Barings BDC, Inc. (NYSE:BBDC) Q3 2023 Earnings Call Transcript

Barings BDC, Inc. (NYSE:BBDC) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Greetings. At this time, I would like to welcome everyone to the Barings BDC Inc Conference call for the quarter ended September 30th, 2023. All participants are in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. [Operator Instructions] Today’s call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company’s website at www.barings.com under the investor relations section. Please note that this call may contain forward-looking statements that include statements regarding the company’s goals, beliefs, strategies, future operating results, and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in forward-looking statements.

These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in the company’s quarterly report on Form 10-Q for the quarter ended September 30th, 2023, as filed with the Securities and Exchange Commission. Bearings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Eric Lloyd: Thank you, operator, and good morning, everyone. With it being Veterans Day tomorrow, I want to start off by thanking all the veterans that are on the phone, and any of their family members or loved ones who’ve supported veterans over the years. We’re very grateful for your service and everything you’ve done for our country. [Indiscernible] we appreciate you joining us for today’s call. Please note that throughout today’s call, we’ll be referring to our third quarter 2023 earnings presentation that’s posted on the investor relations section of our website. On the call today I’m joined by Barings Co-Head of Global Private Finance and President of Barings BDC, Ian Fowler; the BDC’s Chief Financial Officer, Elizabeth Murray, and the BDC’s Co-Portfolio Managers, Bryan High and Matt Freund.

I’d like to start by acknowledging that we have refreshed them with a presentation of our financial information and portfolio statistics. Over the course of the past several months, the team has been intentional about presenting information in a manner consistent with how we review and manage the portfolio. The strategy has not changed. Barings BDC was and remains an investor in the credit of companies engaged in the middle market. Our portfolio is predominantly sponsor-backed and is complemented by a selection of non-sponsored and platform investments. Our portfolio strategy is outlined in greater detail on slide five. We will not spend time this morning discussing our approach. We hope our investors and partners understand that this strategy serves as our guiding light and as we continue to successfully invest throughout the market and deliver compelling returns to our shareholders.

And with the acknowledgement of a new stylistic deal out of the way, we’ll shift our attentions to the important matters at hand and discussing performance during the quarter. BBDC exhibited stability and strong operating results against the backdrop of significant economic uncertainty and macroeconomic volatility during the quarter ended September 30th. Our focus on the top of the capital structure investments and sponsor-backed issuers is serving investors well in these uncertain times. Net asset value per share was $11.25, compared to the prior quarter of $11.34 and $11.05 at December 2022, reflecting a year-to-date increase of 1.8%. Net investment income for the quarter was $0.31, unchanged from the prior quarter. Consistent NII was fueled by normalization of yields from rising base rates.

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Q&A Session

Secondly, continued strong credit performance within our portfolio, and third, lower incentive fees due to the incentive cap in our shareholder-friendly structure. Our performance is a result of a focus of the top of the capital structure and within more defensive industries. We believe BBDC remains well positioned for any further volatility and uncertainty in the market going forward. Investment activity during the quarter reflected a modest degree of net deployments as we viewed certain opportunities in the market as some of the most compelling review during the year. As our shareholders know, we are actively working to maximize the value in our legacy holdings acquired from MVC Capital and Sierra Income and rotate them into compelling Barings originated positions.

Our investment portfolio continue to perform well in the third quarter. Including the acquired Sierra and MVC assets, our total non-accruals are 2.5% of the portfolio on a cost basis and 1.6% on a fair value basis, with one new non-accrual booked during the quarter. With the exception of two investments, all of our non-accrual assets were from acquired portfolios and therefore are covered by our credit support agreements. BBDC shareholders continue to benefit from the credit support agreements provided by the manager. For the current quarter, the CFA valuation was approximately $54 million on a combined basis for the Sierra and MVC credit support agreements. They’re designed to insulate shareholders from realized losses in the portfolio. The reduction in the CFA valuation quarter-over-quarter is primarily due to unrealized appreciation related to positions in the underlying Sierra portfolio.

As investors know, when the issued collateral improves in value, the value of the insurance declines and vice versa. To-date, less than $35 million of net losses have been realized with the acquired portfolios. The remaining unrealized depreciation within the portfolio are spread across a wide number of issuers and are believed to reflect market discounts to par rather than anticipated impairments. Recall that a bulk of the Sierra portfolio was comprised of semi-liquid, broadly syndicated loans that traded infrequently. Following the end of the quarter, two Sierra positions on non-accrual were fully realized. Turning to the earnings power of the portfolio, increasing base rates continue to lift yields on our predominantly floating rate portfolio with weighted average yields on floating rate investments increasing to 11.2% from the prior quarter of 11.0%.

We remain conservative on our base dividend policy and our board declared a fourth quarter dividend of $0.26 per share, consistent with the prior quarter. On an annualized basis, the dividend level equates to 9.2% yield on our net asset value of $11.25. Looking at liquidity, net leverage, which is leverage net of cash and unsettled transactions, was 1.18 times. This is within our target leverage range of 0.9 times to 1.25 times. We continue to prioritize risk management, while balancing the deployment of capital into what has become a very attractive environment for private credit. Before turning over the call, as many of you know, Barings BDC hosted our 2023 Investor Day in early October. We were grateful that many of our investors and partners were able to attend.

The presentations shared at that event and replays of the content are available under the investor relations section of our website for those of you who are unable to attend. We encourage you to review that if you’re able. I’ll now turn the call over to Ian.

Ian Fowler: Thanks, Eric. Recall that BBDC is managed by Barings LLC, a credit-focused asset manager with more than $300 billion of assets under management. The bulk of our portfolio sourced from the Global Private Finance team, an organization with more than 100 investment professionals located around the globe, providing financing solutions to preeminent middle market companies sponsored by private equity firms. BBDC’s portfolio increased by $34 million on a net basis in the quarter, with gross fundings of $138 million offset by $104 million of repayments and sales, which included approximately $50 million of sales to our Jocassee joint venture. Activity during the year has been tempered as private equity buyers take a pause in this rising rate environment to likely determine any impact on valuations.