Bain Capital Specialty Finance, Inc. (BCSF) Earnings Call Transcript

Thank you. Please stand by. Your meeting is about to begin. Hello and welcome everyone joining today's Bain Capital Specialty Finance second quarter ended June 30th, 2026 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. To register to ask a question at any time, please press star 1 on your telephone keypad. Please note this call has been recorded. We are standing by if you should need any assistance. It is now my pleasure to turn the meeting over to Catherine Schneider in Vestor Relations. Please go ahead.

Thanks, Nikki. Good morning and welcome everyone to the Bain Capital Specialty Finance second quarter ended June 30th, 2026 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 Finances 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 factor section of our Forum 10-Q that could cause actual results to differ materially from those indicated. Certain information contained in the presentation has been obtained from published and non-published sources and are prepared by third parties, and in certain cases has not been updated through the date hereof. Such information has not been independently verified by Bain Capital Credit, and Bain Capital Credit does not assume responsibility for the accuracy of such information or updating the presentation based on facts learned following its issuance. 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 CEO, Michael Ewald.

Thanks, Katherine, and good morning, and thanks to all of you for joining us here this morning on our earnings call. joined by Mike Boyle, our president, and our chief financial officer, Amit Joshi. In terms of agenda for the call, similar to past quarters, I'll start with an overview of our second quarter results. discuss the broader market environment and our positioning. Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail. And we'll leave some time, as always, for questions at the end. So beginning with our financial results, we reported solid financial results for the second quarter last night. Net investment income per share was 44 cents, representing an annualized yield of 10.5% on equity, covering our base dividend of 42 cents per share by 105%. Q2 earnings per share were $0.22, representing an annualized return on equity of 5.2%. Importantly, credit quality across our portfolio remained healthy overall during the quarter, despite a modest decline in NAV, and non-accruals continue to remain low across the portfolio, which we view as a continued reflection of the underlying strength and resilience of our underwriting standards and portfolio construction process. To this quarter end, our board declared a third quarter dividend equal to 42 cents per share and payable to record date holders as of September 15, 2026. This represents a 10.1% annualized rate on ending book value as of June 30th. During the quarter, we were pleased to see new activity levels pick up meaningfully following a slower start to the quarter, and broader economic indicators have remained sound, providing a constructive backdrop for investing. BCSF continues to benefit from Bain Capital's private credit platform, which remains active and we believe is well positioned in the core middle market, a segment where we have long been established with deep relationships and expertise. This segment of the market has largely remained insulated from the retail outflows that have weighed on the larger end of the private credit market, reinforcing the relative stability of the core metal market as a segment in which to invest. This core middle market also offers greater liquidity premium, greater debt tranche control, and tighter financial covenants, underwriting tenants that remain critical to us. current environment, new deals have benefited from attractive spreads relative to the tighter levels seen at the end of 2025. The weighted average spread on new first lien originations during the second quarter for us was approximately 570 basis points. Net leverage of new portfolio company investments came in at 4.5 times on average. This compared favorably to average sponsored middle market first lien unit tranche loans of approximately 525 basis points in the second quarter and net leverage of 5.4 times. We also saw a healthy level of repayments during the quarter, including full repayments from two software companies, despite the volatility that occurred across that sector earlier in the year, a testament to the underlying quality of those credits. On a year-to-date basis, however, repayment activity has remained low overall relative to normalized historical levels. Credit fundamentals across our underlying companies have remained resilient. At quarter end, median net leverage across our borrowers was 4.7 times, and median interest coverage remained healthy at 2.1 times. accrual saw a slight increase quarter over quarter, but remained low overall across the portfolio at 2.2% at fair market value as of quarter end. As it relates to software specifically, a topic we discussed at length last quarter, our exposure, including software adjacent companies, represents approximately 12% of our total portfolio. We've remained relatively underweight this sector versus the broader private credit market as we've taken a selective underwriting approach, which is largely focused on the private sector. focused on system of record and highly specialized vertical software. Overall, fundamental performance across our software companies continues to demonstrate solid operating performance. Key performance indicators such as retention rates and revenue growth have not decelerated, and we are generally seeing many companies show continued improvement in profitability and EBITDA margins, a further testament to the underlying quality of the companies in which we've chosen to invest. As a reminder, we maintain a comprehensive risk assessment framework to evaluate the potential substitution risks that emerging AI technologies may pose across our portfolio companies. Based on this ongoing analysis, the vast majority of our software-related investments carry a relatively low risk of AI-driven disruption. reflecting both the differentiated and resilient nature of these businesses and the discipline embedded in our investment approach from the time we first evaluated these companies. Only 4% of the total portfolio at fair value falls into our high and moderate risk ratings for AI disruption. For this smaller subset of companies with elevated AI disruption risk, we are actively monitoring new bookings and retention rates. And notably, many of these companies have continued to demonstrate stable performance and modest growth improvement in the current environment. Turning now to our dividend outlook, we've been pleased to provide strong earnings for our shareholders in recent years, with net investment income covering and or exceeding our regular 42 cent per share dividend. main focus on providing an attractive dividend levels to our shareholders, and we plan to reevaluate that dividend level in the coming quarters, considering factors such as the interest rate environment, upcoming debt maturities of our lower-cost unsecured notes, and other income sources as new M&A deal volume is expected to increase. I will now turn the call over to Mike Boyle, our president, to walk through our investment portfolio in greater detail. Mike?.

Thanks, Michael. Good morning, everyone. I'll start with our investment activity for the second quarter, and then provide an update more detail on our investment portfolio. New fundings during the second quarter were $182 million into 99 portfolio companies, including $73 million in eight new companies and $109 million in 91 existing companies. Sales and repayment activity totaled approximately $277 million, resulting in net sales and repayments of approximately $95 million quarter over quarter. Our fundings were split between new and existing portfolio companies with new port codes representing 40% of our total fundings versus 60% to existing companies. We remain focused on investing primarily in first lien senior secured loans with 91% of our new Q2 investment fundings in first lien structures, 1% in subordinated debt, and 8% in preferred and common equity. We continue to favor core middle market size companies given attractive terms and structure. combined with a large market opportunity of high quality borrowers, consistent deal flow, and more favorable competitive dynamics versus other market segments. median EBIT across our new companies during that quarter was $31 million. Turning to our investment portfolio, at the end of the second quarter, the size of our portfolio at fair value was approximately $2.4 billion across a highly diversified set of 214 portfolio companies operating across 30 different industries. The average position size across our single-name portfolio companies is approximately 40 basis points. Our portfolio primarily consists of investments in first lien senior secured loans, given our focus on downside management and investing in the top of the capital structure. As of June 30th, 63.4% of the investment portfolio at fair value was invested in first lien debt, 1.3% in second lien debt, 3.4% in first lien debt, and 3.4% in second lien debt. 7.7% in subordinated debt, 7.7% in preferred equity, 7.5% in equity and other interests, and 16.4% across our joint ventures, including 9% in the ISLP and 7% in the SLP. The vast majority of our underlying investments within the joint venture structures consist of first-lane loans. As of June 30, 2026, the weighted average yield on the investment portfolio at amortized cost and fair value were 10.8% and 10.4% respectively, as compared to 10.8% and 10.9% respectively as of March 31, 2026. As of June 30th, 2026, 95% of our debt investments bear interest at a floating rate. Moving on to portfolio credit quality trends. As Michael highlighted earlier, credit fundamentals across our portfolio have remained healthy. Median net leverage across our borrowers was 4.7 times as of quarter end compared to 4.6 times in the prior quarter. Median EBITDA was $40 million, which was relatively unchanged from the prior quarter at $42 million. Watchlist investments increased slightly quarter over quarter as reflected in our internal risk rating scale. These investments, which include our risk rating three and four categories, comprise 6% of our portfolio at fair value, an increase of 1% from the prior quarter. Investments on non-accrual represented 3.2% and 2.2% of the total investment portfolio at amortized cost and fair value, respectively, as of June 30th, compared to 1.4% and 0.6%, respectively, as of March 31st. During the quarter, two new companies were added to non-accrual and four companies were removed. from non-accrual status. While this resulted in a modest increase quarter over quarter, we still believe our non-accruals remain low relative to broader industry averages.

Amit will now provide a more detailed financial review. Thank you, Mike, and good morning, everyone. I'll start the review of our second quarter results with our income statement. Total investment income was 62.3 million for the three months ended June 30th, 2026, as compared to 66.2 million for the three months ended March 31, 2026. The decrease in investment income was primarily driven by lower interest income recognized on one of our joint venture investments along with the impact of two new non-agreable investments. The quality of our investment income continues to be strong, as the vast majority of our investment income is driven by contractual cash income across our investments. Interest income and dividend income represented 97% of our total investment income in Q2. Pick interest income represent 12% of our overall investment income in Q2, a modest decrease from the prior quarter. Notably, the vast majority of our PIC income is derived from investments that were underwritten with PIC, totaling 81% of total PIC income, with the remainder related to amended or restructured investments. Total expenses before taxes for the second quarter were 33 million as compared to 37.9 million in the first quarter. The decrease in expenses was driven by lower incentive fee, driven by reduced pre-incentive fee net investment income, and the look-back provision, partially offset by higher interest and debt fee expenses. Net investment income for the quarter was $28.6 million or $0.44 per share as compared to $27.4 million or $0.42 per share for the prior quarter. During the three-month ended June 30th, 2026, the company had net realized and unrealized losses of 14.6 million or 22 cents per share. A net realized loss during the quarter was driven by one of our restructured investment and an exit of a portfolio company. Net income for the three month ended June 30th, 2026 was 14.1 million or 22 cents per share. Moving over to our balance sheet, as of June 30th, our investment portfolio at fair value totaled 2.4 billion, with total assets of 2.6 billion. Total net assets were 1.1 billion as of June 30th, 2026. NAV per share was $16.65, a decrease of 21 cents per share from $16.86 at the end of first quarter, driven by net losses of 22 cents per share. As of June 30th, approximately 80% of our outstanding debt was in floating rate debt and 20% was in fixed rate debt. Our liability management efforts remain disciplined. By conducting an unsecured issuance this year and entering into an amendment of our existing facility subsequent to quarter end which extended our its maturity to 2031 we have pre-funded and mitigated upcoming maturities in 2026 while simultaneously extending debt maturities and preserving the financial flexibility For the three months ended June 30th, 2026, the weighted average interest rate on a debt outstanding was 5% as compared to 4.6% as of the prior quarter end. The weighted average maturity across our total debt commitment was approximately 3.9 years at June 30, 2026. At the end of Q2, our debt to equity ratio was 1.41 times as compared to 1.34 times from the end of Q1. Our net leverage ratio, which represents principal debt outstanding, less cash and unsettled trade, was 1.22 times at the end of Q2 as compared to 1.23 times times at the end of Q1. Subsequent to quarter end, our gross leverage declined to 1.34 times and was at 1.22 times on net basis as of July 31, 2026. Liquidity at quarter end was strong, totaling $806 million, including $606 million of undrawn capacity on a revolver credit facility, $130.6 million of cash and cash equivalent, including $18.5 million of restricted cash, and $69.4 million of unsettled rates, net of receivables and payables of investments. With that, I'll turn the call back over to Mike Ewald for closing remarks.

Thanks, Amit, and thanks, Mike, as well. Look, in closing, we're pleased to deliver another quarter of attractive net investment income and healthy credit fundamentals across our portfolio of middle market borrowers. Looking ahead, we believe the company is well positioned to continue driving attractive earnings for our shareholders, supported by our platform's positioning and investment discipline in the core metal market. We remain committed to delivering value for our shareholders by providing attractive returns on equity and prudently managing our shareholders' capital. Nikki, please open the line for questions at this point. Thanks. Thank you.

If you would like to ask a question, please press star 1 on your keypad. To leave the queue at any time, press star 2. Once again, that is star and one to ask a question. And we will pause for a moment to allow everyone a chance to join the queue. We'll take our first question with Sinyon O'Shea with Wells Fargo. Please go ahead. Your line is open.

Hey everyone, thanks. Good morning. Michael, a couple on the dividend. As you mentioned, I know there's a couple variables, but any guide on sort of a target, target payout on NAV, framework and then sort of second part, um, uh, a target, I guess, spillover as well, sort of where you are there and, um, will that be sort of an input to your 27 plan? Thanks.

Yes, thanks, Finn. I'll let Amit talk about the spillover income, but as you point out, as I said, there's a number of different variables here. So it's been an ongoing topic with our board as we try to project out earnings. Obviously, it looks like base rates may well stay higher here for a while. That's a positive. got that unsecured that we got to pay back coming up in October, so that's a negative. So there's a lot of puts and takes there. We've certainly observed what's gone on in the market in general too with some pressure on other folks' earnings. So it's not so much that we have a target as a percent of NAV. It's more that we want to be ensuring that we're amply covering our dividend in a consistent and sustainable matter. So as we get some more clarity in the back half of the year around base rates, around new deal volume, which generates fee income and our cost of debt going forward as well, That's when we'll end up re-evaluating and see if we stick with the same or change our dividend. I don't know if you want to talk about the spillover income too. That's certainly a source of cash, obviously, as well.

Yes, just to add on to what Mike highlighted, we continue to look at our spillover income, though I would say we want to ensure we are earning NII to meet our dividend set in 2027. So that will be our primary focus. Along with that, again, as you have seen it in the past, we will evaluate our special dividend distribution as required.

to manage our spillback income as well. Okay, appreciate it. And did you guys give the spillover this quarter...

We might have, but if not, yes, it's around $1.26, $0.27. Okay. Okay, thanks. A follow-up on the unsecured...

Is that something that might come down with the post-quarter expansion of the facility?.

Yes, so unsecured, as you know, in October we have a maturity as well, which is due, will be paid down. And of course, we have done the extension of the facility as well. So that all will play a role to bring down the unsecured percentage.

Okay, that's all from me. I'll hop back in. Thanks, everyone.

Thanks, Finn. Thank you. Our next question comes from Derek Hewitt with Bank of America. Please go ahead. Your line is open.

Good morning everyone. So revenue from the JVs and specifically I'm talking about the ISLP was down materially. So could you provide additional color on what happened there? And then should we expect that yield to remain under pressure in the future?.

in the near term? Sure. Thanks for the question, Derek. So we did end up retaining some earnings in the ISLP rather than paying out full interest and dividend from that structure. That was a one-time event in that venture as we're particularly focused on continuing to build diversity. So that is not an indication of broader pressure on earnings in that structure, but more of a one-time event for the quarter. As a reminder, the ISFT, International Senior Loan Program. is about one-to-one levered. It is an off-balance structure, but very comparable leverage level to what's on balance sheet and has been delivering kind of high single-digit IRRs since inception. So it has been performing in line with expectation. As I said, it's more of a one-off event as we're looking at what the exact future will be for the ISLP.