Bain Capital Specialty Finance, Inc. (BCSF) Q2 2026 Earnings Report, Transcript and Summary

Hello, and welcome, everyone, joining today's Bain Capital Specialty Finance Second Quarter ended June 30, 2026, Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. It is now my pleasure to turn the meeting over to Katherine Schneider, Investor Relations. Please go ahead.

Thanks, Nicky. Good morning, and welcome, everyone, to the Bain Capital Specialty Finance Second Quarter ended June 30, 2026, Conference Call. 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 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. Certain information contained in the presentation has been obtained from published and nonpublished sources and are prepared by third parties and in certain cases, has not been updated through the date hereof. Such information has not been independently verified by Bain Capital Credit, and Bain Capital Credit does not assume responsibility for the accuracy of such information or updating the presentation based on facts learn following its issuance. 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, and thanks to all of you for joining us here this morning on our earnings call. I'm also joined by Mike Boyle, our President; and our Chief Financial Officer, Amit Joshi. In terms of agenda for the call, similar to past quarters, I'll start with an overview of our second quarter results and then discuss the broader market environment and our positioning. Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail. And we'll leave some time, as always, for questions at the end. So beginning with our financial results, we reported solid financial results for the second quarter last night. Net investment income per share was $0.44, representing an annualized yield of 10.5% on equity, covering our base dividend of $0.42 per share by 105%. Q2 earnings per share were $0.22, representing an annualized return on equity of 5.2%. Importantly, credit quality across our portfolio remained healthy overall during the quarter despite a modest decline in NAV, and nonaccruals continue to remain low across the portfolio, which we view as a continued reflection of the underlying strength and resilience of our underwriting standards and portfolio construction process. Subsequent to quarter end, our Board declared a third quarter dividend equal to $0.42 per share and payable to record date holders as of September 15, 2026. This represents a 10.1% annualized rate on ending book value as of June 30. So during the quarter, we were pleased to see new activity levels pick up meaningfully following a slower start to the quarter and broader economic indicators have remained sound, providing a constructive backdrop for investing. BCSF continues to benefit from Bain Capital's private credit platform, which remains active and we believe is well positioned in the core middle market, a segment where we have long been established with deep relationships and expertise. This segment of the market has largely remained insulated from the retail outflows that have weighed on the larger end of the private credit market, reinforcing the relative stability of the core middle market as a segment in which to invest. This core middle market also offers greater liquidity premium, greater debt tranche control and tighter financial covenants, underwriting tenets that remain critical to us. In the current environment, new deals have benefited from attractive spreads relative to the tighter levels seen at the end of 2025. The weighted average spread on new first lien originations during the second quarter for us was approximately 570 basis points. Net leverage of new portfolio company investments came in at 4.5x on average. This compared favorably to average sponsored middle market first lien unitranche loans of approximately 525 basis points in the second quarter and net leverage of 5.4x. We also saw a healthy level of repayments during the quarter, including full repayments from 2 software companies despite the volatility that occurred across that sector earlier in the year, a testament to the underlying quality of those credits. On a year-to-date basis, however, repayment activity has remained low overall relative to normalized historical levels. Credit fundamentals across our underlying companies have remained resilient. At quarter end, median net leverage across our borrowers was 4.7x and median interest coverage remained healthy at 2.1x. Nonaccruals saw a slight increase quarter-over-quarter, but remain low overall across the portfolio at 2.2% at fair market value as of quarter end. As it relates to software specifically, a topic we discussed at length last quarter, our exposure, including software adjacent companies, represents approximately 12% of our total portfolio. We've remained relatively underweight this sector versus the broader private credit market as we've taken a selective underwriting approach, which is largely focused on system of record and highly specialized vertical software. Overall, fundamental performance across our software companies continues to demonstrate solid operating performance. Key performance indicators such as retention rates and revenue growth have not decelerated, and we are generally seeing many companies show continued improvement in profitability and EBITDA margins, a further testament to the underlying quality of the companies in which we've chosen to invest. As a reminder, we maintain a comprehensive risk assessment framework to evaluate the potential substitution risks that emerging AI technologies may pose across our portfolio companies. Based on this ongoing analysis, the vast majority of our software-related investments carry a relatively low risk of AI-driven disruption, reflecting both the differentiated and resilient nature of these businesses and the discipline embedded in our investment approach from the time we first evaluated these companies. Only 4% of the total portfolio at fair value falls into our high and moderate risk ratings for AI disruption. For this smaller subset of companies with elevated AI disruption risk, we are actively monitoring new bookings and retention rates. And notably, many of these companies have continued to demonstrate stable performance and modest growth improvement in the current environment. Turning now to our dividend outlook. We've been pleased to provide strong earnings for our shareholders in recent years with net investment income covering and/or exceeding our regular $0.42 per share dividend. We remain focused on providing an attractive dividend level to our shareholders, and we plan to reevaluate that dividend level in the coming quarters, considering factors such as the interest rate environment, upcoming debt maturities of our lower cost unsecured notes and other income sources as new M&A deal volume is expected to increase. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail. Mike?

Thanks, Michael. Good morning, everyone. I'll start with our investment activity for the second quarter and then provide an update in more detail on our investment portfolio. New fundings during the second quarter were $182 million into 99 portfolio companies, including $73 million (sic) [ $73.4 million ] in 8 new companies and $109 million (sic) [ $108.6 ] in 91 existing companies. Sales and repayment activity totaled approximately $277 million, resulting in net sales and repayments of approximately $95 million quarter-over-quarter. Our fundings were split between new and existing portfolio companies with new portfolios representing 40% of our total fundings versus 60% to existing companies. We remain focused on investing primarily in first lien senior secured loans with 91% of our new Q2 investment fundings in first lien structures, 1% in subordinated debt and 8% in preferred and common equity. We continue to favor core middle market sized companies given attractive terms and structure, combined with a large market opportunity of high-quality borrowers, consistent deal flow and more favorable competitive dynamics versus other market segments. The median EBITDA across our new companies during the quarter was $31 million. Turning to our 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 214 portfolio companies operating across 30 different industries. The average position size across our single name portfolio companies is approximately 40 basis points. Our portfolio primarily consists of investments in first lien senior secured loans, given our focus on downside management and investing in the top of the capital structure. As of June 30, 63.4% of the investment portfolio at fair value was invested in first lien debt, 1.3% in second lien debt, 3.7% in subordinated debt, 7.7% in preferred equity, 7.5% in equity and other interest and 16.4% across our joint ventures, including 9% in the ISLP and 7% in the SLP. The vast majority of our underlying investments within the joint venture structures consist of first lien loans. As of June 30, 2026, the weighted average yield on the investment portfolio at amortized cost and fair value were 10.8% and 10.4%, respectively, as compared to 10.8% and 10.9%, respectively, as of March 31, 2026. As of June 30, 2026, 95% of our debt investments bear interest at a floating rate. Moving on to portfolio credit quality trends. As Michael highlighted earlier, credit fundamentals across our portfolio have remained healthy. Median net leverage across our borrowers was 4.7x as of quarter end compared to 4.6x in the prior quarter. Median EBITDA was $40 million, which was relatively unchanged from the prior quarter at $42 million. Watch list investments increased slightly quarter-over-quarter as reflected in our internal risk rating scale. These investments, which include our risk rating 3 and 4 categories, comprised 6% of our portfolio at fair value, an increase of 1% from the prior quarter. Investments on nonaccrual represented 3.2% and 2.2% of the total investment portfolio at amortized cost and fair value, respectively, as of June 30 compared to 1.4% and 0.6%, respectively, as of March 31. During the quarter, 2 new companies were added to nonaccrual and 4 companies were removed from nonaccrual status. While this resulted in a modest increase quarter-over-quarter, we still believe our nonaccruals remain low relative to broader industry averages. Amit will now provide a more detailed financial review.

Thank you, Mike, and good morning, everyone. I'll start the review of our second quarter results with our income statement. Total investment income was $62.3 million for the 3 months ended June 30, 2026, as compared to $66.2 million for the 3 months ended March 31, 2026. The decrease in investment income was primarily driven by lower interest income recognized on one of our joint venture investments, along with the impact of 2 new nonaccrual investments. The quality of our investment income continues to be strong as the vast majority of our investment income is driven by contractual cash income across our investments. Interest income and dividend income represented 97% of our total investment income in Q2. PIK interest income represent 12% of our overall investment income in Q2, a modest decrease from the prior quarter. Notably, the vast majority of our PIK income is derived from investments that were underwritten with PIK, totaling 81% of total PIK income, with the remainder related to amended or restructured investments. Total expenses before taxes for the second quarter were $33 million as compared to $37.9 million in the first quarter. The decrease in expenses was driven by lower incentive fee, driven by reduced pre-incentive fee net investment income and the look-back provision, partially offset by higher interest and debt fee expenses. Net investment income for the quarter was $28.6 million or $0.44 per share as compared to $27.4 million or $0.42 per share for the prior quarter. During the 3 months ended June 30, 2026, the company had net realized and unrealized losses of $14.6 million or $0.22 per share. Our net realized loss during the quarter was driven by one of our restructured investment and an exit of a portfolio company. Net income for the 3 months ended June 30, 2026, was $14.1 million or $0.22 per share. Moving over to our balance sheet. As of June 30, our investment portfolio at fair value totaled $2.4 billion with total assets of $2.6 billion. Total net assets were $1.1 billion as of June 30, 2026. NAV per share was $16.65, a decrease of $0.21 per share from $16.86 at the end of first quarter, driven by net losses of $0.22 per share. As of June 30, approximately 80% of our outstanding debt was in floating rate debt and 20% was in fixed rate debt. Our liability management efforts remain disciplined. By conducting an unsecured issuance this year and entering into an amendment of our existing credit facility subsequent to quarter end, which extended its maturity to 2031, we have prefunded and mitigated upcoming maturities in 2026, while simultaneously extending debt maturities and preserving the financial flexibility. For the 3 months ended June 30, 2026, the weighted average interest rate on our debt outstanding was 5% as compared to 4.6% as of the prior quarter end. The weighted average maturity across our total debt commitment was approximately 3.9 years at June 30, 2026. At the end of Q2, our debt-to-equity ratio was 1.41x as compared to 1.34x from the end of Q1. Our net leverage ratio, which represents principal debt outstanding less cash and unsettled trade was 1.22x at the end of Q2 as compared to 1.28x at the end of Q1. Subsequent to quarter end, our gross leverage declined to 1.34x and was at 1.22x on a net basis as of July 31, 2026. Liquidity at quarter end was strong, totaling $806 million, including $606 million of undrawn capacity on our revolver credit facility, $130.6 million of cash and cash equivalents, including $18.5 million of restricted cash and $69.4 million of unsettled trades net of receivables and payables of investments. With that, I'll turn the call back over to Michael Ewald for closing remarks.

Thanks, Amit, and thanks, Mike, as well. Look, in closing, we are pleased to deliver another quarter of attractive net investment income and healthy credit fundamentals across our portfolio of middle market borrowers. Looking ahead, we believe the company is well positioned to continue driving attractive earnings for our shareholders, supported by our platform's positioning and investment discipline in the core middle market. We remain committed to delivering value for our shareholders by providing attractive returns on equity and prudently managing our shareholders' capital. Nicky, please open the line for questions at this point.

[Operator Instructions] We'll take our first question with Finian O'Shea with Wells Fargo.

Michael, a couple on the dividend. As you mentioned, I know there's a couple of variables, but any guide on sort of a target ROE target payout on NAV framework? And then sort of second part, target, I guess, spillover as well, sort of where you are there? And will that be sort of an input to your '27 plan?

Yes. Thanks. I'll let Amit talk about the spillover income. But as you point out, and as I said, there's a number of different variables here. So it's been an ongoing topic with our Board as we try to project out earnings. Obviously, it looks like base rates may well stay higher here for a while. That's a positive. We've got that unsecured that we got to payback coming up in October, so that's a negative. So there's a lot of puts and takes there. We've certainly observed what's going on in the market in general, too, with some pressure on other folks' earnings. So it's not so much that we have a target as a percent of NAV. It's more that we want to be ensuring that we're amply covering our dividend in a consistent and sustainable manner. So as we get some more clarity in the back half of the year around base rates, around new deal volume, which generates fee income and our cost of debt going forward as well, I think that's when we'll end up reevaluating and see if we stick with the same or change our dividend. Amit, I don't know if you want to talk about the spillover income, too, that's certainly a source of cash, obviously, as well.

Yes. Just to add on to what Mike highlighted, we continue to look at our spillover income, though I would say we want to ensure we are earning NII to meet our dividend set in 2027. So that will be our primary focus. Along with that, again, we -- as you have seen it in the past, we will evaluate our special dividend distribution as required to manage our spillback income as well.

Okay. Appreciate it. And did you guys give the spillover this quarter?

We might have -- but if not, yes, it's around $1.26, $1.27.

Okay. And a follow-up on the unsecured. Is that something that might come down with the post-quarter expansion of the facility?

Yes. So unsecured, as you know, in October, we have a maturity as well, which is due will be paid down. And of course, we have done the extension of the facility as well. So that all will play a role to bring down the unsecured percentage.

Our next question comes from Derek Hewett with Bank of America.

So revenue from the JVs and specifically, I'm talking about the ISLP was down materially. So could you provide additional color on what happened there? And then should we expect that yield to remain under pressure in the near term?

Sure. Thanks for the question, Derek. So we did end up retaining some earnings in the ISLP rather than paying out full interest and dividends from that structure. That was a onetime event in the joint venture as we're particularly focused on continuing to build diversification and expand that structure alongside our joint venture partner. So that is not an indication of broader pressure on earnings in that structure, but more of a onetime event for the quarter. As a reminder, the ISLP, International Senior Loan Program is about 1:1 levered. It is an off-balance sheet structure, but very comparable leverage level to what's on balance sheet and has been delivering kind of high single-digit IRR since inception. So it has been performing in line with expectation. As I said, it's more of a one-off event as we're looking at that what the exact future will be for the ISLP.

Okay. And then my follow-up is, was there any change in the terms of the revolving credit facility that was recently extended other than the elimination, it looks like of the credit adjustment spread.

In reference to revolver, yes, we did replace the credit adjustment spread, right? That through our amendment and extended, we were able to remove.

Okay. But nothing else in terms of like margin requirements or collateral type?

No, no other major changes. That was the big one.

[Operator Instructions] We will move next with Paul Johnson with KBW.

So I guess with leverage 1.2x, 1.3x or so, how should we think about just, I guess, balancing, I guess, the new activity with just new leverage and also the opportunity, I guess, to drop down some investments into the joint ventures. How should we kind of, think about thatI guess, balanced with what you're seeing in the market right now in terms of new deployment here over the near term?

Thanks for the question, Paul. So I would say we have been operating at the higher end of our leverage range, as you know. And part of that has been because there's been pretty limited paydowns, repayments across our portfolio, but also across the broader market in recent history. We do have some ability to drop loans down into our joint ventures, which does allow us some room to continue to originate in today's market. But I will say we are largely focused on being one in, one out. So as loans are paying down, really adding new loans behind them to keep the structure fully invested. But we also have an eye towards moderating back down towards the middle of our net leverage range. So as a reminder, between 1 and 1.25 is our leverage range for the fund. I do think in future quarters, we're looking to pull that back down below that 1.25x that we've been recently operating at, while at the same time, using some of the other levers we have like JVs to facilitate some new investment opportunities for the fund over that time.

Got it. And is that more just because more from a capital management side, that's where you want to operate in this environment? Or would you say it's just more because the environment is maybe just not as attractive as you would like?

It's more of the former. So we have been largely originating first lien loans. And as I noted, over 80% of our originations in the quarter were in first lien structures. And so as we look at the risk of the investments we're making, we're also thinking about capital planning related to that. And so given the first lien skew of the portfolio today, we have been comfortable operating at the higher end of our targeted leverage range. And I will say, as we noted in our remarks, new investment opportunities continue to be attractive. We've still been originating at spreads in the mid-500s for new first lien securities. And so we are still excited about finding new investment opportunities out there in addition to operating within that midpoint of our target leverage range.

My final question, maybe a little bit more of a technical one, but the 12% PIK income for this quarter, if I actually just try to calculate that from the cash flow statement, it looks like something that's quite a bit higher, something a little bit closer to like 19% or so through the 6 months through this year, running at around 19% for this quarter. But I guess can you help me explain what's the -- I guess, the difference between those 2 numbers, if there's some sort of onetime accrual item or something that's flowing through this quarter in terms of the PIK income?

We can look into this more detail and come back to you. But overall, again, our 12% number is more for this current quarter, while cash flow is 6 months. So as you said, in Q1, maybe the PIK income was higher. And then some of it might be driven by our preferred dividend, which at times could also be driving it, but we can look at it and come back to you.

And at this time, there are no further questions in queue. I will now turn the meeting back to Michael Ewald for closing comments.

Thanks, Nicky, and thanks again for all of your time and attention today. We look forward to speaking with you all again soon. Thanks very much. Cheers.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.