KBRA Assigns Rating to Bain Capital Specialty Finance, Inc.'s $350 Million Senior Unsecured Notes
31 Jan 2025 | New York
KBRA assigns a rating of BBB to Bain Capital Specialty Finance, Inc.'s ("BCSF" or “the company”) $350 million, 5.95% senior unsecured notes due 2030. The rating Outlook is Stable. The proceeds will be used for general corporate purposes and for repayment of existing secured indebtedness.
Key Credit Considerations
The rating 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 within the private credit markets dating back to the mid-1990s, with BCC’s platform providing a 26-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 venture ("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 (16.1%), Business Services (11.0%), and High Tech Industries (9.8%).
The company’s funding profile is well diversified, consisting of a secured revolving bank facility, a CLO, and unsecured notes. With this issuance, unsecured debt to total debt will increase to ~73% (pro forma) from 46%, which increases the company's financial flexibility and less asset encumbrance for the benefit of unsecured noteholders. As of September 30, 2024, liquidity was adequate with $501.3 million of bank credit 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, providing the ability to withstand additional market volatility in a less favorable economic environment. Credit quality is solid with non-accruals at 1.9% and 1.1% at cost and fair value, respectively.
The strengths are counterbalanced by the higher proportion of non-qualifying assets (29.4%), which is somewhat offset by the high proportion of first lien senior secured loans within the JV, as well as 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.
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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