Barings BDC, Inc.

Greetings. At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended March 31, 2019. All participants are on a listen-only mode. A question-and-answer session will follow the company's formal remarks. If you would like to ask a question today, you may do so by pressing star 1 on your telephone keypad. 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.bdc.gov. 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 annual report on Form 10-K for the fiscal year ended December 31, 2018, and quarterly report on Form 10-Q for the quarter ended March 31, 2019. Each is filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I will turn the call over to Eric Boyd, Chief Executive Officer of Barings BDC.

Thank you, Donna, and good morning, everyone. We appreciate you joining us for today's call, and please note that throughout this call, we'll be referring to our first quarter 2019 earnings presentation that is posted on the Investor Relations section of our website. On the call today, I'm joined by Barings BDC's President and Barings Co-Head of North America Private Finance, Ian Fowler. Tom McDonald, Managing Director and Portfolio Manager in Global High Yield, and the BDC's Chief Financial Officer, Jonathan Bach. Ian and John will review our first quarter results and market trends in a few moments, but I'd like to begin our call today with a few high-level comments about the quarter. Please turn to slide five of the presentation. This is an update to a slide we shared last quarter highlighting the volatility of liquid credit spreads and their correlation to BDC stock prices. In the fourth quarter, the liquid credit markets experienced their worst quarter since the financial crisis, with prices falling roughly 4.5%. Loan spreads recovered by approximately 100 basis points in January and February of 2019, although the market weakened modestly in March. The first quarter saw a corresponding increase in BDC stock prices that reflected the increase in spreads, with BDC total returns outpacing the broader market. This spread recovery drove improved marks for our broadly syndicated loan portfolio, as underlying performance at our portfolio companies has remained strong. Now turning to slide six, here you'll see our first quarter highlights. You can see our NAV increased 4.9% to $11.52 per share. This was primarily driven by the spread movements I just discussed, resulting in a higher fair value for a Raleigh syndicated loan portfolio. Once again, this movement in portfolio values is not the result of changes in underlying company fundamentals, but rather was driven by a partial reversal of the technically driven sell-off in global credit spreads in the fourth quarter of 2018. Moreover, with continued tightening in liquid credit spreads in the second quarter of 2019, approximately half of the remaining unrealized loss has already been recovered so far in this quarter. From an operating standpoint, our middle market portfolio ramp continued, though it was seasonally down given the deal activity is often slow at the beginning of the year. During the quarter we made investments totaling $65 million and the total value of our middle market portfolio increased to $289 million at quarter end. Net investment income of 16 cents a share was consistent with the fourth quarter and in excess of our first quarter dividend of 12 cents per share. While quarter over quarter investment income increased due to the larger investment portfolio, net investment income was flat due in part to late investment fundings and higher financing costs associated with our new $800 million corporate credit facility that closed in mid-February. I would also note that we will experience the full quarter effect of unused fees in the second quarter of 2019. However, we expect that earnings pressure to be temporary as we continue to leverage our credit line, and we believe the additional liquidity provided by our facility is well worth the cost. On slide seven, we summarized some further financial highlights for the first quarter compared to the previous two quarters. In the middle of the slide, you can see the $25.4 million of net unrealized appreciation that drove the net income and NAV increases in Q1, recovering a large portion of the $52.3 million of unrealized appreciation recorded in the fourth quarter. Leverage was up slightly from last quarter, and our $1.2 billion investment portfolio was partially supported by $580 million of borrowings under our broadly syndicated loan facility, and 40 million of borrowings under our new $800 million corporate revolver. Subsequent to quarter end, we issued an on-balance sheet CLO structure for a portion of our broadly syndicated loan holdings. This allows for very attractive, match-funded financing, and an all-in cost that was lower than our broadly syndicated loan facility. I'll let Jonathan further outline these benefits in his remarks. Before I turn the call over to Ian, I'd like to provide a quick update on our share repurchase program. As our chairman, Mike Reno, outlined on our earnings call last quarter, we believe share repurchases are an important part of any long-term capital allocation philosophy. The share repurchase plan we announced for 2019 aims to repurchase up to 2.5% of the outstanding shares of Barings BDC stock when it trades at prices below NAV and purchase up to 5% of the outstanding shares in the event the stock trades at prices below 0.9 of NAV, subject to liquidity and regulatory constraints. Through a combination of purchases under Rule 10b-5-1 and Rule 10b-18 plans, the company has already purchased approximately 1.5% of its outstanding shares. Overall, this year's repurchase program, our underlying capital allocation philosophy, and substantial ownership by our parent further differentiate our commitment to market-leading alignment with our shareholders. With that, Ian will now provide an update on our investment portfolio and trends we're seeing in the middle market.

Thank you, Eric, and good morning, everyone. Jumping to slide 10, you can see a summary of our new investments and repayments for the last three quarters. Following a very active fourth quarter, the first quarter was slower for both Barings BDC and the market as a whole, as we had 59 million of net middle market loan fundings. While quarters will fluctuate, you can see that our average level of middle market fundings for the last three quarters is roughly 100 million, consistent with the expected average Additionally, we had net sales of BSL portfolio investments of $33 million, continuing our strategy to opportunistically exit certain BSL investments in order to fund middle market portfolio growth. Turning to slide 11, you can see that as of March 31st, the BDC was invested in roughly $838 million of liquid, broadly syndicated loans and $317 million in private middle market loans, including delayed draw term loans. Overall, our portfolio consists of 99% senior secured first lien assets. The BSLs continue to be a diversified portfolio of 111 investments across multiple industries with a weighted average spread of 329 basis points and a yield at fair value of 6%. Senior leverage for this portfolio remained consistent with last quarter, with a weighted average of 4.9 times senior debt EBITDA. Now shifting to the middle market portfolio stats on slide 11, as of March 31st, our 317 million middle market portfolio was spread across 25 portfolio companies, as compared to 249 million across 19 portfolio companies at the end of 2018. Underlying portfolio company fundamentals remains strong with weighted average senior leverage of 4.5 times and a median EBITDA size of our first lien middle market exposure of approximately 34 million. Of the 25 middle market investments, 22 are first lien investments and three are second lien term loans selectively made after considering their leverage levels, structure, credit profiles, and absolute returns. Average spreads and yields are also consistent with last quarter at 501 basis points and 7.8% respectively. We will always evaluate yield structures for the best risk-adjusted returns. But I also want to be clear that we will continue to focus on a predominantly first lean senior secured strategy. Our middle market portfolio remains well diversified as the 25 investments are spread across 13 industries and no investment exceeds 2.1 percent of the total portfolio. Our top 10 investments are shown on slide 12. Now turning to slide 14, here you will see the start of the three slides that outline middle market spread and leverage trends with third-party data from Refinitiv. I think it's valuable to use these same slides each quarter in order to consistently highlight trends in the market. As you can see on slide 14, which illustrates middle market spreads from first lean to mezzanine, there was modest spread widening across much of the middle market in the first quarter. The exception was second lean spreads, which decreased slightly after an increase in the fourth quarter, continuing a trend of tracking more closely with the liquid market. Overall, spreads in the middle market have remained relatively stable and are generally slightly above 2018 averages. Slide 15 shows a slight uptick in leverage during the first quarter for the all-senior and traditional first lien, second lien categories, continuing the increasing leverage trend of recent years. A breakdown of leverage trends by industry is shown on slide 16. While we have the capability and focus to search for the most attractive relative value in a capital structure, our general preference is to structure very deep first lien senior debt into a bifurcated traditional first lien, second lien structure, where the risk-return profile is more clear. Importantly, this allows us to consider where true value really sits. In this competitive environment, we believe the focus, discipline, and capabilities of the Barings platform will lead to high-quality investment opportunities. With that, I'll turn the call over to John to provide more color on our first quarter financial results.