Bain Capital Specialty: IIIQ 2021 Credit Status

With the IVQ 2021 BDC earnings season right round the corner, the BDC Credit Reporter is updating the credit status of as many public BDCs as possible, using IIIQ 2021 data and any subsequent developments we are aware of.

Portfolio Metrics

In the case of Bain Capital Specialty Finance (BCSF), total investment assets at cost amount to $2.380bn, and the fair market value to $2.357bn, a slight discount of (1%). The BDC portfolio at fair value has shrunk (5%) in the first 9 months of 2021.

Investment Rating

There are 105 portfolio companies. The BDC rates the credit status of its portfolio quarterly. As of September 30, 2021 the value of under-performing assets was $244mn, or 10.3% of the entire portfolio. Both the amount and the percentage are largely unchanged from the quarter before.

Non Accruals

BCSF has no loans on non accrual, although two portfolio companies have some debt which is non -performing, as we’ll discuss shortly.

Underperformers

We have identified 7 underperforming portfolio companies, with an aggregate value of $181mn. However, 2 are not material and non income producing. These are NPC International (fast food), which we wrapped up in an article on January 14, 2021 and East BCC Coinvest II (capital equipment).

That leaves 5 companies, of which 2 are rated CCR 3. First there is GSP Holdings, LLC. The company has been underperforming since IIQ 2020 and its first lien debt held by BCSF is discounted up to (21%), but was at a (46%) at worst, suggesting some improvement recently. We have found very little public info on the company. The latest value is $34.1mn.

We also don’t know much about TLC Purchaser and TLC Holdco, with a value – mostly in debt – of $42mn. Of late, the valuation has been modestly trending down with the equity held discounted (57%) and the debt up to (15%). TLC has been underperforming since 2020.

Credit Focus

Of greater concern are Ansira Holdings, Direct Travel and Chase Industries, all of which we rate CCR 4, where the likelihood of an ultimate realized loss is greater than full recovery. We discussed Ansira, which has multiple BDC lenders, back in November 2021. One BDC has its unitranche loan exposure marked as non accruing but BCSF has its loan positions as performing. Total exposure by BCSF is $43.6mn, with much of the income already booked as pay-in-kind. Should the marketing services company default, BCSF has $3.7mn of annual investment income at risk of interruption.

Direct Travel is in a difficult business right now and has already been restructured earlier in the pandemic. Another BDC lender – TCG BDC – carries its exposure to the company’s 10/1/2023 loan as non-performing but BCSF’s 10/2/2023 term loan is still counted as performing, but discounted in value by up to (20%). Furthermore, all the income being booked is in PIK form…Some $6.5mn of annual interest income is in play here – 3.3% of the BDC’s total investment income, so what happens at Direct Travel will materially affect the BDC.

Finally, there’s Chase Industries. Again this specialty door manufacturer has multiple BDC lenders. Also again, BCSF’s income is at least partly being booked in PIK form. BCSF’s exposure is in the first lien debt, which is discounted only (17%). However, Goldman Sachs BDC is in second lien debt, which is non performing (63%). This is cause for concern for BCSF, and the main reason why we’ve applied a CCR 4 rating. The BDC’s debt has a value of $11.4mn and $0.900mn of annual interest income at risk.

Follow Up

We’ll be focused principally on Ansira, Direct Travel snd Chase Industries when BCSF publishes its IVQ 2021 results on February 23, 2022. Clearly, bad news is possible that may cause both further unrealized losses and material loss of interest income. On the other hand, with travel recovering; housing on an uptick and business conditions favorable all three companies financial performance could improve, boosting asset values and leaving income untouched. We’re also reassured that the $114mn of exposure at FMV is almost all in a first lien position. As they say, this could go either way in the short run where valuation and income is concerned but the ultimate outcome promises to be favorable for BCSF.