Good morning and welcome to the Bain Capital Specialty Finance First Quarter Ending March 31, 2021 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Katherine Schneider, Director of Investor Relations. Please go ahead..

Thanks Emily. Good morning everyone and welcome to the Bain Capital Specialty Finance first quarter ended March 31, 2021 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. This call and the webcast are property of Bain Capital Specialty Finance and any unauthorized broadcast in any form is strictly prohibited..

Thanks, Katherine, and good morning all and thank you for joining us on our earnings call. I'm joined today by Mike Boyle, our President; and our Chief Financial Officer, Sally Dornaus.

I'll start with an overview of our first quarter ended March 31, 2021 results, and then provide some thoughts on our investment performance, the overall market environment, as well as our positioning. Thereafter, Mike and Sally will discuss our investment portfolio, credit quality and financial results in greater detail.

As Katherine mentioned yesterday after market close, we delivered strong first quarter results to our shareholders. Q1 net investment income per share was $0.34 driven by solid net investment income earned by our portfolio investments. Our net investment income covered our dividend by 100%.

Q1 earnings per share were $0.49 driven by net gains across our investment portfolio, largely driven by the continued improvement in the performance of our borrowers and broad-based spread tightening. Net asset value per share as of March 31 was $16.69, representing a 0.9% increase from our NAV as of December 31.

As we've observed improving credit metrics across our portfolio, we've been pleased to deliver a continued gradual recovery in our NAV per share to our shareholders. We also demonstrated improving credit metrics throughout our – through our low non-accrual rates.

In fact, as of March 31, the company had no investments on non-accrual status, reflecting a solid credit quality across our diversified loan portfolio. Subsequent to first quarter-end, our board declared a second quarter dividend equal to $0.34 per share and payable to record date holders as of June 30, 2021.

This represents an 8.1% annualized yield on ending book value as of March 31. On February 25, we closed our joint venture partnership with Pantheon through the International Senior Loan Program or ISLP. This program, as you may recall, is focused on investing in middle-market direct lending opportunities across Europe and Australia.

These are two markets in which Bain Capital Credit and its Private Credit Group in particular has a longstanding presence and strong track record of investing as we have a global footprint with local teams focused on providing financing solutions to middle market companies..

Thanks Mike. Good morning everyone. I'll kick it off with our investment activity for the first quarter and then provide an update on our portfolio. Q1 new investment fundings were $384 million in 26 portfolio company, including $143 million in five new companies, $132 million to ISLP and $108 million in 20 existing companies.

Sales and repayment activity totaled $549 million driven by $320 million of investments that were contributed to the ISLP. The remaining $229 million were comprised of broad-based repayment and sale activities across our investments.

As Mike mentioned earlier during the call, new investment levels were high during the first quarter amid a backdrop of strong M&A activity. We were active lending to new platforms through our strong sponsor relationships as well as lending to existing borrowers through our incumbency advantage.

The majority of our new commitments were comprised of first lien loan opportunities. The weighted average yield on new investments was approximately 8.2% as compared to the weighted average yield of 7.2% across our sales and repayments.

As a result, the yield at amortized cost on our total investment portfolio increased by approximately 30 bps quarter-over-quarter. We were also active investing with European borrowers as our flexible and global capital base enables us to reach the unique financing needs across our wide pipeline of borrowers.

Our largest new investment in the first quarter was sourced through our London office to a market leading software and hardware developer headquartered in Germany..

Thank you, Mike, and good morning, everyone. I'll start the review of our first quarter 2021 results with our income statement. Total investment income was $49.8 million for the three months ended March 31, 2021, as compared to $48.3 million for the three months ended December 31, 2020.

The Increase in investment income was primarily due to an increase in prepayment related income and other income. Total net expenses for the first quarter were $27.7 million as compared to $26.4 million in the fourth quarter. The increase was primarily driven by higher incentive fees partially offset by lower interest and debt financing expenses.

Our adviser waived a portion of its base management fee, demonstrating our continued alignment of interest with our shareholders and supporting the regular dividend level. We believe the company is well positioned to drive higher net investment income over time for our shareholders without the need for fee waivers.

Net investment income for the quarter was $22.2 million or $0.34 per share as compared to $21.9 million or $0.34 per share for the prior quarter. During the three months ended March 31, 2021, the company had net realized and unrealized gains of $9.6 million. GAAP income per share for the three months ended March 3Q, 2021 was $0.49 per share.

Moving over to our balance sheet. As of March 31, our investment portfolio at fair value totaled $2.3 billion and total assets of $2.5 billion. Total net assets were $1,078,000 as of March 31. NAV per share was $16.69 as compared to $16.54 at the end of the fourth quarter, representing a 0.9% increase quarter-over-quarter.

Our gains were attributed to net realized and unrealized gains across the portfolio. While we have recovered a large portion of the net unrealized losses on our investments over the course of the past four quarters, we believe there is still the potential for a further gradual recovery based on the current fair valuations across our investments..

Thanks, Sally. In closing, we are very pleased to deliver another solid quarter of earnings to our shareholders. We believe the company is off to a strong start here at the beginning of the year, and that we're well positioned to capitalize on new investment opportunities to drive higher earnings to our shareholders.

We appreciate our shareholders' support managing your capital, and we look forward to continuing to work hard throughout the remainder of the year. Emily, if you could please open the line up for questions? Thanks..

Our first question comes from Finian O'Shea from Wells Fargo Securities. Please go ahead..

Hi. Thanks. Good morning. A couple of questions on the ISLP. It looks like that got off to a quick start but is still underlevered, I think, and it was a partial quarter.

Can you remind us of the leverage target? And what's the sort of run rate ROE as of 3/31?.

Sure. So the leverage target for the ISLP is similar to the leverage target that we stated for BCSF overall, so between 1 and 1.25 net leverage is what we're targeting over time. The ROE for the program, when levered at that level, should be in the 12% to 13% range.

But because we are operating slightly underlevered, as you noted, when we set up the ISLP, we're running closer to 9% or 10% ROEs as of March 31..

Okay. And should we expect – I think it looks like there was some interest income.

Should we expect an uptick in dividend income starting this quarter?.

Yes, that's right. And we talked a little bit about the strength of our European pipeline in the prepared remarks. But I would continue to reiterate that our boots on the ground across the globe are driving really interesting deal flow.

And I would expect the deals coming in through that channel to really tick-up here in the coming quarters to drive that increase in dividend income out of the ISLP over time..

Okay. Thanks.

And then for the assets, what was the breakdown of incumbent portfolio drop-ins versus sell-downs from your new origination this quarter for the ISLP portfolio?.

Sure. So the ISLP portfolio for what we did in Q1 were all incumbent drop-down position. Starting in Q2 and going forward, there will be new originations that will get allocated to that program. But given the program was just set up in February, Q1 was all incumbent sales into that structure..

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

Thanks..

And our next question comes from Ryan Lynch at KBW. Please go ahead..

Hey. Good morning, guys. Thanks for taking the questions. The first one I had was just on your – you kind of talked about your opportunities in the international markets being much stronger than here domestically. I think you said half of your deals were international this quarter.

Can you maybe just compare and contrast how the international margin, obviously depends on which country we're talking about, but just from a high level, how did those markets compare from a competitive standpoint compared to U.S. markets just because it feels like the U.S.

markets have come back, basically, give or take to where pre-COVID levels were.

How has that been from an international standpoint?.

Sure. Just high level, what I would say is probably the most comparable market; especially from a competitive standpoint in Europe versus the U.S. would be the U.K. It's probably one where a lot of folks that might even be U.S.-based might occasionally try to do deals, and it's probably the longest-standing market in terms of looking like the U.S.

from a sponsor-backed M&A perspective. As a result, what you'll see is we tend to – while we have an active business there, and we're obviously based in London, we tend to do some deals in the Nordics. We like the Benelux countries. The company that Mike highlighted in his remarks was actually a German company.

So we're trying to – not as we stay away from the U.K., but certainly, what we're finding risk-adjusted return, because of potentially less computation, because of maybe less sophistication in some of the more peripheral markets of Europe rather than in the U.K. It's not to say Germany is obviously a peripheral market because it’s a huge economy.

But again having a local presence there and having native language speakers of all different countries in our offices actually really helps there as well. So again, I'd say U.K. probably looks most like the U.S. and then each of the other countries is definitely very distinct and different..

Okay. Understood. That's helpful. And then as far as balance sheet capital management, at this point, with the formation of the JV, it looks like you guys delevered your balance sheet as you guys wanted to.

At this point, at this leverage level, is this where we should kind of think about you guys operating going forward?.

Yes, that's right. So we've highlighted that we're focused on a net leverage range between 1 and 1.25. I think where we ended the quarter at 1.15 times was kind of hitting the nail on the head in terms of what we're looking for in terms of operations in the future.

We did highlight in prepared remarks that our goal is to get our asset yields from the mid-7s up into 8% or 8%-plus range. And I think that's a critical part of increasing the income potential of BCSF..

Okay. And on that last point you just mentioned with increasing the yields in your portfolio, I know you've mentioned growing the JV, rotating some assets on your balance sheet as well. As far as the U.S.

middle market lending's going, how would you say that yields in your kind of core target markets are coming in today versus your current portfolio yield?.

Yes. So in the U.S., I'd say the yields have been fairly consistent to your point where we are almost back to pre-COVID level. So a key part of really increasing the yield in the portfolio is, as you noted, JVs and continued allocations into markets outside of the U.S. We do view the U.S.

as an important core earner for BCSF, and we think new investment opportunities should be able to drive yields in that 7.5% to 8% range. But the real way that we're able to pick up spread here is through international markets and things like joint ventures..

Okay. Understood. That's all from me. I appreciate the time this morning..

Thanks, Ryan..

This concludes the question-and-answer session. I would now like to turn the conference back over to Michael Ewald for closing remarks..

Thanks, Emily. Again, we're very happy and pleased with the performance of the company here in the first quarter. We do think it sets us up very well for the remainder of the year, and we look forward to speaking with you after the end of the second quarter. Thanks very much..

This conference is now concluded. Thank you for attending today's presentation. You may disconnect..