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Bain Capital Specialty Finance(BCSF) - 2023 Q2 - Quarterly Report
BCSFBain Capital Specialty Finance(BCSF)2023-08-07 16:00
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Investment Portfolio and Strategy - The company has invested approximately 6,794.3millioninaggregateprincipalamountofdebtandequityinvestmentssinceitsinceptioninOctober2016throughJune30,2023[355]−Thecompanyfocusesonmiddle−marketcompanieswithannualEBITDAbetween6,794.3 million in aggregate principal amount of debt and equity investments since its inception in October 2016 through June 30, 2023[355] - The company focuses on middle-market companies with annual EBITDA between 10.0 million and 150.0million,thoughitmayinvestinlargerorsmallercompaniesopportunistically[357]−Thecompany′sinvestmentstrategyincludesseniorinvestmentswithfirstorsecondlienoncollateral,mezzaninedebt,juniorsecurities,andopportunisticinvestmentsindistresseddebtandstructuredproducts[357]−Invested150.0 million, though it may invest in larger or smaller companies opportunistically[357] - The company's investment strategy includes senior investments with first or second lien on collateral, mezzanine debt, junior securities, and opportunistic investments in distressed debt and structured products[357] - Invested 204.4 million in 60 portfolio companies during Q2 2023, with 35.4millionrelatedtodrawdownsondelayeddrawtermloansandrevolvers[376]−Netdecreaseininvestmentsof35.4 million related to drawdowns on delayed draw term loans and revolvers[376] - Net decrease in investments of 23.5 million for Q2 2023 due to 227.9millioninprincipalrepaymentsandsales[376]−Invested227.9 million in principal repayments and sales[376] - Invested 516.6 million in 85 portfolio companies during the first six months of 2023, with 112.9millionrelatedtodrawdownsondelayeddrawtermloansandrevolvers[377]−Netincreaseininvestmentsof112.9 million related to drawdowns on delayed draw term loans and revolvers[377] - Net increase in investments of 3.2 million for the first six months of 2023 due to 513.4millioninprincipalrepaymentsandsales[377]−FirstLienSeniorSecuredLoansaccountedfor67.0513.4 million in principal repayments and sales[377] - First Lien Senior Secured Loans accounted for 67.0% of the total portfolio by amortized cost as of June 30, 2023[380] - First Lien Senior Secured Loans accounted for 63.7% of the total amortized cost as of June 30, 2023, with a fair value of 1,532,422 million, representing 61.0% of the total fair value[391] - The total investment portfolio as of June 30, 2023, had an amortized cost of 2,544,800millionandafairvalueof2,544,800 million and a fair value of 2,513,854 million[391] - The total fair value of the investment portfolio as of December 31, 2022, was 2,512,707thousand,withFirstLienSeniorSecuredLoansrepresenting65.02,512,707 thousand, with First Lien Senior Secured Loans representing 65.0% of the total fair value[393] Interest Rates and Yields - 94.1% of the company's debt investments as of June 30, 2023, based on fair value, bore interest at floating rates, compared to 94.5% as of December 31, 2022[362] - Weighted average yield on the total portfolio was 12.8% at amortized cost and 13.0% at fair value as of June 30, 2023[380] - 94.1% of debt bearing a floating rate as of June 30, 2023, measured on a fair value basis[384] - The weighted average yield of the investment portfolio increased to 12.8% as of June 30, 2023, compared to 8.4% as of June 30, 2022[406] - The combined weighted average interest rate for borrowings was 5.1% for the six months ended June 30, 2023, up from 3.5% in 2022[414] - Interest rates down 100 basis points result in a net decrease in net investment income of 10,051[474] - Interest rates down 200 basis points result in a net decrease in net investment income of 20,102[474]−Interestratesdown300basispointsresultinanetdecreaseinnetinvestmentincomeof20,102[474] - Interest rates down 300 basis points result in a net decrease in net investment income of 29,944[474] - Interest rates up 100 basis points result in a net increase in net investment income of 10,051[474]−Interestratesup200basispointsresultinanetincreaseinnetinvestmentincomeof10,051[474] - Interest rates up 200 basis points result in a net increase in net investment income of 20,102[474] - Interest rates up 300 basis points result in a net increase in net investment income of 30,152[474]FinancialPerformanceandIncome−Thecompanyprimarilygeneratesrevenuethroughinterestincomeondebtinvestmentsanddistributionsonequityinvestments,withadditionalrevenuefromcapitalgains,loanoriginationfees,andotherfees[361]−TotalinvestmentincomeforthethreemonthsendedJune30,2023,was30,152[474] Financial Performance and Income - The company primarily generates revenue through interest income on debt investments and distributions on equity investments, with additional revenue from capital gains, loan origination fees, and other fees[361] - Total investment income for the three months ended June 30, 2023, was 75,715 thousand, compared to 52,364thousandforthesameperiodin2022[401]−Interestincomeincreasedto52,364 thousand for the same period in 2022[401] - Interest income increased to 58,188 thousand for the three months ended June 30, 2023, from 35,884thousandforthesameperiodin2022,drivenbyportfoliogrowthandrisinginterestrates[406]−NetinvestmentincomebeforetaxesforthethreemonthsendedJune30,2023,was35,884 thousand for the same period in 2022, driven by portfolio growth and rising interest rates[406] - Net investment income before taxes for the three months ended June 30, 2023, was 40,009 thousand, up from 26,715thousandforthesameperiodin2022[401]−Dividendincomeincreasedto26,715 thousand for the same period in 2022[401] - Dividend income increased to 8,728 thousand for the three months ended June 30, 2023, from 6,370thousandforthesameperiodin2022,primarilyduetohigherdividendincomefromequityinterests[406]−Interestincomeincreasedto6,370 thousand for the same period in 2022, primarily due to higher dividend income from equity interests[406] - Interest income increased to 115.1 million for the six months ended June 30, 2023, up from 73.9millioninthesameperiodin2022,drivenbyportfoliogrowthandrisinginterestrates[408]−Dividendincomeroseto73.9 million in the same period in 2022, driven by portfolio growth and rising interest rates[408] - Dividend income rose to 17.1 million for the six months ended June 30, 2023, compared to 10.0millionin2022,primarilyduetoincreaseddividendincomefromequityinterests[408]−Totalinvestmentincomereached10.0 million in 2022, primarily due to increased dividend income from equity interests[408] - Total investment income reached 150.5 million for the six months ended June 30, 2023, up from 98.4millionin2022[408]−Netincreaseinnetassetsresultingfromoperationswas98.4 million in 2022[408] - Net increase in net assets resulting from operations was 29.2 million for the three months ended June 30, 2023, compared to 17.2millionforthesameperiodin2022[435]−Netincreaseinnetassetsresultingfromoperationswas17.2 million for the same period in 2022[435] - Net increase in net assets resulting from operations was 58.5 million for the six months ended June 30, 2023, compared to 50.9millionforthesameperiodin2022[435]ExpensesandFees−Thecompanyincurred50.9 million for the same period in 2022[435] Expenses and Fees - The company incurred 0.2 million in expenses related to the Administrator for the three months ended June 30, 2023, compared to 0.0millionforthesameperiodin2022[367]−Thecompanyincurred0.0 million for the same period in 2022[367] - The company incurred 0.4 million in expenses related to the Administrator for the six months ended June 30, 2023, compared to 0.0millionforthesameperiodin2022[367]−Thecompanyincurred0.0 million for the same period in 2022[367] - The company incurred 0.2 million in expenses related to the sub-administrator for the three months ended June 30, 2023, compared to 0.1millionforthesameperiodin2022[367]−Thecompanyincurred0.1 million for the same period in 2022[367] - The company incurred 0.3 million in expenses related to the sub-administrator for the six months ended June 30, 2023, compared to 0.3millionforthesameperiodin2022[367]−Interestanddebtfinancingexpensesincreasedto0.3 million for the same period in 2022[367] - Interest and debt financing expenses increased to 40.0 million for the six months ended June 30, 2023, compared to 21.7millionin2022,duetohigherprincipaldebtandrisingbaserates[413]−Managementfees(netofwaivers)increasedto21.7 million in 2022, due to higher principal debt and rising base rates[413] - Management fees (net of waivers) increased to 18.0 million for the six months ended June 30, 2023, compared to 16.8millionin2022[417]−Incentivefees(netofwaivers)roseto16.8 million in 2022[417] - Incentive fees (net of waivers) rose to 15.1 million for the six months ended June 30, 2023, up from 7.4millionin2022[418]−ThecompanyrecordedU.S.federalexcisetaxexpensesof7.4 million in 2022[418] - The company recorded U.S. federal excise tax expenses of 0.8 million for Q2 2023 and 1.3millionforthesixmonthsendedJune30,2023[451]−Thecompany′sbasemanagementfeeis1.51.3 million for the six months ended June 30, 2023[451] - The company's base management fee is 1.5% (0.375% per quarter) of gross assets for assets held at a 200% coverage ratio, and 1.0% (0.25% per quarter) for assets below 200% coverage[468] Portfolio Performance and Valuation - Performing investments accounted for 97.9% of the total portfolio by amortized cost as of June 30, 2023[388] - Non-accrual investments decreased to 50.7 million (2.1% of total portfolio) as of June 30, 2023, compared to 71.5million(3.071.5 million (3.0%) as of December 31, 2022[388][389] - Investments rated 2 (performing as expected) constituted 91.4% of the total fair value as of June 30, 2023, with a fair value of 2,180,766 million[397] - The total fair value of investments rated 3 (performing below expectations) was 202,032thousand,representing8.5202,032 thousand, representing 8.5% of the total fair value as of June 30, 2023[397] - Net realized losses on investments were (10.9) million for the six months ended June 30, 2023, compared to (1.2)millionin2022[427]−Unrealizedappreciationoninvestmentswas1.2) million in 2022[427] - Unrealized appreciation on investments was 47.3 million for the six months ended June 30, 2023, offset by (44.7)millioninunrealizeddepreciation[428]−Unrealizedappreciationon31portfoliocompanyinvestmentswas44.7) million in unrealized depreciation[428] - Unrealized appreciation on 31 portfolio company investments was 40.8 million for the six months ended June 30, 2022, offset by unrealized depreciation of (51.1)millionon96portfoliocompanyinvestments[429]−Thecompany′svaluationprocessforilliquid/hard−to−valueassetsincludesinitialvaluationbyinvestmentprofessionals,reviewbyseniormanagement,andperiodicindependentvaluationformaterialinvestments[464][465]−Thecompany′svaluationofportfolioinvestmentswithoutreadilyavailablemarketquotationsinvolvesdiscountedcashflowmodelsandcomparisonstopeercompanies[463]DebtandAssetCoverage−Thecompany′sassetcoverageratiowas175.151.1) million on 96 portfolio company investments[429] - The company's valuation process for illiquid/hard-to-value assets includes initial valuation by investment professionals, review by senior management, and periodic independent valuation for material investments[464][465] - The company's valuation of portfolio investments without readily available market quotations involves discounted cash flow models and comparisons to peer companies[463] Debt and Asset Coverage - The company's asset coverage ratio was 175.1% as of June 30, 2023, exceeding the regulatory minimum of 150%[369] - Asset coverage ratio was 175.1% as of June 30, 2023, compared to 180.0% as of December 31, 2022[438] - Total debt outstanding as of June 30, 2023 was 1,498,500, with a carrying value of 1,489,607[446]−TotaldebtobligationsasofJune30,2023,amountedto1,489,607[446] - Total debt obligations as of June 30, 2023, amounted to 1,498,500, with 300,000duewithin1−3yearsand300,000 due within 1-3 years and 846,000 due within 3-5 years[471] - The weighted average principal debt balance outstanding for the six months ended June 30, 2023 was 1,477.2million,upfrom1,477.2 million, up from 1,267.7 million in 2022[413] Distributions and Dividends - Total distributions declared during the six months ended June 30, 2023 were 49,068,withapershareamountof49,068, with a per share amount of 0.76[448] - Total distributions declared for the year amounted to 43,902,with43,902, with 0.68 per share distributed across two quarters[449] - The company's dividend reinvestment plan allows stockholders to automatically reinvest cash dividends and distributions into additional shares of common stock[453] Market Risk and Hedging - The company's market risk exposure includes changes in interest rates, with investments primarily in illiquid loans and securities of middle-market companies[472] - The company may use hedging techniques like forward contracts to mitigate foreign exchange risks[474] - Net change in unrealized appreciation on investments due to foreign currency was 4,416forthesixmonthsendedJune30,2023,comparedto(4,416 for the six months ended June 30, 2023, compared to (10,607) for the same period in 2022[434] - Net realized gain (loss) on foreign currency transactions was (4,534)forthesixmonthsendedJune30,2023,comparedto4,534) for the six months ended June 30, 2023, compared to 2,678 for the same period in 2022[434] - Net change in unrealized appreciation on forward currency exchange contracts was (1,315)forthesixmonthsendedJune30,2023,comparedto1,315) for the six months ended June 30, 2023, compared to 9,775 for the same period in 2022[434] Revenue Recognition and Contractual Obligations - The company's revenue recognition policy includes recording investment transactions on a trade date basis and using the effective interest method for interest income[458] - The company's contractual obligations include an Amended Advisory Agreement with a base management fee and an incentive fee based on investment performance[467] Cash and Liquidity - Total investment portfolio, cash, and cash equivalents amounted to 2,415,627thousandasofJune30,2023[390]−Cash,foreigncash,restrictedcash,andcashequivalentsincreasedby2,415,627 thousand as of June 30, 2023[390] - Cash, foreign cash, restricted cash, and cash equivalents increased by 2.9 million for the six months ended June 30, 2023[440]