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.

Thanks, Ian. Good morning, everyone. On slide 17, you can see the bridge of the company's net asset value per share from September 30th to December 31st, 2019. As Eric pointed out, our NAV was up by 8 cents this quarter to $11.56 per share. This increase was primarily due to net unrealized depreciation of 13 cents, partially offset by 6 cents of net realized losses, both of which were primarily attributable to activity in the BSL portfolio. Our net investment income for the quarter matched the dividend, and our share repurchase program resulted in 1 cent accretion. As previously stated, our board approved a program for 2020 to purchase up to 5% of our outstanding shares, demonstrating our long-term alignment with our shareholders. Additionally, buying our shares below net asset value is accreted to all shareholders and demonstrates our belief in our own underwriting. Slides 18 and 19 show our income statement and balance sheets for the last five quarters. I'd like to highlight a few items here. First, our total investment income decreased to approximately $900,000 compared to the third quarter. Lower live war and the timing of our continued portfolio transition led to lower interest income. One-time fees also declined. as we had no middle market investment repayments in the fourth quarter. Now, second, on the expense side, lower LIBOR helped total interest expense decrease by $226,000 quarter-over-quarter, despite slightly higher total borrowings. While our base management fee was virtually unchanged for the quarter, G&A expenses were up by approximately $115,000. Also, while it's not shown separately on slide 18, you'll see on the income statement in our Form 10-K that the net realized and unrealized losses on foreign currency transactions totaled approximately $1 million for 2019. These foreign currency transactions relate only to our foreign currency borrowing and hedging transactions. And while not reported separately, please be aware that the net realized and unrealized gains on investments include approximately $1 million related to foreign currency appreciation for those investments. So to sum it, the net impact of foreign currency fluctuations was effectively reduced zero or neutral for 2019, which we would expect given our hedging programs in place, including borrowing foreign currencies to fund foreign currency investments. And you can see on slide 19 our balance sheet trends. Now, excluding our short-term investments, total investments at fair value were down approximately $30 million compared to the third quarter due to the rotation out of our BSL portfolio. As can often happen at the end of the quarter, our cash and short-term investment balances at year-end were transitory and primarily a result of quarterly BSL sales where we were taking advantage of favorable market conditions. A portion of these proceeds was used to partially repay our BSL credit facility in January. During the fourth quarter, we lowered the commitment on this BSL facility from $177 to $150 million. and further lowered it to $80 million subsequent to quarter end to right-size the facility relative to our remaining BSL portfolio. Last week, we also extended the maturity of that BSL facility by one year to August of 2021. And also during the fourth quarter, $22 million of the CLO Class A1 notes were repaid, bringing the total CLO debt principal down to $318 million at year end. Details on each of these borrowings are shown on slide 20. And our leverage as of December 31st, 2019 was 1.17 times or 0.9 times after you adjust the cash and short-term investments as well as the net unsettled transactions. Slide 21 updates our paid and announced dividends since Barry took over as the advisor to the BDC. We announced yesterday that our first quarter 2020 dividend of $0.16 a share will be paid on March 18th of 2020. This marks our sixth consecutive increase and aligns our dividend with the earnings powering the portfolio. And as you think earnings trajectory in 2020, remember that when we closed the transaction in August of 2018 to become the external manager to the BDC, we implemented a fee structure that steps up to 1.375% in 2020 from 1.125% in 2019 and 1% at the onset. We are now more than halfway through the ramp to our directly originated portfolio, and at year end, only about $150 million of the remaining $510 million BSL portfolio was held outside of our static CLO. Our portfolio ramps continued in 2020, and slide 23 summarizes our new investment activity since the start of the new year. Since Jan 1, we've made approximately $108 million of new middle market private debt commitments, of which $73 million have already closed and funded, as well as funding for approximately $5 million for previously committed delay-draw term loans. Consistent with our investment tenants, these investments were primarily first lien, floating rate loans with an average three-year discount margin of 6.2%, and were split roughly two-thirds in the U.S., one-third in Europe. Moving to slide 24, The current bearing is global private finance investment pipelines, approximately $609 million on a probability-weighted basis, and is predominantly first lien secured across a variety of diversified industries. As a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipeline. Finally, I'd like to provide an update on our joint venture with the state of South Carolina retirement system. As mentioned on prior calls, this vehicle allows us to leverage the broader bearings platform and increases the investment diversity within the BEC. Now, as we ramp the vehicle, it will drive shareholder return through the effective use of our non-qualified asset bucket by investing in a wide variety of liquid and illiquid assets across multiple geographies. Now, at year end, the BEC's investment remains $10 million as we continue to ramp the JV portfolio using its subscription leverage facilities. That portfolio was about 94% first lean to new secured assets, with roughly 70% of the portfolio invested in the U.S. and 30% in Europe. Liquid assets made up the bulk of the portfolio at 80%, while the remaining balance of illiquid assets being 40%, 6% Europe, middle market loans, and 37% U.S. middle market loans, as well as 17% in private asset-backed securities. Now, we expect the joint venture's wide investment framework reference will drive uncorrelated returns over time, and we continue to evaluate opportunities in areas such as European credit, structured credit, and make investments in these areas when they have attractive risk-adjusted return profiles. And with that, operator, we'd like to open up the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tunnel indicates that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Finian O'Shea with Wells Fargo. Please proceed with your question.

Hi, good morning. Thanks for having me on. First of all, I'll ask Eric on the earnings ramped. You opened up talking about this being on pace and that outlook should continue. On the earnings sense, you know, it's obviously since you took over here, LIBOR's moved against you and you know, there's probably a, you probably have a more cautious outlook today at this point in terms of taking on risk. So how would you how would you describe to us your position to ramp and grow earnings over 2020 given today's real-time market environment?

You're right, Ben. I mean, obviously LIBOR has moved against this, which has made it challenging. Kind of philosophically is how I'll address it and then kind of get more specific. From kind of day one, I've said to shareholders that we're not going to reverse solve for what assets we need to generate in order to hit a certain targeted ROE. That just, I think, leads people to chasing risk in order to generate a certain return. We come at it the other way, which is we're going to do what risk we think is a prudent risk-adjusted return for a given asset and look at that at an asset level. So as we sit here today, right, with our pre-modeled spreads, the ROE would be more challenging than it would have been 18 months ago. Now, I balance that with one of the benefits of the entire Barings platform, which is something that in these kind of markets really can benefit shareholders, right? We have a – and Tom's here with me – we have a really large liquid investment platform that is, you know, able to capitalize on market volatility and and technicals in the market. You combine that with a very strong special situations group that has proprietary asset flow that can find really attractive yields for assets and come into the portfolio. A third leg of that could be our structured credit business, right? And in these type of markets, when we see loans sell off materially, you could see certain triple B tranches of CLOs really trade off materially. In some cases, even more so with those technicals, they can provide attractive returns, right? balance all that out to say that our only source of opportunity isn't just the middle market direct lending. It's really the power of the $330 billion platform that we have. As you sit here today, and John referenced the pipeline, and Ian, you know, mentioned the market, obviously a lot of people are putting a lot of transactions on hold, right? People are unsure of what the economy is going to look like or, you know, all those things, right? There's just a lot of unknowns right now. And so... Is it a more challenging environment, most likely over the course of the next month or two or whatever period of time for direct originations? Yeah, it's likely to be a more challenging period of time than it has been in the past. But I don't believe that means that there's not opportunities for us on our platform to invest. And so I can't say exactly what that means as far as what that ROE earnings will be, but I think, frankly, these times of volatility, frankly, can really play in the favor of someone like our platform.

I appreciate that. and your willingness to go across to platform more liquid businesses and take advantage. With that, I'll ask a follow on for Ian. You gave some context on European assets improving your spreads. Can you give us color on what sort of like for like risk premium you get on a, say, apples-to-apples European versus U.S. deal today?

Yeah, sure. And good morning. So a couple of things. First of all, European market, the deals that we do in that market, the deals that are done in that market are maybe a quarter of a turn to maybe half a turn deeper in terms of senior leverage with no leverage behind it. So it's one tranche with higher spreads and higher OIDs. The OIDs in the European deals are about 100 basis points more on average than our North American deals. And if you just think in the market, whether it's here or overseas, in terms of the average duration of these loans compressing from three and a half to four years on average to two to three years on average now, getting that pickup in OID actually creates a return lift.

Sure. I appreciate that, and thanks for taking my questions.

Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my questions, and I want to commend you on the ongoing share repurchase activity. I'd like to start out just on yield dynamics in the quarter. Reported yields appeared pretty stable. I know you mentioned there was some potentially some back weighting in terms of the middle market originations. Can you give us a sense for that? Any color there, like 75% of the deals were completed in December or something like that, just to give us a sense for yield dynamics in the quarter?

Yeah, sure. This is Bach, Kyle. So number one, you see the over $180 million in BSL sales. There's a two-part equation, right? We were reducing BSLs consistently throughout the quarter, heavy amounts early. and roughly two-thirds of our deals closed near the end of December, right? So you start to find that that double whammy on both sides led to the timing difference as well as low pressure earnings. So for us, I'd say that's probably good round numbers to look at for the fourth quarter.

That's really helpful. Oh, sorry. I was going to say on my next question, you know, As we think about the forward curve, as we think about your balance of BSLs versus middle market loans, just from a modeling perspective, how are you guys thinking about consolidated yields going forward? And I guess it might be helpful to talk about this sort of coronavirus impact.

Yeah, the unknown, right? So, again, I think Ian mentioned that what we really focus on is credit spread and upfront fees, and basically the combination of those two things. And we don't think the winning model is to play the interest rate game and kind of take a guess or speculation on what those interest rates are. If you look at our blended spread from Q3 to Q4, that blended spread increased from 402 at the end of Q3 to 443 at the end of Q4. And we can control that. What we can't control is what's going to happen in LIBOR or other situations like that. So then we have to look at, again, back to the volatility question, what opportunities does that provide? We also know that we have a target ROE that we want to generate for shareholders, of which we're the single largest one by a large margin. We want to generate that for ourselves, too. And so that's where I think the comments I made earlier to Finn's question around the platform and the other places that we can find attractive yields that can complement and help offset some of the pressure on earnings and return that LIBOR creates.

That's very helpful. Appreciate the time and answering my questions. Thanks, guys.

Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Hi, guys. I've got a couple, but first, yeah, congratulations on extending the repurchase plan. I think that's good for shareholders of which as you know you're the biggest one um let's on on coronavirus um it's early days um or covid19 or what i'm supposed to call it it's early days obviously right now um can give us any color um on on potential um portfolio impacts obviously you don't lend directly to chinese companies or but you know it's expanding via china from china but If I look at three of your top ten industries, for example, three of your top ten investments are transportation and cargo. Now, I presume those aren't shipping container ships applying the China-U.S. route. But any color you can give us on the sensitivity to the supply chain, the indirect impacts, et cetera?

Hey, Robert, it's Eric. I'm going to take a crack at this at first, and then I'll turn it over to Ian and see if Tom has any comments also. So I'm going to take a kind of step back first. I know this is probably the third time I'm now going to reference the platform and the benefit of it. You know, we have an investment office in Shanghai. We have an investment office in Seoul. We have a large investment office also in Hong Kong. So our access and knowledge in those Asia-Pacific markets – is materially different, I believe, than a number of other managers who have a very domestic-centric focus. The only information they're getting is through potentially portfolio companies, which are maybe getting it second or third hand from somebody else. So again, I think our firm knowledge is one that I think brings to bear. So what does that mean as far as specifics? We look at it across the liquid and the illiquid asset classes, because those same impacts, the impacts could be the same in some cases. They also could be different in some cases, right? It's more typical that our larger companies, a company with 500, 600, 700 million of EBITDA, it's going to have a more global type of revenue source as well as potentially a more global type of supplier source. You balance that with our middle market companies are more typically to have a U.S.-centric revenue source and potentially a more limited supplier source. They also have less resources to adjust towards potential challenges. So what have we been focusing on? You hit it on supply chain. It really is how far up the supply chain can we go to kind of get information. And I don't want to go down the path of sharing what our teams in China and the like have communicated to us because I think that's information that we need to kind of keep within the Barings family. But I can tell you that we're all over it. And what we haven't done is speculate as to what exactly it's going to mean for a given company. You hit the logistics types companies, right? obviously goods moving around the world is going too slow. And so there are going to be an impact, but we just don't know what that is today. And I'll come back to the last point on diversification. I believe our largest position in the portfolio is about 2.3% or so, right? From day one, I've made the representation that we are going to run a highly diversified portfolio at the expense of ramping faster, right? We could have put larger holes into the VDC and, grant more middle market assets, that would have helped ROE, but we would have woken up with a position that was 5% or 6% or 7%, and that's inconsistent with how we believe portfolio construction should be done.

Yeah, so, Ron, I think Eric hit on all the key points, and obviously the situation is fluid and expanding. We had our team do a review of the portfolio a month ago, with companies that had any exposure to any supply chain coming from China. Some of this gets back to just good underwriting because if you have any company out there that is locked into one source of manufacturing or one source of supplier without diversification, that's just not a really good credit. I know of one company in the market, not in our portfolio, that went to market And as they went to market, 100% of their manufacturing is in Wuhan. And so obviously that deal was pulled. And so, you know, we don't have any companies in our portfolio with, like, material direct exposure to China. And we're in touch with the management teams in terms of our portfolio companies to make sure that they have plans in place to the extent that they have any exposure to coronavirus issues. And again, I come back to portfolio construction that Eric mentioned and good underwriting. You know, we had a deal in our investment committee the other day. It's a commercial cleaning business. 100% of its revenue is U.S. domestic. But, you know, you need to look at, you know, do they have a concentration in, you know, L.A.? Because, God forbid, something happens in L.A. and, you know, that market shuts down and everyone goes home. So... It just comes back to diversification within the portfolio and within the companies. Yeah, I'll chime in. This is Tom. I'll chime in from the high-yield side. You know, so, you know, we're seeing now yesterday really the first cracks in our market with real selling. I think it was very orderly for the first couple of days of the week. And so now we're starting to see a little bit more of a sell-off in loans on the high-yield side. You know, so... What we're doing is evaluating – you know, clearly there's kind of a first-order impact, I'll call it, with travel companies, airlines, gaming companies, you know, things like that that immediately are backing up in price. And then the second-order impact, which we're trying to evaluate, which is sort of the supply chain and then concentration to customers in China. As you know, the broadly syndicated market is more of a worldwide market, so – You know, we're going through all that now. And so what we're doing as a team in our sectors are just going through, you know, names that we've clearly identified that may have an impact, right? And so identifying, you know, where do they sit from, you know, liquidity perspective, where is leverage, what kind of sponsor support might be there if this thing turns into more of a prolonged kind of situation where they see massive disruption in revenues and cash flow. The last thing I'll say is if you're going to have disruption from the middle market perspective, it's fair to have it. in the slow part of the year, first two quarters than the last half of the year, which is where we pick up most of our volume.

I appreciate that, Colin. Really, really helpful. And kind of then flows into the next question. I mean, you talked about the platform and the potential to take – advantage of some market disconnects in the liquid side or special situations or things like that. And I know you're not generally in the business of market timing, but obviously there is a disconnect going on now, right? At what point would you be, you know, those other avenues are not something you've really exploited within the BDC yet. You know, at what time is it appropriate to do that given, you know, there's the old, you know, catching a falling knife thing and we don't know where all this stops or how bad coronavirus gets?

Yeah, Robert, so this is Tom. I'll weigh in on that because we're kind of actually going through that right now. And so we've got a targeted list of names. You know, we watch bids fall away for some of these names that might not even necessarily be impacted by this situation, right? So you've got outflows now occurring out of mutual funds and ETFs, you know, potential forced selling of names. Right now, it's not really broad across all sort of ratings categories. So we're looking at that first. We've got a number of names that are on our target list that we have target prices for. And so as the bids back up on those and we see the conditions become favorable for those kind of purchases, we're in the process of actually doing that right now.

Robert, this is Bach. So on slide 15, just to take a look, this is one illustrative example. What we outlined there is spreads that occur in middle markets. Those are produced by as well as overlay the credit suites levered loan index. One item that's really important, I know you've heard Eric and Ian mention it, is we are a principal investor first. And so when you think about how we're owned, right, and where loans effectively go, we always have a view that, one, we should never take liquid term and liquid price and put it in an illiquid wrapper. Because at that point, you've lost the true value of illiquidity. And so if you look in the fourth quarter of 2018, you can see when yields gapped out in the liquid market, oftentimes the middle market doesn't move. And so you start to have to ask yourself a question as to which is better from a relative risk, a relative value perspective. And that's very important because right now if all you are is monochromatic in your focus and all you see is black and white of direct lending, this is a world of technicolor. and it requires a very wide frame so that you can not only price your middle market loan appropriately, but then look to Tom or other areas of the platform that can generate good risk-adjusted return.

I'm just going to wrap it up with, I agree with everything Tom and John said, and all I can tell you is we won't get it perfect, right? We're going to look at an opportunity, and if we think the right entry point is 75 or 80, and that's a really attractive place to invest in that, we're going to do that. And if that means the next trade down is five points, that's life. We can't control that. Where we can control is where we enter it, and the risk return we think is attractive at that time. And the technicals will be what they are. Got it.

I appreciate that, Colin. Now, one more, if I can, on the Unitranche versus first lean, second lean kind of synthetic blend. You know, obviously, Unitranche has gotten – competitive, shall we say, to a degree that there may not be a total return premium, which is arguable in the first place. When you look at your portfolio, obviously you've been more on the kind of the traditional first lean. Do you think Is anything changing, ignoring the COVID stuff and everything else right now, anything changing in terms of your appetite to do first lean versus second lean versus Unitranche, given there's been those pretty big dynamic shifts in effective spreads, et cetera, in the fourth quarter?

Yeah, great question, Robert. And so just a couple of things. One, the key is when you think about portfolio construction, it's to really focus in on the credit metrics that we've laid out. So when we build that portfolio, we're trying to get to around, you know, a four and a half times average weighted spread in the portfolio. That will include some deals that are deeper in the capital structure and and it will include other deals that are not as deep in the capital structure. It all boils down to the opportunity that you're looking at and making sure that you're getting paid for the risk. I think what we're really trying to avoid here, and to kind of use this one-dimensional theme even within the middle market, is making sure that we're getting a price for the risk that we're taking. So to the extent we see an opportunity, and the example I think I've used in the past is a software deal that's 20 times enterprise value and someone's out there with a seven times unit tranche, we want to bifurcate that risk because seven times is not senior debt risk. And so we want to bifurcate it into a first lien, second lien, and then we'll pick which side is more attractive. And we'll look at both sides of that equation. You know, that's where we differentiate as a capital solution provider as opposed to someone that's forced based on their fee structure and their return on need to go out and just push unit tranche. And the problem that you're seeing in this market right now is as everyone's forced in that type of structure, they're competing on price. And when you see Unitronch that used to carry a premium over traditional first lien, second lien, completely erode that premium and is even now being priced less than that, you know at the end of the day what's really being given up is you're not getting paid for that implied senior capital risk.

Got it. I appreciate it. Thanks a lot, guys.

Thank you. Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your question.

I have three quick questions. One, the European loans that you've been originating and put on balance sheet this quarter, should we expect to see some or all of those matriculate into the JV after they've spent a quarter on the balance sheet?

Yeah, Casey, great question. This is Fox. So the answer is no, not all. What we're doing is there's an important part where we're trying to manage to the 30% bucket test. So you could probably see, say, some, you know, say greater than 50%, but not all effectively being transferred because our goal is to make sure that, one, we want exposure, right, and we can get exposure to these asset classes two-way through our equity investment in the JV, as well as having some, given right now we have ample capacity in the 30% bucket, owning some on the BDC balance sheet as well. So it's also being smart to pace the growth of the bad asset bucket to make sure that it's in line but still delivering that return. So expect the transitions down, but do not expect full sales. Okay, great.

Thank you. Secondly, while the topside limit of the share repurchase program continues to be 5%, it looks like some of the technical language has changed. Could you explain, has the share repurchase program become more tactical? In what way is the share repurchase program changing? Sure.

Well, number one, I think, if you remember last year where we had outlined very programmatic means to repurchase the shares, where we would purchase 2.5% of the shares above NAB, 5% of the shares below NAB, and we looked at it on a daily basis in terms of where the stock price traded to determine that number. Number one, when we established that program, our commitment to you was to outline, we're going to do what we say we're going to do. Because there's oftentimes situations where folks are happy to announce share buybacks, but not execute them. We would expect a similar level and similar focus in 2020 as we did in 2019. However, once you start to see the geopolitical effects that are occurring, as well as the potential for volatility in the markets, It's really important to make sure that we have free range to make sure that we're going to maximize the ability to repurchase those shares at the right price for you, having understood that we do what we say we're going to do, which we demonstrated in 2019. So there's a little bit of tact to it, but our underlying philosophical view of finding investment opportunities in our assets, as well as our own shares, hasn't changed.

All right, great. Thanks for that. And the last question is, and I guess this is kind of the million-dollar question, is we're clearly seeing some unsettlement in the markets. And if spreads start really blowing out, and obviously it looks like cost of liabilities may even be decreasing more, would you be willing to, considering the fact that those spreads are widening in the broadly syndicated loan market also, lever up a little bit higher to take advantage of spreads blowing out while the cost of liabilities is low.

Yep. I think that's exactly the way we think about managing, frankly, our business. And so we took – I'm going to take a step back. Fourth quarter, Tom and team, as they saw the technicals in the broadly syndicated loan market be attractive, they sold reasonably aggressively into those attractive bids. That's really benefited us as we sit here right now at sub one-to-one leverage, right, which is lower than what we've said we might target or go to in that. So it gives us, let's just call it a quarter turn or so of flexibility that we could capitalize on these technicals without having to sell anything, which would benefit shareholders. But I want to make sure we're really clear that we have no intention to just aggressively increase leverage into this kind of technical dynamic, right? The optionality of having that leverage, the optionality of the cushions we have, the optionality of the diversification that we have on our liability structure are all positives. I think it creates the flexibility to do that when the time's right.

All right, great. Thank you very much. That's all my questions.

Thank you. Our next question comes from Robert Brock with West Family Investments. Please proceed with your question.

Good morning, and thanks for taking my question. Could you talk a little bit about two things? One, LIBOR floors. and is there any pressure to remove them at all, and how low have they gone? Secondly, could you talk a little bit about whether the coronavirus, if you've seen any signs affecting your businesses, particularly those in Europe? And third, maybe just generally, you talked about your spreads. Could you just talk about a little bit how they evolved over the fourth quarter? I know you gave a number for the three months, but just which direction spreads are going? Thank you very much.

It's Ian Fowler. I'll cover the first two and let others jump in. So in terms of the European assets, we went through the same exercise there that we went through with our North American portfolio. There are no material issues with any of those portfolio companies. And like I said earlier, this is a fluid and, you know, from a geographic standpoint, expanding situation. So it's It's dynamic. We're looking at the portfolio on a constant basis, and we're in touch with management teams in the portfolio to make sure that they have plans in place if they're directly impacted. In terms of the LIBOR floors, the majority of our companies do have a 1% floor in the portfolio. I think where you start to lose that floor is when you move up market, and it's one of the reasons why we stay in the middle of the middle market.

Now I'll just highlight because we haven't spent that much time talking about our European business. Roll back to when we closed on the transaction in August of 2018. We said to you at that time there are certain industries that we don't like to invest in. Retail, restaurants, oil and gas, certain like airline type of companies and the like, right? That's consistent in our European business too. So these companies that are in there are high free cash flow type of businesses. They are not restaurants, retail, you know, gathering places for individuals. And so the consistent credit mindset that we have in the U.S. has applied to our European business also.

Finally, Robert, in answer to your question on spread, so we continue to see spread both stable to slightly increasing. The way we outline slightly increasing is given the mixed shift with the VN outline focused on Europe, right, when you start to see the ability to deploy attractive risk-adjusted returns there, strong OIDs and strong VMs, you end up finding that really the overall portfolio mix. Moves higher, as Eric outlined, moving from, you know, 402 to 443 basis points over LIBOR. And then also new investment deployments given Europe's a part of that transaction dynamic. We're seeing roughly, you know, 525 and higher. We've been very fortunate to see spreads stable to increasing even while LIBOR is declining.

I just want to wrap up on the spread point because I don't want someone to sit here and say, well, next quarter it's going to go from 443 to 460. it's going to be what makes the most sense for the risk-adjusted return opportunity in the market. You know, back to where I started, which is we're not going to reverse-fall for an asset flow that fits a certain return profile because I think that can just lead you to chasing risk rather than having to discipline what makes the most sense. And, I mean, I think we're going to continue in this environment. We'll see some spread widening potentially. But if we sell a certain amount of assets into the JV, the European assets that have a little higher spread, and the U.S. flow is not as strong, and we don't see the opportunities that I referenced earlier in more discounted broadly syndicated loans or special situations, it may be that that 443 number is 440. It may be it's 460. I don't know what it will be. But I just don't want, as we highlighted this, I don't want people to model in a 40 basis point increase into the next quarter because that's not how we run our business. Any other questions? Okay. With that, I just wanted to say thank you again. Thank you for your support and trust in us in 2019 as we sit here going into 2020. Know that we're being good stewards of your capital and know all these questions around coronavirus and other things. We're all over that from a platform perspective, but really making sure we're managing the portfolio prudently. And I think that through comments I've made a couple of times, right? It really starts with underwriting, as Ian said, and then it really starts with diversification and improving portfolio construction. And, you know, I know at times that can be frustrating as far as this pace of the ramp, but I think the flexibility that we've generated by running right now at less than one-to-one leverage, by having the single largest asset be 2.3% of our portfolio, really puts us in a good position for whatever the situation might be. I can't promise what the outcomes will be, but I believe we've entered that in a strong position. So thank you for all your support.

Ladies and gentlemen, this does conclude today's event. We thank you for your participation, and you may disconnect your lines at this time.