Bain Capital Specialty Finance: Opportunity for Dividend Investors (NYSE: BCSF)

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Bain Capital Specialty Finance Inc. (NYSE: BCSF) is a well-managed and successful business development company (BDC). It’s a business the market has long ignored, offering investors the opportunity to pick up high-value stocks at a bargain price.

BCSF Pricing Table

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Company presentation

Bain Capital Specialty Finance is a BDC managed by BCSF Advisors, a subsidiary of Bain Capital Credit. Founded in 2015, the company acquired its first institutional investors in October 2016, after which it went public in 2018. Bain Capital Specialty Finance is managed and operated by Bain Capital Credit, the subsidiary of the well-known Bain company.

Leveraging the expertise and experience of Bain Capital Credit’s private group, with over 20 dedicated professionals, Bain Capital Specialty Finance specializes in indirect lending and focuses exclusively on investing in mid-market companies . The company invests in companies with earnings before tax, interest, depreciation and amortization ranging from $10 million to $150 million. Additionally, it invests in common and preferred stocks, debt such as distressed, mezzanine and default securities.

What are BDCs?

The investment objective of Bain Capital Specialty Finance is to generate current income and capital appreciation through investments in strategic joint ventures, direct issuances of secured debt, equity and bond investments of companies. The company is an externally managed specialty finance company that focuses on lending to middle market businesses.

The above objective makes Bain Capital Specialty Finance a mere BDC. A BDC provides regular income to shareholders via declared dividends. They do this by making senior loans to middle market companies – these companies are too big to get financing through community bank loans and too small to raise capital through public equity offerings.

BDCs have seen a growing trend in recent years, but their number remains relatively low. The success of a BDC depends on the quality of its management. Investment managers and BDC shareholders have the same goal: to deliver strong returns while growing assets in the process. Asset growth generates stable income for the shareholder and drives share value appreciation. The flip side is that it also leads to increased fees for advisors. The disadvantage of BDCs is that they incur quite high expenses. Thus, investors who focus on expense ratios are not likely to invest in BDCs. Ultimately, adding BDC to your portfolio is a personal call. If one is inclined to opt for BDCs, it pays to find ones that are very well managed with a diversified portfolio like Bain Capital Specialty Finance.

Financial situation and investment portfolio

Bain Capital Specialty Finance is distinguished by its diversified and well-planned holdings. Despite the economic turmoil of the past two years, the company has not increased its debt. Its cash flow and debt ratio remained stable, signaling the company’s solid strategies and good asset selection.

Bain Capital Specialty Finance assigns a rating of 1 to 4 to the companies in its portfolio. According to its notational nomenclature:

  • An investment is rated 1 if it performs above underwriting expectations and if risks and business trends are generally favourable.

  • An investment is rated two if it works as expected and there are no concerns about the capacity or performance of the business. All newly acquired assets are initially given a rating of 2 and then assigned accordingly based on performance.

  • An investment is rated three if it performs below expectations and there are concerns about business trends and performance, such as non-compliance, declining performance, or delinquency.

  • An investment is rated four if it performs significantly below expectations. If an investment is classified in category 4, the adviser does not expect repayments to be made in full and there is a significant risk of substantial loss.

According to this rating, the quality of Bain Capital Specialty Finance’s portfolio at the end of the third quarter of 2021 is as follows:

Investment performance evaluation

Fair value (in millions)

Percentage of total

Number of companies

Percentage of total

1

20.5

0.9%

3

2.9%

2

2,092.6

88.8%

94

89.5%

3

243.6

10.3%

8

7.6%

Total

$2,356.7

100.0%

105

100.0%

As can be seen, the portfolio is pretty strong overall, and even if several of its investments were to default, the company would be able to de-risk as 88.8% of its assets are in companies that show consistent performance. . In addition, 80% of the company’s investments are in senior senior debt, guaranteeing stability. Only 8% of the company’s assets are invested in stocks, thus avoiding volatility.

In addition, the company holds a broadly diversified portfolio. Major industries in the portfolio include aerospace and defense (10.7%), high-tech industries (8.7%), consumer non-durables (8.2%) and service companies (7 .8%), among others.

Business Geography Chart

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Although most of the company’s investments are based in the United States, it holds a significant number of investments in other geographic locations across Europe. This company’s geographically diverse portfolio with many countries across Europe limits regional volatility and minimizes risk.

Total investment income reported by the company for the third quarter of 2021 is $49,545,000, a significant increase from income reported for the same period of the previous year ($46,817,000). Dividend income also increased for the third quarter of 2021 compared to previous quarters.

An opportunity for attractive dividends

While it is in the very nature of BDCs to provide income in the form of dividends, popular BDCs’ dividend yields have been dismal over the past two years due to the economic disruption caused by the pandemic. However, Bain Capital Specialty Finance was able to maintain reasonably high dividends despite the slight decline. The company currently offers dividend income of $0.34 per share, which roughly equates to dividend yields of around 8.62% per year.

Dividend table

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Although down from pre-pandemic levels of $0.41 per share, the company has maintained steady dividend income, despite the economic turmoil faced by other BDCs. during this period. For those looking for a great dividend opportunity to add to their portfolios, Bain Capital Specialty Finance is a great choice. Despite the pandemic, the company maintained a stable portfolio and did not sink under the weight of immense debt. It has a diversified, high-quality portfolio that generates high dividend yields and gives investors the opportunity to grow their capital to pre-pandemic levels.

Conclusion

The pandemic has weighed on the profitability and operations of BDCs. Many BDCs lost a huge percentage of their capitalization and saw the value of their assets decline. Many of these companies also present serious investment risks as they are often poorly diversified. Some BDCs only invest in stocks of medium-sized companies, while others are too leveraged.

If current interest rates are maintained through 2023, investing in Bain Capital Specialty Finance is a great opportunity, especially for investors looking for dividends. One of the main reasons for the company’s undervaluation is that it is very thinly hedged and has yet to be covered by most investors and investment analysts. This offers investors a rare opportunity to acquire a high quality asset at a bargain price.

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