Bain Capital Specialty Q3 2026 Earnings Call Transcript

Bain Capital Specialty (NYSE:BCSF) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Bain Capital Specialty Finance reported solid Q3 results, with net investment income per share at $0.43, covering its regular dividend of $0.42 per share.

The company is managing its leverage and has been selective with new investments, focusing on first lien senior secured loans.

Bain Capital Specialty declared a Q4 dividend of $0.42 per share, maintaining an annualized yield of 10.2% on ending book value.

The investment portfolio is well-positioned, with most debt investments bearing interest at floating rates and benefiting from the current high-rate environment.

Management highlighted ongoing discussions regarding dividend policy adjustments to align with higher interest rate expectations for 2027.

Net asset value per share decreased slightly to $16.49, attributed to net losses of $0.17 per share.

Non-accruals remained stable at 2.2% of the portfolio at fair value, with some portfolio restructuring noted.

Full Transcript

OPERATOR

Good morning everyone. Welcome to today’s Bain Capital Specialty Finance third quarter ended September 30, 2026 earnings conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. To register to ask a question, press star one on your telephone. To remove yourself from the queue, press star two. Please note today’s call is being recorded, and it is now my pleasure to turn the meeting over to Ms. Katherine Schneider, Managing Director, Investor Relations.

Please go ahead, ma’am.

Katherine Schneider (Managing Director, Investor Relations)

Thank you. Good morning everyone and welcome to the Bain Capital Specialty Finance third quarter ended September 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 the property of Bain Capital Specialty Finance and any unauthorized broadcast in any form is strictly prohibited. I want to remind you that comments made during this call contain forward-looking statements and are subject to risks and uncertainties including those identified in our risk factors in our SEC filings. 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 non-published sources and or 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 learned 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 and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in Bain Capital Specialty. So with that I’d like to turn the call over to our CEO, Michael Ewald.

Michael Ewald (Chief Executive Officer)

Thanks, Katherine, and good morning and thanks to all of you for joining us here on our earnings call. I’m joined today by Mike Boyle, our President, and our Chief Financial Officer, Amit Joshi. In terms of agenda for the call, I’ll start with an overview of our third 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, as usual, we’ll leave some time for questions at the end.

Yesterday after market close, we reported solid financial results for the third quarter. Net investment income per share was $0.43, representing an annualized yield of 10.3% on equity, covering our regular dividend of $0.42 per share by 102%. Q3 earnings per share were $0.26, representing an annualized return on equity of 6.2%. Credit quality across our portfolio remained healthy overall during the quarter and non-accruals were stable despite a modest decline in NAV, which we view as a continued reflection of the strength of our underwriting and portfolio construction.

Subsequent to quarter end, our board declared a fourth quarter dividend equal to $0.42 per share and payable to record date holders as of December 15, 2026. This represents a 10.2% annualized rate on ending book value as of September 30. Turning now to the market environment, deal activity across the industry was lower in Q3, with sponsor-backed M&A volumes remaining well below historical levels and macro and geopolitical uncertainty keeping some buyers and sellers on the sidelines. In that environment, and as we work to bring our leverage closer to the middle of our target range, our pace of new origination activity was more measured than in prior quarters. We remained selective in the quarter, adding a handful of new companies to our investment portfolio, and are confident that this discipline positions us well for future opportunities.

Spreads on new first lien originations remained attractive, averaging between 525 and 600 basis points excluding one of SLP’s investments with a lower spread, and net leverage was conservative at 3.9 times on a weighted average basis. Terms on our investments compare favorably to average sponsored middle market first lien loans of approximately 506 basis point spread and 4.2 times leverage. Credit fundamentals across our underlying companies have remained resilient despite a backdrop of elevated interest rates and persistent inflation. At quarter end, median net leverage across our borrowers was 4.6 times and median interest coverage remained healthy at 2.1 times. While higher rates in recent years have increased the debt service burden for our borrowers, interest coverage remains above historical trough levels, which we believe reflects steady EBITDA growth across the portfolio and the conservative underwriting discipline we applied at the outset of these investments.

We feel confident about our borrowers’ ability to navigate the current higher rate environment, and we believe the strength of these businesses is evident in how they have performed. It is also worth highlighting the vintage of our investment portfolio. Nearly 80% of our investments on balance sheet were underwritten in 2022 or later, after interest rates had begun to rise, meaning these credits were underwritten from the start with today’s rate environment in mind. The remaining 20% of the portfolio is split between 2021 vintage and pre-2021, and we are actively working on processes to exit a number of those investments. Non-accruals were stable quarter over quarter at 2.2% of the portfolio at fair value and 3.3% at amortized cost.

During the quarter, we removed one name from non-accrual as we restructured our investment in A&R Logistics, and we added one new name. Regarding software, we continue to see strong operating performance across our borrowers. Our exposure to this sector is relatively modest, representing approximately 12% of our portfolio at fair value as of September 30, 2026. These are typically mission-critical, deeply embedded platforms, and credit fundamentals remain healthy with resilient retention, steady growth, and strong profitability. We have only one software portfolio company on non-accrual, representing 1.1% of our portfolio at fair value as of September 30, 2026.

Turning to our dividend, we maintained our regular dividend at $0.42 per share for the fourth quarter, which equates to an annualized dividend yield of 10.2% on ending Q3 book value. As our liability structure has reset to higher rates with our low-cost unsecured notes maturing, we are actively evaluating our dividend level with our board in consideration of a higher rate environment in 2027. Our goal is to maintain a level that remains attractive to shareholders, is at a competitive level with our peers, and importantly supported by our core earnings.

Our spillover income is currently estimated to be $1.29 per share, providing us with a strong foundation for our regular dividend and the potential for a special dividend as we near year-end in order to manage tax requirements. We will provide future updates on our dividend policy as they become available. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail. Mike.

Amit Joshi (Chief Financial Officer)

Thank you, Mike, and good morning, everyone. I’ll start the review of our third quarter results with our income statement. Total investment income was $59.9 million for the three months ended September 30, 2026, as compared to $62.3 million for the three months ended June 30, 2026. The decrease in investment income was primarily driven by lower dividend income due to one-time dividend income that was earned on an equity investment during the prior quarter.

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 98% of our total investment income in Q3. PIK interest income represented 13% of our overall investment income in Q3, a slight increase from the prior quarter. Notably, the vast majority of our PIK income is derived from investments that were underwritten with PIK, totaling 83% of our total PIK income, with the remainder related to amended or restructured investments.

Total expenses before tax for the third quarter were $31.4 million as compared to $33 million in the second quarter. The decrease in expenses was driven by lower incentive fee, which was driven by reduced pre-incentive fee net investment income and the three-year lookback provision, along with lower interest and debt expenses due to a decrease in weighted average debt outstanding. Net investment income for the quarter was $27.7 million or $0.43 per share as compared to $28.6 million or $0.44 per share for the prior quarter.

During the three months ended September 30, 2026, the company had net realized and unrealized losses of $11 million or $0.17 per share. Net income for the three months ended September 30, 2026 was $16.7 million or $0.26 per share. Moving to our balance sheet, as of September 30, our investment portfolio at fair value totaled $2.3 billion and total assets of $2.4 billion. Total net assets were $1.1 billion as of September 30, 2026. NAV per share was $16.49, a decrease of $0.16 per share from $16.65 at the end of second quarter, driven by net losses of $0.17 per share. As of September 30, approximately 78% of our outstanding debt was in floating rate debt and 22% was in fixed rate debt.

Subsequent to quarter end, our 2026 notes, which matured in October, were repaid as well. For the three months ended September 30, 2026, the weighted average interest rate on debt outstanding was 5% as compared to 5% as of prior quarter end. The weighted average maturity across our total debt commitments was approximately 4.4 years at September 30, 2026. As we look ahead, we believe our portfolio, consisting largely of floating rate loans, is well positioned to benefit in a higher-rate interest environment. Based on our current portfolio, we estimate a 100 basis point increase to base rate may increase our quarterly earnings by approximately $0.01 per share. Based on our September 30th balance sheet and pro forma for our October 2026 unsecured note repayment at maturity, at the end of Q3 our total debt-to-equity ratio was 1.25 times as compared to 1.41 times at the end of Q2.

Our net leverage ratio, which represents principal debt outstanding less cash and unsettled trade, was 1.18 times at the end of Q3 as compared to 1.22 times at the end of Q2. Liquidity at quarter end was strong, totaling $962 million, including $887 million of undrawn capacity on our revolving credit facility, $58.7 million of cash and cash equivalents, including $13.1 million of restricted cash, and $16.2 million of unsettled trade, net of receivables and payables of investments.

With that, I’ll turn the call back over to Mike Ewald for closing remarks.

Michael Ewald (Chief Executive Officer)

Thanks, Amit. Before turning the call over to questions, we want to acknowledge Amrit Kahnwald, our newest independent board member. Many of you will have seen our press release regarding the board’s appointment of Amrit, which was released after market close yesterday. Amrit brings extensive financial and strategic experience as well as a deep governance background, and we’re excited to welcome someone with his knowledge and skill set to our board.

Lastly, in closing, we delivered a solid quarter of attractive net investment income with resilient credit fundamentals across our middle market borrowers. Looking ahead, we believe Bain Capital Specialty is well positioned to continue driving attractive earnings. Supported by our platform, our deep presence in the core middle market, and our disciplined approach to investing, we remain committed to delivering attractive returns on equity and managing our shareholders’ capital prudently.

Thanks for the help today, and please open the line for questions.

OPERATOR

Certainly. Thank you, sir. Ladies and gentlemen, at this time, if you do have any questions, please press star one. If you find your question has been addressed and would like to remove yourself from the queue, you may do so by pressing star two. Once again, it is star one for questions. We’ll go first this morning to Finian O’Shea with Wells Fargo Securities.

Finian O’Shea (Analyst at Wells Fargo Securities)

Hey everyone. Good morning. So it sounds like the bond maturity won’t be rolled into a new issue. There were also some post-quarter downsizing of the JVs. Can you talk about if those are related and if there’s sort of more to go with your on- and off-balance sheet leverage profile?

Amit Joshi (Chief Financial Officer)

I would say from our perspective, we are continuously monitoring leverage. Based on our overall thought process, we want to operate around 1.2 to 1.5 times of leverage. So part of all the strategy is driven by managing both on-balance sheet as well as off-balance sheet leverage. When we are looking at our leverage, we are looking both on-balance sheet and on a consolidated basis. So part of it is driven by just managing overall portfolio mix from that perspective.

Finian O’Shea (Analyst at Wells Fargo Securities)

Okay, that’s helpful then. Michael, you flagged the addition of Amrit to the board post-quarter. With his expertise, can you talk about what sort of initiatives or strategic enhancements you’re looking for from Amrit and his background?

Michael Ewald (Chief Executive Officer)

I think one of the things that we really appreciate is he’s got a strong 40 Act background as well. So the more, again, expertise and experience we can add in that context, I think it’s going to be helpful for us as we continue to navigate going forward.

Finian O’Shea (Analyst at Wells Fargo Securities)

That’s helpful. I guess one more I meant to add on the post-quarter JV sales: you bought some, the BDC bought some collateral back. Usually we don’t see things go that way. Can you talk about the why there and the sort of profile? Were those discounted at all, or were they on the newer, cleaner end of things?

Michael Ewald (Chief Executive Officer)

Sure. So we actually ended up putting some more assets into the structure and took some assets out with the goal towards building a bit more diversification. Usually our portfolios will have north of 50 different issuers, and that portfolio was a bit more concentrated than was ideal. And so really the moves to move some parts of some assets back onto the balance sheet and put some names in that structure just helps build out the diversification of that portfolio specifically.

Finian O’Shea (Analyst at Wells Fargo Securities)

Great, thank you.

OPERATOR

Thank you. We’ll go next now to Paul Johnson with KBW.

Amit Joshi (Chief Financial Officer)

Thank you for your question. Yes, I would say, right, as you’re aware, we have the two JVs, and both JVs do have retained earnings, which we, of course, have been redeploying into those JVs to generate more income yield for BCSF overall and our investor base. So we do have income retained in those JVs, and we always continue to evaluate what is the best approach in terms of putting that money back to work or distributing it. So that would be a factor.

At the same time, as Mike Ewald highlighted, we continue to evaluate what should be our projected, more go-forward dividend yield, and those discussions continue to happen, which also will be part of the discussion as we evaluate Q4 and future earnings. There were no accelerated interest income. I do want to highlight that last quarter, for one of our JVs, we had taken less interest income compared to what we took, and this was back to normal this quarter. So there is that difference overall, but nothing outside the anomaly as such, I would highlight.

Yeah. From interest income, we are back to normal levels this quarter, so that’s what I would expect. And, of course, as I highlighted, there is some dividend income retained in that which we have not taken this quarter but will continue to evaluate for future quarters.

OPERATOR

Thank you. And just a quick reminder, ladies and gentlemen, star one for questions this morning. We’ll go next now to Ethan Kay with Lucid Capital Markets.

Ethan Kay (Analyst at Lucid Capital Markets)

Hey guys, thanks for taking the question. You mentioned, I believe, ISLP had experienced—I forget your words—some softness maybe. You pointed out the kind of 9% ROE back to BCSF, and then, I guess, you know, last quarter the decision was made to retain some earnings. I guess, are those two things related, and can you kind of just provide some additional color on, you know, what’s maybe transpiring there? What drove the slightly lower ROE relative to your target?

Michael Ewald (Chief Executive Officer)

Sure, yeah. It does primarily go back to some of the comments I made around diversification. So as we wanted to get that portfolio more diverse and get the leverage of that portfolio back up to between one and one and a quarter, we do think that we’ll be generating high single digits or low double digits going forward. But there was certainly some—I noted the softness was really a combination of a couple of credit losses in the portfolio over the last 12 months, but then also running below leverage targets because of a more concentrated portfolio.

So although 9% was still kind of within the range of outcomes that we expected, it was on the lower end. So some of the moves that we made last quarter, we do think repositioned that portfolio to be back, hopefully, in double digits looking forward.

Ethan Kay (Analyst at Lucid Capital Markets)

Got it. That’s helpful. And then on the A&R Logistics restructuring, can you kind of just talk about how that played out relative to prior marks?

Michael Ewald (Chief Executive Officer)

Yes, it was actually fairly similar to historic marks. This has been a company that has underperformed since COVID, and the sponsor just funded into it incrementally over the years. But we ended up restructuring that and taking the keys here, which was very comparable to the mark historically. So we do think our valuation processes do a very good job of incorporating the most current information and hopefully avoid any time we’re doing a restructure to see some gap down in marks.

So A&R was pretty consistent with historic levels from a fair market value perspective.

Ethan Kay (Analyst at Lucid Capital Markets)

Got it. Thank you, guys.

Michael Ewald (Chief Executive Officer)

Thank you for the questions.

OPERATOR

And we’ll take our next question now from Derek Hewitt of Bank of America.

Derek Hewitt (Analyst at Bank of America)

Good morning, everyone. Could you talk a little bit about how you’re thinking about stock buybacks in your capital plan, since it looks like leverage has moderated from prior quarters?

Michael Ewald (Chief Executive Officer)

Sure, Derek. Thanks for the question. You know, it is something we consistently discuss with our board. Look, as you noted, we are starting to see leverage moderate a little bit. We’re trying to bring it down from the kind of top end of the range to more of the middle of the range. So as we do that, we will have more flexibility to make new investments to a greater extent. We also have probably more room to consider whether we do a stock buyback.

So that’s certainly in the calculus. We always do debate the relative merits of that: is the short-term pop worth longer-term less earnings power? We’re also certainly aware of there being a fair amount of shares that are actually held by institutions, including ourselves, which impacts the float as well. So we’re mindful of not further reducing that float too. So there’s pluses and minuses associated with it, and it’s something that, like I said, we consistently debate, but haven’t had as much of a debate recently given that we’ve been fully invested. But that’s something that we’ll talk a little bit more about going forward.

Derek Hewitt (Analyst at Bank of America)

Okay, appreciate the answer. And then one last one for me: just in terms of PIK, I appreciate the commentary about good vs. bad PIK, but could you talk a little bit about PIK collections during the third quarter and maybe how it has trended on a quarter-over-quarter basis or year-over-year basis?

Amit Joshi (Chief Financial Officer)

We can get back to you with specific numbers. I would say that on some of the investments, we did collect PIK, but most of these investments, again, right, we are capitalizing PIK. So the collections have not been that huge overall.

Michael Ewald (Chief Executive Officer)

Okay. I would just add we didn’t have meaningful exits in the PIK positions over the quarter, so that really is what would drive the ultimate collection. Great. Thank you. Thank you, Derek.

OPERATOR

Thank you. And gentlemen, it appears we have no further questions this morning. Mr. Ewald, I’d like to turn things back to you for any closing comments.

Michael Ewald (Chief Executive Officer)

Thanks, Bo. And thanks again for all of your time and attention today. Thanks for joining us on the conference call. We’ll look forward to speaking to you again soon and certainly wish you a pleasant day. Thanks.

OPERATOR

Thank you, Mr. Ewald. Again, ladies and gentlemen, this will conclude today’s Bain Capital Specialty third quarter conference call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.