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Bain Capital Specialty Finance: IIQ 2020 Results – First Look

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We mulled over the most appropriate rating for BCSF’s IIQ 2020 results for some time before plumping for FAIR rather than GOOD. Leaving aside the issue of the Rights Offering, which raised fresh capital at a sharp discount to book value, and resulted in a big drop in NAV Per Share, the value of the portfolio did not move much in the period. In fact, adjusted for the Rights Offering – and as the BDC itself notes in the press release – NAV Per Share dropped to $15.81 from $15.82. That’s not much of a drop but most of the BDC’s peers were headed upwards. That might be because BCSF is a more conservative grader of its investment assets or that there are continuing weaknesses there that might show up later. Certainly, BCSF has no great challenge where non accruals are concerned, just 2 names out of 109. However, there’s more to credit than non performing loans, and we’ll be looking closer when we undertake a Credit Review. Note, though, that the BDC’s own internal rating system suggests underperforming assets have increased in the most recent quarter versus the IQ 2020…Also worrying to the BDC Reporter is that regulatory leverage remains on the high side despite raising new equity capital. Regulatory debt to equity is 1.52x (or 1.42x net of cash as we’ve recorded in the BDC Data Table). That may be lower than the IQ 2020 when the net leverage was 1.78x, but is still high by comparison to BCSF’s peers. For example, Ares Capital (ARCC) is at 1.08x. Thankfully, Liquidity seems to be GOOD, with management claiming over $400mn in cash and unused availability, but the 10-Q and the conference call transcript may yet change our minds. From an earnings standpoint, BCSF did well enough, with a Net Investment Income Per Share of $0.37. That’s a ways down from $0.44 the quarter before but when you figure in the Rights Issue…Like most every other BDC, BCSF has been hit by the drop in LIBOR, reducing the portfolio yield from 8.1% to 6.6% in the course of a year.  Combining both the bigger share count, a smaller yield and no room to grow the balance sheet, it’s no wonder BCSF has cut its dividend from $0.41 a quarter to $0.34, a (17%) drop. Frankly, we worry that management may have to reach for the scalpel again before long, perhaps dropping to a $0.30 dividend. We note the analysts are projecting IIIQ 2020 NIIPS of $0.34, and a slightly lower level in all of 2021. Not much of a negative nature would have to happen to this low yielding, highly leveraged brand name BDC – which has had to pay up for both new equity and debt capital recently – before the payout got reduced again. We retain a Long Term Outlook of FAIR.

For all the First Look reviews of IIQ 2020 BDC results, check out the BDC Data Table. We are constantly adding new updates as results come in and we undertake an initial survey. Besides these reports, we are also filling in NAV Per Share and investment portfolio size data to compare with prior periods; adding company or BDC Credit Reporter generated data on underperforming companies and assets and affirming or amending our earlier assessments of every BDC’s Liquidity, Credit, Dividend and Long Term Outlook

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