Bain Money Specialty Finance, Inc. (NYSE:BCSF) is the BDC arm of Bain Cash, a non-public alternate asset management agency. The BDC’s stock at this time trades at a stock generate of about 9.8% though retaining a very secured portfolio composition.
Having claimed that, the BDC decreased its dividend by 17% for the duration of the pandemic, and the business only covers its dividend with internet financial commitment cash flow.
If non-accruals boost, the enterprise will most likely reduce its dividend payout.
A Initial Lien-Focused Personal debt Portfolio And Evolution
The investment target of Bain Money Specialty Finance is on middle-sector organizations with once-a-year EBITDA of $10-150 million. As of March 31, 2022, the enterprise growth company had designed investments in 115 organizations throughout 29 industries, creating BCSF moderately varied.
The portfolio of Bain Cash Specialty Finance, which is largely produced up of 1st and 2nd lien credit card debt investments, was valued at $2.16 billion at the close of March. 70.4% of the portfolio was manufactured up of to start with lien senior secured investments.
The chart under depicts the evolution of BCSF’s portfolio above time, and some improvements have occurred in the very last yr. In typical, the company improvement company’s reliance on secured to start with lien financial debt has diminished. The proportion of very first liens has reduced from 82% in 1Q-21 to 70% in 1Q-22, whilst the proportion of 2nd liens has remained secure at around 5%.
In order to boost generate, the BDC has begun to spend a better proportion of its assets in subordinated personal debt and fairness, which may be deemed a riskier in general expense method.
Close to 25% of the BDC’s portfolio is comprised of property other than the maximum rated financial debt (to start with and second lien secured debt). In comparison to other business improvement firms, Bain Cash Specialty Finance has a extra risky investment portfolio and hence a greater chance of developing over-ordinary credit score losses in a economic downturn. The BDC’s portfolio was absolutely accomplishing as of March 31, 2022, with % of its financial loans in default.
100% Pay out-Out Ratio, No Margin Of Safety
About the past calendar year, Bain Cash Specialty Finance’s net investment revenue has remained steady, with the company enhancement company producing $.34 per share of NII in each individual quarter.
All through the Covid-19 pandemic, the BDC minimized its dividend payout by 17%, and the corporation has since settled for a quarterly dividend payout of $.34 for every share, reflecting a 100% pay back-out ratio.
When it comes to dividend investing, I would like to see a margin of NII basic safety to shield my investment, which BCSF does not present.
Hazards Mirrored In Ebook Value Discounted
Bain Money Specialty Finance has a P/B many of .807x, indicating a 19% price reduction to ebook benefit.
Ordinarily, I like to buy BDCs at steep savings to ebook price, but not this time.
Mainly because of the company’s higher dividend danger, BCSF trades at a low cost to ebook value. If just a person investment decision fails to spend out, the BDC may perhaps be forced to minimize its dividend however again.
BCSF Has Dividend Pitfalls
Bain Capital Specialty Finance, like its BDC rivals, will be impacted by a credit score market downturn, which could end result in decrease investment volumes, decrease internet expense cash flow, and greater decline ratios.
The portfolio of Bain Capital Specialty Finance may possibly be entirely carrying out suitable now, but a economic downturn could change that, and loan losses could translate into decrease e book values. BCSF could trade at an even lower book worth several in this situation.
The 100% fork out-out ratio centered on NII should really also be of problem to dividend investors, specifically considering that the BDC has formerly diminished its dividend. A enterprise enhancement firm that is a buy right now nevertheless, is Oaktree Specialty Lending (OCSL).
In terms of portfolio composition and performance, I would probably classify Bain Cash Specialty Finance as a middle-of-the-highway business enterprise enhancement firm.
The steep low cost to ebook value is fully justified given that BCSF distributes 100% of its web expenditure earnings. The simple fact that the BDC had to reduce its dividend through the pandemic reveals that the dividend is really risky.
Whilst the firm’s financial commitment portfolio is performing properly, a minor modify in credit rating high-quality could tip Bain Capital Specialty Finance over the edge and pressure one more dividend cut.