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Bain Capital Specialty Finance Inc. (NYSE:BCSF) is a well-managed and well-performing Business Development Company (BDC). It is a company that the market has overlooked for a long time, providing investors with the option to pick up high-value shares at a great price.
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Company Overview
Bain Capital Specialty Finance is a BDC managed by BCSF Advisors, a subsidiary of Bain Capital Credit. Founded in 2015, the company acquired its first institutional investors in October 2016, following which it made its shares public in 2018. Bain Capital Specialty Finance is managed and operated by Bain Capital Credit, the subsidiary of the well-known company Bain.
Leveraging the expertise and experience of Bain Capital Credit’s Private Group, with over 20 dedicated professionals, Bain Capital Specialty Finance specializes indirect lending and focuses exclusively on investing in mid-sized companies. The company invests in firms with earnings before taxes, interest, depreciation, and amortization ranging from $10 to $150 million. Additionally, it invests in common and preferred equity, debts like distressed, mezzanine, and default securities.
What Are BDCs?
The investment objective of Bain Capital Specialty Finance is to generate current income and capital appreciation through investments in strategic joint ventures, direct originations of secured debt, equity investments, and corporate bonds. The company is an externally-managed specialty finance firm focused on lending to middle-market companies.
The aforementioned objective makes Bain Capital Specialty Finance seem like a straightforward BDC. A BDC provides regular income to shareholders via declared dividends. They do this by giving first-lien loans to middle-market companies – these companies are too large to get financing from community bank loans and are too small to raise capital via public offerings of shares.
BDCs have been a growing trend in recent years, yet the numbers remain relatively small. The success of a BDC depends on how well it is managed. Both the investment managers and shareholders of BDCs have the same goal – provide solid returns while hopefully growing assets in the process. Growing assets generate steady income for the shareholder and lead to an appreciation of the share value. The flip side is that it also causes growing fees for advisors. The drawback of BDCs is that they incur fairly high expenses. So, investors with a laser focus on expense ratios are not likely to invest in BDCs. Ultimately, adding BDCs to your portfolio is a personal call. If one is inclined to go with BDCs, it pays to find ones that are highly well-managed with a diverse portfolio like Bain Capital Specialty Finance.
Financial Position And Investment Portfolio
Bain Capital Specialty Finance stands apart in its diverse and well-planned holdings. Despite the economic turmoil of the last two years, the company has not raised its debt load. Its cash flow and the debt-to-equity ratio have remained stable, signaling the company’s solid strategies and the right asset selection.
Bain Capital Specialty Finance assigns a rating of 1 to 4 for companies in its portfolio. As per its rating nomenclature:
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An investment is rated one if it’s performing above underwriting expectations and the risks and business trends are generally favorable.
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An investment is rated two if it’s performing as expected and there are no concerns about the company’s ability or performance. All newly acquired assets are initially given a rating of 2 and then assigned accordingly based on performance.
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An investment is rated three if it’s performing below expectations and there are concerns about the company’s trends and performance like non-compliance, declining performance, or delinquency.
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An investment is rated four if it’s performing significantly below expectations. If an investment is categorized as 4, then the advisor doesn’t expect repayments to be made in full, and there is a significant risk of substantial loss.
According to this rating, the quality of Bain Capital Specialty Finance’s portfolio at the end of the third quarter of 2021 is as follows:
|
Investment Performance Rating |
Fair Value (In Millions) |
Percentage of Total |
Number of Companies |
Percentage of Total |
|
1 |
20.5 |
0.9% |
3 |
2.9% |
|
2 |
2,092.6 |
88.8% |
94 |
89.5% |
|
3 |
243.6 |
10.3% |
8 |
7.6% |
|
Total |
$2,356.7 |
100.0% |
105 |
100.0% |
As we can see, the portfolio overall is quite strong, and even if several of its investments defaulted, the company would be able to reduce risks because 88.8% of its assets are in companies that show steady performance. Also, 80% of the company’s investments are in first lien senior debt, ensuring stability. Only 8% of the company’s assets are invested in equity, thereby avoiding volatility.
Also, the company holds a widely diversified portfolio. The major industries in the portfolio include aerospace and defense (10.7%), high tech industries (8.7%), consumer goods non-durable (8.2%), and services business (7.8%), a
mong others.
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Though most of the company’s investments are based in the US, it has a significant number of investments in other geographic locations across Europe. This company’s geographically diverse portfolio with many countries across Europe limits regional volatility and minimizes risk.
The total investment income declared by the company for Q3 2021 is $49,545,000, a significant increase from the income reported for the same period in the previous year ($46,817,000). The dividend income has also grown for the third quarter of 2021 compared to the earlier quarters.
An Opportunity For Attractive Dividends
While it is in the very nature of BDCs to provide income through dividends, the dividend yields of popular BDCs have been dismal in the last couple of years due to the economic disruptions caused by the pandemic. However, Bain Capital Specialty Finance has been able to maintain reasonably high dividends even despite the slight drop. The company currently offers a dividend income of $0.34 per share, roughly equating to dividend returns of approximately 8.62% annually.
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Though this is a drop from the pre-pandemic levels of $0.41 per share, the company has maintained a stable dividend income, despite the economic turmoil faced by other BDCs during this period. For those looking for an excellent dividend opportunity to add to their portfolios, Bain Capital Specialty Finance is an excellent choice. Despite the pandemic, the company has maintained a stable portfolio and hasn’t fallen to the burden of immense debt loads. It has a high-quality and diversified portfolio that generates high dividend yields and gives investors the potential to increase their capital to pre-pandemic levels.
Conclusion
The pandemic has taken a toll on the profitability and operations of BDCs. Many BDCs lost a huge percentage of their capitalization and saw a decrease in their asset values. Many of these companies also pose serious investment risks as they are often not very diversified. Some BDCs invest only in the equities of mid-sized companies, while others have too large a debt load.
If current interest rates are maintained until 2023, investing in Bain Capital Specialty Finance is an excellent opportunity, especially for investors looking for dividends. One of the main reasons for the company’s undervaluation is that it’s very uncovered and has not yet been covered by most investors and investment analysts. This presents investors with a rare opportunity to acquire a high-quality asset at a great price.