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?