Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter-ended September 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 ask a question during today's event, you may do so by pressing star 1 on your telephone keypad. Anyone on the phone who needs operator assistance may signal an operator by pressing star 0. 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 section 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 September 30, 2020. Each is 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 will turn the call over to Mr. Eric Lloyd, Chief Executive Officer of Barings BDC. Ladies and gentlemen, please stand by. We need to bring Mr. Lloyd back online. Music Mr. Lloyd, please go ahead.

Thank you, and I guess this goes with 2020. We start conference calls with challenging situations like this, so I apologize for that. I got dropped. Thank you, Donna. Good morning, everyone. We appreciate you joining us for today's call, and I hope you and your families are doing well and staying healthy and positive during these times. Please note that throughout today's call, we'll be referring to our third quarter 2020 earnings presentation. That's posted on our investor relations section of our website. On the call today, I'm joined by Barings BDC's president and Barings co-head of global private finance, Ian Fowler, Tom McDonald, managing director and co-portfolio manager, Brian High, Barings head of U.S. special situations and co-portfolio manager, and the BDC's chief financial officer, Jonathan Bach. Ian and John will review details of our portfolio and third quarter results in a moment, but I'll start off with a few high-level comments about the quarter. Turn with me to slide five of the presentation. We've shown this slide in the last several quarters to provide a sense of the volatility of Brawley syndicated loan prices and the correlation to BDC equity prices. In the third quarter, Brawley syndicated loan prices continued to increase with spreads down over 100 basis points. BDC equity prices, however, remained relatively flat quarter over quarter, largely driven by factors such as select dividend reductions and increased non-accruals for some companies. Jumping to our third quarter financial highlights on slide six, Barings BDC's net asset value per share improved by 74 cents in the quarter, a 7.2% increase to $10.97. Unrealized appreciation on our investment portfolio was the primary driver of this increase, as market and credit-driven improvements continued to help reverse some of the unrealized depreciation we experienced in the first quarter. As of September 30th, our total investment portfolio was carried at 98.3% of cost, compared to 87.4% six months ago at March 31st. We had no non-accrual assets at the end of the quarter, as all of our investments remain current on both interest and principal payments. While at some point, every direct lender, including us, will experience non-accruals, I am especially pleased with this portfolio's performance during this trying year, which I view as a testament to both our original underwriting and our ongoing portfolio management of our investment teams. Our net investment income per share was 17 cents, up from 14 cents per share in the second quarter and above our third quarter dividend of 16 cents per share. we continue to take advantage of market conditions to rotate out of our initial BSL portfolio and redeploy that capital into higher yielding middle market and cross-platform investments. Total sales and repayments of 252 million included 210 million from our initial BSL portfolio, which was redeployed into 145 million of new originations with a weighted average all-in spread of 921 basis points. The investment pipeline has remained very healthy in Q4, as John will discuss in more detail later, and we now expect by the end of the year to have largely completed our rotation from our initial BSL portfolio into primarily a middle market portfolio. Based on these results and expectations for the coming quarter, we announced yesterday that our board increased our fourth quarter dividend payable in December to 17 cents per share. Turning to slide seven, you'll see some additional financial highlights for the quarter. John will go through the details of the financial shortly, But I do want to make one key point. You can see on the first line of slide seven that our investment portfolio increased $82 million for the quarter. This increase, however, included a $153 million increase in our short-term cash investments from BSL sales that were used to repay debt after quarter end. Thus, our true investment portfolio actually decreased $70 million during the quarter as a result of our portfolio rotation that I referenced earlier. Despite this decrease in portfolio size, you can see that our total investment income actually increased slightly during the quarter. Even with continued downward pressure on LIBOR, the rotation out of initial BSLs and the higher middle market and cross-platform investments, those drove an increase in total investment income and better positions to portfolio for continued growth going forward, while still maintaining a high-quality, predominantly first-lane portfolio. Slide 8 outlines the key strengths of Behring's platform that help facilitate this portfolio rotation. Behring's BDC is uniquely positioned within the broader Behring's global fixed income franchise to focus primarily on middle market direct lending, but also take advantage of Behring's wide investment frame of reference to participate in a differentiated deal flow across both public and private markets to find the most attractive risk-adjusted returns in different market cycles and periods of volatility. This multi-channel origination strategy has enabled Barings BDC to grow its cross-platform investments over the last six months as a complement to the middle market direct lending portfolio and, as I mentioned previously, increase our dividend to 17 cents per share for the fourth quarter. It is this large, experienced, and global platform that we believe will continue to drive long-term shareholder returns. I'll wrap up my comments by providing a brief update on our planned merger with MVC Capital. The transaction has progressed in accordance with our original timeline as we have filed our preliminary and amended proxy statements with the SEC. We still expect the shareholder meetings to approve the transaction to be held in December with a targeted closing date for the merger in mid to late December. We encourage all of our shareholders to review the BDC's registration statement on form N-14 and the definitive proxy materials once made publicly available on our website and on the SEC's EDGAR page. I'll now turn the call over to Ian to provide an update on the market in our investment portfolio.

Thanks, Eric, and good morning, everyone. Focusing first on the broader market, please turn to slide 10 of the presentation. As you would expect, middle market activity is down in the U.S. this year compared to 2019 with a focus on add-on acquisitions. This is where Eric's comments of a wide frame of reference are of particular importance. If there is a limited universe of quality transactions in the market, firms with the ability and experience to execute across investment types will be in the best position to take advantage of the quality opportunities. Jump to slide 11. The Credit Suisse Single B Leverage Loan Index continued to tighten in the third quarter and is now back inside middle market levels. As we saw an increase in activity, Direct lending spreads were generally within a 25 basis point range across the different subsectors relative to the second quarter. Switching gears to the Barings BDC portfolio on slide 12, we show a summary of our investment activity for the third quarter. So we are on the same page. Let me define cross-platform investments. We are categorizing investments here that take advantage of the breadth of the Barings investment platform. including items such as opportunistic liquid loan and bond investments, special situation investments, and structured products that would include CLOs and asset-backed securities. Relative to a slow second quarter, the third quarter was much more active in terms of both middle market and cross-platform investments. Net new middle market investments totaled $53 million, with gross fundings of $96 million partially offset by sales and repayments of $43 million. New investments included seven new platform investments, totally $80 million, and $16 million of follow-on investments and delayed draw term loan fundings. We also had $50 million of additional cross-platform investments and continued the rotation out of our initial BSL portfolio. Slide 13 provides a bridge of our portfolio from June 30th to September 30th. which includes increases in the values of our portfolio investments that John will describe in more detail shortly. At a high level, I will say that overall, our portfolio has performed well during the pandemic. And you can see some of the key components of this if you turn to slide 14. Here you can see an enhanced view of our total investment portfolio at September 30th, including key portfolio characteristics such as revenue contribution, and certain credit statistics. The goal of this slide is to provide further details on the three primary components of our portfolio, which are our initial BSL portfolio, our middle market portfolio, and our cross-platform investments. Here are a few high-level points of note. Our initial BSL portfolio, which at one point totaled roughly $1.2 billion, is now down to $96 million, with further reductions expected in the fourth quarter. In terms of our core portfolio, we were invested in roughly $758 million of private middle market assets at quarter end, which included $92 million of unfunded commitments and $186 million of cross-platform investments, which included the remaining $42 million of unfunded commitments to our joint venture investments. The $906 million funded total portfolio was spread across 125 portfolio companies and 28 industries as we continue to focus on diversification within our portfolio. As Eric mentioned, we have no investments on non-accrual status, and just as importantly, we had no material modifications to the cash payment terms of our debt investments. For any lender, it is ultimately the conversion of investment income into cash that is key, which is why I want to draw your attention to the income contribution section of this chart. Here you can see that only 2% of our revenue consisted of PIC interests, with no restructured PIC investments for portfolio companies facing liquidity challenges and unable to pay their cash interests. In addition to the strong performance of the current investment portfolio, I believe it is worthwhile to outline the premium spread on our new investments relative to liquid credit benchmarks. Jump to slide 15. As many investors have become accustomed to bearings, they understand we as a team seek attractive illiquidity and complexity premium across our wide investment frame of reference. This enhanced diversification drives improved investor outcomes and allows us to remain disciplined and not over-allocating to one core market. As outlined here, Barron's BDC deployed 145 million at an all-in spread of 921 basis points, which represents a 372 basis point spread premium to comparable liquid middle market indices at the same risk profile. Diving deeper into our core middle market segment across Europe and North America, we averaged a 207 basis point spread relative to liquid market indices. And within the cross-platform investment category, you can see the incremental premium that this asset category provides with premiums ranging from 500 to almost 1200 basis points. We've discussed the benefits of our wide investment frame of reference. And slide 16 provides a graphical depiction of relative value across the triple B, double B, and single B asset classes. 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, leading to the actual results I outlined on the prior slide. Our top 10 investments are shown on slide 17 with no investment exceeding 3.1% of the total portfolio and the top 10 representing only 24% of the total portfolio. Our portfolio remains diverse and with limited exposure to any single investment or industry. With that, I'll turn the call over to John to provide additional color on the financial results. John?

Thanks, Ian. On slide 19, you can see the bridge of the company's net asset value per share since last quarter, showing an increase of 74 cents per share. While our net investment income outpaced our dividend by one penny per share, the primary driver of the increase was net unrealized depreciation on our investment portfolio and foreign currency transactions of $1.17 per share. This appreciation included 59 cents per share reclassed adjustment to more than offset the 43% per share net realized loss on investments in foreign currency. These net realized losses were driven primarily by sales of investments in our initial BSL portfolio, with roughly 80% of those losses coming from the complete exit of positions in Fieldwood Energy and Men's Warehouse. You can see a further breakdown of our net unrealized depreciation on both a dollar and per share basis on slide 20. The $1.17 per share of net unrealized appreciation, which equates to approximately $56 million, included an appreciation of approximately $17 million on our middle market investment portfolio, of which $14 million was attributable to lower spreads in the broader market for middle market debt investments, and a million of which was attributable to underlying credit or fundamental performance. Both our cross-platform investments and our initial BSL portfolio saw appreciation of $7 million, and we had $28 million of reclassification adjustments I mentioned that more than offset the $21 million of net realized losses we incurred in the quarter. I'd like to point out that slide 20 provides a further breakdown of the values of our cross-platform investments in a special situation, opportunistic liquid, structured products, and our joint venture investments as we continue to look for ways to increase the clarity and transparency around our investment portfolio. Slides 21 and 22 show our income statement and balance sheets for the last five quarters. As we've discussed, our net investment income per share increased to 17 cents for this quarter. In addition, to the total investment income elements that Eric mentioned, I'd like to point out that our fee income included only $91,000 of non-recurring fee income, so our growth in net investment income for the quarter was not driven by one-time fees that will go away in future quarters. We also saw a $0.9 million decrease in our interest expense for the quarter as a result of lower LIBOR and the lower spread on our senior credit agreement due to the investment grade credit rating we received in the third quarter. From a balance sheet perspective on slide 22, the high level of short-term investments driven by sales within our initial BSL portfolio was fully used to repay our debt securitization on October 15th. We also issued $50 million in our first series of unsecured notes during the quarter. This $50 million issuance was the first series of draws under our $100 million unsecured debt commitment we announced in early August. Our debt-to-equity ratio at September 30th was 1.32 times or 0.74 times after adjusting for cash, short-term investments, and unsettled transactions. Details on each of our borrowings are shown on slide 23, which shows our debt profile for each of the last two quarters, as well as pro forma for certain financing activities that occurred subsequent to quarter ends. In addition to the full repayment of both classes of CLO notes in October, last week we completed a new $175 million unsecured debt issuance comprised of $62.5 million of five-year notes with a coupon of 4.25% and $112.5 million of seven-year notes with a coupon of 4.75% for a blended coupon of 4.57%. As part of this new issuance, the remaining $50 million commitment from our August unsecured debt issuance was reduced to $25 million, and following both issuances, we now have total unsecured debt outstanding of $225 million split evenly between five-year and seven-year maturities with an additional commitment to purchase up to $25 million of unsecured debt. This diverse liability structure represents better positions Barron's to take advantage of the wide investment frame of reference across the Barron's platform and provides more flexibility during periods of market volatility. Jump now to slide 24. Barron's BDC has available borrowing capacity under our $800 million senior secured corporate credit facility, which was further enhanced by the $175 million unsecured note offering, as well as our remaining $25 million unsecured debt commitments. The chart on slide 24 outlines the impact of using this available liquidity on our net leverage, including the impact of funding our unused capital commitments. While Barings BDC does not have any revolver exposure, we have $92.4 million of delayed draw term loan commitments to our portfolio companies, as well as $41.9 million of remaining commitments to our joint venture investments. This table shows how we have the available capacity to meet the entirety of these commitments if called upon while maintaining cushioning against our regulatory leverage limit. Slide 25 updates our paid and announced dividends since Barings took over as the advisor to the BDC. As Eric mentioned, we announced yesterday that our fourth quarter 2020 dividend will be 17 cents per share, an increase of a penny per share compared to the third quarter. I'll wrap up with two final points starting on slide 27, which summarizes our new investment activities so far during the fourth quarter and our investment pipeline. We've been active since October 1st with approximately $155 million of new commitments, of which approximately $131 million have been closed and funded. Of these new commitments, 98% are in first lien senior secured loans and the weighted average origination margin, or DM3, was 8.2%. We've also funded approximately $9 million of previously committed delayed drop-term loans. The current Barings Global Private Finance Investment Pipeline is approximately $2.4 billion on a probability-weighted basis and is predominantly first-linked senior secured investments. As a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipelines. And finally, I believe it's important to highlight the incentives point that we've discussed on previous calls. As many of you know, Behring seeks to ensure that its incentive fee structure provides the adequate latitude to make the right loan in the right structure throughout credit cycles. And this is a concept we often like to outline as investment math, whereby we seek to answer an important question asked by LPs. What do you need to lend action? in order to generate the ROE promised. As a part of the MVC transaction, Barings is seeking to lower its base management fee to 1.25% down from 1.375%. As one compares this investment math relative to that of other fee structures, it becomes clear that Barings BDC can sufficiently prosecute its 8% targeted ROE at NAV while maintaining the freedom to invest in lower-split collateral relative to other examples posted here. In our view, this high degree of investor alignment, when combined with our wide frame of reference, can lead to a superior investor outcome over time as it limits the requirement to stretch for yield and income, only to see NAV degradation in the future. Also related to the MVC merger, as we continue to work towards the closing, we have not made any share repurchases under our repurchase plan for 2020. And as a reminder, in connection with the merger, Barron's BDC has committed up to $15 million in share repurchases following the closing of the transaction. Now, as 2020 challenges will follow us and follow the market into 2021, we look forward to meeting those challenges with enhanced liquidity, a quality investment portfolio, and a strong origination outlook centered on investment discipline and a multi-channel origination approach with a very wide investment frame of reference. And with that, operator, we'd like to open up the line for questions.

Thank you. Ladies and gentlemen, the floor is open for questions. If you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. A confirmation tone will indicate 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. In the interest of time, we do ask that participants limit themselves to one question and one follow-up before rejoining the queue for additional questions. Once again, that's star one to register questions at this time. Our first question is coming from Finn O'Shea of Wells Fargo. Please go ahead. Mr. O'Shea.

Hi, everyone. Sorry about that. Thanks. I appreciate everybody, the opportunistic strategy breakout and Now it looks like you'll have more of an unsecured debt profile. So I guess first question for Eric, does this mean we'll see a shift in strategy or perhaps a more fluid strategy on the origination side? Obviously the BDC started out mostly oriented to middle market, but it looks like you started to get opportunistic in the volatility this year, which is obviously great. And now we're seeing, you know, more clear language. So any just high level on what this means for how we look at the BDC going forward?

Thanks, Ben. So those of you who joined us, you know, almost two years ago now, a little over two years ago, you know, when we were able to execute on the triangle transaction, we were new to the BDC space. And I said at that time on our initial calls that the first job order was, frankly, to establish credibility with our shareholder base, with the analyst community, and within the industry, and do what we say we're going to do. And the focus then, and continues to be the core part of the portfolio, to be directly originated, first lien, senior secured loans. To John's point, we think the fee structure allows us to do that at levels that are very sound from a credit perspective, as evidenced by the lack of, we have no non-accruals in our portfolio right now in the BDC, while also kind of preserving the return that we're targeting for investors. That being said, as we've kind of evolved over the course of the past quarters, we've tried to share at times kind of the insights into bearings in the platform. You saw some European deals, if you go back a year ago, And then we've started to introduce some of our other capabilities into the BDC from an investor return perspective. That's not intended to be in any way, shape or form a shift in strategy, but I do think when we think of the 30% bucket that we have, it is our obligation as a manager to make sure that we're looking for the best risk adjusted returns across our wide spectrum of investment capabilities we have at Barings and bring those to bear for our investors. of which obviously at Barings we're by far the largest investor in the BDC. So no shift in strategy. We're still going to say, you know, we call it boring is beautiful. The core of the portfolio is going to be directly originated, first lien, senior secured, but you will continue to see some portion of that 30% bucket do what I believe we're being paid to do, which is find the best risk adjusted returns we can, particularly in parts market volatility. and we're agnostic to where that comes within Barings. This is a Barings BDC, not just our private finance platform.

Sure, that's very helpful, thank you. And another one on our platform vertical is that on middle market Europe, that appears to have been very robust this quarter. A lot of that was sold down to the JV. just trying to get a feel as if that was that for the BDC's appetite or was that to create space for MDC? I know they have Europe as well, but just on a higher level on allocation, how does the BDC and JV fit in line? Like, are they both equals in claiming allocation to Europe deals or does the BDC get its fill, and then the JV gets its fill of that. Any color on how we can think of where Europe fits in for, I guess, essentially the BDC shareholders?

Sure, Finn. So we'll start with kind of a high-level view of where we believe that the joint ventures can make quite a deal of sense. So to manage the 30% bucket, it's always important to realize that the JV, it's about diversification of return across a wide investment frame, not over-levering middle market or over-levering BSL investments in order to generate a risk return to try to solve a problem. And so what happens is when the BDC participates, the BDC participates in Europe and U.S. loans on the exact same frame as all our clients. But remember, the BDC cannot hold a vast majority of European loans because of a result of the 30% limitations. So what you'll see is there's a level of diversification, we'll call it loan transfers or sell-downs to the joint venture, so that the BDC can still have exposure to the space, but at the end of the day, not end up over-allocating the 30% bucket into, let's say, just a few names across Europe. It's nice to have a very diversified portfolio. So on a go-forward basis, you know, Finn, you referenced the transfers. Those would have been European loans that were done in a previous, you know, say two quarters ago, right, and then they were effectively transferred down, and you can expect to see transfers in the future. Kind of keep into the view that the BDC, while it wants to have some level of European exposure, it does always make sure to watch that diversity level appropriately. So from a participation perspective, It all starts with the BDC as what gets onboarded inside the BDC and then gets transferred down to the JV as both the partners agree if it's an attractive opportunity to transfer down. And so, really, it's about diversification. It's about maintaining what we saw, at least in this quarter, was, as Ian had outlined, an attractive DM, but also making sure that diversification widely occurs both in the joint venture sector and in the BDC portfolio itself in that 30% bucket.

Thanks. Can you remind us of the JV's target leverage profile?

I think when we announced the transaction, you know, nearly a quarter and a half or, sorry, nearly a year and a half ago, you know, there was an expectation of roughly two times, right, across the equity position. Note that this is a JV that, you know, that BDC participates in with roughly a $50 million capital investment and our JV partner at roughly $500 million in equity.

Okay. That's helpful. Thank you, everybody.

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

Hi, guys. Good morning. Congratulations on the quarter and also on The disclosures, some of the things incredibly helpful to us, and I think investors, particularly like the restructured pick line. I mean, it's zero for you, but that element is something that's extremely difficult to tease out of a schedule of investments, but provides a really compelling picture. for your portfolio in contrast to some others out in the market. But just on the spreads, et cetera, that you saw, you're seeing, I mean, on chart 14, if I look at the middle market, the average spread for the middle market business now is 536. At the end of 19, it was 528. So it's only moved up very modestly while leverage obviously has ticked up. The leverage in that portfolio was 4.7 at the end of 2019. It's 5.2 now. In the context of what's going on on chart 15 where your deployments were at 7.30, meaningfully higher spreads, can you walk us through kind of the change there in terms of spread to leverage and how that relates to kind of the much wider spreads you saw in the deployments for Q3, because there's 200 basis points wide of your average for the quarter. Just trying to get a feel of risk, leverage, pricing, et cetera, and how that's playing out.

Hey, Robert, it's Ian. I'll start, and Eric or John can jump in. A couple things going on here. First of all, as you look at the portfolio and you look at Europe versus U.S., typically in Europe, the deals are bilateral deals, so there's one tranche of debt. Typically, that debt is a little higher than the U.S. market. But at the same time, the OID and the spreads can be higher as well. So on a relative value basis, it can be a very attractive investment. And then in terms of the U.S. market, the way I would look at it is in this market, any company that certainly in the third quarter and now, that's getting financed and attracting new capital is a high quality company. It's COVID light or COVID green. It's performed well and it's underwritable through a recovery that we yet don't know what that geometry is going to look like. And so if you look at the, and you're right, if you look at the spread, the spread is pretty much flat. in the U.S., a little different than Europe. The leverage has actually come down about a quarter of a turn-ish. But what has changed in the North American market is the OID. And that really reflects the fact that in this market with scarce deal flow, sponsors are trying to take deals off the table, whether they're proprietary in nature or it's a limited auction. and it's highly competitive. And so sponsors are looking for financing partners that can provide capital and reliability and responsiveness to help them take those deals off the table. And so they're paying more for those deals through the OID. So if you're an agent, if you're leading these transactions, you're benefiting from that higher OID. And you can see on that portfolio chart that our OID is around 3%, which was definitely higher than pre-COVID. You add on to that in North America, slightly lower leverage, better documentation, and really high quality deals. And so you get to a point where you can look at a very attractive investment opportunity. and you can look at it in terms of on a relative value to the liquid market. We talked about the illiquidity premium, or you can break it down to return by turn of leverage and look at it from that perspective as well.

Got it. I appreciate that. If I can, kind of tying on to that, the slide, I guess, 27, originations... in in q4 since i mean the dmv dmv's and spreads are not the same thing but at 8.2 percent um that that seems to to be holding in um pretty well right i mean given given where spreads were in in in q3 um can you give us any color on for that that Q4 origination or those Q4 originations so far. I mean, is any of that the really high spread opportunistic stuff that you did in Q3 that we see on slide 15? Or is that more of the middle market type deals where you're still finding opportunities to capture quite attractive spreads and DM margins, even in Q4, even with competition coming back?

I'll start with the middle market and then I'll let Eric and John jump in. We continue to see the deals that we are working on continue to be attractive from that perspective. Now, obviously there's a lot of capital out there and so our expectation is that with this competition you're going to see some of those returns compress over time. I think the other thing that you want to be focused on is, and I mentioned this earlier, once you get through a dislocation, it's really the high-quality businesses that can attract new capital. Clearly, there are companies coming out of the woodwork here that maybe aren't so high-quality in nature that are going to be looking for financing. you want to make sure you pick the right ones. And so what we're not going to do is start taking undue risk and looking for that return and take on too much risk for that return. So we're going to stay disciplined. And I think we're in a really good spot because as we went through the whole COVID situation, while other platforms were dealing with capital issues and liquidity issues, we didn't have any of those issues. So the market saw us as a stable and reliable source of capital. And quite frankly, we're getting a lot of portfolio companies and new platform opportunities coming to us because of what some of these sponsors saw during the market. And in a couple of cases, we've actually replaced existing agents. So I see it continuing. We're extremely busy right now in terms of the pipeline, but nothing lasts forever. So we expect things to get back to a fairly competitive environment. And Eric and John, I don't know if you want to add anything to that.

I think, Ian, you answered it very well. The only thing I'd just specifically, Robert, that does refer to not exclusively, but very much our core directly originated middle market business. So think of those deals that were funded in October. Those were probably August type of, you know, initial due diligence and transactions, given how time goes. And so, as Ian said, nothing lasts forever. So I'd say, you know, I'd say it's more competitive today than it was in August, but we're still finding some really attractive opportunities.

Got it. Got it. I appreciate that. And one more, if I can. Obviously, leverage pro forma for cash or short-term investments in these deployments, obviously, is paramount. is in a pretty good spot. The MVC deal, if it's approved by shareholders, would deliver you even more. And even in the context of that leverage, obviously earnings are very good and drove an increase of dividend. So given the deals that you have managed to, or the attractive spreads you've got with this leverage profile, has there been any thought to it? either maybe even targeting staying at a lower leverage, given that if you can produce the earnings at a lower leverage, that's no risk all in. I mean, any thoughts on that?

Yep. So, you know, we started at the beginning of this. I think one of our first calls I referenced how managing the liability side of our balance sheet was going to be something we focused on and hopefully would be a differentiator. for us and I think what you've seen with our cost of capital, our unsecured issuances that you've seen here staggering at those maturities have all been positive. When we looked at the pipeline we saw coming in really that August-September timeframe and how the strength of the pipeline that we saw for October type of closings and as John referenced, the probability weighted pipeline that exists now going forward, combined with the return or the strength of the liquid market, We really viewed it as a time to frankly sell a lot of our liquid collateral at that time that it added some volatility to our underlying NAV and move that. And so sell that, that created the cash, which makes the net leverage to your point, you know, at an attractive level, we saw the pipeline coming through. We said all along, you know, buying optionality on whether it be unsecured credit, If you go back to our original revolver, we ended up taking more revolver capacity than we initially went out for to buy that optionality. And so to the extent that we can generate the appropriate return for shareholders at a lower leverage is something we'll absolutely evaluate. It's really for us, it's about maintaining that optionality and that flexibility to make sure that when the market opportunity is there, that we have the leverage capacity to take advantage of it for the benefit of shareholders.

Got it. I appreciate that. Thank you, and congrats on the quarters.

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

Hey, good morning. Thanks for taking my questions. You know, I know this is just, you know, one quarter of data, you know, that we're looking at, but I really appreciate the breakdown of the investments in the middle market versus cross-platform. But this quarter, two-thirds of your originations were kind of in the middle market, and a third were in that cross-platform. That feels pretty high, but do you think you're going to sustain that type of breakdown, or is it just given this uncertain economic time, this is creating increased deal activity in that cross-platform? And any sort of long-term... you know, breakdown. Of course, it depends on the market environment, but do you have any sort of long-term breakdown of what percentage of that cross-platform strategy you would like to make as a percentage of your portfolio, just given that's, you know, a much higher-yielding strategy?

Thanks, Ron. Derek, it really is just what the market opportunity provided us. You know, it wasn't a huge volume quarter if you look at the middle market relative to, you know, the cross-platform, but we saw some good opportunities in the cross-platform investments and we thought, you know, to capitalize on them. If you look at the October number that we referenced there, I mean, you'd see that be a much, much higher percentage of directly originated first lien senior secured. And if I look at Q4, I would think of it as kind of a core stuff that we told you we were going to do over time. So, you know, we don't have a target. We don't look at it and say, you know, we want 25% of it to be that. we look at it and say, you know, you got to manage the 30% bucket, right? We don't want to get right up against it too much, you know, from a percentage basis. So if you think of that, the core part of the portfolio, I'd say it's kind of always going to be kind of 75 plus percent of what we do. But I do think that, you know, when we see those opportunities and one of the benefits I think bearings brings to the shareholders is, between our really deep liquid team in U.S. and Europe, our structured credit team, our private and public ABS teams. Our deal flow is really robust across various asset classes. And as importantly, it gives us a relative value framework that I think if you go back to fourth quarter, I think it was a year and a half ago or so, we had a really slow origination quarter. And that was where we had a lot of volatility in the liquid markets. And we didn't see a real illiquidity premium. So we kind of put our foot on the brake on the middle market in that case, because we didn't really see that as value. And so where we do see value, we're going to step in there to benefit shareholders. But I wouldn't view it as a change in strategy, nor is it a target we have. But I would think of it as using that 30% bucket, some portion of it for this type of investment, which I think can help differentiate ourselves versus other managers.

Okay. Understood. you know, just recently, you know, over the last several months, you guys have done a really good job getting the IG rating and diversifying the liability structure with some unsecured notes, including, you know, more in the fourth quarter. Obviously, there's a lot of benefits, and I think that that should be well received, you know, by the market, your guys' diversification and liability structure. Those unsecured notes are a little bit higher cost than your line of credit. So, I'm just wondering, as we sit here today with pro forma for the issuance you guys have done in the fourth quarter, do you feel good about the composition of your liability structure, or would you still like to layer on additional unsecured notes in the future, you know, if the pricing is right?

Hi, Ryan. This is Bach. I'll argue that there's certainly an opportunity to layer in more unsecured debt just generally speaking, because there is a general expectation for that of investment-grade BDCs to have secured debt, think of your revolvers, no more than 30% of your total assets. And so you can kind of look at our ratio and understand where we are versus where many rated BDCs are targeted or kind of ranked. Honestly, the true north when it comes to how you think about unsecured debt issuance comes out in slide 28 because, you know, clearly everyone saw the benefits of unsecured debt issuance, right? It helped quite a few respected peers navigate the timeframe, and it also avoided the material dilutive rights offerings, et cetera, that had occurred in more secured-oriented type debt structures. That being said, you don't want to let your liability structure become the tail that wags the dog. And so if you have a high focus on attractively priced debt and you make sure that when you put it together with your alignment, your fee structure, et cetera, and you're able to continue to prosecute across a wide array of assets with that required spread mass that we referenced, then yes, it's attractive because it provides flexibility and protection during times of volatility. But at the same time, it doesn't force material yield seek to the detriment of investors because you can see that happen just as fast because it's a two-edged sword. So for us, we're comfortable. You can kind of see the math outlined on 28, and that's more of a long-term view for us. And so you could expect the additional unsecured debt to be layered in while keeping a very important point on price and realizing that there can be downsides when you increase your unsecured debt too much to the point where it forces you into the wrong asset base at the wrong time. But right now, we can expect more and still allow us to achieve our objective returns with a very stable and boring liability structure.

Okay. Understood. That's all I have today. Congrats on the really nice quarter, guys.

Thanks, Ron. Appreciate it.

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

I know we only have a couple of minutes, but I just have two questions. Was it at the point where when you looked at the spread available on the broadly syndicated loan portfolio, which you said the yield at fair value was 480 versus your cost of capital that it simply didn't make sense to hold any of them anymore?

Less of a cost of capital decision, Casey, and much more of an opportunistic redeployment opportunity because, you know, clearly, you know, you can look at those two as exclusive events and not necessarily connected because even a smart manager that might be raising carry, right, could still, you know, hold liquidity at a certain cost to the extent that they felt they weren't exiting those at proper fair value and redeploying them at wider spread.

Yeah, okay. And secondly, Ian, if you could give us some color in terms of, you know, when you talk about the cross-platform investments, And I understand Eric says, you're still in bearings lane. You're not in the normal lane of the normal BDC. So I think investors would benefit from understanding what type of companies are these? What type of opportunities are these that are creating this excess return so that they can get a better feel with some more specificity about how you're investing and what your investing philosophy is?

Why don't we have Brian High, who's on the phone, answer that. He's one of our co-portfolio managers. He runs our U.S. special situations business. So maybe, Brian, if you're available to add a little color to that, and then, Ian, you can backfill.

Yeah, sure. Thanks, Eric. So if I just have you turn back to slide 15, you can see that John broke it out nicely in a few different buckets. The special situations investments being Think of them as more of a rescue financing type of an investment. Good companies, they got caught up in COVID, running out of liquidity, and we're looking for attractive ways to provide them capital with solutions that are maybe a little bit not down the middle of the fairway, whether it's a drop down of assets to finance on a first thing basis or a super senior loan or something like that. Opportunistic liquid is exactly what it would sound like. It's just good intrinsic value based on dislocation in the market. Typically, for this vehicle, we're looking for more off the run transactions that maybe don't have a liquidity in the market, and we know them fairly well given the research platform that we have here at Barings. And then the structured products, this is another form of rescue financing. The theme that I would point to, I guess, in the third quarter was with double ETCs related to some of the airlines, providing capital with some of the metal as a collateral, but having the underlying risk of the airline as well. So we think we get a good risk-adjusted return given the fact that we have those hard assets, and we can leverage our ABS team within Barings as well as our real assets team to really understand exactly what it is we're lending against and then take a broader view on the overall credit of the airline as well.

You know, Casey, as well as, you know, this kind of theme that, you know, Ryan hit it, Finn hit it. You know, from day one, we promised you transparency and communication. So one of the takeaways for me will be, you know, if we get to the point we can have an investor day, maybe it'll be virtual. We'll zoom it or something. We'll do a real focus on these other areas because I think we spent a lot of time on our traditional first lien senior secured middle market business. But maybe we'll use some time during that investor meeting to really do some deep dive in a couple of these areas so that people can get, you know, really understand the teams, the depth of the team, the track record, and all of that so that there's no concern around it.

Great. That's helpful. Thank you. That's all my questions. Thanks, Casey.

Thank you. Our next question is coming from Kyle Joseph of Jefferies. Please go ahead.

Good morning, guys. Nice quarter. Thanks for taking my questions. And yeah, let me echo that. Appreciate all the color in the deck. I know you guys have a lot going on. And I think the deck does a good job really explaining it and making it easy to understand. So appreciate that. Most of my questions have been answered. Just a few. Obviously, in terms of portfolio yields, obviously, there were some some kind of nuances in the quarter in terms of the buildup of short-term investments ahead of the debt pay down. But just want to get kind of a refreshed outlook given the portfolio rotation we saw in the quarter, some of the new investments you're seeing in terms of ABS and opportunistic. You know, give us a sense for your kind of near-term yield outlook and then layer in, you know, how that looks, you know, with theoretically an MVC portfolio on top of it into next year.

Kyle, what I would do is, you know, if you turn to the balance sheet, so clearly you can also, looking at our subsequent events, right, the DMs on average of 8.2%, and as Ian and Eric outlined, kind of a focus on the, we'll call it core, direct lending at widespread. Expect that to continue. You can expect the debt structure to change. Now that you know, of course, we announced the securitization pay down as well as the unsecured debt And so when you get to that kind of blending, right, you can approach certainly a leverage target a bit higher than where we are now, but before the delevering activity that would occur on the onboard of the MVC merger, right? So all in all, I think it was perhaps referenced previously that you can expect origination strength in the quarter from ourselves. You can also expect earnings lift as it relates to a higher earning portfolio that becomes onboarded. And you could also likely expect leverage to remain fairly constant over this timeframe. Well, not a little bit higher than 0.74, clearly, because you can imagine it's been a heavy deployment quarter. But at the same time, we'd be left with more than enough carrier dry powder capacity to take advantage of opportunities in the future while still generating an improved ROE as a result of the rotation. So all those kind of factors come together to just point as a refresh of improved ROE with still improved ability to deploy capital to the extent volatility returns and middle market volumes stay robust moving into 2021.

Very helpful. And then one follow-up from me. I think this has been glossed over a little bit in the quarter, but obviously we're still in a pandemic. There's a lot of companies struggling. I know you guys referenced no non-accruals and no increase in pick income from restructuring and anything like that, but can you give us a sense for just broadly how portfolio company performance has trended between second quarter and third quarter? Did you see ongoing recoveries? Did some continue to struggle and just kind of Talk about the trends you're seeing on average in your portfolio.

I'll give a couple of high-level comments and then turn it over to Ian to kind of get some specifics. I'd say the first thing I'd say is the partnership approach I've seen with our private equity clients during this situation has really been strong. And I think that partnership from both sides really is defining in a lot of ways and I think will lead to enhanced relationships. Two, I'd say management teams in general have adjusted business plans and business models much more quickly and much more creatively than I would have expected. And so I think, you know, just in general, I'd say, you know, the partnership that the private equity firms and us have worked in a constructive manner combined with management teams who have been, I'd say, very impressive on their ability to adapt have really part of the reason or a lot of the reason why this portfolio is continuing to perform as it is in addition to our underwriting on the front end. But I'll turn it over to Ian to give anything specific and kind of second to third quarter.

Yeah. Well, first of all, I would just put a finer point on what Eric said. I mean, one of the reasons why we like the sponsor business is because of that very fact that, you know, sponsors, if you pick the right sponsors and we underwrite the sponsors that we work with, We expect them to be ahead of the curve and to be proactive. And we definitely saw that during COVID and the dislocation caused from COVID. And, of course, as you underwrite the issuers, you know, we underwrite the management teams. And so the combination of both the efforts by the management teams and the sponsors to right-size the business, but also in terms of communication and transparency, that was really important for us. You may recall that we discussed last quarter, we went through each company in the portfolio, working with the sponsors and the port co-management teams to forecast the next two quarters. Obviously, it was done at a time with a lot of uncertainty. Expecting the worst, we were pretty proactive and I think conservative in terms of our internal risk ratings. We downgraded a number of companies expecting adverse impacts because of shelter in place and the COVID dislocation. But at a high level, recall that we limit and avoid many consumer-facing businesses generally, and especially those that are discretionary in nature, such as retail, restaurants, and gyms. So the good news for us is our portfolio was comprised of mostly essential businesses with Um, yeah, they were, uh, some of them were impacted initially by shelter in place, but came out of that. Um, and, and we really avoided the industries that I think a lot of other people, uh, have had to deal with, uh, in a tough environment where the business model has been impaired, uh, because of COVID and, and they haven't been able to work their way through it. So third quarter, we just saw a lot of better financial performance than what we initially. estimated when we had those initial conversations, and we've reversed many of those downgrades that took place in the second quarter.

Very helpful. Thanks again for answering my questions. Thanks, Kyle. Thanks for your time.

Thank you. Our last question today is coming from Bryce Rowe of Robert W. Baird. Please go ahead.

Thanks. Good morning. Maybe talk about a topic we haven't talked about for the last couple of quarters because of the ongoing acquisition. But with that expected to close here by the end of the year, just curious what the appetite might be for more stock repurchases given your action in the past. I assume that they're still up for grabs, so to speak.

Yeah, so we announced as part of the transaction, right, that we'll do $15 million of share buybacks post the transaction, the closing of the MVC. And, you know, we work with our board on that strategy on an annual basis, depending on factors. And so it's always something that will be in a discussion that we'll evaluate, you know, using basically the equity as a form of return to shareholders if it's attractive. At the same time, we want to make sure we balance the scale and liquidity of the underlying corpus of equity, too. And so that, in combination with our board, is something we look at on an annual basis. But we've already committed to the $15 million post-transaction.

Great. Thanks, Eric. Appreciate it. You got it, bud.

Thank you. At this time, I'd like to turn the floor back over to Mr. Lloyd for closing comments.

I just want to thank everybody for dialing in and your time. I know particularly for the analyst community, y'all are very busy at this time. I appreciate the compliments on our transparency and the quality of the deck. And Jonathan Bach and Elizabeth Murray and their team have really put a lot of effort into that. And so I'm glad it's recognized by people out in the investor community. If we can answer anything else, always let us know. We're always here. Just everybody stay healthy and stay positive out there. And thanks for your time and support.

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