Bain Capital Specialty Finance (New York Stock Exchange:BCSF) planned to increase its quarterly dividend on the back of strong first-quarter fiscal 2023 earnings with strong gross and net investment income. Set the discount rate to net asset value within two digits. The business development company last declared quarterly cash dividends: $0.42 per share, an increase of 10.5% from the previous payment, resulting in an annualized dividend yield of 10.4%. Income is the prize, and BCSF’s dividend has had a dramatic trajectory, growing at a compound annual growth rate of 7.3% over the past three years. Double-digit rate hikes are likely not the last in the near term, as the current macro environment forms an almost Goldilocks-like backdrop for the rapid growth of BDC’s floating rate credit portfolio.
of The Fed’s “higher for longer” mantra means that what is seen as the golden age of BDCs is here to stay. However, with the federal funds rate currently at a 22-year high of 5.25% to 5.50%, and markets widely expecting the Fed to leave interest rates unchanged at its next FOMC meeting on the 20th, the hawkish view is It is likely that it has reached its peak. of October. The recently reported fair value of his BCSF investment portfolio as of the end of the second quarter of 2023 was: $2.38 billion It spans 142 portfolio companies in 30 different industries.
8% discount to NAV, 10.4% dividend yield, strong coverage
The portfolio resulted in net asset value of $1.126 billion, or approximately $17.44 per share, continuing to increase from $17.37 per share in the first quarter. The second quarter’s NAV also expanded from his $17.15 NAV per share in the year-ago period, giving BCSF a debt-to-NAV ratio of 1.32x at the end of the second quarter. This leverage ratio is up from his 1.12x a year ago, but is still within a sensible range and compares favorably to his peer group. The net debt-to-equity ratio decreased to 1.13x, which also continued to decline from 1.16x in the first quarter. This figure takes into account major debt balances, alongside cash and equivalents and net receivables.
We would like to see this ratio stay within this range through 2024, contrary to most expectations that the US should have a soft landing. Importantly, BDC is currently trading at his 8% discount to NAV. This is a significant reduction from the 28% discount the last time I covered it. Total investment income was $75.7 million, an increase of 44.6% from $52.36 million in the prior-year period, and net investment income was $38.9 million, or approximately $0.60 per share. This gives NII an annualized yield on book value of 13.9%, compared to NII’s $0.41 per share in the prior year period.
Importantly, NII covered its second quarter dividend by 143%, creating real security and increasing the likelihood of a year-end special dividend. The company said in its second-quarter earnings call that spillover earnings were $0.66 per share and that the board will evaluate the possibility of additional distributions toward the end of 2023.
The golden moment of private credit
We like that BDC has only two portfolio companies in accrual status as of quarter end. This was approximately 2.1% and 0% of the total investment portfolio at amortized cost and fair value, respectively. Additionally, 94.1% of BCSF’s fixed income investments at fair value are floating rate securities, and its broad investment portfolio provides a weighted average yield of 13%. BCSF will likely announce a special year-end dividend payment, but even if coverage levels remain strong, no further increases are likely until next year. Basically, BDCs need to carefully balance between stabilizing NAV towards the end of interest rate hikes and maintaining appropriate dividend levels.
A prolonged period of appreciation supports increased investment returns for BDCs, but ultimately requires a reduction in the federal funds rate. We may have reached the peak that the market is currently pricing in. 98% The Fed may keep interest rates at current levels at the next FOMC meeting. Private credit, or nonbank lending, is becoming increasingly important in the U.S. economy as major banks prepare for higher capital requirements in the upcoming Basel III endgame and regulators move to respond to the March banking crisis. will play a role. I hold a key position in BCSF with the aim of BDC ultimately trading in line with his NAV. This suggests further upside with the possibility of a year-end special dividend or additional dividend program.