Greetings. Welcome to the Bain Capital Specialty Finance Fourth Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question answer session will follow the formal presentation.

[Operator Instructions] Please note this conference is being recorded.I will now turn the conference over to your host, Kyle Nagarkar, Investor Relations. Mr. Nagarkar you may begin..

Good morning and welcome to the Bain Capital Specialty Finance Conference Call for the Fourth Quarter and Full Year 2019.

Last night 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 include risks and uncertainties which are identified in the risk factors section of our annual report and 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'd like to turn the call over to our President and Chief Executive Officer Michael Ewald..

Thanks Kyle, and good morning and thank you all for joining us for our fourth quarter 2019 earnings call. As Kyle mentioned my name is Michael Ewald and I'm joined today by our Vice President and Treasurer Mike Boyle and our Chief Financial Officer Sally Dornaus.

As usual I will start with a brief review of the quarter and provide some thoughts on our strategy and the market. Then both Mike and Sally will give some additional detail on the investment book and our results.Let me start by saying that 2019 was a solid year for us.

During our first full fiscal year as a public company I believe we have continued to take the necessary steps to position the company to achieve long-term sustainable returns for our shareholders.

We have maintained our disciplined and highly selective investment approach by focusing on first lien senior secured investments in the current economic cycle.

We have further bolstered the right side of the balance sheet with an eye towards long-term stability, flexibility and overall low cost.Lastly, we have positioned the company for further growth following the consolidation of the ABCS joint venture allowing for future growth of yield enhancing strategic partnerships as well as the spoke investment strategies such as aviation finance.

All of these actions we believe put us in a strong position at the end of the year and poised for continued success.In an illustration of our consistency our board is declared a first quarter base dividend of $0.41 per share.

This quarter's dividend will be payable on April 30, 2020 to stockholders of record as of March 31, 2020.At the end of the year the portfolio represented $2.5 billion invested across 30 different industries and 114 portfolio companies with a current weighted average yield of 7.8 %.

Approximately 87 % of our portfolio is invested in first dollar risk including traditional first lien loans and unit tranches. During the fourth quarter we originated $341 million of new investments and experienced sales or repayments of $331 million.

This brought new origination for the entire fiscal year to $1.295 billion against sales or repayments of $1.088 billion.Similarly to the end of the third quarter we continue to operate near the top end of our leverage range.

However, we proactively reduced our leverage during the quarter from 1.63 times debt-to-equity at the end of the third quarter to 1.55 times gross and 1.48 times net of cash at the end of the fourth quarter.

We remain comfortable at this level given our conservative investment book and we continue to be focused on expanding the core earnings of the company through thoughtful portfolio construction.From a market perspective in our view the fourth quarter was neither distinguished by high new deal and M&A volume nor the choppiness that we experienced during the fourth quarter of last year.Simply said it was a rather fine quarter for an experienced lender such as ourselves.

We made five commitments to new portfolio companies backed by private equity sponsors with whom we have had long-standing relationships.

The weighted average spread of new investments with LIBOR plus 580 basis points in line with our investment objectives.As exhibited by our activity in the quarter we remain highly selective and are pleased with the current opportunity set.

As we continue investing year in 2020 we are mindful of myriad current events impacting the markets broadly an individual portfolio company performance specifically. For instance the presidential election in the U.S.

could well have an impact not only for growth going forward in that market but also potentially result in new regulations across multiple industries.The expansion of Corona virus concerns beyond China and to Europe as recently this week has also prompted us to review potential impacts to our existing portfolio companies as well as adjustments to our underwriting going forward.

In any event, we do expect a slowdown in deal flow over the next few months.Lastly I will note that over the last year our advisors shown a willingness to support the dividend as we continue to orient the company for further profitability growth.

We are pleased the voluntary waivers of management and/or incentive fees were at a minimum in the fourth quarter.

In fact, the majority of fourth quarter waivers related to the previously announced actions from the ABCS consolidation earlier in the year.While we hope that this trend will continue it is our expectation that advisors support will be present as needed going forward.Sally will now provide a more detailed financial review..

Thank you Mike and good morning everyone. I'll start the review of our fourth quarter 2019 results with our income statement. Net investment income for the quarter was $21.3 million or $0.41 per share which was consistent with the third quarter of 2019.

For the year ended December 31, 2019 we had total net investment income of $84.9 million, an increase of 52 % year-over-year.GAAP earnings per share for the three months ended December 31, 2019 was $0.41 per share compared to $0.35 per share for the three months ended September 30, 2019.

For fiscal year 2019 we had net investment income per share of $1.64 compared to a $1.45 for 2018 and GAAP earnings per share of a $1.90 compared to $0.69 for 2018.Total expenses for the quarter net of waivers increased $2 million to approximately $33.5 million in the fourth quarter compared to $31.5 million in the third quarter.

Our expenses increased primarily due to a first full quarter of interest in fee expense associated with our 2019-1 debt and no income incentive fee waiver in the fourth quarter.For the three months ended December 31, 2019 our management and incentive fee net of waivers with $7.3 million and $4.5 million respectively.

Similar to last quarter our advisor voluntarily waived its right to receive a base management fee on the incremental assets associated with the ABCS transaction, for the fourth quarter the impact of that voluntary waiver was $1.3 million.

In addition, our adviser also voluntarily waived an additional $500,000 related to management fee.As we have stated in the past and continue to demonstrate we and our adviser believe that the fee waiver aligns with the interest of our shareholders and our commitment to a stable dividend.Now moving over to our balance sheet, as of December 31 our investment portfolio at fair value totaled $2.5 billion and total assets of $2.6 billion.

During the fourth quarter we had fundings of $341 million offset by sales and pay downs of $333 million in the quarter.Excluding the impact of the ABCS joint venture distribution on balance sheet in Q2, we had total net portfolio growth during the year of $207 million.

The weighted average portfolio yield at amortized costs was 7.8%, which is consistent with the third quarter.Moving to the right side of the balance sheet, total net assets were $1 billion as of the end of the year. NAV per share was $19.72 compared to $19.71 in the third quarter.

As of December 31, we had total principal debt outstanding of $1.6 billion comprised of our Goldman Sachs and JP Morgan credit facilities along with our 2018-1 notes and the 2019-1 debt.

Subsequent to year-end we are pleased to announce that our recent amendments to both of our Goldman Sachs and JP Morgan credit facilities provided us improved flexibility and pricing that shareholders will benefit from in 2020 and beyond.The amendment to our Goldman Sachs credit facility alleviated various covenants which will allow us to better maximize that facility.

The amendment to our JP Morgan credit facility improved pricing to LIBOR plus [indiscernible] from LIBOR plus 275 and extended the maturity date to January 2025.Our debt to equity ratio was 1.55 times in Q4 compared to 1.63 times in Q3.

Our net leverage ratio which represents principal debt outstanding left cash was 1.48 times in Q4 which is consistent with Q3. Finally, we are pleased to announce that our board declared a fourth quarter dividend of $0.41 per share which is in line with the dividend amount paid throughout 2019.

The first quarter dividend is payable on April 30, 2020 to stockholders of record on March 31, 2020.Thank you as always I will now turn the call over to Mike Boyle, Vice President and Treasurer to walk through our investment portfolio and some recent investments in more detail..

Thanks Sally. I'll kick it off with an update on the credit quality of our portfolio and also provide more detail on our origination this quarter. As of December 31, the fair value of our investment portfolio is 2.5 billion diversified across 114 portfolio companies operating in 30 industries.

99% of the fair value of these investments is performing in line or ahead of our underwriting case split between our performance ratings of 1 and 2. In the fourth quarter we placed one issuer on non-accrual NPC International. As a results the percentage of our portfolio and non-accrual and amortized cost with 56 basis points.

The performance issues that the business were driven by idiosyncratic factors and were actively involved in the restructuring of that business.Our investments are primarily comprised of first lien senior secured loans which represent 87 % of the portfolio. The weighted average yields at amortized costs of these investments is 7.8%.

median EBITDA is $47 million with an average leverage level of 5.2 times. 89% of our investment contained financial maintenance covenants.We have been favoring sectors that should not cycle alongside the macro economy including high-tech and aerospace and defense.

The defensive nature of our investments is a key consideration in choosing to operate at the high end of our leverage range.Shifting to fourth-quarter origination we invested $341 million which includes $193 million across five new portfolio companies over the course of the quarter.

During the same period the portfolio experienced $333 million in repayments and sales. The weighted average spread of new investments with LIBOR plus 580 versus [indiscernible] at LIBOR plus 510.One specific example of an investment in the quarter is a unit tranch we extended to support the LVO of the living company.

The living company is the leading furniture fixtures and equipment provider serving the student housing and hospitality end market. We like the company due to its diversified customer and property based exposure to the recession resistant student housing market and asset light high margin business model.

We were well positioned to lead the financing due to our experience in the hospitality and student housing space as well as our strong relationship with the sponsor.I'd also like to spend a brief moment highlighting the progress we have made to date in our aviation book.

Bain Capital Credit has a long-standing presence investing in aviation through various cycles, securities and structures.

Given the high current income provided by aviation leasing assets long-term contracts and strong downside protection offered by hard collateral we believe Bain Capital Credits aviation strategy is well aligned with the investment objectives of the company.

At year end our total investments in aviation leasing assets stood at 3% of our portfolio at amortized cost offering a yield of 10.8%.This exposure is currently included our aerospace and defense industry classification.

Well we are still very much in our infancy building the company's aviation portfolio it's our expectation that over time our aviation investments will serve as in a creative, diversified and differentiated source of income for the company.In summary we feel good about the current state of the portfolio and our ability to identify and invest in new investment.

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

Thanks Mike. As always I'd like to thank our investors for their continued support and all of you for your time today. Operator with that please open the line for questions..

At this time we will be conducting a question answer session. [Operator Instructions] Our first question is from Fin O'Shea, Wells Fargo. Please proceed with your question..

Hi, good morning. Thanks for taking my question. Just to start out on you mentioned some facility amendments and that expands your ability to fill those up.

Can you give a little more context here pointed to the consideration that it may be difficult to rotate into unit tranche given those typical marginal advanced rates that where you are today and leverage..

Sure. So I can talk a bit about our thought process on the amendment. Really first and foremost we were focused on reducing the cost of those structures and we did that successfully on the JP Morgan amendment.

Both facilities, both revolving facilities that we have predetermined advance rates against unit tranche assets and contemplate the fact that we do originate unit tranche often. So we do continue to have the flexibility through both our different revolving structures to invest in unit tranche loans without meaningfully lower advance rates..

Okay. Thank you and then I saw there's on just a couple of portfolio questions on [indiscernible] that was involved in an acquisition post quarter.

Is that something you're able to disclose if you're involved in the incremental or you were able to move out of that position?.

We are still involved in the situation and you are correct that there was an acquisition that was happening, that had happened after the end of the quarter..

And with medical depot, I saw the loan rate tick up there.

Was this due to any, is this something with the leverage grid or was there form of rearrangement?.

So there was an amendment that was completed last year to that capital structure which we were involved in facilitating. The uptick in the price of that loan is really driven by the fundamental performance of the business. It's not related to a step up and interest rate or anything like that..

Okay. Great. That's all for me and thank you..

Thanks Fin..

Our next question is from Ryan Lynch, KBW. Please proceed with your question..

Hey, good morning guys. First question I had is, you guys are now kind of up to your max leverage point within the BDC, you guys obviously have other pools of capital across BDC just one component of that.

So could you maybe speak to -- how you guys are still staying relevant and active with both your sponsors as well as your other lending partners like [BDC] given that the capital constraints right now at the BDC..

Sure. Thanks Ryan.

One of the things that we've talked about before I think you've really seen hit in the last quarter so is that the since we started the BDC at the end of 2016 really investing into 2017, it's still a fairly immature portfolio from that perspective and so our weighted average life across our book in terms of whole period is somewhere between two and three years and so we are expecting to see that that repayment number continue to pick up and we've had some low quarters where it's been like $60 million and last quarter was $300 million.So I think you're going to see continued churn in the book which I think generates a fair amount of appetite in and of itself within the BDC still and then to your point we do have a range of other accounts commingled and managed accounts that end up spanning about $8 billion across our platform.So there's still appetite there allowing us to stay relevant within our segment.

We certainly haven't had explosive growth in our AUM and that's very much on purpose because we are focused really on that [$10 million to $150 million] EBITDA range it’s really $20 million to $75 million EBITDA range and we think we have the appropriate level of capital to continue to target that well..

Okay. Makes sense. You mentioned the coronavirus in your prepared comments. I know it's very early on it's still an extremely fluid situation. So I am not going to necessarily ask you about that the impact that it's going to have like a portfolio because I think it's such a fluid situation.

How should we think we know how it's going to look like even for a month from now but I do want to ask you about when something like this happens and we're currently in the kind of evaluation a process of this, can you just walk me through the processes and steps that you guys take as a credit platform to monitor the moving pieces with the virus and how it is impacting or potentially impacting your borrowers?.

Sure let me just start kind of a big picture. I think UFC it's still fluid and I appreciate that at that point of view. Look it's certainly well documented that we are conservative positioned across our investment book everything from being 87 % in first dollar risk we're in defensive industries primarily.

We're highly focused on documentation and covenants. We're in control and majority of our investments you can see all that in investor presentation. That's on our website as well.

So we have been positioning the portfolio that way primarily due to what we've perceived as economic cycle risk out in the market and we proceeded for a few years.Now whether the catalyst for slower growth and/or higher cost across our portfolio companies ends up being COVID-19, I think we still feel like we're appropriately positioned that way and our now even more happy that we've done it that way.In terms of monitoring portfolio company performance especially as the virus has expanded beyond China more into Europe and especially Italy.

So far this week we actually sent a fair amount of time this week recalibrating all of our portfolio company performances now.

We're in pretty active conversations with our sponsors and portfolio company management on a fairly regular basis.I will tell you that that communication is picked up in the last couple of weeks here as we've tried to understand the impact across the portfolio. I don't think it's as simple as saying 85 % of the portfolio is U.S.

so therefore there's nothing to worry about in the U.S. because that's just overly simplistic as you point out, we don't know what's going to happen yet within the U.S.

whether and how the virus is going to impact us here and not only that a lot of these companies are selling on since the middle market companies selling on other companies or even if those companies are American they might have revenue or supply chain issues tying back to China for example.So it is something we're monitoring actively in that we've been talking to management teams actually a lot of them this week in particular to see how that's going to shake out I think from a reported numbers perspective you probably won't see that until first quarter or second quarter numbers are reported by those individual portfolio companies..

Okay. That's really helpful for color and context and all that. So those are all my questions. I appreciate the time today..

Great. Thanks Ryan..

Our next question is from Derek Hewett Bank of America. Please proceed with your question..

Good morning everyone. The international portfolio represents, I think as Mike said earlier about 15% versus about 11% of the prior quarter.

Are you seeing better risk adjusted spreads in Europe at this point? And more importantly is there a longer-term target size as a percentage of the overall portfolio for international?.

Thanks Derek. Look -- I think part of the growth there has just been with the consolidation of ABCS. There's been more room in the qualifying bucket. So we've prudently expanded our international exposure within BCSF.

It's clearly been a tenant of our investment thesis from the get-go really when we first raised the BDC that there's some interesting relative value that we can play globally.

I will say that last year we found that the relative value of Europe was in fact more attractive than it was in 2018 for example.So there is some natural growth just because we've seen the opportunities set there be more interesting. That'd be the first point.

The second point in terms of what we think from a range perspective obviously we're limited to 30% but what you'll see in our portfolios across the asset class is 20% - 30 % Europe is certainly not or including Australia I guess so 20% - 30 % international is certainly not outside the realm of possibility..

Okay. Great. And then one on spread if I may. Spread on before the exercise if, I believe I heard correctly was 5.1 % this quarter. I think was 4.9 last quarter. It seems like that's helped the company to defend the portfolio yield at least this past quarter.

So what percentage of the portfolio still has these lower yielding types of investments that could potentially be rotated into more higher spread investments over the next couple of quarters?.

Sure, I'd say there's broadly about 5% to 10% of the portfolio that's left that is on the lower end of our spread range that we think could be rotated in coming quarters..

Okay. Great. Thank you. That's all for me..

Thank you..

[Operator Instructions] We have reached the end of the question and answer session. I will now turn the call back over to Michael Ewald for closing remarks..

Thanks Omar and again thanks to everyone for your time today. I really appreciate the time and the support certainly be able to get further questions feel free to reach out to us and we look forward to sharing upcoming results in future calls. Thanks very much..

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