Bain Capital Specialty (NYSE:BCSF) held its first-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.

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Summary

Bain Capital Specialty reported a net investment income per share of $0.42 for the first quarter, with an annualized return on equity of 10%. The earnings covered the regular dividend, but were impacted by net unrealized losses due to credit weaknesses and market valuation adjustments.

The company declared a second quarter dividend of $0.42 per share, maintaining an annualized yield of 10%. Credit performance remained solid with low non-accrual levels, as the company navigated a challenging market environment marked by AI disruption concerns and credit market volatility.

Future outlook suggests a favorable investment environment with widened pricing by 25 to 50 basis points. The company remains focused on disciplined underwriting and diversification, particularly in software and middle market companies, while maintaining a strong liquidity position and proactive liability management.

Full Transcript

Kathryn Schneider

Thanks, Jamie. Good morning and welcome everyone to the Bain Capital Specialty Finance first quarter ended March 31, 2026 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 most recently filed annual report on Form 10K and any subsequently filed quarterly reports on Form 10Q as well as other filings with the SEC that could cause actual results to differ materially from those indicated. Forward looking statements made today include without limitations, statements regarding dividend sustainability, investment pipeline leverage targets, credit quality trends and the potential impact of AI disruption on portfolio companies. Bain Capital Specialty Finance assumes no obligation to update any forward looking statements at this time unless required to do so by law or by the rules of the NYSE on which our securities are listed. Lastly, past performance does not guarantee future results. So with that I'd like to turn the call over to our CEO, Michael Ewald.

Michael Ewald (Chief Executive Officer)

Thanks Kathryn and good morning and thanks to all of you for joining us here today on our earnings call. I'm joined here by Mike Boyle, our President and our Chief Financial Officer, Amit Joshi. In terms of the agenda for the call, I'll start with an overview of our first 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 of course we'll leave some questions for time. We'll leave some time for questions at the end. So beginning with our financial Results Net investment income per share for the first quarter was $0.42, representing an annualized return on equity of 10.0%. Our net investment income fully covered our regular dividend during the quarter, demonstrating the continued earnings power and resilience of our portfolio. Q1 earnings per share were $0.05, primarily driven by net unrealized losses across our investment portfolio. These losses were largely attributed to idiosyncratic credit weakness within certain portfolio companies as well as broader market driven valuation adjustments stemming from credit spread widening and multiple compression during the quarter. Subsequent to quarter end, our board declared a second quarter dividend of $0.42 per share payable to shareholders of record as of June 15, 2026. Our Q2 dividend equates to an annualized yield of 10.0% based on ending book value as of March 31, 2026. Credit performance across the portfolio remained fundamentally sound. Non accrual levels continue to remain low and stable as no new investments were shifted to non accrual during the quarter and our borrowers generally demonstrated healthy operating performance and resilient credit fundamentals despite a more uncertain macroeconomic backdrop. In fact, the first quarter was an increasingly challenging market environment characterized by heightened public market volatility, investor concerns surrounding AI-driven disruption, risk on software valuations, renewed inflationary pressures fueled by geopolitical uncertainty and retail outflows from private credit vehicles. These factors contributed to a more cautious and selective risk environment across broader credit markets. Against this backdrop, our pace of new investment activity moderated during the first quarter with our funding split between supporting new portfolio companies and providing add on financings and fundings to existing borrowers. BCSF continues to benefit from Bain Capital's private credit platform whose long standing presence, deep relationships and extensive expertise in the core middle market position us favorably in the current market. While much of the recent net retail outflows have been concentrated among large cap private credit managers, potentially tempering new investment activity in that space, our platform remains well positioned to serve as a consistent long term capital provider to our target core middle market borrowers. We remain focused on our long standing investing tenets of disciplined underwriting, maintaining meaningful control over our debt tranches and strong financial covenant protections. Spreads on our Q1 new originations average approximately 550 basis points on a weighted average basis, while net leverage levels remain prudent at 4.4 times EBITDA. Looking ahead into the second quarter to date we have begun to see a pickup in volumes for new investment activities. The current investing environment for lenders has been moderately more favorable as we have observed pricing widen by an additional 25 to 50 basis points, reflecting the market's increasingly cautious tone. As we discussed in detail on our previous earnings call, BCSF software exposure, including software adjacent companies, represents approximately 13% of our total portfolio. Our private credit platform has remained disciplined and highly selective in investing capital, enabling us to thoughtfully target the areas of the market where we see the most compelling risk adjusted opportunities. While the past several years have been characterized by significant capital formation and heightened competition across sectors such as software and technology, we maintained a measured underwriting approach and resisted the broader trend toward increasingly aggressive structures. In addition, given our history in the space and broad investment platform, we have expertise and experience in a large number of diverse industries, thereby limiting our over reliance on any one sector. Importantly, evaluating the potential risks and implications associated with AI-driven driven disruption is not a new exercise for our platform. We believe VCSF is uniquely differentiated amongst its peers through the breadth of expertise and institutional knowledge embedded across Bain Capital's broader credit platform as well as adjacent business units including ventures, tech opportunities and private equity. These teams have all been actively incorporating AI-driven related risk assessment and management frameworks into their investment process for several years, allowing us to continuously refine our underwriting standards and integrate best practices and proprietary insights into our own investment framework over the years. Our software investment strategies remain intentionally centered on mission critical systems of record software and highly specialized vertical software businesses that serve deeply embedded and essential functions within their respective markets. During the first quarter, we conducted a comprehensive risk reassessment to evaluate the potential substitution risks that emerging AI-driven technologies may pose across our portfolio companies. Based on this analysis, the majority of our software investments carry a relatively low risk of AI-driven driven disruption, reflecting the differentiated nature and resilience of these businesses as well as our disciplined approach, investment approach and framework when we first evaluated these companies. Importantly, our software portfolio companies continue to exhibit strong underlying credit fundamentals supported by healthy operational performance and consistent earnings growth since the time of underwriting. As of quarter end, median LTV in that Segment is approximately 37% when adjusted for current enterprise value multiples and these borrowers maintain solid interest coverage levels of approximately 2.0 times. Looking ahead, we believe BCSF remains well positioned to navigate the current market environment. Our portfolio continues to demonstrate solid underlying health and is supported by a well diversified liability structure strengthened by the issuance of unsecured debt earlier this year to proactively address our near term 2026 maturity. While we ended the quarter at the upper end of our target net leverage range of between 1.0 and 1.25 times, we believe we remain in a position to capitalize on attractive investment opportunities as the portfolio continues to generate healthy levels of repayment activity. Against this backdrop, we believe BCSF's regular dividend of 42 cents per share can be maintained in the current environment. However, at the same time, we will continue to thoughtfully evaluate our dividend policy alongside our board on a quarterly basis, consistent with our disciplined approach to capital management and long term shareholder value creation. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail.

Mike Boyle (President and Chief Financial Officer)

thanks Mike and good morning everyone. I'll start with our investment activity for the first quarter and then provide an update in more detail on our portfolio. New fundings during the first quarter were $243 million into 107 portfolio companies, including $124 million and 13 new companies and $111 million in 93 existing companies and $9 million into the Senior Loan Program or SLP. Sales and repayment activity totaled approximately $255 million, resulting in net sales and repayments of $12.2 million. Quarter over quarter, our new investment fundings were split between new and existing portfolio companies with new fundings representing 51% of total versus 49% of fundings made to existing companies. This quarter we remain focused on investing in first lien senior secured loans with 93% of our new fundings within first lien structures, 4% into investment vehicles, 2% in pref and common equity and 1% into subordinated debt. New investment activity for the quarter continued to benefit from Bain Capital's deep industry expertise and long standing sponsor relationships. We remain focused on investing in defensive sectors such as food and beverage, business services and health care where we believe companies are best positioned to demonstrate resilience across varying economic environments. We also continue to favor core middle market sized companies, a segment that we believe offers attractive terms and structure combined with a large market opportunity of high quality borrowers, consistent deal flow and more favorable competitive dynamics relative to other market segments. Reflecting this focus, the median EBITDA across our new companies added to the portfolio during the quarter was $41 million. Sales and repayment activity remained healthy during the quarter, driven by a combination of full realizations and repayments as well as partial sales and repayment activity. Turning now to the investment portfolio specifically, at the end of the first quarter, the size of the portfolio at Fair value was $2.5 billion across a highly diversified set of 212 portfolio companies operating across 30 different industries. The average position size across single names in our portfolio was approximately 40 basis points. Our portfolio primarily consists of first lien investments, given our focus on downside management and investing in the top of capital structures. As of March 31, 66% of the investment portfolio at fair value was in first lien debt, 1.2% in second lien debt, 3% in subordinated debt, 6.7% in preferred equity, 6.8% in common equity and other interests, with 16% across our joint ventures, including 9% in the international senior loan program and 7% in the senior Loan Program, in both of which the vast majority of underlying investments are first lien loans. As of March 31, 2026, the weighted average yield on the portfolio at amortized cost and Fair value was 10.8% and 10.9% respectively, consistent with December 31, 2025. As of March 31, 2026, approximately 93% of our debt investments bear interest at a floating rate. Moving on to portfolio credit quality trends, fundamentals across the companies remain solid during the quarter, continuing to reflect the resilience and quality of our portfolio construction. Median net leverage across our borrowers was 4.6 times EBITDA, representing a modest improvement from the prior quarter, and median interest coverage remained healthy at 2.1 times across our borrowers watch list investments represented approximately 5% of the portfolio at fair value in line with recent quarters. Importantly, the composition of these names has remained stable and we have not observed a meaningful migration of new borrowers onto our watch list. Rather, the category continues to be concentrated within a limited number of idiosyncratic situations versus broad based credit deterioration. In addition, our exposure to these investments remain primarily positioned in first lien loans, providing us with what we believe to be favorable positions within each capital structure with greater potential for downside protection. Non accrual levels remained low across our portfolio as of quarter end, representing 1.4% at amortized costs and 0.6% at fair value. This reflected a modest improvement from the prior quarter's level of 1.6 and 0.8% respectively, and notably no new companies were added to non accrual during the quarter. Taking all of this together, the health and credit quality of our portfolio remains on solid footing. Amit will now provide a more detailed financial review.

Amit Joshi (Chief Financial Officer)

Thank you Mike and good morning everyone. I'll start the review of our first quarter results with our income statement. Total Investment income was 66.2 million for the three months ended March 31, 2026 as compared to 68.2 million for the three month ended December 31, 2025. The decrease in investment income was primarily driven by decrease in effective yield on the existing debt investments and which reduce interest income. The quality of our investment income continues to be high as vast majority of our investment income is driven by contractual cash income. Across our investments, interest income and Dividend income represented 98% of our total investment income in Q1. Pick interest income represented approximately 13% of our overall investment income in Q1. Notably, the vast majority of our PIK interest income is derived from investments that were underwritten with PIK totaling 81% of our total PIK interest income. Only a small portion of our PIK interest income is related to amended or restructured investment. Total expenses before taxes for the first quarter was 37.9 million as compared to 37.7 million in the fourth quarter. The increase in expenses was driven by higher interest and debt fee expenses driven by the issuance of March 2031 note for 350 million in January partially offset by lower management and incentive fee. Net investment income for the quarter was 27.4 million or $0.42 per share as compared to 29.7 million or $0.46 per share for the prior quarter. During the three month ended March 31, 2026, the company had a net realized and unrealized losses of 24 million or $0.37 per share. As Mike highlighted earlier, our net losses were largely attributed to idiosyncratic credit weakness within a limited number of our portfolio company in addition to broader market related mark to market adjustments. Net income for the three month ended March 31, 2026 was 3.4 million or $0.05 per share. Moving over to our balance sheet as of March 31, our investment portfolio at fair value totaled 2.5 billion and total assets of 2.6 billion. Total net assets were 1.1 billion as of March 31, 2026. NAV per share was $16.86, a decrease of $0.37 per share from $17.23 at the end of fourth quarter driven by net losses of $0.37 per share. As of March 31, approximately 80% of our outstanding debt consisted of floating rate debt with the remaining 20% comprised of fixed rate debt. Our approach to liability management continues to reflect a disciplined and proactive strategy. Through a successful execution of unsecured debt issuance during the first quarter, we were able to effectively pre fund and address upcoming 2026 maturities while simultaneously extending the duration of our debt profile and enhancing overall financial flexibility. For the three month ended March 31, 2026, the weighted average interest rate on our Debt outstanding was 4.6% consistent with the prior quarter. The weighted average maturity across our total debt Commitment was approximately 4.1 year. It mature at March 31, 2026. At the end of Q1, our debt to equity ratio was 1.34 times as compared to 1.32 times from the end of Q4. Our net leverage ratio, which represents principal debt outstanding less cash and unsettled trades was 1.28 times at the end of Q1 as compared to 1.24 times at the end of Q4. Liquidity at quarter end was strong totaling 729 million including 660 million of undrawn capacity on our revolver credit facility, 34.2 million of cash and cash equivalent including 17.6 million of restricted cash and 34.6 million of unsettled rate net of receivables and tables of investments. With that, I'll turn the call back over to Mike Evold for closing remarks.

Michael Ewald (Chief Executive Officer)

Thanks Amit. In closing, we were pleased with the continued execution of our investment strategy on behalf of our shareholders during the first quarter. Our portfolio continues to generate attractive levels of investment income. While credit quality across our middle market borrowers remains stable. We believe the company remains well positioned to capitalize on compelling new investment opportunities in the current market. We remain committed to delivering value for our shareholders through disciplined portfolio and liability management and producing attractive returns on equity. And thank you for the privilege of managing our shareholders capital with that. Jamie, please open the line for questions. Thanks.

OPERATOR

Thank you. At this time, if you would like to ask a question, please press Star one on your keypad. You may remove yourself from the queue at any time by pressing Star two once again, that is Star one to signal for a question and Star two to remove yourself from the queue. We will pause for just a moment to allow questions to assemble We'll take our first question from Paul Johnson with kbw. Please go ahead.

Paul Johnson (Equity Analyst)

Good morning. Thanks for taking my questions. So I mean, earnings were in line with the dividend this quarter and as you mentioned, you evaluate the dividend each quarter. I would imagine you're taking a close look at that now. I'm just curious though, I mean, as you approach those discussions is, you know, you have generally generated a higher operating ROE than in this space in general for a few reasons. And I'm wondering is that still sort of a goal in mind going forward? And you know, if so, I guess how much is under evaluation here in terms of not just the dividend level but the fee structure and those sorts of things to continue to generate an above Market roe.

Michael Ewald (Chief Executive Officer)

Thanks, Paul. Look, on the dividend front, I mean it is a continuous evaluation rate and base rates certainly drive a fair amount of that discussion. They were on a somewhat downward trajectory there for a while. They have held here at a kind of intermediate level based on inflation forecast, everything else. I'm guessing they'll probably stick around here for a while. So that is certainly one driver of our decision regarding dividends. Clearly, earnings from JVs, things like that are also going to be impactful there. As I said in my remarks, as we look at it as we sit here today, we certainly feel comfortable with that $0.42 dividend for Q2 and then we'll continue to evaluate that going forward. Regarding our ROEs, I wasn't sure which way you're going with that. If we have good ROEs, are you suggesting that maybe we even increase fees? Wasn't quite sure what you meant there, but look, it's certainly something where we continue to ensure that we're competitive with other BDCs out there both in terms of our return levels, our consistency of dividend, and then taking into account what other folks are doing on pricing and how they're performing as well. So it is a continuous evaluation and discussion with our board.

Paul Johnson (Equity Analyst)

Got it. Appreciate it. That's helpful. And then just I guess in terms of the spread widening and your ability, I guess to kind of capture, you know, a new vintage going forward here with investment activity, you know, with leverage is where it is where it is. At 1.3 times, how are you, do you think, you know, you're able to, I guess, capitalize on that if you do see meaningfully, you know, increased activity, you know, at better terms, you know, is it you do you have, I guess, better line of sight on, you know, repayments that you would expect over the course of the year or still capacity within some of the JVs to take on some of that activity? Just. That'd be great to hear. Thanks.

Michael Ewald (Chief Executive Officer)

Yeah, look, you really touched on two of the big drivers there, right. One is repayments, which are somewhat notoriously difficult to forecast. You know, we'll get a heads up a week before we're getting a repayment. So always difficult to tell what that schedule is going to look like. And we continuously get those. We certainly benefited from some of those in the, in the first quarter, so we're able to rotate out some investments there. And then the second point you mentioned Too is those JVs where there still is additional capacity and potentially the ability to add some more over time as well. So you'll Notice that some of our repayments were actually sales down to those JVs. So there continues to be an opportunity to grow those as well.

Paul Johnson (Equity Analyst)

Appreciate it. That's all for me, thanks.

Michael Ewald (Chief Executive Officer)

Thanks, Paul.

OPERATOR

Once again, ladies and gentlemen, that is Star One. If you would like to signal for a question, we'll hear next from Derek Hewitt with Bank of America. Please go ahead.

Derek Hewitt (Equity Analyst)

Good morning everyone. So it appears that Gail Aviation drove most of the unrealized loss this quarter. So what was the change in the investment thesis that caused the loss and then for you to exit the investment?

Amit Joshi (Chief Financial Officer)

Overall, we exited the investment during the quarter, so it was more based on realization. We, as you can appreciate, there were approximately five planes which as you have highlighted in the past, we have been trying to liquidate that investment. And as we were ironing things out, we have been revisiting based on our projection the fair valuation. So I think based on compared to prior market, came very close to that. And we exited the investment during the quarter. Again, as we have highlighted in the past, aviation is a sector overall, we do look at it. That's an area where we have teams which are focused on it. So depending on how we look at it from a long term perspective, for this portfolio, we wanted to exit out of that investment and that's what happened during Q2.

Michael Ewald (Chief Executive Officer)

Okay. I would just add, if you think about, you know, on the look, there's a number of asset backed opportunities that we've always got going on in the background. Aviation certainly one of those, you know, the trade around leasing to airlines and planes has, has got a little bit more saturated. So the opportunity set isn't quite as attractive there as it was when we first got into it several years ago. So we made the decision to exit that. But as Amit mentioned, we still have a pretty strong positive view around aerospace and defense in general and continue to actively invest there. And also opportunistically are looking at some other asset backed plays as well.

Derek Hewitt (Equity Analyst)

Okay, thank you for that. And then of the 27 cents of unrealized losses during the quarter, what percentage of that was just due to just your general kind of spread widening and then what was due to kind of specific credit issues?

Amit Joshi (Chief Financial Officer)

Yeah, it's a little tougher to parse that out and be too exact there. You know, if you have a company that misses its budget, but it's up 10% over last year, you know, and there's a slight markdown there. Is that because it missed budget, it's still up over last year. Is that because of spread widening? So there's A whole bunch of little puts and takes across the portfolio. But what I would say is the majority of it was limited to companies on non accrual which tend to bop around a little bit. We actually had a, we had an increase in one of our non accrual names this, this quarter as well. So there's always going to be a little bit of noise in that bucket as well as that, that spread widening piece.

Derek Hewitt (Equity Analyst)

Okay, great. And then lastly for me, like what are the puts and takes of, of executing on your buyback? I believe it's roughly $50 million which would be accretive kind of based on where the stock is trading today versus kind of a new originations just given the more investor friendly environment where you can get spreads of. I believe you said 25 to 50 basis points higher than what you were previously receiving.

Michael Ewald (Chief Executive Officer)

Yeah, look, that's certainly another item of debate that we engage in with our board at our quarterly meetings and even between those quarterly meetings as well. We're constantly evaluating the math around a potential bit of a short term boost from buybacks versus being able to reinvest some of that capital in an existing attractive market. And there's also just the added governor of operating close to the top end of our leverage range. So those are all considerations that we do take into account. To date we haven't executed on that, but it certainly is an open topic.

Derek Hewitt (Equity Analyst)

That's all for me. Thank you.

Michael Ewald (Chief Executive Officer)

Thank you. Oh, sorry Derek. The other. Sorry. The other point on the stock buyback too is just it's not the most liquid stock as you can probably appreciate as well. So that can make stock buybacks a little bit difficult too. Yeah, understood.

OPERATOR

We'll return now to Paul Johnson with kbw. Please go ahead.

Paul Johnson (Equity Analyst)

Yeah, thanks. Just one more follow up. Thanks for taking me. I was wondering if I can ask you a specific credit if you don't mind. I noticed that the maturity was pushed back from last quarter and there's several other lenders in the loan and I'm not sure if you're in a position of control or not, but I noticed your mark was lower than a few of your peers. But Premier Imaging, I was wondering if you could provide any sort of color on what the situation is there. I guess if the sponsor has been supportive of the company, but then as well as just more broadly with kind of all the volatility that we've had, I guess in the software, you know, technology market, has that impacted the M and A, I guess environment, you know, within the healthcare sector at all. If that was Also obviously, has been a challenged sector for the last several years.

Michael Ewald (Chief Executive Officer)

So I'd say we have not on the healthcare side, to start, we really have not seen any meaningful degradation in the exposures we have to that space. And part of that's because we've been much more active in recent vintages. So think 2023 and 2024 deals. In health care, when we felt like many of the issues, particularly around roll ups, were already exposed in the market, and so it allowed us to lend into companies at lower leverage points with lower adjustments. So we've continued to see the health of that portfolio be. Be reasonably strong. And then on your specific name question about a name, it's one that we're actually a fairly small holder of the tranche and so we do work with our third parties to, to evaluate the mark that we're using, as we do with all the other assets in the portfolio. But this is one that we are not in a control position and so that could be a component reflected in our valuation versus some peers that might have more of a control stake.

Paul Johnson (Equity Analyst)

Got it. Thank you. That's all for me?

Michael Ewald (Chief Executive Officer)

Thank you.

OPERATOR

And with no further questions in queue at this time, I'd like to turn the floor back over to Michael Ewaldt for any additional or closing comments.

Michael Ewald (Chief Executive Officer)

Thanks, Jamie, for all your help today and thanks again for everyone's time and attention on the call. We were happy to report first quarter results here and look forward to speaking with you all again soon. Have a great day. Thanks.

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