Good day, and welcome to the Bain Capital Specialty Finance Fourth Quarter and Fiscal Year Ended December 31, 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Katherine Schneider, Investor Relations. Please go ahead, madam..

Thanks, Irina. Good morning, everyone, and welcome to the Bain Capital Specialty Finance Fourth Quarter and Year ended December 31 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. 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 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. So with that, I'd like to turn the call over to our Chief Executive Officer, Michael Ewald. .

Thanks, Katherine, and good morning to all of you, and thanks for calling in today. I'm joined here by Mike Boyle, our President; and our Chief Financial Officer, Sally Dornaus.

I'll start with an overview of the results of our fourth quarter and the year-ended December 31, 2021 and then provide some thoughts on our performance, the market environment, and the recently announced Bain Capital senior loan program. Thereafter, Mike and Sally will discuss our investment portfolio and financial results in greater detail.

So beginning with our results, Q4 net investment income per share was $0.34 bringing net investment income per share for the full year to $1.36 or an 8.1% return on average net assets for 2021. Our net investment income covered our dividend by 100% for the full year 2021.

Earnings per share were $0.35 for the fourth quarter and $1.86 per share for the full year. This represents a total return on equity of 11.5% that we generated for our shareholders in 2021. Our returns were driven by the stable interest income earned from our middle market borrowers and net realized and unrealized gains across the portfolio.

Net asset value per share was $17.04 as of December 31, up $0.01 from our NAV as of September 30. Subsequent to quarter end, our Board declared a first quarter dividend equal to $0.34 per share, and payable to record date holders as of March 31, 2022. This represents, an 8% annualized yield on ending book value as of December 31.

So during the fourth quarter and looking back on the year, we remain focused on the execution of our investment strategy and strategic initiatives that we've set forth for our shareholders back at the beginning of 2021. Looking at the asset side first.

We witnessed improved and continued stable credit quality across our portfolio throughout the year, as demonstrated by some key credit metrics.

For each quarter end date in 2021, including the fourth quarter, we had no investments on non-accrual status, and we had a decline in our internal risk rating three investments which our company is performing below expectations relative to our initial underwrite to 10% of the portfolio was fair value at the end of 2021, down from 13% as of prior year-end.

We attribute this to our upfront diligence and discipline, when reviewing new investment opportunities, as well as to the strong portfolio company performance across our diversified portfolio of high-quality middle market companies.

We also leveraged, the broader Bain Capital Credit platform to source compelling new investment opportunities for BCSF throughout the year. BCSF benefits from Bain Capital Credit's Private Credit Group, which has a track record of investing in middle-market private debt dating back to 1998, and has differentiated global sourcing capabilities.

In 2021, and during the fourth quarter, we witnessed record levels of new loan originations in the middle market driven by a favorable macroeconomic backdrop and high levels of M&A-sponsored activity.

Against this backdrop, our private credit group remained very active and invested $2.7 billion in more than 100 middle market companies during the year, including approximately $1.2 billion on behalf of BCSF.

The company's investment in the International Senior Loan Program or ISLP, which is our strategic joint venture that we formed a year ago in February 2021 continue to grow steadily throughout the year. As a quick reminder, the ISLP focuses on providing direct lending solutions to middle-market borrowers, primarily across Europe and Australia.

Both markets in which Bain Capital Credit has a long-standing presence and track record of investing. The ISLP allows us to further expand BCSF's reach and capabilities into these regions, markets where we continue to see attractive investment opportunities.

2021 was particularly an active year for us internationally, as we found attractive relative value in these markets. Looking abroad, served as a portfolio diversifier and enhanced our sourcing capabilities given the competitive U.S. market. Approximately 45% of our private credit group's platform originations in 2021 are to non-U.S.

dollar borrowers, which helped to support the growth of our investment in the ISLP. Since the inception of the program in February 2021, ISLP's investment portfolio has grown to over $500 million of fair value, invested across 27 different middle-market borrowers.

The growth in ISLP's underlying investment portfolio has led to an increase in BCSF investment in ISLP on balance sheet to 7.4% of the total portfolio at fair value up from 5.6% as of March 31, 2021. Subsequent to quarter end, BCSF and its joint venture partner increased the size of our commitment to the ISLP.

BCSF increased its total commitment by $60 million, bringing its total to approximately $250 million. This represents a total position size of up to 11% based on the size of the investment portfolio at year-end.

It is also important to note that the presence of our team on the ground in these geographies coupled with our focus on private equity-sponsored companies and senior positioning in the capital structure allows us to invest prudently even in periods of geopolitical turmoil such as today.

Our new origination activity combined with the growth of our ISLP investment contributed to an improvement in our portfolio asset yields both quarter-over-quarter and year-over-year. As of December 31, 2021, our weighted average portfolio yield was 7.6% at amortized cost, up from 7.5% as of the prior quarter end and 7.3% as of the end of 2020.

We remain focused on improving the yield on our total portfolio to an 8% target, while maintaining our focus on senior secured loans. Turning now to our liabilities.

We took proactive measures throughout the year and continuing during the fourth quarter to strengthen the company's balance sheet and funding profile by increasing the amount of unsecured debt in our capital structure, while simultaneously lowering our overall cost of capital to better position BCSF to drive attractive returns for our shareholders.

During the year, we closed on $900 million of new financing commitments, including $600 million of new unsecured debt borrowings.

In the institutional debt markets we took advantage of low treasury rates and strong investor demand levels in 2021 to access attractive five-year fixed rate debt, which positions the company well if interest rates continue to rise.

As of December 31, 2021 unsecured debt represented 50% of total debt outstanding, a significant improvement from 10% at the end of 2020. During the fourth quarter, we refinanced our 2019-1 CLO to reduce the blended net spread across class tranches by approximately 70 basis points and extended the final maturity rate by two years to 2033.

In addition, we entered into a new $300 million senior secured revolving facility with Sumitomo Mitsui Bank that is attractively priced at 175 basis point spread over the reference rate subject to certain requirements.

Our active balance sheet management allowed us to reduce the weighted average stated interest rate on our total borrowings from 3.2% at the end of 2020 to 2.9% as of December 31, 2021. The company has a near-term opportunity to further reduce its cost of debt as a non-call period on our 2023 8.5% notes expires in June of this year.

Lastly, I wanted to touch on the recent formation of the Bain Capital Senior Loan Program, or SLP that we announced last week. The SLP is structured as a 50-50 joint venture between BCSF and Keppel from Amberstone, a credit-focused investment manager that advises institutional investors.

The structure is similar to that of the ISLP that we discussed earlier. And while the ISLP focuses on senior loans to middle market borrowers primarily across Europe and Australia, the SLP will focus primarily on U.S.

borrowers and remain consistent with our platform's core middle market focus, which we define as companies with between $25 million and $75 million of EBITDA.

The senior loan program provides us with increased capacity and balance sheet flexibility to invest in senior middle market loans, which we believe should enhance our capabilities and scale in the current market environment. Initial capital commitments to the SLP totaled $358 million, including $179 million from BCSF.

The scale allows for the position size to grow overtime as we find attractive new investment opportunities and can provide for higher portfolio yields to drive greater net investment income for our shareholders. Let me now turn the call over to Mike Boyle our President, to walk through our investment portfolio in greater detail..

Thanks Mike. Good morning. I'll start with our investment activity for the fourth quarter and then provide an update in more detail on our investment portfolio.

Q4 new investment fundings were $291 million across 39 portfolio companies, including $173 million in nine new portfolio companies $92 million in 29 existing companies and $26 million to the ISLP. Sales and repayment activity totaled $369 million in the quarter.

Our new investments benefited from Bain Capital Credit's industry research team which provides us with deep sector expertise across many verticals and allow us to uncover companies in niche industries that are expected to be strong performers over the coming years.

During the quarter, we continue to invest across various industry themes such as, business services, aerospace and defense and Hi-Tech. We continue to favor middle market companies within the core of the middle market.

This is a segment where we find attractive companies to invest in given their diversity of revenue streams and multiple levers driving growth over our investment period.

Furthermore, as we have witnessed a trend of direct lenders moving further up market as they have grown in size, we prefer to remain in the core middle market where it is possible to win deals based on sponsor relationships and diligence capabilities which we believe, are part of Bain Capital's value proposition for its shareholders and driving attractive risk-adjusted returns.

Looking across our new platform originations during the quarter, the weighted average EBITDA across our new borrowers was approximately $50 million right in the middle of the $25 million to $75 million core segment. For the full year, investment fundings were $1.2 billion. Total sales and repayment activity for the year were $1.4 billion.

While our portfolio experienced a modest decline in the size during the year as a result of this activity this was largely driven by BCSF asset contribution to the ISLP during the first quarter. We are pleased with our ability to maintain a steady portfolio size within the midpoint of our target leverage range of between one and 1.25 times.

Turning to the investment portfolio, at the end of the fourth quarter, the size of our portfolio at fair value was $2.3 billion across a highly diversified set of 106 portfolio companies operating across 29 industries.

Our investment strategy for BCSF remains consistent with our focus on first lien, senior secured loans to sponsor-backed middle-market companies. As of December 31st, 78% of the investment portfolio at fair value was invested in first lien debt, 5% in second lien debt, 1% subordinated debt, 9% in equity interest and 7% in the ISLP.

It is worth highlighting, that while the overall percentage of first lien investments has come down in recent quarters this is largely attributed to our investment in ISLP which is comprised of nearly 100% first lien loans.

As Mike mentioned earlier during the call, we were pleased to see asset yields improve across the portfolio both during the quarter and over the course of 2021.

As of December 31st 2021 the weighted average yield of the investment portfolio at amortized cost and fair value was 7.6% and 7.8% respectively, as compared to 7.5% and 7.6% respectively, as of September 30th.

98% of our debt investments bear interest at a floating rate, positioning the company favorably if interest rates rise beyond the reference rate floors across our loan. When assessing the impact to the underlying companies in our portfolio, we believe there is sufficient cash flow for interest coverage across all of our borrowers.

Furthermore, given the high cost of debt for middle market borrowers an increase in rates has a lower impact on overall borrowing costs. Sally will provide further details on the potential earnings impact to the company if rates continue to rise.

Moving on to portfolio credit quality trends, credit metrics at our borrowers were largely stable quarter-over-quarter. The median leverage through our investment was 5.2 times as compared to 5.1 times as of September 30thth. Median EBITDA was $49 million.

Within our internal risk rating scale credit quality trends were stable and unchanged quarter-over-quarter. As of December 31st, 90% of our portfolio at fair value was comprised of risk rating ones and twos with the risk rating one being the highest risk rating in terms of positive credit performance.

Risk rating 3 investments comprised 10% of our portfolio at fair value in line with the prior quarter end.

While the overall percentage of the total portfolio at fair value was unchanged, the number of portfolio companies were reduced from eight to seven companies driven by one portfolio company that was upgraded during the quarter based on improved underlying performance.

There continues to be no investments classified as a risk rating 4, our lowest risk rating in terms of credit quality. Our risk rating 1s and 2s have a weighted average fair value mark of approximately 99%, reflecting a continued gradual improvement of approximately 30 basis points from the prior quarter.

Our risk ratings 3 investments have a weighted average fair value mark of approximately 83% of par, in line with the prior quarter end valuation.

While forecasts were amended due to the impacts of recent COVID-19 variance that occurred during the back half of 2021, we continue to see strong sponsor support for these COVID rebound names and importantly liquidity has not been an issue.

Furthermore we believe the outlook for these companies is positive as a more normalized environment has resumed in the back part of this year. We continue to believe these investments have the potential to contribute to NAV appreciation as we expect our original investment thesis to remain intact.

In 2021, we demonstrated continued improvements across our risk rating 3 investments throughout the year, driven by year-over-year decline in the total value of these investments from 13% to 10% of the portfolio and a reduction in the number of companies from 15 to seven.

These improvements were primarily driven by upgrades due to improved company performance and par exits. The company had no investments on non-accrual as of December 31st, marking the fourth consecutive quarter of no non-accruals in 2021. 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 2021 results with our income statement. Total investment income was $51.5 million for the three months ended December 31, 2021 as compared to $49.5 million for the three months ended September 30, 2021.

The increase in investment income was primarily due to an increase in dividend income. Total expenses for the fourth quarter were $29.6 million as compared to $27.8 million in the third quarter. The increase was driven by an increase in interest and debt financing expenses, primarily due to the termination of our JPMorgan credit facility in December.

There were no fee waivers during the quarter by the adviser for a second consecutive quarter. As we have discussed with our shareholders in prior quarters, we have been focused on driving higher net investment income without the need for fee waivers to cover our regular dividend.

The continued improvements on the asset side as well as the liabilities that Mike Ewald touched on earlier have positioned us well to achieve this for our shareholders. Net investment income for the quarter was $21.9 million or $0.34 per share as compared to $21.8 million or $0.34 per share for the prior quarter.

Net investment income per share for the full year 2021 was $1.36 per share.

During the three months ended December 31, 2021, the company had net realized and unrealized gains of $400,000, while our portfolio exhibited $2.7 million of net gains across investments this was offset by a $2.3 million realized loss from the extinguishment of our JPMorgan credit facility.

GAAP income per share for the three months ended December 31, 2021 was $0.35 per share bringing earnings per share for 2021 to $1.86. Moving to our balance sheet. As of December 31st, our investment portfolio at fair value totaled $2.3 billion and total assets of $2.6 billion. Total net assets were $1.1 billion as of December 31st.

The NAV per share was $17.04 as compared to $17.03 at the end of the third quarter. As Mike Ewald discussed earlier in his prepared remarks, we took proactive steps during the fourth quarter to further strengthen the company's balance sheet and funding profile.

In October, the company issued $300 million of 255 unsecured notes maturing in October 2026. This was our second unsecured notes offering in 2021 and resulted in an improvement in the overall unsecured debt outstanding in our capital structure, totaling 50% as of December 31, 2021, up from 30% as of the prior quarter end.

In November, we refinanced the company's 2019-1 CLO debt primarily to reduce the blended net interest rate from LIBOR plus 230 to LIBOR plus 162 to extend the reinvestment period from October 15, 2023 to October 15, 2025 and to extend the final maturity date from October 15, 2031 to October 15, 2033.

Lastly, we put in place a new $300 million senior secured revolving credit facility with SMBC that matures in December 2026. This facility has an accordion feature that allows us to increase the total size to up to $1 billion which gives us room to increase the size and further diversify our lending counterparties over time.

The stated interest rate of this facility is at the applicable reference rate plus 175, subject to certain requirements and elections at the company's discretion. In connection with putting this new revolving facility in place, we terminated the company's JPMorgan credit facility, which had a stated interest rate of LIBOR plus to 375.

For the three months ended December 31, 2021, the weighted average interest rate on our debt outstanding was 2.9%, an improvement from 3% at the prior quarter end and 3.2% at the end of 2020.

The company is well positioned in a rising interest rate environment as the majority of our assets are in floating rate investments and a large portion of our debt capital consists of fixed rate debt.

As of December 31, 2021 and holding all else constant, we calculate that the company will begin to see a significant benefit upon a 200 basis point increase in rates that could increase our quarterly earnings by approximately $0.05 per share. At the end of Q4, our debt-to-equity ratio was 1.3 times compared to 1.23 times at the end of Q3.

Our net leverage ratio, which represents principal debt outstanding less cash, was 1.12 times at the end of Q4 as compared to 1.15 times at the end of Q3. Our net leverage ratio continues to be in line with our stated target range of between one times and 1.25 times.

Available liquidity consisting of cash and undrawn capacity on our credit facilities was $467 million against our $234 million of undrawn investment commitments. This represents coverage of two times as of December 31. As of December 31, 2021, the company was in compliance with all terms under its secured debt facilities.

With that, I will turn the call back over to Mike for closing remarks..

Thanks Sally. In closing here, we are pleased with our execution of our investment strategy and initiatives on behalf of our shareholders during the fourth quarter and the entirety of 2021, consistent with many of the priorities that we discussed earlier last year.

We demonstrated improving credit quality trends across our portfolio and our platform's ability to source attractive new middle market direct lending opportunities on a global basis. We also positioned our liability stack to focus more on unsecured debt and took advantage of locking in an overall lower cost of capital in the face of rising rates.

As we look forward into 2022, we believe the company is well positioned to capitalize on attractive growth opportunities. We thank you for the privilege of managing our shareholders' capital. Irina, please open the line for questions..

Thank you. And we will take our first question from Ryan Lynch in KBW. Please go ahead..

Hey, good morning all. Thanks for taking my questions. First one is maybe just a housekeeping one for you Sally.

I'm not sure if I missed it, but what drove the big increase in dividend income in the quarter?.

So there were two things but the ISLP as you remember is structured as a debt investment and an equity investment. And so, there was -- the primary driver was the dividend income from the ISLP..

Okay.

So that -- so if the primary driver is dividend income from the ISLP that increase, should we expect that roughly that level to be sustainable going forward then?.

Yes. That's -- and actually I would expect it and Mike Boyle can comment on this. I would expect some increase in that as well given that. It's likely that the size of the ISLP is bigger..

Okay, great. And then moving to the other JV, the SLP. I was just wondering if you could provide any more details on that.

First it sounds like the strategy of the SLP, is it basically the same as sort of your -- the strategy of assets that go on your balance sheet and this just allows you to basically provide more scale and a larger commitment sizes to potential borrowers.

Is that correct?.

Yes that's correct. And another key part of it is really middle market securitization. We have historically done middle market CLOs directly off the balance sheet of BCSF.

And I think this opportunity allows us to do more middle market CLOs or middle-market securitizations with the AAA ratings that we can get in the CLO market that are done with that JV rather than doing them all directly on balance sheet..

Okay. Understood.

And then with the SLP, do you guys have any preliminary thoughts on the expected leverage in that in the JV, expected time frame to ramp that up targeted overall dividend yield or return profile to yourselves from that entity? And then has there been any thoughts or discussions of dropping down a pool of assets from your balance sheet into that, or do you expect that to just basically start from scratch and just grow organically?.

Sure. So the investment will be structured similar to the international senior loan program and where there'll be a debt component as well as an equity component. The debt component for the SLP will accrue at a 10% interest rate.

And then we think overall ROEs from the program should be in the double-digits so I think 12% to 15% or so just given our expectation for the assets versus liabilities in that structure. We have sized it so that it could ramp to 5% to 7% of the portfolio over the course of 2022.

And we do think that that's achievable given what we see from the market environment today. We could drop down some assets. We have contemplated that but have not yet decided whether that makes sense at this point in time..

Okay. And then last question for me. What drove the overall strong growth in the ISLP that underlying portfolio grew substantially in the quarter. Meanwhile, your balance sheet portfolio actually strong.

So what was the opportunity set that you guys were seeing in their contracts with the opportunities that you guys are seeing for loans that go on your balance sheet..

Sure. So we did find really attractive risk return across Europe, particularly in countries like the UK and Germany, when we were out investing in the ISLP. I'd say that the industries that we were investing in internationally were quite similar to what we were doing in the US.

So technology healthcare were two of the key segments we were investing in the senior – in the international senior loan program. We think the risk return in Europe is particularly interesting today. We noted that about 45% of the investments we made over the course of 2021 were outside of the US so across Europe or in Australia.

And we think there's strong potential that that persists in 2022, where there's really attractive risk-adjusted return beyond just the US when we're ramping the portfolio..

Okay. Understood. Appreciate the time this morning. Thank you..

Thank you, Ryan..

Thanks, Ryan..

Thank you. There's no other questions at this time..

Okay. Well, thank you Irina and thank you everyone for dialing in today. As I mentioned earlier, certainly appreciate your support, historically and going forward as well and we're looking forward to a successful 2022 here – 2022 going forward. Thanks very much..

Thank you. And this will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect..