Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter and year end of December 31, 2019. All participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. If anyone should require operator assistance during the conference, please press star zero 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.barringsbdc.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, 2019, as 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'll return the call over to Eric Lloyd, Chief Executive Officer for Barings BDC.

Thank you, Operator, and good morning, everyone. We appreciate everyone joining us for today's call. And please note that throughout this call, we'll be referring to our fourth 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 global private finance, Ian Fowler, Tom McDonald, managing director and portfolio manager in our global high yield group, and BDC's chief financial officer, Jonathan Bach. Ian and John will review our fourth quarter results and provide a market update in a few minutes. They'll begin today's call with some high-level comments about the quarter. Please turn to slide five of the presentation where you can see our fourth quarter highlights. Overall results were consistent with the third quarter as we increased proprietary asset exposure and remained active in reducing our broadly syndicated loans. As I have mentioned on prior calls, our investment ramp is both steady and deliberate. Since August of 2018, we've invested approximately $660 million in middle market investments, averaging $110 million per quarter, with new middle market investments totaling $165 million in the fourth quarter of 2019. Additionally, we matched those fourth quarter originations with a healthy $169 million of net broadly syndicated loans, sales, and repayments, bringing our total BFL exposure to below 50% of the portfolio at December 31st. As we look at 2020, we remain on track with a steady, deliberate transition, expecting to average $100 million of proprietary originations per quarter in normalized markets to drive us towards our 8% yield expectation. For the quarter, NAV per share was $11.66, increased primarily by appreciation of our broadly syndicated loan portfolio, while our net investment income was $0.15 per share, driven by sales of broadly syndicated loans, late quarter middle market loan fundings, and lower LIBOR. 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 99.9% of cost at December 31st, and our broadly syndicated loan portfolio was valued at 96.5% of cost. The BSL portfolio appreciation was widespread, with 80% of our positions increasing in value during the quarter. We did recognize 2.9 million of net realized losses on select sales within our broadly syndicated loan portfolio during the quarter. As we continue to analyze this portfolio and the market, we will exit the BSL position at a loss if we believe we can realize a higher risk adjusted return on the capital by reinvesting it in another position. On slide six, we summarized some additional financial highlights for the last five quarters. Ian will discuss market conditions in more detail, but I will say that our investment pace is always measured against the market opportunity set. The direct lending environment today requires significant investment discipline, a wide frame of reference, and a high degree of shareholder alignment to be successful. Barings, as a $338 billion investment manager, has a wide investment funnel across global markets and multiple asset classes. Additionally, our unique ownership by MassMutual and commitment to investor alignment led us to create a market-leading fee structure with a high investment hurdle, low base management fee, and no upfront fee scrape. The fee structure gives us more 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 with this point of alignment and provide an update on our share and purchase program. Please turn to slide seven. As a reminder, the share repurchase program we announced for 2019 aimed to repurchase up to 2.5% of outstanding shares when Barings BDC stock traded at prices below NAV and repurchase up to 5% of outstanding shares in the event the stock traded at prices below 0.9 of NAV. Based on our trading levels, the target amount for our 2019 repurchases was 4.5% of outstanding shares. We reached that target. generating $0.07 per share of NAV appreciation for the year. I'm also happy to announce that our board has approved a share repurchase program for 2020, authorizing the company to repurchase up to a maximum of 5% of the outstanding shares during the year if shares trade below NAV, subject to liquidity and regulatory constraints. 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 9, you can see a summary of our investment activity for the fourth quarter. New middle market investments sold $165 million, with sales and repayments of $28 million. As you can see from the trend over the last six quarters, we have maintained our expected $100 million quarterly middle market loan origination pace, funded by BSL sales and borrowings under our credit facility. New investments included 15 new platforms, and eight follow-on investments. Five of these investments were European platforms, and we expect to continue ramping in Europe as we see very favorable terms in that market and believe it is an excellent way to diversify the BDC's portfolio. On slide 10, you can see that at the end of 2019, we were invested roughly $606 million of private middle market loans and equity, which included $49 million of unfunded commitments. Liquid, broadly syndicated loans were down to $510 million, which, as Eric mentioned, makes this the first quarter where our directly originated portfolio exceeded our BSL portfolio. Our portfolio is high quality with 97.6 senior secured first lien assets. The weighted average senior leverage for the total portfolio remained consistent with last quarter at 4.9 times. Focusing on the middle market portfolio statistics, As of year-end, our $557 million funded middle market portfolio was spread across 53 portfolio companies, as compared to $422 million across 38 portfolio companies at the end of the third quarter. Underlying portfolio company fundamentals remain strong, with weighted average senior leverage of 4.7 times and weighted average interest coverage of 2.7 times. Of the 53 middle market investments, 51 were first lien investments and two were selectively chosen second lien term loans, comprising less than 1.5% of the portfolio. Average spreads were up this quarter from 519 basis points at September 30th to 528 basis points at December 31st. Despite the increase in spreads, overall yields remained flat at 7.2%, primarily as a result of lower LIBOR. The substantial portion of the spread increase was due to higher spreads associated with the five 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 53 investments are spread across 17 industries with no single investment exceeding 2.3% of the total portfolio. Turning to our BSL portfolio, The weighted average spread was 349 basis points and a yield at fair value of 5.6% at December 31st. Consistent with the middle market portfolio, while the spread was up 329 basis points at the end of the quarter, the yield remained flat at 5.6% due to lower LIBOR. As Eric mentioned, as part of our liquid exposure, we did recognize 2.9 million losses on the sales of a selection of BSLs and the subsequent reinvestment of that capital including $1.5 million related to the sale of a portion of our position in Malincroft, which we believe bear positions the portfolio for appreciation going forward. Our top 10 investments are shown on slide 11 and reflect another aspect of the overall diversity of our portfolio, as the top 10 positions represent only 20% of the overall portfolio. Turning to slide 13 of the presentation, here you will see two graphs showing direct lending volumes and spread differentials Unitronch and traditional first lien, second lien structures. The first key takeaway here is that while bank-led syndicated no market loan volume was down in the fourth quarter, it was one of the best quarters since 2014 for the direct lending market. Sponsors focused on direct lending execution to reduce risk caused by volatility in the first lien, second lien market, with a particular focus on Unitronch transactions in the fourth quarter. This shift stands out if you look at the graph on slide 14, which shows Unitron's volume by quarter, with the fourth quarter hitting all-time highs for both middle market and large corporate deals. With a shift in the focus of capital-heavy managers to large mega Unitron executions, we've seen a positive dynamic in the middle of the middle market for transactions that allow us to be selective target market. Our fee structure does not force us into chasing return with higher risk, and our focus as a principal investor is to select the best risk-adjusted return. On slide 15, you can see that as Unitron's volumes have increased, spreads have fallen, reaching historic lows at the end of 2019. While this graph does not break out the spreads based on company size, The Unitron spread compression is clearly more impactful for higher EBITDA companies. Spreads for other structures generally increased during the fourth quarter, highlighting the importance of focusing on each individual issuer and structure when pricing risk. Looking ahead, we continue to remain highly selective, keeping a tight focus on our core sponsors and markets across the U.S. and Europe. This investment frame of reference allows us to continue the pace of our shift from BSL to middle market and proprietary assets without an overemphasis on one product, obligor, or geography. In this market, we cannot stress enough the value of choice, and with a large investment funnel across high-quality obligors, desperate asset classes, and niche geographies, we continue to be deliberate and focused on deploying capital to achieve strong risk-adjusted returns. I'll now turn the call over to John to provide more color on the fourth quarter results.