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Bain Money Specialty Finance, Inc. (NYSE:BCSF) is the BDC arm of Bain Funds, a non-public choice asset administration company. The BDC’s stock now trades at a inventory produce of about 9.8% when sustaining a extremely secured portfolio composition.

Getting claimed that, the BDC reduced its dividend by 17% through the pandemic, and the company only handles its dividend with web financial investment cash flow.

If non-accruals raise, the company will most probably lower its dividend payout.

A Initially Lien-Centered Credit card debt Portfolio And Evolution

The financial investment concentration of Bain Funds Specialty Finance is on center-market place firms with once-a-year EBITDA of $10-150 million. As of March 31, 2022, the organization advancement corporation experienced designed investments in 115 firms throughout 29 industries, generating BCSF moderately assorted.

The portfolio of Bain Cash Specialty Finance, which is mostly designed up of 1st and 2nd lien financial debt investments, was valued at $2.16 billion at the conclusion of March. 70.4% of the portfolio was created up of 1st lien senior secured investments.

Debt Investment Focus

Personal debt Financial investment Target (Bain Capital Specialty Finance)

The chart below depicts the evolution of BCSF’s portfolio above time, and some alterations have transpired in the very last yr. In general, the small business improvement company’s reliance on secured first lien debt has lowered. The share of initially liens has reduced from 82% in 1Q-21 to 70% in 1Q-22, whilst the share of 2nd liens has remained steady at all around 5%.

In get to enhance produce, the BDC has started to invest a higher proportion of its belongings in subordinated credit card debt and fairness, which might be considered a riskier in general financial investment system.

About 25% of the BDC’s portfolio is comprised of property other than the best rated financial debt (initially and 2nd lien secured financial debt). In comparison to other business enterprise growth companies, Bain Funds Specialty Finance has a more risky investment portfolio and thus a bigger risk of manufacturing over-ordinary credit score losses in a economic downturn. The BDC’s portfolio was fully carrying out as of March 31, 2022, with % of its financial loans in default.

Evolution Of BCSF's Portfolio

Evolution Of BCSF’s Portfolio (Bain Cash Specialty Finance)

100% Pay back-Out Ratio, No Margin Of Protection

In excess of the very last yr, Bain Money Specialty Finance’s internet expense earnings has remained reliable, with the company development company generating $.34 for every share of NII in just about every quarter.

All through the Covid-19 pandemic, the BDC decreased its dividend payout by 17%, and the enterprise has due to the fact settled for a quarterly dividend payout of $.34 for every share, reflecting a 100% pay-out ratio.

When it will come to dividend investing, I’d like to see a margin of NII security to shield my financial investment, which BCSF does not deliver.

Net Investment Income Per Share

Web Investment Cash flow Per Share (Bain Capital Specialty Finance)

Hazards Mirrored In Book Worth Price reduction

Bain Capital Specialty Finance has a P/B several of .807x, indicating a 19% price reduction to reserve value.

Usually, I like to invest in BDCs at steep bargains to reserve price, but not this time.

Since of the firm’s higher dividend chance, BCSF trades at a price cut to guide worth. If just one particular investment decision fails to pay out, the BDC may perhaps be pressured to minimize its dividend but again.

Chart
Data by YCharts

BCSF Has Dividend Risks

Bain Funds Specialty Finance, like its BDC competitors, will be impacted by a credit rating industry downturn, which could result in decreased expenditure volumes, decrease internet expense income, and better loss ratios.

The portfolio of Bain Capital Specialty Finance may well be thoroughly undertaking ideal now, but a recession could adjust that, and financial loan losses could translate into reduce reserve values. BCSF could trade at an even decreased reserve worth a number of in this case.

The 100% spend-out ratio primarily based on NII should also be of concern to dividend buyers, specially considering the fact that the BDC has beforehand reduced its dividend. A enterprise development enterprise that is a buy correct now nonetheless, is Oaktree Specialty Lending (OCSL).

My Summary

In conditions of portfolio composition and effectiveness, I would in all probability classify Bain Money Specialty Finance as a middle-of-the-highway business enhancement business.

The steep price reduction to e book price is completely justified given that BCSF distributes 100% of its web expenditure cash flow. The simple fact that the BDC had to lower its dividend during the pandemic shows that the dividend is very risky.

Though the firm’s investment decision portfolio is performing nicely, a small improve in credit rating excellent could suggestion Bain Capital Specialty Finance more than the edge and pressure another dividend slash.

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