KBRA Affirms Ratings for Bain Capital Specialty Finance, Inc.
14 Feb 2025 | New York
KBRA affirms the issuer and senior unsecured debt ratings of BBB for Bain Capital Specialty Finance, Inc. ("BCSF" or "the company"). The rating Outlook is Stable.
Key Credit Considerations
The ratings and Stable Outlook are supported by BCSF’s ties to the $51 billion Bain Capital Credit ("BCC") credit platform, including $14 billion dedicated to private credit as of September 30, 2024, along with SEC exemptive relief to co-invest in other funds managed by BCSF’s adviser and its affiliates. BCC's solid management team has a long track record working in private credit markets dating back to the mid-1990s, with BCC’s platform providing a 27-year history of strong credit performance through economic cycles. Also supporting the rating is BCFS’s well-diversified investment portfolio comprised largely of senior secured first lien loans at 63% (83% on a look-through to the joint ventures ("JV")) to 159 portfolio companies across 31 sectors, most in the core middle market with median EBITDA of $42 million. The top three portfolio sectors, when excluding JV investments, are Aerospace & Defense (16.0%), Business Services (11.0%), and High Tech Industries (9.8%). Credit quality is adequate with non-accruals at 1.9% and 1.1% at cost and fair value, respectively, consistent with rated peers.
The company’s funding profile is well diversified, consisting of a secured revolving bank facility, a CLO, and unsecured notes. With the January 2025 senior unsecured issuance of $350 million, unsecured debt to total debt increases to ~73% (pro forma) from 46%, which increases the company's financial flexibility and creates less asset encumbrance for the benefit of senior unsecured noteholders. As of September 30, 2024, liquidity was adequate with $501.3 million of bank line availability and $30.5 million of cash and cash equivalents, including cash denominated in foreign currency and excluding $29.3 million of short-term restricted cash, set against $600 million of near-term unsecured debt ($300 million due in March 2026 and $300 million in October 2026) and $432.2 million of unfunded commitments. A proportion of the unfunded commitments are tied to transactions and/or negative covenants and are not expected to be drawn. As of September 30, 2024, the company’s gross and net leverage were 1.14x and 1.09x, respectively, which are within the company's target net leverage range of 1.0x-1.25x. Asset coverage is adequate at 188% when considering its 150% regulatory asset coverage, providing the company a 25% cushion and the ability to withstand additional market volatility in a less favorable economic environment.
The strengths are counterbalanced by the high proportion of non-qualifying assets (29.4%) and elevated leverage when consolidated with JV investments, which is somewhat offset by the high proportion of first lien senior secured loans within the JVs (~97%). Further counterbalancing strengths are retained earnings constraints as a regulated investment company ("RIC") and uncertain economic environment with high base rates, inflation, and geopolitical risks.
BCSF is an externally managed, non-diversified, investment management company that elected to be treated as a Business Development Company (BDC) under the 1940 Act and as a RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment taxable income. The company was formed as a Delaware Corporation in October 2015 and was publicly listed on the NYSE in November 2018. The company is managed by BCSF Advisors LP, a wholly owned subsidiary of Bain Capital Credit, which is a wholly owned subsidiary of Bain Capital, LP, which had in excess of $185 billion in AUM as of September 30, 2024.
Rating Sensitivities
Given the Stable Outlook, a rating upgrade is not expected over the medium term. A rating downgrade and/or Outlook change to Negative could be considered if management increases focus on riskier investments coupled with higher leverage metrics or makes a significant change in the current management structure. A prolonged downturn in the U.S. economy that has material impact on performance and non-accruals that significantly affect capital, leverage, and liquidity metrics would also negatively impact ratings/Outlook.
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