Barings BDC, Inc.

At this time, I'd like to welcome everyone to the Barings BDC conference call for the quarter ended June 30th, 2019. All participants are in a listen-only mode. A question and answer session will follow the company's formal remarks. 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.baringsbdc.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 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 June 30, 2019, each as filed with Securities and Exchange Commission. Barry's BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I'll turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thank you, Kevin, 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 second 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 Co-Head of North America Private Finance, Ian Fowler. Tom McDonald, Managing Director and Portfolio Manager in our global high-yield team, and the BDC's Chief Financial Officer, Jonathan Bach. Before going through the second quarter results, I'd like to take a moment to reflect on the last four quarters. It has been approximately one year since Barings was voted by shareholders to have the opportunity to serve as the investment advisor to the BDC. In our first quarterly earnings call last November, I said that long-term success in sponsored lending is a marathon. that requires strong credit discipline, a diligent focus on asset liability management, a broad and deep investment platform and team, and a deep commitment to long-term investor alignment. While it's only been four quarters, I believe we have made strong progress toward these objectives in the last year. Our investment portfolio has grown from zero to approximately $1.2 billion in one year, including over $350 million of funded private middle market loans, with no non-accrual assets and strong underlying performance across the portfolio. These investments have been financed in part with three sources of debt, including two new credit lines and a static CLO issuance. Our recently announced joint venture with the state of South Carolina retirement system will help drive shareholder returns through effective use of our non-qualified asset bucket with a respected institutional partner. Finally, we have continued to demonstrate our commitment to long-term investor alignment through programs such as the BDC's ongoing share repurchase program and the $50 million Barings LLC share purchase plan that was completed in February, with Barings LLC now owning over 27% of Barings BDC. While we believe that this is a strong start for the BDC, we know that continuing to deliver steady and stable operating results is vital for investor trust, and we will remain focused on this mission going forward. Switching gears to the second quarter, please turn to slide five of the presentation, which shows the volatility in liquid credit spreads and their correlation to VDC stock prices. Compared to the previous two quarters, spreads were relatively flat from March 31st to June 30th. On our May earnings call, we indicated that liquid credit spreads had tightened in the early part of the quarter, but subsequent widening in June led to a flat overall spread, resulting in a relatively consistent value for our liquid Burleigh-Sneekay loan portfolio quarter over quarter. As we would expect, the second quarter saw generally flat BDC stock prices, consistent with liquid credit spreads. Turn now to slide six for our second quarter highlights. Overall, I would characterize it as a steady quarter, as our NAB increased from $11.52 per share at March 31st to $11.59 per share on June 30th. Our net investment income was down slightly, coming in at $0.15 per share for the second quarter versus $0.16 for the first quarter. We indicated on last quarter's call that we would experience the first full quarter of unused fees on our new $800 million corporate credit facility during the second quarter, which coupled with a full quarter of fee amortization was approximately two cents a share. As our middle market portfolio grows, we expect to continue to leverage this credit line and view the near-term earnings impact as secondary to the long-term benefits of the liquidity provided by this facility. Our net investment income of 15 cents per share more than covered our second quarter dividend of 13 cents per share. The ramp of our middle market portfolio continued with seven new middle market debt investments totaling $67 million during the quarter and total investments of $80 million, including our add-on investments and our joint venture equity investment. We also saw the first repayments in our middle market debt portfolio with two investments made in 2018 that were repaid at par. After a relatively rapid start, the latter half of the second quarter was slower in terms of overall deal activity. As always, our focus continues to be on quality investments, and while we will not target a specific amount for new investments each quarter, we continue to believe that a reasonable expectation is for average quarterly deployments of around $100 million, although any given quarter could be above or below that amount. Ian will discuss our portfolio activity in more detail shortly. Slide 7 shows some additional financial highlights for our first four quarters as the investment manager. Note that our leverage remained relatively consistent in the quarter at 1.09 times, and our net asset value grew in part by net unrealized appreciation on our portfolio of $1.9 million. Our middle market portfolio continues to be marked right around our cost basis, as performance across the portfolio has been consistent with expectations since close. Additionally, we continue to be comfortable with the underlying operational performance of our broadly syndicated loan portfolio as a whole and the liquidity provided by our diversified liability structure. Finally, slide eight provides an update on our share repurchase program. As you're probably aware, the share repurchase program was announced for 2019, aims to repurchase up to 2.5% of the outstanding shares when Barings BDC stock trades at prices below NAV. and repurchase up to 5% of the outstanding shares in the event the stock trades at prices below 0.9 times NAV, subject to liquidity and regulatory constraints. If you look at where our stock has traded since we announced the program, the current 2019 repurchase target would be approximately 4%. Since the beginning of this program, the company has repurchased approximately 1.9% of its outstanding shares, so we are well on our way to meeting our commitment under this repurchase program and continuing to enhance our alignment with shareholders. I'll now turn the call over to Ian to provide an update on our investment portfolio and middle market investment trends. Thanks, Eric.

Good morning, everyone. On slide 10, we show details of our investment activity for the second quarter, as well as net funding trends for the last year. Our gross middle market debt fundings for the quarter of $72 million included seven new platform debt investments and five follow-on investments. While up from the seasonally slow first quarter, I would characterize the second quarter as a little slower than normal, as investment activity tailed off a bit in late May and early June. This trend has continued into July, but we have seen signs of increased deal flow and would expect more activity as we get through the summer months. Two middle market debt investments, Global Trans and Lindstrom, were fully repaid in the quarter, resulting in net middle market fundings of $66 million, when you also take into account our $5 million equity contribution to the joint venture. For our broadly syndicated loan portfolio, we had net sales and repayments of $28 million. Jumping to slide 11, at the end of the second quarter, we were invested in approximately $809 million of liquid broadly syndicated loans and $388 million in private middle market loans and equity, including $36 million delayed draw term loans. We continue to focus on senior secured, first lien assets, and these investments comprise 99% of our portfolio. Average spreads and yields for our broadly syndicated loan portfolio were down slightly since March, ending the quarter at 327 basis points and 5.8% respectively. Senior leverage for this portfolio remained relatively consistent with last quarter, with a weighted average of five times senior debt to EBITDA. Our middle market portfolio with a funded value of $352 million was primarily comprised of 28 first lien debt investments and two second lien term loans. The underlying credit statistics for this portfolio were consistent with the first quarter with weighted average senior leverage of 4.5 times and weighted average interest coverage of 2.9 times. Average spreads were also consistent with the first quarter at 500 basis points. while average yields were down slightly from 7.8% to 7.5%. All of our debt investments are variable rate instruments, many with LIBOR floors, which we believe is a better strategy than fixed rate investments in this environment. That said, our focus continues to be on the credit spread, as that is ultimately our compensation for risk. From a valuation perspective, no middle market debt investments valued below 98% of costs. Overall, our portfolio remains well diversified with 142 investments spread across 28 industries and with no investment exceeding 2.1% of the total value of our portfolio. Our top 10 investments are shown on slide 12. Turning to slide 14, here you will see the start of three slides that outline middle market spread and leverage trends with third-party data from Rotinitiv. I'll start with a global slide that outlines current yields earned in the large corporate market compared to middle market syndicated and middle market direct lending transactions. In short, the spread premium enjoyed by middle market lenders relative to the large corporate market is at all-time lows. This is driven by a combination of spread widening and liquid loans as a result of capital outflows and continued competition in a less active middle market. When facing these market conditions, we believe it is critical for managers to one, keep a militant focus on the senior portion of the capital stack in high quality companies, and two, emphasize a high degree of portfolio diversification. As you can see on slide 15, True first lien middle market spreads are currently averaging 546 basis points. Looking at our first lien deployments, we've kept a focus on quality where our average first lien since externalization is approximately 500 basis points. Additionally, investors may notice that Unitron spreads have tightened materially and now sit on top of first lien senior loans. Slide 16 shows a slight uptick in leverage during the first half of 2019. for the all-senior, first-lane MEDS, and first-lane, second-lane categories, continuing the increasing leverage trend of recent years. Today's lending environment affords investors many opportunities to relax standards on leverage in order to compete for deals, which once again emphasizes my earlier points about investing focus, discipline, and diversification. We continue to focus on finding quality transactions over meeting yield or deployment targets, which we believe will ultimately be best for long-term shareholder returns. With that, I'll turn the call over to John to provide more color on our financial results.