Barings BDC, Inc.

At this time, I would like to welcome everyone to the Bering CDC, Inc. conference call for the quarter-ended March 31, 2020. All participants are in 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 Inspector Relations section. Please note this call may contain certain 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 31st, 2019, and quarterly report on Form 10-Q for the quarter ended March 31st, 2020, each as filed with the Securities 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 Lloyd, Chief Executive Officer for Barings BDC.

Thank you, Operator, and good morning, everyone. I first want to start by just saying I hope everybody is doing physically and mentally well in whatever situation you're currently in and that you and your loved ones are making the best of these unique times. We appreciate everyone joining us for today's call. Please note throughout this call, we'll be referring to our first quarter 2020 earnings presentation that's been posted on our investor relations section of our website. Today on the call, I'm joined by Barings BDC's president and co-head of private finance, Ian Fowler. Tom McDonnell, managing director in the portfolio management for our liquid credit and global high yield and BDC's chief financial officer, Jonathan Bach. Ian and John will review our first quarter results and provide a portfolio and market update in a few minutes. I'll begin today with some high level comments about the first quarter and the market volatility that we saw. Please turn to slide five of the presentation. In the first quarter, the liquid credit markets and BDC stock prices experienced their worst quarter since the 2008 financial crisis, falling roughly 14% and 46%, respectively. The global fear and uncertainty created by the COVID-19 really drove selling across the board. In the past, we've discussed the high correlation between liquid credit spreads and BDC stock prices and this correlation proved true again in the first quarter, regardless of the underlying collateral held by BDCs. Just as the equity markets revalued risk in the BDC space in the first quarter, We believe that increased risk and corresponding price moves should be reflected in our net asset value. On slide six, you see our first quarter highlights. As we would expect, the market volatility caused by COVID-19 had a direct impact on our net asset value, as NAV per share declined 20.8% in the quarter to $9.23. John will go through a NAV bridge later, but suffice to say that unrealized depreciation in our portfolio was the driver of this decrease. Each quarter, we value our investments by taking into account market and portfolio company information in our internal valuation process that is consistent across the entire Bearings platform and consistent quarter to quarter. Our total investment portfolio is carried at 87.4% of cost at March 31st versus 98.3% of cost at December 31st. Overall, we've been pleased with how the sponsors and management teams of our middle market portfolio companies have handled these challenging market conditions. All but four of our middle market debt investments are valued above 90% of cost as of March 31st, with the remaining four valued above 85% of cost. We continue to have no non-accrual investments, and all portfolio companies made their scheduled interest and principal payments in the first quarter. Additionally, we've seen improved conditions in the liquid markets since quarter end, resulting in appreciation in our broadly syndicated loan portfolio. Ultimately, however, how quickly the country gets back to work will be a critical driver of portfolio performance in the second quarter. While portfolio performance was certainly the story of the first quarter, I do want to point out a couple of other key items. First, our net investment income per share of 15 cents was consistent with the fourth quarter of last year, and 1% below our first quarter dividend of 16 cents per share. While we did see the expected increase in our investment income for the quarter as a result of our middle market deployments last December, the impact of further LIBOR declines and an overall slowdown in middle market lending in March resulted in a relatively flat investment income and net investment income for the quarter. Second, in terms of our portfolio rotation, we had gross middle market originations of $93 million during the first quarter, which were funded in part by $46 million of net Raleigh syndicated loan sales. Importantly, when we saw the slowdown in direct lending market in March, the breadth of the bearings platform allowed us to be opportunistic with strategic purchases of 22 million of broadly syndicated loans and 12 million structured product investments at attractive prices that should generate increased returns in future quarters. It is during these times of market volatility that Barings' wide investment funnel across global markets and multiple asset classes can allow the Barings BDC to remain active in these markets and search for the most attractive risk adjusted returns. On slide seven, we summarize some additional financial highlights for the first quarter in each quarter of 2019. Despite the NAV decline during the quarter, our net debt equity ratio was 1.2 times still well below the regulatory threshold of 2.0 times and providing a cushion to withstand additional pressure on asset values, meet our contractual commitments for unfunded capital and support existing and new investments with incremental capital. Ultimately, the decisions we have made since becoming the investment advisor to the BDC in August of 2018, including our fee structure, our focus on high quality, true first lien senior secured investments, as well as bearings unique ownership by MassMutual have positioned us to manage through these challenging markets and opportunistically take advantage of market dislocations that should drive long term shareholder value. Turning to slide eight, I'll provide a quick update on our share repurchase program. You'll recall that we announced a new share repurchase program for 2020 on our last earnings call, whereby the board has authorized the company to purchase up to 5% of its outstanding shares during the year, a share straight below NAV per share, subject to liquidity and regulatory constraints. This program kicked off in early March. And through yesterday, we have repurchased roughly 2% of our total shares outstanding, or approximately $7 million. The volatility in our stock price created a strong buying opportunity. as our average purchase price per share was $7.21 over the entire period. And the first quarter NAV accretion of 3 cents per share generated by these repurchases should provide a long term benefit to shareholders as loan prices reflate. As a reminder, Barings LLC continues to be Barings BDC's largest shareholder, owning 28.4% of the shares outstanding. Another example of our commitment to long term shareholder alignment. Let me finish by thanking the bearings team for their incredible tremendous efforts during this difficult time of uncertainty. We are focused on the health and well being of our employees and of our communities, creating a work from home environment and flexibility to allow employees to do their job effectively, while taking care of their families and loved ones and themselves. I continue to be impressed by the focus of our investors, portfolio companies and other stakeholders and their titles efforts, I believe will prove to be a driver of long term success. I'm now going to call over to Ian to provide an update on our investment portfolio and what we're seeing in the middle market today.

Thanks, Eric. And good morning, everyone. I want to echo Eric's comments. I hope all of you and your families are well and safe. On slide 10, we show a summary of our investment activity for the first quarter. Frankly, from a middle market investment standpoint, the first quarter consisted primarily of January and February. as new investment activity largely came to a standstill in March. New middle market investments totaled $93 million, with sales and repayments of $41 million during the quarter. New investments included 10 new platforms, including four European platforms, and 10 follow-on investments. Regarding the follow-on investments, $9 million was for the funding of previously committed delayed draw term loans, and $6 million was for new commitments to existing portfolio companies. And in all instances, the investments were made to fund acquisitions. Other than funding $1.6 million of delayed broad term loans in April to fund add-on acquisitions, Barings BDC has not made any additional investments in portfolio companies to support liquidity needs driven by the current economic environment. It is important to note that Barings B2C does not have any revolver commitments, so there has not been a drain on our liquidity as a result of portfolio company revolver draws. John will discuss our liquidity in more detail, but we remain focused on our ability to meet all of our contractual delayed draw term loan commitments to portfolio companies. Given that our DDTLs are generally earmarked for acquisitions and require compliance with incurrence covenants, we would not expect material usage of these DDTLs in the current economic environment. As Eric mentioned, while middle market activity was slow in March, we did opportunistically take advantage of market conditions. Of the $28 million of broadly syndicated loan purchases in the quarter, $22 million was made in March, and we also made $12 million of structured product purchases, which includes CLOs and private asset-backed securities. Given the prices of these assets, we believe the long-term returns generated by these high-quality liquid investments will generate some of the best risk-adjusted returns available in the current market. On prior calls, I've emphasized the value of choice and Barings large investment funnel across high quality obligors and desperate asset classes has proven to be advantageous in this volatile market. On slide 11, you can see that at March 31, we were invested in roughly 645 million of private middle market loans and equity, which included 74 million of unfunded commitments, and 385 million of liquid, broadly syndicated loans. I'll walk through how the portfolio changed during the first quarter in a minute. But first, I'd like to make some high-level observations about our portfolio. The portfolio statistics on slide 10 regarding leverage, interest coverage, and EBITDA are all generally consistent with the statistics we reported last quarter. Given the timing of financial reporting, These metrics are primarily supported by portfolio company financial information as of December 31st, 2019. Even after they are updated to reflect first quarter portfolio company results, the COVID-19 impact in our economy will not be fully reflected. That is why it is important to focus on items like seniority and diversification in this market. Our total portfolio was 96.9% senior secured. First lien assets spread across 29 different industries. The $571 million funded middle market portfolio was spread across 62 portfolio companies and 18 industries in sponsored back transactions. While the $385 million BSL portfolio was spread across 94 portfolio companies, and 20 industries. Our top 10 investments are shown on site 12 and reflect another aspect of the overall diversity of our portfolio. As the top 10 positions represent only 21% of the overall portfolio and no investment exceeds 2.4% of the total portfolio. Thus, no single investment should have a significant impact on the company overall. There are many unknowns heading into the second quarter and beyond, which is why a high-quality, diverse portfolio is more important than ever. Slide 13 shows a bridge of our total investment portfolio from the end of 2019 to March 31st. We've touched on the key origination and repayment components, but this slide also shows the impact of unrealized depreciation on the portfolio as a whole. which totaled 121 million for the quarter. This unrealized depreciation is further broken out on slide 14. You can see that approximately 83 million or 68% of the unrealized depreciation was attributable to our liquid investments, while 35 million or 29% was attributable to our middle market portfolio. Within the middle market portfolio, 26 million was driven by higher spreads in the broader market for middle market debt investments based on our observations of a combination of high yield and middle market indices. We've classified $8 million of the middle market portfolio unrealized depreciation as being attributable to underlying credit or fundamental performance. At this point, the vast majority of this is not driven by reported portfolio company results, but rather our ongoing proactive analysis of the impact of the current situation on our portfolio companies, including the effects on revenues and liquidity through our discussions with management teams and sponsors. Certain investments have been impacted more than others, and our evaluations have been adjusted to reflect this. As Eric indicated, all of our portfolio companies made their scheduled interest and principal payments in the first quarter, and we continue to remain in close contact with each company as the COVID-19 situation develops. Switching gears to the broader market, please turn to slide 16 of the presentation. While average unit tranche spreads saw a slight uptick in the first quarter, they remain near historic lows, while spreads for the other non-bank structures generally decreased during the first quarter. It is important to keep in mind, however, that the majority of this data was driven by market conditions in January and February. So, the spread increases as a result of COVID-19 are muted thus far. As you can see from the Credit Suisse Single B Leverage Loan Index, we would expect spread increases across the board in the second quarter based on current market conditions. Slide 17 gives a graphical depiction of relative value across the BBB, BBB, and single B asset classes. Recall bearing size and scale is a $327 billion asset manager provides RBDC with a unique investment frame of reference in both liquid and illiquid credit. The data here outlines spreads at three-year highs across the spectrum, but it also shows the relative value opportunities that can exist for investors at different levels of credit risk. For an example, an investor looking to take single B risk can earn an investment spread of 981 basis points invested in liquid corporate loans relative to approximately 750 basis points in direct lending Unitronch. In contrast to the extent an investor wanted a similar yield provided by that Unitronch transaction, but improved their risk position, they could consider structured market investments in BBB CLOs at widespread. In short, the value of choice across markets provides a meaningful benefit to the BBC investors. In our core direct lending markets, we will continue to be highly selective, focusing on select sponsors and markets across the U.S. and Europe. We will also continue to be opportunistic across the credit spectrum, but always maintaining diversity without an overemphasis on one product, obligor, or geography. With that, I'll turn the call over to John to provide more color on our financial results.