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Bain Capital Specialty Finance, Inc. (NYSE:BCSF) is the BDC arm of Bain Capital, a personal various asset administration agency. The BDC’s inventory at present trades at a inventory yield of about 9.8% whereas sustaining a extremely secured portfolio composition.
Having stated that, the BDC diminished its dividend by 17% throughout the pandemic, and the corporate solely covers its dividend with web funding revenue.
If non-accruals enhance, the corporate will most definitely scale back its dividend payout.
A First Lien-Targeted Debt Portfolio And Evolution
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The funding focus of Bain Capital Specialty Finance is on middle-market firms with annual EBITDA of $10-150 million. As of March 31, 2022, the enterprise growth firm had made investments in 115 firms throughout 29 industries, making BCSF fairly numerous.
The portfolio of Bain Capital Specialty Finance, which is usually made up of first and second lien debt investments, was valued at $2.16 billion on the finish of March. 70.4% of the portfolio was made up of first lien senior secured investments.
Debt Funding Focus (Bain Capital Specialty Finance)
The chart beneath depicts the evolution of BCSF’s portfolio over time, and a few modifications have occurred within the final yr. On the whole, the enterprise growth firm’s reliance on secured first lien debt has decreased. The share of first liens has decreased from 82% in 1Q-21 to 70% in 1Q-22, whereas the proportion of second liens has remained steady at round 5%.
With a purpose to enhance yield, the BDC has begun to speculate a higher proportion of its property in subordinated debt and fairness, which can be thought of a riskier total funding technique.
Roughly 25% of the BDC’s portfolio is comprised of property apart from the very best rated debt (first and second lien secured debt). Compared to different enterprise growth companies, Bain Capital Specialty Finance has a extra dangerous funding portfolio and thus a better threat of manufacturing above-average credit score losses in a recession. The BDC’s portfolio was absolutely performing as of March 31, 2022, with 0% of its loans in default.
Evolution Of BCSF’s Portfolio (Bain Capital Specialty Finance)
100% Pay-Out Ratio, No Margin Of Security
During the last yr, Bain Capital Specialty Finance’s web funding revenue has remained constant, with the enterprise growth agency producing $0.34 per share of NII in every quarter.
In the course of the Covid-19 pandemic, the BDC diminished its dividend payout by 17%, and the corporate has since settled for a quarterly dividend payout of $0.34 per share, reflecting a 100% pay-out ratio.
In the case of dividend investing, I would wish to see a margin of NII security to guard my funding, which BCSF doesn’t present.
Internet Funding Earnings Per Share (Bain Capital Specialty Finance)
Dangers Mirrored In Ebook Worth Low cost
Bain Capital Specialty Finance has a P/B a number of of 0.807x, indicating a 19% low cost to e-book worth.
Usually, I like to purchase BDCs at steep reductions to e-book worth, however not this time.
Due to the corporate’s excessive dividend threat, BCSF trades at a reduction to e-book worth. If only one funding fails to pay out, the BDC could also be compelled to scale back its dividend but once more.
BCSF Has Dividend Dangers
Bain Capital Specialty Finance, like its BDC rivals, shall be impacted by a credit score business downturn, which may end in decrease funding volumes, decrease web funding revenue, and better loss ratios.
The portfolio of Bain Capital Specialty Finance could also be absolutely performing proper now, however a recession may change that, and mortgage losses may translate into decrease e-book values. BCSF may commerce at a fair decrease e-book worth a number of on this case.
The 100% pay-out ratio based mostly on NII must also be of concern to dividend buyers, particularly for the reason that BDC has beforehand diminished its dividend. A enterprise growth firm that could be a purchase proper now nonetheless, is Oaktree Specialty Lending (OCSL).
My Conclusion
By way of portfolio composition and efficiency, I’d most likely classify Bain Capital Specialty Finance as a middle-of-the-road enterprise growth agency.
The steep low cost to e-book worth is absolutely justified on condition that BCSF distributes 100% of its web funding revenue. The truth that the BDC needed to scale back its dividend throughout the pandemic exhibits that the dividend is extraordinarily dangerous.
Whereas the corporate’s funding portfolio is doing properly, a minor change in credit score high quality may tip Bain Capital Specialty Finance over the sting and pressure one other dividend lower.
