Bain Capital Specialty Finance, Inc.

Good morning, ladies and gentlemen, and welcome to the Bain Capital Specialty Finance first quarter ended March 31st, 2024 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, May 7th, 2024. I would now like to turn the conference over to Catherine Schneider. Please go ahead.

Thanks, Konstantin. Good morning, and welcome everyone to the Bain Capital Specialty Finance first quarter-ended March 31, 2024 conference call. Yesterday, after market close, 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. 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 includes 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. So with that, I'd like to turn the call over to our Chief Executive Officer, Michael Ewald.

Thanks, Catherine, and good morning to all of you, and thank you for joining us here today on our earnings call. I'm also joined by Mike Boyle, our president, and our chief financial officer, Amit Joshi. In terms of the agenda for the call, I'll start with an overview of our first quarter and its March 31st, 2024 results, and then provide some thoughts on our performance, the overall market environment, and our positioning. Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail. And as usual, we'll also leave some time for questions at the end. So yesterday after market close, we delivered strong first quarter results. Q1 net investment income per share was 53 cents as we continue to benefit from high base interest rates as well as high spreads across our portfolio. Our net investment income return represented an annualized yield of 12% on book value and covered our regular dividend by 126%. Q1 earnings per share were $0.55, driven by improved credit quality across our portfolio investments during the quarter. Our net income produced an annualized return on book value of 12.5%. These results then led to another consecutive quarter of growth in our net asset value to $17.70, reflecting a 0.6% increase from our $17.60 NAV as of December 31st. Subsequent to quarter end, our board declared a second quarter dividend equal to 42 cents per share and payable to record date holders as of June 28, 2024. The board had also declared an additional dividend of 3 cents per share for shareholders as of June 28, as we previously announced back in February. So this brings total dividends for the second quarter to 45 cents per share, which we believe represents an attractive yield for our shareholders at a 10.2% annualized rate. on ending book value as of March 31st. Turning now to the market environment, we saw an increase in new loan volumes across both private and public credit markets, largely driven by refinancing activity. As the Fed has tapered its expectations for future rate hikes and has broached the subject of rate cuts later on in 2024, we have seen market sentiment gain confidence against a positive economic outlook. This drove a recent reawakening within the broadly syndicated loan market during the first quarter. And we saw a reversal of the growth in private credit takeouts from the BSL market that we had witnessed over the course of 2022 and 2023, when large direct lending players filled a temporary void in the credit markets. In our view, this recent strengthening of the BSL market will cause increased and continued competition to large upper middle market private credit players. But notably, this refinancing activity was very much limited to the upper middle markets. segment during the first quarter and not observed at all in the core middle market segment, where BCSF plays. However, Bain Capital Credit's private credit group platform also benefited from the increased activity levels witnessed during the first quarter as, with the risk of an impending recession seemingly receding with a more constructive economic and rate environment outlook prevailing, our private equity sponsor partners picked up their investment activity. Our gross originations during Q1 were $403 million. up 31% year-over-year from Q1 2023 volumes, and up 95% sequentially from Q4 2023 volumes. As mentioned, we continue to favor core middle market-sized companies with EBITDA between $25 and $75 million. The median portfolio company EBITDA of our new direct originations in Q1 was $37 million. Not only is this segment of the market less susceptible to the refinancing risk taking place in the large-cap upper middle markets, But many of the core tenants that we value for direct lending activity are much more attainable in this segment of the market in our view. For example, we favor attributes such as higher spread premiums and strong lender controls through credit agreement documentation containing financial covenants. And we also seek out investments where we can and have control positions by being the majority holder within a small lender group. Turning to credit quality, our portfolio companies continue to perform well. and have proven to be resilient thus far in light of the higher interest rate environment as demonstrated by improving credit quality trends across our portfolio. We saw a modest decline in our non-accrual rates across the portfolio quarter over quarter. Investments on non-accrual represent 1.7% and 1.0% of the total portfolio amortized cost and fair value respectively as of March 31st. Portfolio company fundamentals exhibited positive trends with a median net leverage across our portfolio, declining to 4.7 times at quarter end, down from 4.8 times as of the prior quarter and 4.9 times year over year. Lastly, credit risk rating trends also showed positive momentum with 97% of our investment portfolio at fair value, performing in line or better than expectations relative to our initial underrate, up modestly from 95% as of the prior quarter end. Notwithstanding these solid portfolio metrics, our team remains vigilant and monitors our portfolio companies very closely. Finally, we ended the first quarter at a net leverage ratio of 1.09 times, near the middle of our target net leverage ratio of between 1.0 and 1.25 times, providing us with ample dry powder to capitalize on new investments in the current environment. Thus far into 2024, we've been pleased with the higher activity levels compared to the lower overall transaction volumes seen in 2023. Bain Capital's global and longstanding presence in the middle market positions us well to source new investment opportunities from our broad and deep set of relationships while still remaining highly selective as we conduct our in-depth diligence work. Furthermore, our platform incumbency advantage provides us with a sourcing, underwriting, and execution advantage as supporting existing portfolio companies can be a fertile source of new investment activity to provide add-on capital to existing portfolio companies allowing them to grow and execute their longer-term business plans. I will now turn the call over to Mike Boyle, our president, to walk through our investment portfolio in greater detail. Mike. Thanks, Mike, and good morning, everyone. I'll start with our investment activity for the first quarter and then provide an update on our portfolio. Investments made during the first quarter totaled $403 million into 83 companies, including $238 million into seven new companies. Sales and repayment activity totaled approximately $296 million, resulting in net investment funding of $107 million quarter over quarter. Investment fundings to new portfolio companies represented nearly 60% of our gross originations in the quarter, as new transaction volumes were healthy. We also continued to remain active supporting our existing portfolio companies, with new fundings into existing companies totaling $127 million in Q1. For the new investments made during the first quarter, we were the majority or lead lender driving terms and structure as we leveraged our sourcing relationships and Bain Capital's in-house industry expertise. As Mike highlighted earlier in the call, we remain focused on investing in the core middle market, a segment of the market that we have been investing in for the past 25 years and one where we can drive favorable terms, structures, and pricing. The weighted average spread on our new directly originated portfolio companies this quarter was approximately 695 basis points over SOFR across our first lien debt investment. And the weighted average net debt to EBITDA leverage ratio on these new loans was approximately 4.75 times, reflecting conservative capital structures in the current market environment. The first quarter was also an active quarter of sales and repayment activity across our portfolio. Our largest repayment in Q1 was driven by an exit on our first lien and equity investment in direct travel as the company conducted a successful sales process. This was a 2017 vintage investment that was restructured back in 2020 during COVID. Bain Capital Credit was heavily involved in the restructuring as one of the large lenders, and we were pleased to drive a positive outcome for our shareholders given our deep restructuring capabilities and expertise. The gross IRR and multiple of money for our investment in direct travel since inception were 13% and 1.8 times money on money. Turning to the investment portfolio, the end of the first quarter, the size of our investment portfolio at fair value was approximately $2.4 billion across a highly diversified set of 153 companies operating across 32 different industries. Our portfolio primarily consists of investments in first lien senior secured loans, given our focus on downside protection and investing in the top of capital structures. As of March 31st, 67% of the investment portfolio at fair value was invested in first lien debt, 2% in second lien debt, 2% in subordinated debt, 4% in preferred equity, 9% in equity and other interests, as well as 16% across our joint ventures, including 11% in the International Senior Loan Program and 5% in the Senior Loan Program. The underlying investments within both of our joint venture structures are first lien loans. As of March 31st, 2024, the weighted average yield of the portfolio at amortized cost and fair value were 12.9% and 13.0% respectively, as compared to 13.0% and 13.1% respectively as of December 31st, 2023. 94% of our debt investments bear interest at a floating rate, positioning the company favorably in today's higher interest rate environment. Moving over to portfolio credit quality trends, fundamentals remain healthy, and we have observed positive credit migration across our portfolio. As Mike Ewald highlighted earlier, the median leverage attachment point declined to 4.7 times as of March 31st, as compared to 4.8 times as of December 31st. Within our internal risk rating scale, we continue to see improvements within our risk rating one and two investments, which indicate companies are performing in line or better than expectations relative to our initial underwrite. As of March 31st, these risk rating one and two investments comprise 97% of our portfolio fair value, up from 95% as of year end. Risk rating three and four investments comprise 3% of our portfolio fair value, and contributing to this decline from quarter over quarter, was an upgrade of one of our riskier-rated portfolio companies that had migrated to a higher tier based upon improving underlying business fundamentals. Investments on non-accrual remained low across our portfolio and represented 1.7% and 1.0% of the total investment portfolio at amortized cost and fair value as of March 31st, down from 1.9% and 1.2% respectively as of December 31st. Amit will now provide a more detailed financial review.