Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended June 30th, 2020. All participants are on a listen-only mode. A question and answer session will follow the company's formal remarks. If you would like to register a question for today, please press star 1 on your telephone keypad. Also, if you need any technical assistance, you may press star 0 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, including 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, and quarterly report on Form 10-Q for the quarter ended June 30, 2020. Each is filed with the Security and 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 Boyd, Chief Executive Officer of Barings BDC. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate everyone joining us for today's call. And I just want to start off by saying that I hope you and your families are are doing well and staying healthy as we continue to navigate these uncertain times that we're all living in right now. Note that throughout today's call, we're going to be referring to our second quarter 2020 earnings presentation that's posted on the investor relations section of our website. Similar to all the calls we've been on in the past, I'm joined by Barings BDC President and Barings Co-Head of Global Private Finance, Ian Fowler, Tom McDonnell, Managing Director and Portfolio Manager, of Global High Yield and BDC's Chief Financial Officer, John Bach. As we typically do, Ian and John will read details of our portfolio and second quarter results in a moment, but I'll start off with some high-level comments about the quarter. Before turning to the presentation, I'd first like to mention a recent development that we did not include in our earnings release, but it was included in a release by Moody's Investor Service last night. We are excited to relay that Barings BDC has received an investment-grade rating of BAA3 with a stable outlook for Moody's. And subsequent to the quarter end, Barings BDC has also entered into a commitment for a $100 million private placement of unsecured debt. We expect to draw on this $100 million commitment over the next 12 months. The first $50 million will be priced at a 4.66% coupon, with the remaining $50 million to be priced at the time of borrowing. Post this issuance, We believe that Behring's strong capital profile as an investment grade issuer will provide a distinct advantage to Behring's BDC throughout this period of market volatility. Turn with me to slide five of the presentation. You'll recall that in the first quarter, the liquid credit markets and BDC stock prices experienced their worst quarter since the 2008 financial crisis. We were all pleased to see a meaningful rebound of both metrics in the second quarter. And while there has not been a complete reversal from the first quarter losses, the improvement has still been significant. As you would expect, the market improvement had a direct impact on our financial results. Move to slide six. For our second quarter highlights, our net asset value per share increased by $1 per share in the quarter, or 10.8%, to $10.23. John will go through the NAB bridge later, but unrealized appreciation in our investment portfolio was the primary driver of the increase. Our total investment portfolio increased was carried at 93% of cost at June 30 versus 87.4% of cost at March 31st. All of our middle market investments remain current on both interest and principal payments. We did have one broadly syndicated loan in Fieldwood Energy that moved to non-accrual status in the second quarter, but our overall broadly syndicated loan portfolio saw significant price improvement in the period. Having our middle market and broadly syndicated loan portfolios spread across 155 investments with an average size of 6.3 million or 0.6% of the total portfolio provides strong diversity that is really critical in markets like we're in today. Our net investment income per share of $0.14 was $0.02 below our second quarter dividend of $0.16 per share. This was driven by the further impact of LIBOR declines, and an overall slowdown in middle market lending that started in March. Net middle market deployments during the quarter were $21 million, as we continued to selectively reduce our Brawley syndicated loan portfolio by a net amount of $67 million. As part of this continued rotation out of Brawley syndicated loans, we did realize $16.6 million of losses, primarily on certain investments we felt had more downside risk and had been heavily impacted by COVID-19. Notable sales included seed drill, 24-hour fitness, and Hertz. The impact of these realized losses, however, had already been reflected in our NAV at the end of the first quarter. Moving to slide seven, we summarized some additional financial highlights for the second quarter. In addition to the portfolio value improvement, our net debt-to-equity ratio decreased from 1.2 to 1 times as a result of both lower net debt and higher NAV. This provides more cushion to withstand additional pressure on asset values, meet our contractual commitments for unfunded capital, and importantly, support existing and new investments with incremental capital. Turning now to slide eight in our share repurchase plan. You can see that we have repurchased approximately 2% of shares year-to-date under the plan we announced in February versus our authorized target of up to 5%. This generated $0.05 of NAV per share accretion for the year. We would anticipate making additional share repurchases under this plan, subject to regulatory and liquidity constraints. I'll now turn the call over to Ian to provide an update on our investment portfolio and what we're seeing in the middle market today.

Thanks, Eric. On slide 10, we show a summary of our investment activity for the second quarter. Overall, it was a slow quarter across the market, and we continue to be selective in terms of both of our deployments and BSL sales. Net new middle market investments totaled $21 million, including two new platform investments, while the BSL and structured products portfolio saw a net decrease of $67 million based on selective dispositions. As you can see on slide 11, at June 30th, we were invested in roughly $668 million of private middle market loans and equity, which included $71 million of unfunded commitments and $351 million of liquid broadly syndicated loans. Portfolio leverage was up slightly compared to the first quarter, which you would expect as we are beginning to see the first impact of the uncertain economic environment come through reported portfolio company financials. I will cover portfolio performance and the resulting valuation impact shortly. The $597 million funded middle market portfolio was spread across 64 portfolio companies and 18 industries in sponsor-backed transactions, while the $351 million BSL portfolio was spread across 81 portfolio companies and 26 industries. We expect to continue to rotate out of the broadly syndicated loans in the third quarter, with a net BSL portfolio decline likely to be even higher than what we saw in the second quarter. Our top 10 investments are shown on slide 12. with no investment exceeding 2.4% of the total portfolio and the top 10 representing only 21% of the total portfolio. Our portfolio remains diverse and with limited exposure to any single investment or industry. Slide 13 shows a bridge of our total investment portfolio from March 31st to June 30th. 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 $66.5 million for the quarter. As we showed you last quarter, this unrealized depreciation is further broken out on slide 14. You can see that approximately $32 million or 48% of the unrealized depreciation was attributable to our liquid investments, while $9 million or 14% was attributable to our middle market loan portfolio. Within the middle market loan portfolio, $5 million was driven by lower spreads in the broader market for middle market debt investments based on our observations of a combination of high yield and middle market indices, and $3 million of the middle market portfolio unrealized depreciation as being attributable to underlying credit or fundamental performance. Overall, our middle market portfolio has weathered the COVID-19 situation well. and the credit improvement we saw this quarter was relative to conservative expectations we had last quarter during a period of extreme uncertainty. We continue to monitor our portfolio closely, having regular discussions with management teams and sponsors to stay abreast of the latest operating performance and liquidity trends. Turning for a moment to the broader market, please turn to slide 16 of the presentation. The credit suite single B leveraged loan index tightened considerably in the second quarter, although still remaining above middle market levels. Direct lending spreads, as expected, were generally wider in the second quarter, although the data is based on a smaller sample size than in prior quarters and is also reflective of the bias of new investment activity toward names with minimal COVID impact. Overall, I would characterize the market as improving, as we are seeing more activity and more transactions involving quality companies that have demonstrated an ability to navigate the current environment. Slide 17 provides an update of a new slide we showed last quarter, providing a graphical depiction of relative value across the BBB, BBB, and single B asset classes. Spreads were down this quarter compared to the three-year highs we saw across the spectrum last quarter. But more importantly, it continues to show the relative value opportunities that can exist for investors at different levels of credit risk and how the value of choice across markets provides a meaningful benefit to BDC investors. It is in this type of market that the broad investment frame of reference, size and scale of bearings, can provide the greatest benefit. With that, I'll turn things over to John to wrap up the call with some additional color on our financial results.