition, we continued to demonstrate meaningful progress in deleveraging our balance sheet while delivering stable net investment income to our shareholders. As of September 30th, our net leverage ratio was 1.33 times, down from 1.42 times as of the end of Q2, and significantly down from the end of Q1, where it was 1.78 times. The decline in our leverage ratio this quarter was attributed to par principal repayments and sales activity, together with the increase in our net assets during the quarter. As a result of this deleveraging, we have significantly improved the strength of the company's balance sheet. First, we have greater asset cushion to withstand any potential volatile periods ahead. And second, we have better positioned the company to take advantage of new yield-accretive investment opportunities to grow earnings. Based on the current portfolio, our target leverage range remains 1 to 1.5 times, and we're now just about in the middle of that range. We are comfortable operating there given the high foreseen exposure within our portfolio, while also maintaining significant asset coverage should market conditions change. During the third quarter, credit quality and, importantly, credit clarity continue to improve as exhibited by the following trends in the portfolio. We have observed improving revenue, cash flow, and liquidity trends at our borrowers as a result of more normalized economic activity and cost-cutting measurements actioned earlier this year. The average loan-to-value of our investments is approximately 46%, and we believe these valuations continue to hold true in the current environment. For example, within our portfolio, we have observed sponsors being able to attract new minority equity investments at valuations similar to levels that existed pre-COVID-19. We believe our active portfolio management and ability to come to amenable solutions with our portfolio companies and sponsors is a reflection of the significant resources of our advisor. These improvements are reflected in our overall risk rating trends and non-accrual rates. As of September 30th, 13% of the total investment portfolio at fair value was in a higher risk rating bucket of either a three or a four, down from 16% as of the end of Q2. Non-accruals declined quarter over quarter to just 0.2% of the total portfolio at both cost and fair value as a result of no new investments being added to non-accrual status and a successful resolution of one of our prior non-accruals. Following a period of low new deal activity in Q2, middle market transaction volumes rebounded in Q3 on the backs of sponsor and lender receptivity to new investments and a rebound in economic activity. In the near term, however, we remain cautious given the continued risks in the economy, such as lingering systemic unemployment, especially in the service industries, and slow and uneven corporate recovery. In such an environment, we have been focused on capitalizing our incumbency advantage with existing borrowers as sponsors seek to take advantage of tuck-in acquisition strategies. This allows us to benefit from underwriting an existing portfolio company with a demonstrated history of performance and clean EBITDA. while further benefiting from improved documentation, lower leverage, and increased economics in order to compensate us for higher risk premiums today. During the third quarter, all of our new investment funding activity was to existing borrowers. We are also beginning to see opportunities for new platform transactions in the fourth quarter and beyond, and will continue favoring companies in defensive industries that are less tied to consumer consumption. We believe the company is well-positioned to take advantage of such opportunities to expand the core earnings of the company. Subsequent to quarter end, our board declared a fourth quarter dividend equal to 34 cents per share and payable to record date holders as of December 31st, 2020. This represents an annualized 8.4% yield on ending book value as of September 30th. Based on the current attributes of the investment portfolio, we believe this dividend level is sustainable in this current market environment. As Sally will discuss further, it is important to note that our net investment income is largely comprised of high quality contractual cash interest income. PIC income, or payment in kind income, represents less than 5% of our total interest income. As deal flow normalizes and M&A activity begins to pick back up to more normalized levels, sales and repayment activity levels should increase as well, providing the company with incremental income through prepayment-related fees, including the acceleration of original issue discount, or OID, providing further support to our current dividend strategy. I will now turn the call over to Mike Boyle, our Vice President and Treasurer, to walk through our investment portfolio in greater detail.