KBRA Affirms Ratings for Bain Capital Specialty Finance, Inc.

KBRA affirms the issuer and senior unsecured debt ratings of BBB for Bain Capital Specialty Finance, Inc. (NYSE: BCSF) ( “the company”). The Outlook for the ratings is Stable.

Key Credit Considerations

The ratings and Stable Outlook are supported by BCSF’s ties to Bain Capital, LP, a global asset manager with $180 billion in AUM, including Bain Capital Credit LP (“BCC”), a global credit platform with $45 billion of AUM, including $12 billion of private credit. The company focuses on providing first lien senior secured loans to middle market companies, which had a median EBITDA of $58 million as of 3Q23. The company benefits from the BCC credit platform through SEC exemptive relief to co-invest with other BCC funds and affiliated BDCs, which allows for scale and key resources of the much larger BCC platform. As of September 30, 2023, BCSF had a well-diversified $2.4 billion investment portfolio comprised mostly of senior secured first lien loans primarily sponsored backed to 143 middle market companies concentrated in non-cyclical, defensive sectors. The top three sector concentrations, excluding the company’s two joint ventures, were aerospace and defense (14.1%), high tech industries (10.2%), and business services (6.9%).

BCSF maintains solid access to the capital markets with a diverse funding mix to include a secured bank facility, unsecured debt, and a CLO. BCSF’s liquidity is solid at $329 million, including $224 million of undrawn capacity on the revolving credit facility, $105 million of cash and cash equivalents, including cash denominated in foreign currency and $26 million of short term restricted cash and less than $1 million of unsettled trades with no debt maturing within 2 years and ~ $284 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. Six hundred million dollars of senior unsecured debt matures in 2026 that may need to be refinanced in the next several years. Approximately 44% of the company’s total outstanding debt was comprised of senior unsecured debt, allowing for greater financial flexibility. The company’s leverage was adequate at 1.22x with a target range of 1.0x to 1.25x. The asset coverage ratio was 182%, allowing for a 21% cushion to absorb increased volatility in less favorable markets and the potential for increased non-accruals in a high interest rate environment. When considering the company’s investment in its two joint ventures, consolidated leverage is higher than peers, which is somewhat offset by the JVs’ high proportion of senior secured first lien loans (94%), which boosts BCSF’s first lien senior secured loans of 64% of total investments to 82% of total investments on a look-through basis.

The ratings also consider BCSF’s excellent management team that has a long track record of working within the private debt markets (senior members of the company have 24+ years or more experience in leveraged finance). As of September 30, 2023, BCSF’s asset quality remains solid with ~95% of the investment portfolio internally rated its highest ratings of 1 or 2. The company had three portfolio companies on non-accrual which comprised 1.0% of total investments at fair value and 1.5% at cost as of September 30, 2023. Despite the potential for adverse credit headwinds in 2024, KBRA believes the company should manage well through the cycle with solid management experience, underwriting protection to the downside with 93% of its loans having at least one financial covenant and 75% with positive voting control. The strengths are counterbalanced by the potential risks related to the company’s illiquid investments, higher proportion of non-qualifying assets (29.3%) than peers, somewhat offset by the high proportion of first lien senior secured loans within the JVs, retained earnings constraints as a Regulated Investment Company (RIC,) and an uncertain economic environment with high base rates, inflation, and geopolitical risk.

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 as an RIC, which among other things, must distribute to its shareholders at least 90% of the company’s investment company 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, a wholly owned subsidiary of Bain Capital, LP.

Rating Sensitivities

Given the Stable Outlook, a rating upgrade is not expected over the next one to two years. 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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