Business Context and Reporting Period
Bain Capital Specialty Finance, Inc. (BCSF) is an externally managed business development company (BDC) and regulated investment company (RIC) focused on senior direct lending to middle-market companies. This Form 10-Q covers the quarterly period ended June 30, 2018, and the six months ended June 30, 2018. The company is managed by BCSF Advisors, LP, a subsidiary of Bain Capital Credit, LP.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $38.9 million | $6.8 million |
| Net Investment Income (After Taxes) | $22.3 million | $3.8 million |
| Total Expenses (Net of Waivers) | $16.6 million | $3.0 million |
| Net Increase in Net Assets from Operations | $17.5 million | $5.2 million |
| Net Asset Value (NAV) per Share | $20.14 | $20.25 |
| Total Net Assets | $754.6 million | $504.5 million |
| Total Investments (Fair Value) | $1.069 billion | $831.6 million |
| Weighted Average Yield (Debt) | 8.5% | 8.2% |
| Debt Outstanding | $446.5 million | $451.0 million |
| Asset Coverage Ratio | 2.69 to 1 | 2.12 to 1 |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew significantly, with total investments at fair value increasing from $831.6 million at December 31, 2017, to $1.069 billion at June 30, 2018. This was driven by $373.5 million in new investments during the six-month period.
- Revenue Surge: Net investment income increased substantially to $22.3 million (six months 2018) from $3.8 million (six months 2017). This growth is primarily attributed to the larger portfolio size and increased distribution income from the company's investment in Antares Bain Capital Complete Financing Solution LLC (ABCS).
- Expense Increase: Total expenses rose to $16.6 million, driven by higher interest and debt financing expenses ($9.6 million vs. $0.4 million) due to increased leverage deployment, and higher management and incentive fees.
- Unrealized Losses: The company reported a net unrealized depreciation of $9.3 million on non-controlled/non-affiliate investments for the six months ended June 30, 2018, primarily due to foreign currency fluctuations and negative valuation adjustments, notably on the American Tire Distributors Inc. Term Loan. This was partially offset by a $7.6 million unrealized appreciation on forward currency exchange contracts.
- Capital Raise: The company raised $251.0 million through capital drawdowns and $3.2 million through dividend reinvestment during the six months ended June 30, 2018.
Guidance, Outlook, and Risks
- Market Outlook: Management notes that while loan spreads have tightened, yields have remained stable due to rising LIBOR rates. The Advisor observes that sponsors are increasingly utilizing EBITDA add-backs, prompting heightened scrutiny in underwriting. Despite headwinds, the Advisor believes the investment set offers attractive risk/return opportunities.
- Fee Waiver: The Advisor voluntarily waived 50% of the income incentive fees earned during the three months ended June 30, 2018 ($1.0 million), which is irrevocable.
- Liquidity: As of June 30, 2018, the company had $141.0 million in cash and cash equivalents, $501.8 million in uncalled capital commitments, and $165.0 million undrawn on revolving credit facilities. Management expects these resources to be sufficient for operations and investing for at least the next twelve months.
- Risks: Key risks include credit risk in the portfolio, interest rate risk (though 96.1% of debt is floating rate), foreign currency exchange risk (mitigated by forward contracts), and the potential for unrealized valuation adjustments to differ from realized values. The company is subject to the 1940 Act asset coverage requirements (currently 2.69 to 1).
Investor Verification Checklist
- Valuation of Level 3 Assets: Verify the fair value of $710.2 million in Level 3 investments, which rely on unobservable inputs and management judgment.
- ABCS Investment Performance: Review the performance and leverage of the Antares Bain Capital Complete Financing Solution LLC (ABCS) joint venture, which represents 18.7% of the portfolio and is a significant income driver.
- American Tire Distributors Inc. Exposure: Assess the impact of the specific valuation adjustment on the American Tire Distributors Inc. Term Loan, cited as a primary driver of unrealized depreciation.
- Capital Commitments: Confirm the status of the $501.8 million in uncalled capital commitments from investors.
- Debt Covenants: Monitor compliance with asset coverage ratios and other covenants on the $446.5 million outstanding debt facilities.