{"id":89111,"date":"2023-11-27T01:57:39","date_gmt":"2023-11-27T06:57:39","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/bain-capital-specialty-finance-i-was-wrong-about-this-11-yielding-bdc-nysebcsf\/"},"modified":"2023-11-27T01:57:42","modified_gmt":"2023-11-27T06:57:42","slug":"bain-capital-specialty-finance-i-was-wrong-about-this-11-yielding-bdc-nysebcsf","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=89111","title":{"rendered":"Bain Capital Specialty Finance: I Was Wrong About This 11% Yielding BDC (NYSE:BCSF)"},"content":{"rendered":"
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<\/picture>
<\/figcaption><\/figure>\n<\/p>\n

Against my expectations from last year, business development company Bain Capital Specialty Finance, Inc. (NYSE:BCSF<\/span>)<\/strong> performed better than expected, which has led to the BDC\u2019s stock sell for a lower discount to net asset value.<\/p>\n

The business development company profits from higher net investment income and debt yields in a rising-rate environment, which has yielded a couple of dividend increases for passive income investors.<\/p>\n

Taking into account the improved dividend coverage in particular, I am modifying my stock classification from Sell to Buy.<\/p>\n

My Rating History<\/strong><\/h2>\n

My rating history on Bain Capital Specialty Finance is blemished, primarily because my reservations about the business development company\u2019s poor dividend coverage last year led to a Sell rating.<\/p>\n

However, Bain Capital Specialty Finance has performed rather well since October 2022 when I called BCSF a yield trap. The BDC\u2019s stock has since increased 25% and Bain Capital Specialty Finance handed passive income investors a decent number of dividend raises as well. My stock classification is changing primarily because of Bain Capital Specialty Finance\u2019s much better pay-out metrics.<\/span><\/p>\n

Bain Capital Specialty Finance\u2019s Portfolio<\/strong><\/h2>\n

Bain Capital Specialty Finance\u2019s investment portfolio continued to consist primarily of highly secured First Liens (64%) at the end of the third quarter. Other instruments include investment vehicles (15%), Second Liens (4%), Subordinated Debt (2%), and Equity investments (15%).<\/p>\n

Bain Capital Specialty Finance\u2019s investment portfolio was valued at $2.39 billion in 3Q-23 compared to $2.29 billion in the year-ago quarter, which implies an increase in the total portfolio value of approximately $96 million.<\/p>\n

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\"Invested<\/span>
\n

Invested Portfolio By Asset Type (Bain Capital Specialty Finance)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Across all investment categories, Bain Capital Specialty Finance made $616 million in new investment commitments in the first three quarters of 2023. Of this investment volume, 84% went to First Liens.<\/p>\n

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\"New<\/span>
\n

New Investment Fundings By Asset Type (Bain Capital Specialty Finance)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Bain Capital Specialty Finance profited from an increase in key interest rates in the last year, which triggered a rather substantial uptick in portfolio yields.<\/p>\n

Though the debt yield curve has started to flatten in the last two quarters, Bain Capital Specialty Finance\u2019s portfolio yield stood at 12.9% at the end of the third quarter, up from just 10.2% in the year-ago period.<\/p>\n

The increase in interest rates and the BDC\u2019s positioning towards floating-rate debt (94.2%) have been the two drivers of growing net investment income and improved dividend coverage.<\/p>\n

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\"Yield<\/span>
\n

Yield Comparison On Assets And Debt Outstanding (Bain Capital Specialty Finance)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Underlying Credit Quality Remains Solid<\/strong><\/h2>\n

Bain Capital Specialty Finance had three portfolio investments on non-accrual, which reflected a non-accrual ratio of 1.0% based on fair value, at the end of the third quarter.<\/p>\n

In June, two portfolio companies were on non-accrual status and the business development company reported a non-accrual ratio of 0.0%, also based on fair value. Overall credit quality remained good, in my view, despite the slight increase in non-accruals in 3Q-23.<\/p>\n

BCSF Is Now Delivering A Substantial Margin Of Dividend Safety<\/strong><\/h2>\n

Bain Capital Specialty Finance earned $0.55 per share in net investment income in the third quarter compared to a dividend pay-out of $0.42 per share. The dividend pay-out ratio in 3Q-23 as well as in the last twelve months was 76%, which is much improved compared to the 100% pay-out ratio last year.<\/p>\n

Furthermore, Bain Capital Specialty Finance has handed passive income investors three dividend raises in the last year, reflecting total growth of 24%. Despite the increase in the BDC\u2019s dividend, the dividend pay-out metrics improved substantially compared to last year.<\/p>\n

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\"Dividend\"<\/span>
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Dividend (Author Created Table Using BDC Information)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Still Selling At A Discount To Net Asset Value Of 14%<\/strong><\/h2>\n

Bain Capital Specialty Finance\u2019s discount has lowered substantially as the company\u2019s dividend raises attracted new buyers. However, the stock is still selling at a 14% discount to book value and has a compelling risk\/reward relationship, in my view.<\/p>\n

Most business development companies that I own in my passive income portfolio are trading near or at net asset value, which means that BCSF implies a higher-than-average margin of safety.<\/p>\n

\n

\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

Investment Headwinds And Fed-Related Risks<\/strong><\/h2>\n

Bain Capital Specialty Finance is primarily a floating-rate business development company, meaning an end to the present rate-hiking cycle strongly suggests that its net investment income would be set for a contraction next year. The discount to book value may already reflect this expectation, however. Inflation declined to 3.2% in October, which makes the case for declining key interest rates next year.<\/p>\n

My Takeaway<\/strong><\/h2>\n

Bain Capital Specialty Finance has performed much better than expected due to the company\u2019s exposure to floating-rate debt investments, which has provided powerful net investment income fuel in the last year.<\/p>\n

As a consequence, Bain Capital Specialty Finance has handed passive income investors three dividend raises in the last year.<\/p>\n

Taking into account the much-improved dividend coverage metrics for the business development company and the fact that a discount to book value is still available, I am upgrading my stock classification for Bain Capital Specialty Finance to Buy.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Against my expectations from last year, business development company Bain Capital Specialty Finance, Inc. (NYSE:BCSF) performed better than expected, which has led to the BDC\u2019s stock sell for a lower discount to net asset value. The business development company profits from higher net investment income and debt yields in a rising-rate environment, which has yielded […]<\/p>\n","protected":false},"author":1,"featured_media":89112,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-89111","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nBain Capital Specialty Finance: I Was Wrong About This 11% Yielding BDC (NYSE:BCSF) | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Against my expectations from last year, business development company Bain Capital Specialty Finance, Inc. 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