Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC Incorporated conference call for the quarter ended September 30th, 2019. All participants are in a listen-only mode. A question and answer session will follow the company's formal remarks. Today's conference 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.bearingsbdc.com under the Investor Relations section. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. 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 reports, on Form 10-K for the fiscal year ended December 31st, 2018, and quarterly report on Form 10-Q for the quarter ended September 30th, 2019, each as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or advise any forward-looking statements unless required by law. At this time, I will turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC. Please go ahead.

Thank you, 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 third quarter 2019 earnings presentation that was 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 Global Private Finance, Ian Fowler, Tom McDonald, Managing Director and Portfolio Manager of our Raleigh Syndicated Loan Assets and Global High Yield Group, and BDC's Chief Financial Officer, Jonathan Bach. Ian and John will review our third quarter results and provide a market update in a few minutes, but I'd like to begin today with some high-level comments about the quarter. Please turn to slide five of the presentation, where you'll see our third quarter highlights. Overall results were consistent with the second quarter as we continued to selectively increase our direct lending exposure while also maintaining a steady NAV per share. For the quarter, NAV per share was $11.58, while our net investment income increased by one penny, coming in at $0.16 per share for the third quarter versus $0.15 per share for the second quarter. We continue to have no loans on non-accrual, and the overall credit performance of our portfolio remains strong. Our middle market debt portfolio was valued at 99.7% of cost as of September 30th, and our broadly syndicated loan portfolio was valued at 96.3% of cost. The BSL portfolio decreased in value by approximately $2 million for the quarter, although we did see appreciation for roughly two-thirds of our investments, including names such as STI Packaging and Reynolds Group. This appreciation, however, was offset by volatility in a handful of liquid securities particularly in the energy and prescription drug industries, such as Seadrill, Fieldwood Energy, and Malintrub. The majority of the underperformance was focused within a few specific names, as we have only seven broadly syndicated loan investments out of 103 that were valued below 90% of cost at quarter end. Shifting gears for a moment, I'd like to focus investors on our investment ramp and transition from broadly syndicated loans to directly originated and proprietary investments. I'll characterize our investment ramp as both steady and deliberate. Since August, we've invested $490 million in middle market investments, averaging $90 million per quarter, with new middle market investments totaling $121 million in the third quarter. Additionally, we matched those third quarter originations with $130 million of net broadly syndicated loan sales in the third quarter and continued to selectively sell in the fourth quarter. bringing our broadly syndicated loan exposure to 61% of portfolio at September 30th. In short, from an origination standpoint, we're exactly where we said we would be, and we expect this steady and deliberate transition, averaging approximately $100 million of middle market and proprietary originations per quarter, to drive us towards an 8% yield. On slide six, we summarized some additional financial highlights for the last five quarters. Ian will discuss market conditions in more detail, but I'll say that our investment pace must also be measured against the market opportunity set. Let me be clear. We are operating in a challenging lending environment, and the wealth of capital aggressively pursues a finite set of quality investment opportunities. Additionally, lower LIBOR and tight investment spreads pressure market yields on all direct loans, and this may likely drive further competitive market behavior. In my view, investing in this competitive environment requires two very important actions to remain successful. First, managers should keep a wide investment frame of reference to ensure a proper focus on relative value. This includes a view of both liquid and illiquid assets, special situation investment opportunities, as well as multi-geographic focus to prevent being overly reliant on one asset class or category. Second, some periods have a fee structure and liability profile It gives the external manager the ability to focus on attractive risk-adjusted returns and limits seeking current income today at the expense of NAV deterioration in the future. Thankfully, Barings, as a $335 billion asset manager, has an extremely wide investment frame of reference across global markets and multiple asset classes. We've managed in many markets through many multiple cycles, all with the goal of delivering attractive risk-adjusted returns through recycles. Additionally, our unique ownership by MassMutual committed to investor alignment has led us to create a market leading fee structure. This fee structure gives us the flexibility to generate attractive risk adjusted returns to investors while at the same time focusing on high quality, true first lien senior secured investments. Before turning the call over to Ian, I will continue this point of alignment and update you on our share repurchase program. Please turn to slide seven. As a reminder, The share repurchase program we 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 outstanding shares in the event the stock trades at prices below 0.90 NAV, subject to liquidity and regulatory constraints. Based on how our stock is traded, the target amount for 2019 repurchases will likely be around 4.5%. Since the beginning of the program, The BDC has already repurchased 3.9% of the outstanding shares, and we fully expect to achieve our commitment target by the end of the year, continuing to demonstrate our strong alignment with our shareholders. With that, I'll ask Ian to provide an update on our investment portfolio and trends we are seeing in the middle market.

Thanks, Eric, and good morning, everyone. Jumping to slide nine, you can see a summary of our new investments and repayments for the third quarter. and net funding trends for the last five quarters. Our gross middle market fundings for the quarter of $121 million included 10 new platform investments and six follow-on investments. Included in these numbers are an additional $5 million for the joint venture, plus three European investments totaling $33 million. We look at our 10-plus year direct lending leadership position in Europe as an excellent backdrop for diversification. as it continues to be a growing opportunity for middle market direct lenders who hold roughly a 50% share of the current market and continue to take share from the large banks, a dynamic that creates a strong relative value proposition. Europe also provides an opportunity to make investments in strong middle market companies that have characteristics of much larger companies. Europe is not one single market, and barriers to entry within a single country can create competitive positions that middle market companies do not typically enjoy in the U.S. Furthermore, while a company's EBITDA profile of 30 million may classify the investment as a middle market company based on its size, the company's dominance in a niche market in a certain geography can be a characteristic normally enjoyed by much larger companies. And we will continue to utilize the Barron's platform to take advantage of these types of opportunities going forward. Turning to slide 10, you can see that as of September 30th, the BDC was invested in roughly $675 million of liquid broadly syndicated loans and $469 million in private middle market loans and equity, including $47 million of unfunded commitments. Overall, our portfolio consists of 98% senior secured, first lien assets. The broadly syndicated loan portfolio had a weighted average spread of 329 basis points and a yield at fair value of 5.6%. While the spread was up slightly from 327 basis points at the end of the second quarter, the yield was down from 5.8% due to lower LIBOR. The weighted average senior leverage for this portfolio remained relatively consistent with last quarter, at 5.1 times versus five times at June 30. Shifting to the middle market portfolio stats on slide 10. As of September 30, our 422 million funded middle market portfolio was spread across 38 portfolio companies, as compared to 352 million across 30 portfolio companies at the end of the second quarter. Underlying portfolio company fundamentals remain strong, with weighted average senior leverage of 4.6 times and weighted average interest coverage of 2.7 times. Of the 38 middle market investments, 36 first lien investments and two were selectively chosen second lien term loans. Average spreads were up this quarter from 500 basis points of June 30th to 519 basis points, at September 30. As with the broadly syndicated loan portfolio, however, overall yields declined to 7.2%, primarily as a result of lower LIBOR. A portion of the spread increase was due to higher spreads associated with the new European investments. As we have said before, our focus continues to be on credit spreads, as that is ultimately our compensation for risk. Our middle market portfolio remains well diversified, as the 38 investments are spread across 14 industries, with no single investment exceeding 2.2% of the total portfolio. Our top 10 investments are shown on slide 11. Now switching gears to the broader market, please turn to slide 13, where we show 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 the middle market lenders relative to the large corporate market remains at all-time tights. This is driven by continued capital flows into the middle market in light of a generally average level of M&A volume relative to 2018, as well as widening spreads in liquid loans as a result of technical outflows. What's more, the tightening illiquidity premiums on the middle market asset class require an extreme focus on ensuring illiquid credit is priced appropriately relative to its liquid counterpart. This is where varying scale and depth in numerous asset classes comes into play, as this allows us to properly price and drive attractive relative returns across multiple asset classes and geographies in search for relative value. As you can see on slide 14, true first lien middle market spreads are currently averaging 538 basis points. And looking at our first lien deployments, we've kept the focus on quality, where our average first lien spread since externalization is approximately 510 basis points. Additionally, investors may notice that Unitron spreads have tightened materially and now sit on top of first lien senior loans. This serves as a reminder that it is important to look at each issuer and capital structure individually, focusing on the true security position rather than simply a name or a category. On slide 15, we show leverage trends in the broader marketplace, not specific to our portfolio. While the traditional first-lane mezzanine and first-lane, second-lane structures remain elevated in the third quarter, They were relatively consistent with second quarter levels. The senior and Unitron categories, however, rose to their highest measured levels since this tracking began. I think it's also interesting to note that both first lien and total leverage hit new record highs of four and a half times and five times for middle market sponsored transactions in the third quarter. with 53% of mill market-sponsored deals having total leverage of greater than five times. Today's lending environment affords investors many opportunities to relax standards on leverage in order to compete for deals, which once again emphasizes our earlier points about investing focus, discipline, and diversification. We will continue to focus on finding quality transactions over meeting yield expectations or deployment targets, which we believe will ultimately be best for long-term shareholder returns. I'll now turn the call over to John to provide more color on our third quarter results and the opportunities presented by our joint venture.