Greetings and welcome to the Bain Capital Specialty Finance Fourth Quarter and Fiscal Year Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Katherine Schneider Investor Relations. Please go ahead ma'am.

Thanks Rana. Good morning everyone and welcome to Bain Capital Specialty Finance fourth quarter and year ended December 31st, 2022 conference call. Yesterday after market close, we issued our earnings press release and investor presentation of our quarterly and year-end results, a copy of which are 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 made 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.

Thank you, Katherine. Good morning everyone and thank you for joining us on our earnings call today. I'm here with Mike Boyle, our President; and our Chief Financial Officer, Sally Dornaus. I'll start with an overview of our fourth quarter and year ended December 31st, 2022 results and then provide some thoughts on our performance, the overall market environment, and our positioning. Thereafter, Mike and Sally will discuss our investment portfolio and financial results in greater detail. Beginning with our results, Q4 net investment income per share was $0.37, equating to an annualized yield on average book value of 8.7%. Our net investment income covered our dividend by 103% during the fourth quarter. Q4 earnings per share were $0.67 equating to an annualized return on average book value of 15.7%. For the full year 2022, net investment income per share was $1.59, equal to a 9.3% return on equity. This was up over 100 basis points from our 2021 NII return on equity. Our NII covered our dividend by 115% during the year. Earnings per share for 2022 were $1.63, representing a total return on equity of 9.8% for the full year of 2022. Consistent with our 2021 earnings, our annual net earnings exceeded our dividend payout for a second consecutive year. We believe this is an important metric for measuring not only attractive levels of net investment income generated across our portfolio, but also overall credit performance of our portfolio and is a testament to Bain Capital Credit's experience investing in the middle market. Our returns were driven by high-quality interest income earned from our middle market borrowers and strong credit performance as demonstrated by overall net realized and unrealized gains across our portfolio during both the fourth quarter and full year. Our net asset value ended the year…

Thanks, Michael. Good morning, everyone. I'll start with our investment activity for the fourth quarter and then we provide an update and more detail on our portfolio. New investment fundings during the fourth quarter were $221 million across 44 portfolio companies, including $101 million in five new companies, $102 million in 38 existing companies and $18 million in the ISLP. Sales and repayment activity totaled approximately $162 million, resulting in net funded portfolio growth of $59 million quarter-over-quarter. For the full year, investment fundings were $1.5 billion. Total sales and repayment activity for the year were $1.4 billion. We were pleased with our ability to modestly grow our investment portfolio size, while staying within our net leverage target range. Our new investing activity for the fourth quarter and full year were comprised of a mix of new fundings to new portfolio companies and existing portfolio companies. During the year, our new investment fundings, excluding investments in our joint ventures were comprised of approximately 65% to new companies and 35% to existing companies. Our incumbency advantage across our large portfolio of middle market borrowers provides us with ability to provide add-on capital to existing borrowers with whom we have an existing relationship. In 2022, we benefited from higher market spreads on new originations. On our first lien investments that we originated to new companies during the fourth quarter, the weighted average spread was approximately 695 basis points, which was 150 basis points higher as compared to our new first lien originations one year ago in Q4 2021. Not only are we able to underwrite new first lien loans at higher spreads and yields, but we have also seen leverage levels on new loans decrease as lenders are focused on maintaining levered free cash flow and fixed charge coverage ratios. We remain…

Thank you, Mike and good morning, everyone. I'll start the review of our fourth quarter 2022 results, with our income statement. Total investment income was $62.4 million for the three months ended December 31, 2022 as compared to $58.8 million, for the three months ended September 30, 2022. The increase in investment income was primarily driven by the benefit of rising interest rates, across our large portfolio of senior secured, floating rate loans. Total expenses for the fourth quarter were $37.3 million as compared to $28.7 million in the third quarter. The increase in expenses was driven by greater incentive fees, due to a higher cumulative net return earned by the company. As a reminder, we net our capital losses whether realized or unrealized against pre-incentive net investment income, for the purposes of calculating incentive fees and measure our cumulative net return against our hurdle rate over a trailing three-year period. While this can create periods of volatility within our incentive fee stream, we believe this provides us with the proper alignment with our shareholders, especially during periods of elevated market volatility. Net investment income for the quarter was $24.2 million or $0.37 per share as compared to $30.1 million or $0.47 per share for the prior quarter. Our net investment income was lower during the quarter due to higher incentive fees earned from prior quarters given our three-year total return look back future. Excluding the impact of the look back, Q4 NII would have been approximately $0.43 per share. Net investment income per share for the full year 2022 was $1.59 per share. During the three months ended December 31, 2022, the company had net realized and unrealized gains of $19.3 million. GAAP income per share for the three months ended December 31, 2022 was $0.67 per share, bringing…

Thanks, Sally. In closing, we were pleased with the execution of our investment strategy on behalf of our shareholders during the fourth quarter and the entirety of 2022. We demonstrated high and attractive levels of investment income earned across our portfolio and strong credit performance across our middle market borrowers while mitigating risk wherever possible. As we look forward into 2023, we believe our portfolio is on strong footing to navigate greater periods of volatility ahead and that we are well positioned to capitalize on attractive growth opportunities. We remain committed to delivering value to our shareholders by producing attractive returns on equity and thank you for the privilege of managing our shareholders' capital. Operator, please open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Arren Cyganovich with Citi.

Thanks. I was wondering if you could talk a little bit about the health of your portfolio of companies and how they're dealing with the rising interest costs and any other inflationary impacts of their businesses?

Sure. Happy to talk through it. So we did highlight in our remarks that the net leverage of our portfolio of companies on average is 5.1x which was actually down from 5.6x one quarter before, which I think indicates the continued strong earnings of the portfolio. We've also been focusing in on the interest coverage ratios across the portfolio where historically we've been north of 2x interest coverage. We've really focused in although that has come down the rising interest rates we are still around that 2x mark across the overall portfolio and any names that are closer to 1.5x interest coverage fall into that risk rating three baskets where we are focused on the near-term outlook for those companies and making sure we're avoiding any sort of restructuring or default. So companies overall have been performing quite well although it has been a much more challenged environment.

And Arren, I'd also add that from an inflationary perspective, we've been I guess pleased and surprised to the extent to which our portfolio of companies have been able to increase prices themselves in order to hold up their gross margins if not actually constant, but certainly up there. Of course, the negative consequence of that is that just kind of keep seeing inflationary spiral going right? But overall, they've actually performed pretty well from a profitability perspective as well.

Thanks. And maybe just about the origination environment. Obviously, it seems much more lender-friendly today, but also I would imagine deal activities probably lower. What's your outlook in terms of originations going forward?

Yeah. I think deal activity is definitely lower. I think we continue to see muted sales and churn in the portfolio. Having said that, we continue to see some strength on the add-on front where if private equity sponsors are holding their investments longer, they're trying to bolt-on some acquisitions in the meantime. So you'll have seen the stats in our remarks and in our filings that we are active both on the new deal front, but also especially so on the add-on front. It's always hard to look in a crystal ball, right? But I would imagine that 2023 from a completely new LBO perspective is going to be more muted than 2022, although we saw some of that slowdown already happened in the second half last year anyway

Got it. All right. Thank you.

Sure.

Thank you. Our next question comes from Paul Johnson with KBW. Please go ahead, sir.

Yes, good morning. Thanks for taking my question. Adding on Arren's question a little bit, have you guys conducted any sort of test, I guess, with your portfolio in terms of distressing portfolio of companies with something like the forward curve or perhaps something even more extreme with that and got my sense, I guess, where your portfolio falls in terms of interest coverage or anything that you can provide along those lines?

Sure. So we do run a number of stress tests across our portfolio as a test of overall health in today's environment. What we've done is both run forward curves, but also some snap adjustments, so interest rates, SOFR rates 5% plus, if they went there immediately and for a prolonged period of time to understand the interest rate coverage decay that would happen. And that's an important factor when we're actually doing our risk ratings one through four. And names that are -- have more rapid decay in interest rate coverage are what fall into our risk rating 3, which are still a fairly small percentage of our portfolio overall. So that is to say, yes, we run stress tests, but we do feel quite good about the health of the portfolio. As I said, we are about two times interest coverage based on today's -- on an LTM perspective of interest rate coverage in the portfolio. We do see that coming down, if we run some of these stress tests, but we still feel like we're adequately covered across the portfolio.

Got it. Appreciate that. Thanks for the color on that. Another question I just had, you guys have a fairly large percentage of your portfolio in the aerospace and defense industry, around 15% or so. That's generally been a big sector for you guys. That industry has obviously undergone some massive probably changes over the last year or so. I'm just wondering your kind of thoughts on that sector and whether you find things to be, I guess, more attractive there, how you feel about your current portfolio? Just any sort of color you can provide there would be interesting.

Sure. So, I mean, if you break it up a little bit and take the kind of pieces separately on the defense side that's certainly been pretty steady. And arguably that's a good place to be these days, when you think about geopolitical concerns, and the likely backdrop that that has for defense spending. On the aerospace side, a lot of that exposure has been more on parts and pieces and components and things like that. There's a little bit of aircraft leasing in there, but we focus a little bit more on the widgets, if you will. And that certainly took a hit from COVID. It also took a hit quite frankly from the 737 MAX grounding. However, coming out of COVID, now you've certainly seen travel bounce back pretty considerably. And you've also seen that the 737 MAX orders pick back up again. And so we think we're on the right platforms from a commercial aerospace perspective the growing ones. We've seen that demand pick up pretty considerably again. And so we actually think it's a pretty interesting place to be today.

Yeah. Thanks. That's interesting. The last question a smaller one. I'm just wondering, if you're able to give any sort of sense of incentive fee for next quarter, if you expect it to be anywhere kind of in line with, I guess, what we had this quarter $9.2 million. Or any level you can provide would be helpful.

Yeah. So I think a little bit in our remarks, I talked about how our calculation works. And I think that the look back sometimes did this quarter, causes a little bit of volatility quarter-over-quarter. So we're a bit higher than I would expect the run rate to be although I think we have another quarter of this coming based on how we see the look back calculation working.

Appreciate. Thanks.

Great. Well, it looks like there's no more questions. I really appreciate everyone's time today. Certainly, if you have any other questions, please do reach out, and we look forward to updating you in the normal course here. Thanks very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.