Good morning, ladies and gentlemen, and welcome to the Bain Capital Specialty Finance Second Quarter Ended June 30, 2023, Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Wednesday, August 9, 2023. I would now like to turn the conference over to Katherine Schneider, Director of Investor Relations. Please go ahead.

Thanks, Sindu. Good morning, and welcome, everyone, to our Bain Capital Specialty Finance Second Quarter ended June 30, 2023, Earnings Conference Call. Yesterday after market closed, 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 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 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. So with that, I'd like to turn the call over to our CEO, Michael Ewald.

Thanks, Katherine, and good morning to all of you, and thanks for joining us here on our earnings call today. I'm also joined by Mike Boyle, our President and our Chief Financial Officer, Sally Dornaus. I'll start with an overview of our second quarter ended June 30, 2023, 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. Yesterday after market closed, we delivered strong earnings results. Q2 net investment income per share was $0.60, an increase of 20% quarter-over-quarter, driven by the continued benefit of higher interest rates across our portfolio. Our net investment income return represented an annualized yield of 13.9% on book value and was well in excess of our Q2 dividend, demonstrating 158% NII dividend coverage. Q2 earnings per share were $0.45, driven by stable credit quality across our portfolio investments during the quarter. Our net income produced an annualized return on book value of 10.4%. These results in turn led to modest NAV growth during the quarter. Net asset value per share as of June 30 was $17.44, reflecting a 40-basis point increase from our $17.37 NAV as of March 31. And with all that, we're very pleased to announce that our Board increased our regular quarterly dividend by $0.04 per share, up 10.5% to $0.42 per share, to shareholders of record as of September 29, 2023. This represents an annualized yield of 9.6% on ending book value as of June 30 and an 11% annualized yield at BCSF's current trading levels. Importantly, this increase in the regular dividend rate represents the third increase for our shareholders in the past 12 months. Our dividend framework seeks to provide our shareholders with an attractive rate…

Thank you, Mike, and good morning, everyone. I'll start with our investment activity for the second quarter and then provide an update on our portfolio. New investment fundings during the second quarter were $198 million across 46 portfolio companies, including $120 million into 6 new companies. Sales and repayment activity totaled approximately $228 million, resulting in a net funded portfolio decline of $30 million quarter-over-quarter. This quarter, we remained focused on investing in first lien senior secured loans with 81% of our new funding within first lien structures and 15% in investment vehicles, which comprised an additional $30 million contribution to our Senior Loan Program. The remaining 4% was comprised of equity investments, driven primarily by our new investment to Legacy Corporate Lending that Mike Ewald just highlighted. With new originations, we continue to leverage our long-standing relationships with private equity sponsors who value our ability to minimize execution risk when financing their deal, paired with our deep industry expertise across many niche verticals. Turning to the 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 142 companies operating across 30 different industries. We have continued to grow our diversification by portfolio company with the highest number of borrowers within our portfolio since inception, growing 16% year-over-year. Our portfolio primarily consists of investments in first lien loan, given our focus on downside management and investing in the top of capital structures. As of June 30, 64% of the investment portfolio at fair value was invested in first lien debt, 4% in second lien debt, 2% in subordinated debt, 4% in preferred equity and 11% in equity and other interests and 15% in our joint ventures. As we have highlighted to our shareholders…

Thank you, Mike, and good morning, everyone. I'll start the review of our second quarter 2023 results with our income statement. Total investment income was $75.7 million for the 3 months ended June 30, 2023, as compared to $74.7 million for the 3 months ended March 31, 2023. 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, partially offset by lower other income. BCSF continues to benefit from high-quality sources of investment income, largely driven by contractual cash income across its investments. Interest income and dividend income represented 97% of our total investment income in Q2, with prepayment-related income representing less than 1%. Other income comprised only 3% of our total investment income. Total expenses for the second quarter were $35.7 million as compared to $42 million in the first quarter. The decrease in expenses was driven by lower incentive fees. Net investment income for the quarter was $38.9 million or $0.60 per share as compared to $32.2 million or $0.50 per share for the prior quarter. During the 3 months ended June 30, 2023, the company had net realized and unrealized losses of $9.7 million. Net income for the 3 months ended June 30, 2023, was $29.2 million or $0.45 per share. Moving over to our balance sheet. As of June 30, our investment portfolio at fair value totaled $2.4 billion and total assets of $2.7 billion. Total net assets were $1.1 billion as of June 30. NAV per share was $17.44, up from $17.37 at the end of the first quarter, representing a 0.4% increase quarter-over-quarter. The increase in our NAV was driven by the outearning of our dividend, coupled with the relative stability in the value of our investments during the…

Thanks, Sally. So in closing, we are pleased to deliver another quarter of strong earnings for our shareholders with NII well in excess of our dividend and NAV growth as our underlying borrowers continue to perform well. We're also delighted to deliver another regular dividend increase, reflecting the company's continued earnings growth and stability. Bain Capital Credit remains well positioned to execute on its direct lending strategy, given our platform's expertise, resources and relationships that have been built on 25 years of experience investing in this middle market. We remain committed to delivering value for our shareholders through producing attractive ROEs. And thank you for the privilege of managing our shareholders' capital. Sindu, please open the line for questions.

[Operator Instructions] Our first question comes from Ryan Lynch from KBW. Please go ahead. Your line is open.

Good morning. Thanks for taking my questions and really a nice quarter. First one I had was just on the Legacy Corporate Lending investment. The investments that are made in that vehicle, will those all show up as investments in that portfolio company? Or will you be making any investments from that team? Will any of those investments go directly on your balance sheet?

Hi. Good morning, Ryan. Thanks for the question. So all of the investments will end up in that entity, so they won't be directly on our balance sheet.

Okay. So what is kind of the expectation? I know it's a new investment, kind of a new formation of a strategy and a team at your company. I mean, what is sort of the goal for kind of growth of that business over the next year or 2?

Sure. So we modeled a number of different scenarios depending on how the market evolves over the next year or 2. I think in our base case, we could see that growing to be a 5% position in the portfolio, but there is potential upside from there if we think the market opportunity continues to be compelling to be slightly larger than 5% over time.

Okay. And then on that, I guess, it depends on what sort of specific investment they're making because it sounds like that team can do a lot of things. I assume accounts receivable financing is probably going to have a different return than like a machine or equipment financing. But I guess what are sort of the overall returns that are expected on those investments? Are those investments are going to be financed, I'm assuming a combination of capital from Bain as well as leverage in that entity? And then ultimately, when this entity gets sort of full scale or scaled, which I'm not sure the timeframe of that, but it sounds like there'll be a period of time before it does that, what is the return expectation that you hope to generate from this investment?

Sure. So baseline returns that we're looking at for the investment on the equity are about 15%, 16%. We do think they'll be slightly lower than that as we ramp and build diversification. But we do have an expectation that over the next 6 to 12 months, that portfolio should be operating at that mid-teens level of return. And given the highly cash-generative nature of those investments, we think it will be producing some nice net investment income for BCSF over time.

How will they be financed with leverage also in the fund as well?

It's a combination. So there will be some leverage at the company, but then we'll also be contributing equity every time we make a new loan.

What sort of leverage roughly would you expect to run that and operate that entity at?

Yes. So probably about 2x and 3x leverage.

Okay. All right. I appreciate all the comments on that. The other question I had was, you mentioned, Mike, you mentioned that you're starting to see a little bit of tightening in spreads still. Still very attractive spreads in the marketplace, but starting to kind of see a little bit of tightening, which is not uncommon and is something we've heard from other platforms out there today. I'm just curious, outside of a little bit of spread tightening, are there any other sort of changes in the quality of deals? Whether are you starting to see any sort of pressure on any other terms or are structures besides just the spreads for the new deals out there, while still keeping in mind that the overall deals are still a really good environment for deploying capital?

Yes, Ryan. Not really, I think, is the short answer. We're definitely seeing some pressure on that spread, like we said, call it, 25, 50 basis points. But as you point out, on 11, 12 kind of percent returns at the asset level, that's not really that big a move necessarily. On the leverage front, that's another pinch point at times. But as you saw, our average for last quarter was about 4.5x. So that's still pretty conservative. And that's really driven by the math, given how base rates are, how much tech can the company afford. And cutting 25 basis points out the spread is really not going to alter that much. So we haven't seen pressure there. The third pressure point then would be just general documentation, things like covenants. As you know, our philosophy is very much focused on getting financial covenants in over 90% of our deals. So that's certainly at least a term that we would not give on. And other documentation terms like EBITDA definitions and things like that are still, in our estimation, pretty tight and pretty lender friendly. So it really has just been a little bit on the spread side where we've seen the competition.

Okay. Understood. That's all from me. Nice quarter and I appreciate. Thanks for that.

Our next question comes from Derek Hewett from Bank of America. Please go ahead. Your line is open.

Good morning, everyone and congrats on the good quarter. My first question is about the incentive fee. It was a little bit lower than expected. So was the calculation, was that impacted by the realized losses during the quarter? And should we expect the incentive fee to normalize beginning in the third quarter?

Yes. So it doesn't have to do with this quarter. It's because of our look-back and the COVID quarter causing a bit of noise. When you do the calculation on a cumulative basis, then you take what you take entire. You would have noticed last quarter and the quarter before, we're sort of at an elongated rate. So it's going to cause this quarter and the next quarter to be slightly lower and then it will start to normalize again, just the math kind of shakes out.

Okay. That makes sense. And then the yield on the international JVs in aggregate remain really attractive. So how should we think about the growth in that international JV portfolio going forward? Do you want to kind of keep it where it's at, at a roughly like 15% of the overall portfolio? Or do you think there's a little bit more room for growth?

There is some room for growth, Derek. But I don't think it will be a couple of percentage points, not a step function in terms of growth. We are continuing to see interesting opportunities, particularly internationally. But I would note, there has been some churn in that portfolio as well, where we're able to replace assets that are harvesting with new assets. So limited growth there, but we have been very pleased with the yield profile coming out of both joint ventures.

Okay. Great. And then my last question is just around the overall funding strategy. I mean, you have some time because your bonds aren't due for another few years or so, but all of the bonds are due in 2026. And just given what we've seen some other BDCs do within the unskewed funding markets recently, what is the strategy in terms of kind of staggering the bond maturities?

We are focused on looking at laddering maturities and recognize that the unsecured market is open today. We are managing the fact that we do have plenty of runway to the existing securities. So we're always managing when the market is open vis-à-vis the needs of the existing liability stack.

Our next question comes from Arren Cyganovich from Citi. Please go ahead. Your line is now open.

Thanks. In your commentary, you mentioned kind of a muted LBO activity with buyers and sellers kind of having a hard time reaching equilibrium. What do you think will get them to move on? And do you have any idea of timeframe when that could open back up?

Yes. Arren, look, it's a good question. I think there's a little bit of probably pent-upness, right, that's happening in the sponsored market, that there's obviously plenty of dry powder there. So while we took a pause, I think there's going to be increasing pressure to actually invest. But I think there's also a matter of once we start getting some economic stability and understanding whether there's a recession, if there's going to be a recession and what the recovery looks like, so you can get a little more confidence about different growth vectors. I think at that point, sponsors certainly going to be willing to potentially pay more for assets on a forward-looking basis than they might be right now. So I think that's all part and parcel with it. In talking to advisers in the space, kind of the tip of the spear that there seems to be an increase or an uptick in pitch volume there. And that then translates into an actual transaction several weeks or a couple of months later. So from a timing perspective, it does seem like there could be a rush post Labor Day to get some fresh deals out into the market. So we're hopeful that the second half of the year ends up picking up a little better than, I guess, the fourth quarter of the year sort of picking up a little bit more.

[Operator Instructions]. Thank you. There appear to be no further questions. I will turn the conference back to Michael Ewald for closing remarks.

Great. Thanks, Sindu. And thanks again for everyone's time and attention today. We're very pleased to share the results of the second quarter here with you and we look forward to talking with you again soon. Thanks very much.

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.