Bain Capital Specialty Finance, Inc. (NYSE:BCSF) is the BDC arm of Bain Cash, a personal different asset management company. The BDC’s stock at this time trades at a stock yield of about 9.8% whilst preserving a highly secured portfolio composition.
Acquiring reported that, the BDC lowered its dividend by 17% through the pandemic, and the company only covers its dividend with internet expenditure profits.
If non-accruals raise, the corporation will most probable cut down its dividend payout.
A Very first Lien-Focused Credit card debt Portfolio And Evolution
The financial commitment focus of Bain Cash Specialty Finance is on center-market place corporations with annual EBITDA of $10-150 million. As of March 31, 2022, the enterprise development business experienced made investments in 115 companies throughout 29 industries, producing BCSF fairly varied.
The portfolio of Bain Money Specialty Finance, which is largely designed up of very first and second lien debt investments, was valued at $2.16 billion at the conclude of March. 70.4% of the portfolio was created up of initially lien senior secured investments.
The chart down below depicts the evolution of BCSF’s portfolio over time, and some variations have happened in the very last 12 months. In basic, the company progress firm’s reliance on secured first lien credit card debt has reduced. The percentage of first liens has lessened from 82% in 1Q-21 to 70% in 1Q-22, although the percentage of next liens has remained steady at about 5%.
In get to increase yield, the BDC has started to make investments a bigger proportion of its assets in subordinated debt and fairness, which may perhaps be considered a riskier all round investment decision approach.
Close to 25% of the BDC’s portfolio is comprised of assets other than the highest rated credit card debt (to start with and 2nd lien secured financial debt). In comparison to other organization advancement companies, Bain Capital Specialty Finance has a more risky financial investment portfolio and hence a increased possibility of making above-regular credit losses in a economic downturn. The BDC’s portfolio was completely accomplishing as of March 31, 2022, with % of its loans in default.
100% Shell out-Out Ratio, No Margin Of Security
About the past 12 months, Bain Money Specialty Finance’s net investment profits has remained dependable, with the business enterprise advancement company manufacturing $.34 for each share of NII in just about every quarter.
In the course of the Covid-19 pandemic, the BDC diminished its dividend payout by 17%, and the organization has given that settled for a quarterly dividend payout of $.34 for each share, reflecting a 100% pay back-out ratio.
When it comes to dividend investing, I would like to see a margin of NII safety to shield my expense, which BCSF does not give.
Dangers Reflected In E-book Benefit Price reduction
Bain Funds Specialty Finance has a P/B multiple of .807x, indicating a 19% discounted to e book benefit.
Generally, I like to acquire BDCs at steep discount rates to book price, but not this time.
For the reason that of the company’s superior dividend chance, BCSF trades at a discounted to book benefit. If just a single expense fails to pay out out, the BDC may be pressured to reduce its dividend nevertheless again.
BCSF Has Dividend Challenges
Bain Capital Specialty Finance, like its BDC rivals, will be impacted by a credit industry downturn, which could final result in decrease financial commitment volumes, lessen web expense money, and increased reduction ratios.
The portfolio of Bain Money Specialty Finance may possibly be entirely undertaking proper now, but a recession could alter that, and personal loan losses could translate into reduced e book values. BCSF could trade at an even decreased ebook benefit several in this circumstance.
The 100% spend-out ratio centered on NII should also be of issue to dividend traders, in particular due to the fact the BDC has earlier lowered its dividend. A small business advancement corporation that is a buy suitable now nevertheless, is Oaktree Specialty Lending (OCSL).
In terms of portfolio composition and effectiveness, I would probably classify Bain Capital Specialty Finance as a center-of-the-highway organization growth company.
The steep price reduction to reserve value is fully justified provided that BCSF distributes 100% of its internet expense money. The actuality that the BDC experienced to decrease its dividend in the course of the pandemic displays that the dividend is particularly risky.
While the firm’s expense portfolio is undertaking perfectly, a slight improve in credit score high quality could suggestion Bain Funds Specialty Finance more than the edge and pressure a further dividend cut.