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.

Thanks, Ian. And if you could turn to slide 19. You can see the bridge of the company's net asset value per share since last quarter. And the dollar per share increase was due primarily to net unrealized depreciation on our investment portfolio of $1.36 per share. which was partially offset by roughly $0.34 per share from realized losses on sales of certain assets in our BSL portfolio. You saw the breakdown of unrealized depreciation on a NAV per share basis when Ian discussed slide 14, which included value improvements across all of our asset categories. Now, slides 20 and 21 show our income statement and balance sheet for the last five quarters. I will not spend too much time here given that we've already hit the highlights, but I'll point out that while we had lower investment income primarily to a decrease in our weighted average yield on performing debt investment from 5.8 at March 31st to 5.5% at June 30th due to lower LIBOR, we also saw a decrease in operating expenses to help mitigate this impact from a net investment income perspective. From a balance sheet perspective on slide 21, you can see that our investment portfolio, excluding short-term investments, was up slightly in the second quarter, reflecting the net impact of our unrealized depreciation being offset by the rotation out of BSL investments. This rotation enabled us to repay debt during the quarter as our CLO debt balance decreased to $225 million at June 30th. We were also able to use cash to further repay these notes in the quarter with a $48 million repayment on July 15th made with cash and short-term investments on hand at June 30th. Details on each of our borrowings are shown on slide 22. While it was subsequent to quarter end, this slide also shows the new $100 million unsecured commitment that Eric referred to earlier in the call. Our debt to equity ratio, at June 30th was 1.16 times, or more importantly, one times after adjusting for cash, short-term investments, and unsettled transactions. I would also note that we voluntarily elected to fully repay and terminate our BSL credit facility during the quarter. Now jump to slide 23. From a liquidity perspective, our primary sources of liquidity continue to be proceeds from the continued rotation out of liquid BSL, as appropriate and depending on market conditions, as well as borrowing capacity under our $800 million senior secured corporate credit facility. Today's available borrowing capacity under this facility, which is subject to leverage, borrowing base, and other financial conditions, will be further enhanced by the $100 million private placement commitment for unsecured debt. It's exactly this funding profile. that allows Barings BDC to be both defensive in its liability structure, but opportunistic in the asset composition of the investment portfolio on a go-forward basis. And as we showed you last quarter, the chart on slide 23 outlines the impact of our net leverage of funding our unused capital commitments. While Barings BDC does not have any revolver exposure, we have $70.5 million of delayed draw term loan commitments to our portfolio companies, as well as $43.5 million of our remaining commitments to our joint venture investments. While we would expect limited usage of our committed delayed draw term loans, this table shows how we have the available capacity to meet the entirety of these commitments if called upon, while maintaining cushion against our regulatory leverage limit. In addition, our $351 million liquid broadly syndicated loans provides additional liquidity if needed. Now, while we could sell these investments to reduce leverage while not impacting current NAV, we could also sell these investments in order to redeploy the capital into other investments with improved risk-adjusted returns. Any sale, of course, would likely convert an unrealized loss to a realized loss, but long-term NAV could be improved with the incremental returns on these new investments. Now, slide 24 updates our paid and announced dividends since Behring took over as advisor to the BDC. We announced yesterday that our third quarter 2020 dividend of 16 cents per share will be paid on September 16th, 2020. Lastly, slide 26 summarizes our new investment activity so far during the third quarter and our investment pipeline. Since July 1st, we've made approximately $61 million of new private debt commitments with approximately $16 million having closed and funded. Of these new commitments, 87% are first lien secured loans, with 27% of the originations based in Europe. The weighted average origination margin, or DM3, of these investments is 10.7%, and we've also funded approximately $6 million of previously committed delayed drop-term loans to performing companies. The current Barings Global Private Finance Investment Pipeline is around $937 million on a probability-weighted basis, and it is predominantly first lien senior secured investments. Now, you may recall that this pipeline was approximately $110 million last quarter, so a significant increase in the last three months, and this is also supportive of Ian's comments regarding improved market conditions we're seeing. As a reminder, this pipeline is estimated based on our expected closing rates for all deals in the investment pipeline. And with that, operator, we'd like to open the line for questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register a question at this time. Our first question today is coming from Finian O'Shea of Wells Fargo. Please go ahead.

Hi, good morning. Thanks for having me on. First question for Ian on your commentary on portfolio improvement from the previous more conservative assessment, is this related to liquidity or your forward earnings outlook? And in the case that it's the latter, does that mean that companies are deleveraging or that earnings are actually holding up or are going to hold up versus what you initially had underwritten? Any more context on the, you know, qualitative context on the change from last quarter would be helpful.

Yeah, sure, Finn. Thanks. Yeah, look, let me throw out a couple of things. When we looked at the first quarter, we really started working with management teams before quarter end. knowing that the COVID situation was fluid and it was going to have an impact. And we were sort of expecting it to be somewhat similar to what other countries around the world were going through. So what we really did was a prospective forecast with those management teams and those sponsors of what they thought the next couple months were going to look like, knowing that with all the uncertainty, it was going to be really difficult to underwrite anything beyond that. And I would say a couple of observations. One, I think some management teams were overly pessimistic in terms of what they thought their market was going to be like with COVID. We also saw some sponsors, or I would say generally most sponsors and management teams, take aggressive actions in terms of cost reductions and adjusting their cost structure. So I think that was helpful. And then I would say that sort of the third set of companies that had pessimistic outlooks, some of them actually have been able to pivot in terms of their business model and pick up business where they didn't think they were going to be able to pick up business. So it's hard to say that there was a general trend other than when we had those discussions and we were working with those management teams looking at their forecasts and their liquidity needs, it was kind of at the darkest days of this situation, which obviously remains fluid. What I will say on a broader basis is is that as a portfolio, we are really well positioned because we just don't have companies that are what I would call COVID red industries, which is retail, restaurant, and travel and leisure in the middle market portfolio. And I would just say by nature, we typically avoid or minimize companies consumer-facing businesses anyway because it's just really hard to underwrite consumer trends. And so because of that, we had no payment defaults in the middle market portfolio. We had no material modifications in the middle market portfolio. That does not mean to suggest that we're not going to have some challenges. It's really going to depend on what the next 6, 12, 18 months look like. That's very helpful. Thank you.

And then a two-part, I'll start with one at a time. Jonathan, the Moody's rating, did you or the BDC commit to any change in leverage ratios, leverage composition, anything of that sort that would have, you know, constrained your, your previous, uh, strategic outlook or approach. And, and as sort of a second part to that, uh, a roundabout way to ask that again, um, does that change your, um, does that change the BDC's investing approach to, to, uh, more aggressive strategies?

I'll, uh, Just the first part of your question, as it relates to change, no. And so what I think is indicative of a high-quality platform is that in the midst of a global pandemic, receive an investment-grade credit rating, which we believe is a show of both the strength of balance sheet, the strength of portfolio. And our forward outlook was the same for many of the others that are investment-grade rated, right? So I think you can see, you know, our leverage target of roughly 1.25 times, et cetera, fits inside of the scope of what's been outlined in the IG community. In terms of opportunity, there's two points to that. First, as you go through a period of uncertainty, when you have the flexibility of a capital structure to allow you to be both defensive, that's important because we've seen several situations where To the extent there were material loan modifications or fear of them, there's been dilutive capital raised that's harmed investors either on the debt or equity side. So there's a defensive purpose that here having an IG credit rating certainly helps prevent. And then from an offensive point of view, clearly as Ian and Eric have outlined, boring is beautiful. Boring remains beautiful. However, you can also see that if you have a wide frame of reference, and ability to invest in different asset classes as the vast majority of markets go through a period of unprecedented volatility, it's best to have the capital structure to then invest in those opportunities when they come out. So the answer is right on track with where we've been before, but also having that ability and that optionality is valuable to us and also valuable to our shareholders.

Okay, thank you. And just a final small question for anybody there. And forgive me if you provided this. Any guidance on your post-quarter BSL sales?

Yeah, so this is John. You could probably imagine that our current quarter run rate for BSL reductions, and again, remember, we're very focused on making sure that those BSL reductions are done so very close to our original purchase prices, would be very similar to that of last quarter, right, on a go-forward basis. Clearly, depending on the market environment, right, right now we've seen some relative strength, particularly in our high-quality BSLs that's in on balance sheets. And we continue to take advantage of that, realizing that additional dry powder and opportunity coming into the face of wider spreads is going to be beneficial for us all. But we're still very focused in on making sure we do so on a NAV neutral basis.

That's all for me. Thank you.

Thank you. Our next question is coming from Bryce Rowe of National Securities. Please go ahead.

Thanks, everyone. Good morning. Appreciate you taking the questions here. You mentioned the no material modifications with respect to the middle market book. I'm curious if you were maybe getting some requests for waivers or modifications and maybe pushed back on those a bit, or you simply weren't getting many requests at all?

Thanks. So, yeah, I mean, we had a couple of companies that needed some modifications in that platform. So I don't think anyone could have constructed a portfolio that would be, you know, totally COVID proof. But in the BDC portfolio, you know, we had, you know, if you look at the industries that were most impacted by the shelter in place, it was like dental management practices, And so a lot of those businesses were completely shut down. And so, you know, a lot of it really depended on how quickly those areas of geography of market reverted back to normal. And fortunately, they were able to do that. And, you know, the liquidity was there for those companies not to need the material modification. I'm not going to say that there weren't any, but it wasn't a large number of businesses that were thinking about or looking for modifications.

Okay, that's helpful. And then I wanted to maybe talk about the pipeline relative to the level of the BSL portfolio and that transition. So clearly good to see pipeline having built back up over the past three months. And you all have talked in the past about the transition from BSL to middle market with middle market originations at a certain pace over any given quarter. So I'm curious, are we kind of back at that preconceived pace that was originally laid out? And then when we think about some of these BSL sales, you mentioned that some of the heavier hit names were exited and you took the loss here in the second quarter. It sounds more like you're seeing opportunities to sell BSLs closer to your cost basis now with the tightening of spreads. And so I'm wondering if the pace of middle market is really going to be the driver of the transition away from BSL, or if you'll simply be opportunistic with the BSL sales to exit close to cost at this point.

So this is Eric. I'll take a first crack at it, and then the team can jump in. What I'd say is we never want to be in a position, nor would we have our middle market pipeline drive us selling DSLs at a price that we don't believe is appropriate from an exit perspective. And that's one of the reasons why we've continued to deleverage. We were 1.2 last quarter, deleveraging through this quarter. And to Finn's question that John referenced, it's fair to say we've continued to sell into this market rally here. post the second quarter from a BSL perspective, really to give us flexibility around two things to the extent that the middle market pipeline, which I'll address in a second, turns into investment opportunities and, or there's more market volatility that creates other investment opportunities. You know, John referenced the deals that we did here in the quarter, DM was over 10%. And so those are really attractive from a risk return perspective. I'd say on the pipeline, it's great to see the pipeline having basically gotten back to, I'll call it a more normalized level from a pipeline perspective. What I would characterize, though, is prior to the COVID thing, we were averaging right around $100 million a quarter, plus or minus, from middle market originations into the BDC, which were, as you said, offset by sales of BSLs or increasing leverage, depending on the opportunity at the time. Still keeping that leverage really prudent. And that's what we're going to continue to do. I think it'd be hard to say right now that we could predict that kind of, you know, the pace that we saw M&A the last six, eight, 10 quarters is kind of back. What I'd say is the pipeline's beginning to build. Deal discussions are occurring. How many of those actually turn into transactions? I'd say it's still the jury's out a little bit on that. So I wouldn't want to say we're back to, where we were, but I'd say we're certainly have a much better pipeline than what it looked like, you know, four, six, eight, 12 weeks ago. So I'm not trying to dodge your question. I just don't want, I want somebody to model that out as, as you know, like, like, so we're kind of back to that run rate, but I mean, there's a chance at it, but we just haven't seen the behaviors and the consistency of, of, of closure of M and a deals that would give you a high degree of confidence. And that's, what's going to happen, but it could.

That's helpful, Eric. I appreciate it. I have one last question around with the pipeline having built up here a little bit, obviously I would assume the origination teams are more active here. Just curious how difficult it is to conduct any level of due diligence at this point with social distancing or maybe Zoom-type due diligence. Maybe you could just talk to the process and what you've had to change to get comfortable with that process.

I'll turn that over to Ian. You can imagine it's kind of unprecedented ways we've done due diligence even for us who've done this for 30 years. I'll let Ian talk about how we're approaching it.

I still think about the days of closing deals where you're all together in one room working throughout the night looking at docs and negotiating deals. In terms of the technology, I'd say that people are figuring it out. There's a process around it. We've been involved with sponsors doing diligence with management teams that is being done remote with us. I've seen some private equity firms in a boardroom with the management team, social distance, but we're not in there, but we're there virtually. I think if you just kind of look at what's happening, obviously add-on acquisitions have been fairly consistent, that kind of activity, and I think we'll continue to see most of that, and one of the advantages of add-ons is that a lot of, because it's consolidating within an industry. There's a lot of knowledge and relationships in that industry so that the buyer probably knows the management team of the target. I think we're seeing sponsors buy companies that they had previously looked at in the past and so they're familiar with those businesses and the management teams of those businesses. I really think, and look, the whole market over the last nine years has been a lot of sponsor-to-sponsor transactions, right, as opposed to strategics coming in or IPOs. And I wouldn't be surprised if you see some horse trading where sponsors are looking to put money to work. There's less risk putting money to work with a property that they've owned in the past. and that sponsor is looking for an exit, and so I think you'll see some of those appear as well. Kind of adding on to what Eric said, we're still at the early stages. I mean, if you think about it, the life cycle of our deals is around 8 to 12 weeks generally from beginning to close funding, and so anything that we're looking at right now really was originated back in May. And so it's still early days. It's difficult to say for sure because there's not a lot of data points out there, and we're still in this price and risk discovery of really where the market is and how sustainable it is. I think it feels pretty good, but we just don't have visibility into what the rest of the year looks like. There might be some... focus on trying to get some transactions done because there might be an administration change and tax laws could change. I've heard that being mentioned. But these are only companies that are COVID-like or COVID green businesses with no issues. I'd say companies that don't fit that profile are really on the sidelines here. And for us, in terms of our strategy, we're not chasing risk. We're not backing up the truck. But if we see good, attractive businesses, you know, we're going to chase them pretty hard.

Great. Thank you all for the time. Appreciate it.

Thank you. Our next question is coming from Robert Dodd of Raymond James. Please go ahead.

Hi, guys. First one for you, Jonathan, I think, and then one for kind of on the pipeline. So on the liability stack, obviously, I mean, the BSL, you terminated the BSL dedicated kind of revolver. You still have a number of things you can use for that, obviously. But with the BSL portfolio like continuing to shrink, what should we expect for the overall kind of evolution of the capital structure? Because right now you have the general revolver You can have that $100 million from private placement, but those are kind of the structures that exist right now, plus cash and some of the BSL assets, obviously, that exist to serve the middle market. As the BSL declines, if it declines, your percentage, if you will, of secured financing on the middle market go up. So what's the management process you're going to do to keep that unsecured mix lower or higher.

Yeah, makes complete sense. So if you think about the mix of the liability stack, you can imagine that, one, it'll be financed with both senior secured debt as well as an increase in unsecured outstandings as well over time. You know, our view is unsecured debt can be a very attractive form of financing because it's just the timing in which you kind of acquit and issue it is extremely important because if you fast forward or rewind perhaps maybe six quarters ago to the extent that you were issuing investment grade credit and forcing, you know, based on incentives and fee math, which Robert, we know you know very, very well, it would force yield seek into improper asset classes that might have introduced more NAV volatility over time. Today, if you layer in unsecured debt as a part of the capital stack, the investment opportunity overall, senior secured loans, and then as also Eric mentioned, Barron has a very wide frame off a lot of other asset classes. Not only are you able to diversify your liability structure, but you can grow earnings accretively as a result. So forward outlook would be, you'll see utilization of both secured and unsecured sources with the view that in today's environment, the flexibility offered by unsecured debt and the strong returns that are available in a wide array of asset classes means that you can see that composition increase. Does that help, Robert?

That does. Thank you. And then if I can, on the portfolio and more the pipeline, I mean, for your comments, it sounded like your confidence in any given pipeline deal closing is maybe lower than it had been, right? Because a lot of these things are early stage. And it's a problem really with the weighted pipeline. So how would you, to put you on the spot a little bit, how would you characterize kind of the gross pipeline? I mean, is that, are you seeing a lot more early stage opportunities, but with lower confidence that each one will actually close? Or how's that checking out, right now?

Yes, I'll take a first crack at it. Go ahead, Ian. No, Ian, you go ahead. No, go ahead.

Okay. I was going to say... You start, Eric. I'll jump in.

All right. I would say this way, Robert. I would say that in the past probably three to five weeks, we've seen a material increase in prospective deal flow. So I would say it's a lot more early stage now than than things that are, you know, the Ian said kind of eight, our typical process is eight to 12 weeks plus or minus. So I'd say it's more stuff in the early to mid stage than it is the latter stage. I'd say the latter stage stuff is primarily add on acquisitions for existing portfolio companies. This Ian referred to and what we call COVID green industries. So we've seen the underlying performance of that particular company, how they've weathered this challenging time that everybody's living in. We've seen the same on the target. So those opportunities, I'd say, are more progressed. But I'd say for a new platform transaction, it'd be more in the early stage, which is why I was characterizing it saying it's a little harder to have a certain degree of confidence that all the things will align for an actual M&A execution to occur around that portfolio company. Ian, please jump in and add on anything.

No, I think you hit it. The only thing I would add is that both in terms of new deals, I think, and especially if it's horse trading activity sponsor to sponsor, it's not a wide auction. When you're in this environment, if you're well positioned from a competitive standpoint, I think the likelihood of that deal closing is a higher hit rate than we would normally see because in a normal market right when you take a look at a at our portfolio or our pipeline you know the hit rate somewhere between four and six percent in this in this environment where it's low volume but you've got two sponsors that are kind of negotiating a deal and we're plugged in you know our hit rate on that deal is going to be much higher than four to six percent so that that's a positive but like Eric said So if you factor in that kind of 8 to 12 weeks, we're still pretty early. So how some of those deals progress really depends on the transaction itself, how it's going to market, who's involved in our position with those sponsors. The one thing I will point out, which is good if you have an attractive portfolio, is from an AUM perspective, in this environment, there's not a lot of runoff.

Got it. Thank you. If I can, I'll follow up to that. I mean, so would you characterize the kind of businesses, the early stage ones, the platform ones that are coming in, as more characterized by sponsor portfolio management rather than liquidity seeking from borrowers? And would that tend to indicate that You might not be replicating the 10.7% DL3 that we saw in Q2 with those new jobs that are coming.

Yeah. So it's interesting, right, because, you know, I mean, this whole cycle is interesting. And having been through cycles before, you know, they're always different other than there's a beginning, middle, and end. And what's unusual about this one is in a normal cycle, we would have seen a period of, you know, distressed sellers, right, platforms that are looking for liquidity coming to market, selling performing assets to get liquidity. I'm just talking about the middle market here. We would have seen companies with broken balance sheets that need some gap capital. We would have seen some little R and some big R restructuring. We really haven't seen that yet because I think of a couple things. One, you know, we had that quick rebound. I wouldn't say recovery, but we had a rebound. And because of our assets by nature being illiquid and the platforms of today's market versus markets of 15, 20 years ago where there's probably more flexibility to kind of kick the can down the road, I mean, we know there are companies out there that are impaired. We know there are companies out there that need liquidity, but we're just not seeing it in the market yet. And so really as long as this involvement, this support by the Fed and fiscal policy continues, it's going to push out that stuff. And I don't know whether you'll be able to outgrow it or not. I expect that at some point we'll probably see some of those opportunities. But the deals that we're looking at right now, they're attractive companies and their sponsors are selling because probably because they're looking for, they know they're in the money. And even, and I would say for companies that are COVID green, you know, we've even seen some purchase price multiple expansion. So, you know, why wouldn't you take some chips off the table as you look at your portfolio? And so, as you said, it's really looking at portfolio management. from a sponsor perspective.

Got it. I appreciate that, Callum, and that's it for me. Thank you, guys.

Thank you.

Thank you. Our next question is coming from Casey Alexander of Compass Point. Please go ahead.

Yeah, good morning. I have two quick questions. One, in your subsequent events, you discussed the two investments that you made, which were first lien senior secured debt investments with a weighted average yield of 14%. That sounds like a weighted average yield that is unusual for first lean in any environment. So I'm just kind of wondering what the nature of those investments were that allowed for such an elevated return on them, especially given the fact that you guys try to target very senior first lean with, you know, lower leverage attachment points.

Sure. Hey, sir. You want to take that, John, and I can provide some color?

Yeah, sure. So Casey, one of the benefits of the wide frame of reference of bearings is that we can focus in on different pockets of opportunity that exist. And so, for example, we have our core Boring is Beautiful direct lending mandate, which Ian and our teams and Eric always execute with the types of spreads and returns, and more importantly, the risk profile. that you'd expect. But additionally, Barings operates a number of verticals, whether it's either structured credit or in this case, special situations where in certain instances where companies are finding themselves strapped for liquidity, you are able to provide perhaps a larger company a liquidity solution at a very attractive rate of return and credit profile. And that benefit that affords us by the fact that Barings' platform in credit is so wide and global is you can identify some of these larger companies that are going to be looking for those liquidity solutions, and we can execute them with a team that has done this as their primary job for the last 20 years. So it's a mix, and these types of opportunities come. They're episodic, but certainly attractive and great compliments to the direct lending portfolio. But, you know, Ian can also expound as well.

No, no, you've got it.

Well, my recollection is that those special situations were ideally likely to ultimately find their way to the JV. Is that possible that these are being brought on balance sheet and then ultimately going to be sold down into the JV?

No. So, Casey, the broader point for, I mean, the answer is we always execute in tandem with our partners, with our JV partners. But when you think of the joint venture, There is a heavy focus as it relates to diversification. So clearly the BDC as well as the JV can own – both own a credit such as this one. This is not going to be considered a bad asset. However, for example, a European loan, you would not see the same level of ownership largely because if a European loan comes on the BDC balance sheet, there is also diversification tests. that we have to be aware of. So at the end of the day, clearly everybody moves in the same direction, but for something that sits as a good asset for BBDC, you can expect BBDC and the JV to participate at the end of the day, still providing good risk-adjusted return at appropriate levels of diversification. So it's not as if the JV drives this type of investment. It's that BBDC is open to this type of investment, as is the JV, and clearly when these pockets open up and which only Barings can execute on, we all participate and keep it diversified as well. All right.

Hey, Casey, Derek, let me just make sure we're clear. So don't think of those investments as kind of what I'll call the core of our portfolio, right? We're not changing our strategy in any way, shape, or form. When we do see a special situation, it may happen to be first lien, may happen to be, you know, technically first lien, but we see a situation like that that we believe the risk-adjusted return is really attractive, we're going to selectively in a modest size relative to the other investments make investments in those areas. So although it's first lean, don't think of it as all of a sudden we're changing our core first lean strategy to having these type of yields. It's not that at all.

All right, understood. Thank you. Secondly, since the last conference call, there hasn't been any actual share change in the share repurchase program, and the stock has been trading sort of in the 15%-ish discount to NAV range. But with this increase in NAV that's jumped to over 20%, are we now at a level where, since you changed the share repurchase program to something more discretionary, that this looks like a better shot on goal to do some accretive share repurchases?

Casey, this is Buck. I'll kind of answer that. Really, when we think about share repurchase overall, I know this was kind of our commitment on our February call of 2019, that this is always a part of our capital allocation philosophy. And so you can expect to see additional share repurchases, and you can expect them to be accretive. the timing of which can certainly fluctuate. But philosophically, we sit exactly in alignment because we do recognize that there's opportunities in the broader market as well as our own share base. If you look back to last quarter, I can think you kind of see kind of a general trend where there's some in the middle or some at the beginning of the year, in the middle, and in the end. And sometimes it just depends on the weightings. But at the end of the day, we remain philosophically aligned and, more importantly, committed. So we believe that's an important part of capital allocation philosophy subject to, and this is always important, just the broader liquidity constraints and or the regulatory environment.

Okay. Well, thank you for that. I'm done.

Thanks, Casey.

Thank you. Our next question is coming from Ryan Lynch of KBW. Please go ahead.

Hey, good morning. Thanks for taking my question. I just have one today. You know, as we look through credit cycles, you know, if you could time them perfectly, you know, kind of at the height of cycles, it would make sense to reduce risk as much as you could, move more into first-lane, you know, secular growth businesses. And then at the bottom of the cycles or coming out of cycles, you know, It would make sense to add on more risk or lean into more of this asset move. You move down the capital structure, take on more cyclical businesses. Obviously, you have to time the cycle right to do that. It doesn't sound like that's your guys' approach as we're in this cycle and potentially coming out. Can you just talk about... why no, no, it doesn't seem like desire to lean into more risk potentially coming out of the cycle.

I'll start at that and then maybe turn it over to Ian. So you're right. We do not macroeconomic try and time our investments. We underwrite our typical deal of somewhere between five and seven years in length from a loan maturity perspective. We underwrite every single deal, assuming there's going to be some form of credit cycle or economic cycle during the life of that asset. So that would have been true two years ago, five years ago, you know, and it'll be true tomorrow. Um, and so now listen on the margin, do you understand the economic environment? Meaning when you've been in a very strong bull market, you have to be potentially a little more cautious because you know, at some point you're just closer to that cycle. As you come out of a cycle, you can feel that too. So on the margin, you can think about margin enhancement for a company or margin expansion for a company being potentially more logical than that environment. But we don't industry time or market time or economic cycle time our investments. Our view is it's very difficult to predict what those cycles will be, how long they'll last. And so we just assume there's going to be a cycle during the life of every single investment we make. Ian, if you want to add anything to that.

Yeah, I guess the only thing I would add is just from a capital stack perspective, and that is, I mean, look, we are a capital solution provider. We've got a long history investing in junior capital and senior, and we've been managing third-party junior capital for decades. and experience through cycles. And so, like Eric said, we don't change our credit view based on where we are in the cycle, but every time we look at an opportunity, if it's an attractive company, we do look at it from a relative value lens. You know, we focus on probability default, loss given default, And we can be agnostic in terms of where we play in that capital structure. And that is a competitive advantage that we have when we're talking to private equity firms. And obviously what we want to do is be in the dumb money in the transaction if there is dumb money in the transaction. But I'd say what we did do over the last few years is just given how frosty the market was, we focused more on the top of the cap structure in a defensive play. Obviously, building a portfolio in the last two years of a cycle is a really challenging situation. As we come out of this cycle, to the extent that we see good junior opportunities, we'll definitely look at those. I think right now, the issue is We still have COVID flare-ups. We still have the Fed propping up the economy. And so I don't know if you can really say that we've, you know, we moved through the trough and we're headed up at this point. I don't know if that helps at all.

No, no, that's good color and definitely fair points. Those are all my questions. I appreciate the time today.

Thank you. This brings us to the end of the question and answer session. I would like to turn the floor back over to Eric Lloyd for closing comments.

I just want to say thanks to everybody for joining us today. I know it's a busy time for particularly the analysts on there. Thanks for joining us. And everybody at Barings, we just hope everybody out there stays healthy, stays positive, and if we can do anything, answer any questions for any of our shareholders, analysts going forward, you know how to get a hold of us. So thank you again for your time.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.