New York, February 25, 2021 -- Moody's Investors Service, ("Moody's") has
assigned a Baa3 long-term issuer rating to Bain Capital Specialty
Finance, Inc. (BCSF), a business development company
(BDC) externally managed by an affiliate of Bain Capital, LP,
a large alternative investment firm. The outlook is stable.
Assignments:
..Issuer: Bain Capital Specialty Finance, Inc.
....LT Issuer Rating, Assigned Baa3
Outlook Actions:
..Issuer: Bain Capital Specialty Finance, Inc.
....Outlook, Assigned Stable
RATINGS RATIONALE
BCSF's Baa3 long-term issuer rating reflects its baa3 standalone
assessment, which is supported by deep credit expertise and wide
management capabilities of Bain Capital Credit, Bain Capital's
credit investing arm. The rating also reflects a focus on first
lien senior secured loans, which should help mitigate unexpected
losses, solid profitability, and low loan losses since inception.
The rating also reflects BCSF's commitment to operating around a
target debt-to-equity ratio of 1x-1.25x,
consistent with other similarly-rated peers. This represents
a shift from BCSF's previous operating target of 1x-1.5x
debt-to-equity, which allowed for the possibility
of higher leverage and therefore thinner cushion to the minimum regulatory
150% asset coverage ratio (ACR).
BCSF was established in 2015 and commenced operations in 2016.
It primarily invests in private first lien senior secured and unitranche
loans in middle market firms with annual EBITDA between $10 and
$150 million. As of 31 December 2020, BCSF had approximately
$2.5 billion in investments at fair value. Bain Capital
Credit had a total of $43.7 billion in asset under management
as of 1 November 2020.
BCSF recently announced a partnership with Pantheon, a private equity
firm, to create a joint venture (JV) to invest in private direct
loans to companies located outside the US. While BDCs must under
law have at least 70% of their investments in US-based companies,
BCSF maintains a higher proportion of investments in non-US companies
relative to peers, which provides it with a degree of geographic
diversification that benefits creditors. By transitioning assets
to the international JV, BCSF was able to reduce its pro forma net
leverage ratio to roughly 1.1x from 1.3x as of 31 December
2020, which provides it with a greater cushion to the 150%
minimum ACR. The pro forma calculation has been based on BCSF's
balance sheet and BCSF's initial contribution of assets to the JV,
each as of 31 December 2020.
The rating also reflects BCSF's less evolved funding profile,
which includes a lower proportion of unsecured debt relative to peers,
though this is offset by management's commitment to improving the
funding profile through unsecured issuances in the near term. The
baa3 standalone assessment also considers BCSF's limited operating
history, having only commenced operations in 2016. It also
incorporates the risks common to BDCs, including the illiquidity
of private direct lending investments, covenant compliance and liquidity
risks associated with the requirement that investments be marked to fair
value, and high dividend payouts that increase its reliance on equity
capital markets for growth capital.
BCSF is currently contending with the effects of the ongoing coronavirus
pandemic, which resulted in a significant decline in investment
fair values and an increase in investments on non-accrual status
during the first half of 2020, as economic conditions deteriorated.
Since that time, as economic activity began to recover, supported
by monetary and fiscal policy, investment fair values have mostly
recovered and portfolio non-accruals have declines to nearly pre-pandemic
levels.
The stable outlook reflects Moody's expectation that BCSF will maintain
stable asset quality, profitability and leverage in the next 12-18
months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The rating could be upgraded if Moody's believes that debt-to-equity
will remain consistently below 1x, and if the firm decreases the
proportion of secured debt in its capital structure, improves liquidity
and debt maturity laddering.
BCSF's rating could be downgraded if the company increases leverage
beyond 1.3x debt-to-equity target, increases
investments that Moody's expects will increase the firm's
asset and earnings volatility, suffers a significant decline in
earnings, pays dividends that exceed net investment income on a
regular basis, or materially increases reliance on secured debt.
The principal methodology used in this rating was Finance Companies Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Bruno Baretta
Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
