Good morning, and welcome to the Bain Capital Specialty Finance Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please, note, this event is being recorded. I would now like to turn the conference over to Katherine Schneider, Investor Relations at Bain Capital Specialty Finance. Please go ahead.

Thanks, Chris. Good morning, everyone, and welcome to the Bain Capital Specialty Finance conference call for the second quarter of 2020. 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 Finance's Investor Relations website. Following our remarks today, we will hold a question-and-answer center for analysts and investors. This call is being webcast, and a replay will be available on our website. This call and 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-Q 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. Today I'm joined by Michael Ewald, our President and Chief Executive Officer; Michael Boyle, our Vice President and Treasurer; and our Chief Financial Officer, Sally Dornaus. In terms of the agenda for the call, Michael Ewald will first provide an overview of our second quarter results and the recent capital market actions that we took during the quarter. Thereafter, Mike Boyle and Sally will discuss our investment portfolio, credit quality and financial results in greater detail. So with that, I'll turn the call over to our President and CEO, Michael Ewald.

Thanks, Catherine. And good morning, and thank you all for joining us on our earnings call. We hope everyone is staying safe and healthy. Before jumping into our second quarter results, I want to take some time to discuss the current environment and the recent actions that we took to strengthen the company's balance sheet and better position it to navigate an uncertain future. The market environment today continues to be marked by uncertainty due to the COVID-19 pandemic. Most businesses across the global economy have been impacted to varying degrees, depending on the nature and type of company. From our viewpoint, the extent of the impact on each business will largely be driven by the duration of the pandemic, which unfortunately continues to be unknown. Nevertheless, we've been encouraged by early indications of better-than-expected performance by our portfolio in the second quarter. We believe these positive results can largely be attributed to the swift actions that the owners and management teams of these businesses took in late March and early April to preserve capital through several cost-cutting or delaying actions. Notwithstanding these positive indications, we remain watchful for the unique challenges at middle market companies and impacted COVID-19 sectors face, and place a high emphasis on preparing for any prolonged economic challenges that could arise. Consistent with Bain Capital Credit's focus on capital preservation and disciplined investment approach, we have been conservatively positioning the company's balance sheet over the past several years. Our investment portfolio, which Mike Boyle will discuss in greater detail later in this call, is comprised largely of first lien senior secured floating rate assets across a set of portfolio companies diversified by both industry and geography. Given the significant volatility exhibited in the markets during Q1 and our focus on positioning the company to better…

Thanks, Mike. Good morning, everyone. I'll kick it off with our investment activity this quarter and then provide an update on our portfolio and underlying credit quality. In the second quarter, new investment fundings were $49 million in 16 portfolio companies operating across 10 different industries. The majority of these fundings were to existing portfolio companies. Sales and repayments totaled $67 million, primarily driven by the repayments of revolving credit facilities. As we discussed on our Q1 earnings call, we experienced an increase in revolver funding requests during March as many of our portfolio companies brought cash onto their balance sheet as a defensive measure in light of an uncertain market environment. We were pleased to see some of these facilities repaid in the second quarter. The revolver utilization across these facilities was approximately 51% as of June 30 as compared to a high of approximately 81% as of March 31. At the end of the quarter, BCSF had adequate liquidity, consisting of cash and undrawn capacity on our secured facilities of approximately $441 million against our $119 million of undrawn investment commitments, representing coverage of 3.7x. As of June 30, the fair value of our investment portfolio was $2.5 billion, and was relatively unchanged from the prior quarter. Our portfolio is highly diversified, comprised of 109 unique companies. The top 10 investments represent 24% of our exposure, meaning that no single investment should have a significant impact on the performance of the company overall. 88% of the portfolio at fair value was invested in first lien debt, including 1% in first lien last out debt. The remaining portfolio was comprised of 6% in second lien debt, less than 1% in subordinated debt, 1% preferred equity and 5% common equity. As Mike Ewald mentioned earlier in the call, we have…

Thank you, Mike, and good morning, everyone. I'll start the review of our second quarter 2020 results with our income statement. Total investment income was $47.9 million for the 3 months ended June 30, 2020, as compared to $51.5 million for the 3 months ended March 31, 2020. The decrease in investment income was primarily driven by a decrease in interest income due mainly to a decrease in LIBOR over the quarter. Our investment income is comprised primarily of contractual cash-paying interest income. We take a conservative accounting approach to recognizing commitment fees or structuring fees on new investments. This is referred to as the original issue discount, or OID, which we amortize over the life of the loan as opposed to taking fees upfront. Total expenses for the quarter were $27.9 million in the second quarter as compared to $29 million in the first quarter. The decrease was driven by lower interest and debt financing expenses due to the decrease in LIBOR and lower other operating expenses. Net investment income for the quarter was $20 million or $0.37 per share as compared to $22.5 million or $0.44 per share for the prior quarter. This quarter, the fair value mark as a percentage of notional on our investment portfolio stayed relatively flat quarter-over-quarter at approximately 94% as of June 30, 2020. This was largely attributed to broad-based spread tightening across our investment portfolio and offset by decreased financial performance due to COVID-19 for certain portfolio companies. As we have discussed on prior earnings calls, we employ a robust valuation framework with 100% of illiquid investments being reviewed by an independent third-party provider each quarter. We believe these additional layers of review provide for best-in-class valuation processes, especially during periods of increased market volatility. During the 3 months ended June 30,…

Thanks, Ally. We're pleased to deliver solid results to our shareholders, notwithstanding the continued challenging economic backdrop. Since the inception of BCSF, we've been positioning the portfolio conservatively, as reflected by the high percentage of first lien senior secured loans and highly diversified set of companies and defensive industries. We believe this provides us with a strong foundation to manage any downside risks to our portfolio companies in the current environment. Furthermore, Bain Capital Credit has a long-standing history and expertise in investing in leveraged capital structures through multiple market environments. Finally, we appreciate the support from our shareholders in managing our investor capital to drive attractive risk-adjusted returns. Chris, please open the line for questions.

[Operator Instructions]. Our first question is from Finian O'Shea of Wells Fargo.

First question on the LIBOR impact. I know that's a headwind right now. The 6/30 million number is much lower than 3/31. Can you give your floor weighted average? And then, any nuances there as to what rates your borrowers have effectively locked in and what that is going to spill out for next quarter on the LIBOR side for your earnings impact?

Sure. Thanks for the questions, and good morning. So the weighted average LIBOR floor across our portfolio is about 74 basis points. And that is driven by the vast majority of our U.S. borrowers having a 1% LIBOR floor, while the majority of the European borrowers that might be set off of EURIBOR or a different rate would be having a 0% floor.

Okay. So sorry, is there -- are you mostly out of the woods on the top line impact?

Yes, that's right. So the yield that we quoted, highlights, the impact of most of those hitting their floor is as of 6/30.

Okay. And then just a question for Michael. It looks like you've recovered about 20% of first quarter markdowns, which is on -- definitely on the lower end of who's reported so far. You've also had no nonaccruals. So things look pretty stable in that aspect. Any commentary on your valuation and/or portfolio underlying performance that's driving this delta, understanding you're only responsible for your own book? But to the extent you've watched others report, I would ask for any color there that you could provide.

Sure, Fin. And glad you asked. Obviously, you know as well, you know that we have a pretty vigorous valuation process that Sally highlighted in her remarks as well. Having an individual model on every company, every quarter, having that reviewed by a third-party every quarter as well I think is important there. And there's no one determinant that we will use for where our marks shake out at the end of the quarter. Clearly, all of that will roll up to 1 single NAV across the portfolio. But I probably wouldn't focus too much on a couple of percentage points change, up, down, flat, and really focus on probably underlying credit quality. And there, I think the investment performance ratings are probably a good proxy there. We were very aggressive back at the end of Q1 in terms of moving about 17 companies to risk rating 3 out of our 100 change companies. Today, it's still 17 companies. I think 1 or 2 left, 1 or 2 came in, but it's still 17 companies. And there is still just 2 that are risk grading 4 or on nonaccrual, as you point out. And then there's no change quarter-on-quarter. So I think the good news here is that we've got consistent quality across the portfolio. And I think at a high level, if you think about different determinants, yes, there's been a lot of talk about how reference markets are up and spreads are tightened, that's absolutely true. But I'd point out a few other points here. One is performance is better than it was feared across portfolio companies generally at the end of 3/31. But again, generally speaking, it's worse than expected based on where Q2 was last year and based on what year-end budgets from end of 2019, beginning of 2022, would have suggested Q2 performance would have been, right? So performance overall is down. Our credit quality, though, was flat. And so if you put that all together, with some continued uncertainty in the economy here, having book value be flat this quarter certainly seems reasonable. It's not like we had nonaccruals double. It's not like we had our 3s double. And our market value, our book value was up 5%. Yes, I think book value flat is a pretty sober evaluation of where things stand today.

The next question is from Ryan Lynch of KBW.

As I look at your guys' investment activity this quarter, looks like the sales and repayments in the quarter dropped pretty significantly. I was a little surprised to see that a lot of BDCs had actually pretty robust activity regarding the sales repayments as they look to delever, as well as some borrowers who drew down unfunded commitments kind of repaid those. So could you provide any commentary on what was really driving the low level of sales and repayments in this quarter?

Yes. Good question, Ryan. Thanks. The -- I guess I'd make a couple of comments, and Mike will, I'm sure will jump in too. But on the sales and repayments front, what I would point out is that we can't always determine when we're going to get repaid here, right? I mean, a lot of the repayments we do get. Our portfolio companies are being sold. We may not participate in any sort of role or maybe strategic buys until we can. And because there was pretty muted M&A activity, you didn't see a lot of companies change hands and therefore, pay off, pay out their old facilities. So, we didn't really see that, which has historically driven a lot of our repayment volume. The other thing, where we did see some was, I think Mike Boyle mentioned the statistic where we did see revolver draws up to 81% or so with the end of Q1, that's since come down to 51%. So you saw some of that cash actually come back to the system. But the repayment front, there just wasn't much action. And I think that holds true on the new investment front too where on a net basis we had some repayments, we had a couple of delayed draw term loans that were paid -- sorry, that were drawn because there are some of our portfolio companies that try to get opportunistic and make a couple of acquisitions and things like that. So that's really what drove a lot of the new investments that we made. But again, because there's muted M&A activity, you didn't see a whole lot of new platforms that came into the BDC either.

Okay. Understood. And then you mentioned you had several amendments in portfolio companies this quarter. Can you quantify that as either a percentage of the portfolio or just the absolute dollar amount of amendments you made this quarter? And then as part of those amendments, you mentioned you gave them short-term covenant release, but usually got additional fees or terms. Were any of those amendments accompanied by additional equity capital contributed by the sponsor?

Yes. So look, at a high level it was -- I believe it was 11 companies out of our 109 companies, where we signed the amendment of some flavor. Together, that represents about 8% of our portfolio, both fair market value and cost. So that gives you a high level sense. And in terms of -- I'm trying to think, individual deals, Mike, I don't know if you have those stats in front of you in terms of how many may have been equity contributions, et cetera.

Yes. So more than half of those came with incremental equity dollars coming in from sponsors. So we have been pleased with the continued sponsor support across the portfolio.

Okay. And then just one last one. You guys obviously made significant changes to the -- your capital structure, doing the rights offering. But you guys also did what I would consider very high costs, unsecured note, relative -- 8.5% relative to the yield on your portfolio of kind of the mid- 60s. So I was a little surprised to see the cost on that debt. So can you just walk through what was the need behind issuing the unsecured notes at that high of a cost? As well as we look forward, how do you feel about the current composition of your capital structure to kind of weather through and manage through this downturn at this point?

Sure. So we did decide to issue that $150 million unsecured debt in order to provide some greater flexibility in our balance sheet, particularly as we look at potential restructurings across our portfolio. And we wanted a capital structure that would be durable in that environment. Although the cost of debt was higher than we would have liked across the entire weighted average cost of capital, it added about 30 basis points to the cost across the whole cap stack. So we were thoughtful when we issued that incremental note as to how that stacked up relative to the assets we were investing in. But we think that it is the right -- was the right move to drive long-term value in the environment that we're looking for. And we do think that there's a continued -- we have a continued commitment to having unsecured debt in our capital stack. So although it's 10% today, that is a way of financing that we think will continue to tap in the future, albeit at lower cost than we have historically.

Our next question is from Derek Hewett of Bank of America.

Michael, do you have any high-level thoughts on yesterday's SEC announcement on AFFE? And are there other potential areas where new rules would make sense for the industry at this point?

Hey, Derek, thanks for that. Yes, look, the -- I think there's still a lot to be learned. And we're still trying to get up to speed on it a little bit. I think the -- I think it's a step in the right direction in terms of making it easier for institutions to invest in the BDC space, which I think is good news. What I'm trying to get a handle on or what we're trying to get a handle on is around that 10% limitation. Clearly, more is better. So I'm not sure to what extent. It's going to drive institutional behavior to invest in BDCs more. Certainly ones that are more active I think could very well start taking positions in BDCs, whereas the more passive ones that are more index-related, I think it's unclear to see how the different indices end up treating that limitation with that 10% governor in there. So we've got a 60-day comment period here, I think. So it'll be interesting to see what sort of comments get posted. I'm sure we'll offer an opinion to someone at some point here, but are still trying to develop that as well. In terms of other rules, there's really not much that's kind of front of mind for us. We are certainly in favor of BDCs being allowed to go to 2:1 leverage rather than 1:1. I think that the NSA FFE thing was the other big one that we were looking at. So I don't think there's anything else that's immediately front of mind for us beyond seeing how this one shakes out.

[Operator Instructions]. I appear that we have no further questions. I would like to turn the conference back over to Mr. Michael Ewald for his closing comments. Please go ahead, sir.

Great. Thanks, Chris, and thanks, everyone, for joining us on our call today. Again, we're very pleased with how the quarter shook out, and looking moving on to Q3 at this point. Thanks very much. Cheers.

Thank you very much, sir. Ladies and gentlemen, that then concludes this conference call. Thank you for attending today's presentation. You may now disconnect.