Barings BDC, Inc.

Greetings, and welcome to the Barron's fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to CEO Eric Lloyd. Please go ahead.

Thank you, Kevin, and good morning, everyone. We appreciate you joining us for today's call, and I hope that you and your families are doing well and staying healthy during this unprecedented time. Please note that throughout today's call, we'll be referring to our fourth quarter 2020 earnings presentation that is posted on the investor relations section of our website. On the call today, I'm joined by Barings BDC's president and co-head of global private finance, Ian Fowler, Tom McDonald, managing director and portfolio manager, Brian High, Barings Head of U.S. Special Situations and Co-Portfolio Manager, and the BDC's Chief Financial Officer, Jonathan Bach. As we typically do, Ian and John will review details of our portfolio and fourth quarter results in a moment, but I'll start off with some high-level comments about the quarter. The way our earnings calendar fell this year, it's been almost four and a half months since our last earnings call. And as you saw in our preliminary earnings release in February and yesterday's filings, We finished 2020 with an extremely active quarter. Between a record quarter for originations, completing the MVC capital acquisition, issuing new unsecured debt, and announcing a dividend increase, we have a lot to cover today. The timing of this call also affords us the opportunity to provide greater visibility into the first quarter of 2021, and you will see the strong finish to 2020 has continued into the new year. Let's start with the high level on slide five of the presentation. The macro trends we saw in the third quarter continued into the fourth quarter as broadly syndicated loan prices continued to increase and ended the year back at pre-COVID levels. And while BDC equity prices were also up in the fourth quarter, increases have lagged the BSL market and BDC equities ended 2020 with a 21% decline for the year. Now turning to Barings BDC, flip to slide six for our fourth quarter financial highlights. our net asset value per share improves two cents in the quarter to 1099. As you might expect based on the market trends I outlined, net unrealized depreciation in our investment portfolio drove NAV per share higher, but this impact was partially offset by net dilution from the NBC capital acquisition. When we announced the transaction last August, we outlined that the fixed share exchange rate was based on Barings BDC's NAV per share as of June 30, 2020 of 10-23. Given the increase in our NAV per share since that time, we did experience some NAV per share dilution when the transaction closed in December. This dilution, however, is expected to be a near-term impact as we continue to believe both the drivers behind the transaction will result in long-term NAV per share accretion. Importantly, our actual net asset value increased from approximately $526 million at September 30th to almost $718 million at December 31st. This expanded equity base will provide for increased leverage and investment capacity, and the opportunity to reposition certain assets into directly originated investments could help drive NAB per share and earnings accretion in the future. Our net investment income increased from $0.17 per share in the third quarter to $0.19 per share in the fourth quarter. Given that the MVC capital acquisition closed on December 23rd, this increase was not driven by the acquired assets, but rather the impact of net new bearings originated investments totaling $332 million as we effectively completed the rotation out of our initial Brawley syndicated loan portfolio. This increase in core earnings drove the increase in our first quarter 2020 dividend, 2021 dividend rather, to 19 cents per share, up from 17 cents per share in the fourth quarter. Ian will discuss originations in more detail, but the fourth quarter total deployments were a record for both Barings BDC and the overall Barings global middle market lending footprint. Our existing investment portfolio continued to perform well in the fourth quarter. As of December 31st, our total investment portfolio was carried slightly above original cost, and no Barings originated assets were on non-accrual. One asset, acquired through the NBC Capital transaction, with a value of $3 million was on non-accrual status. But overall, that portfolio's performance continues to be in line with our original expectations. Slide seven outlines some additional financial highlights for the quarter. Here you can see our investment portfolio at fair value grew to almost $1.5 billion at year end. The $380 million increase, however, included a $140 million decrease in our short-term cash investments. Thus, our true investment portfolio actually increased $525 million during the quarter as a result of the MVC capital acquisition and the net deployments I referenced earlier. Even with this increase in size, our net debt to equity ratio is 1.04, well within our target range for leverage. The quality of our capitalization also improved with the issuance of 175 million of unsecured notes in the fourth quarter. And this focus on our capital structure continued in the first quarter of 2021 with an additional $150 million unsecured note issuance in February. Let me wrap up my comments with a few high-level observations about 2020 as a whole. It was an unprecedented year on many levels, and the global pandemic created business and personal challenges too numerous to name. If you had told me in late March of 2020 or April of 2020 that Barings BDC would end the year having completed its portfolio rotation out of broadly syndicated loans into directly originated assets, having no Barings originated assets on non-accrual, receiving an investment grade credit rating, and completing the acquisition of a low lever BDC at a discount to NAV, I certainly would have taken that outcome in a heartbeat. This result was driven by a number of factors, including the hard work and dedication of people across the entire Barings platform, various investment teams, and our internal partners. Partnership with our private equity firms and our portfolio companies and other partners. Two other elements that we frequently discuss were also critical to this outcome. First, Behring's wide investment frame of reference allowed us to participate in a differentiated deal flow across public and private markets, finding the most attractive risk adjusted returns at different times during the year that certainly saw a high level of volatility. Each quarter of 2020 presented different investment dynamics and Behring's BDC was able to remain active throughout the year. Second, We continue to believe the alignment between a DDC and its manager is critical. Our alignment was further evidenced by the credit support agreement that was put in place as part of the MVC capital acquisition, as well as a lower base management fee that became effective on January 1st, 2021, as a result of last year's shareholder vote. During challenging times, we believe this type of alignment is critical to achieving optimized results for shareholders. I'll now turn the call over to Ian to provide an update on the market and our investment portfolio.

Thanks, Eric, and good morning, everyone. Let me begin on slide nine with some additional details on the record level of investment activity that Eric mentioned. Net new middle market investments totaled 393 million, with gross fundings of 528 million, partially offset by sales and repayments of 135 million. New investments included 24 new platform investments, totaling $418 million and $110 million of follow-on investments and delayed draw term loan fundings. We also had $13 million of net new cross-platform investments. As a reminder, these are investments 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 collateralized loan obligations and asset-backed securities. Our initial BSL portfolio decreased by $74 million, and given that only $15 million of that portfolio remained at year end, and it has been further reduced to approximately $2 million today, we will no longer be reporting it separately going forward. We've included the assets acquired in the MVC capital acquisition under cross-platform investments on this slide, with a total of $185 million acquired at the closing of the transaction and $5 million of subsequent repayments before year-end. You may have expected to see a higher number based on our initial discussion of the transaction, but MVC had over $30 million of assets and repayments following our August announcement, consistent with our expectations. Two logical questions when you have a quarter with deployments of this level are one, why was volume so high? And two, how can you be confident with the quality of the originations? Direct lending to middle market companies effectively stopped in the second quarter as the focus shifted to simply navigating the crisis. As government policies took shape and companies began to fully understand the implications of the pandemic, the third quarter started to see a pickup in transactions involving quality companies that demonstrated an ability to navigate the challenging environment. This dynamic came into full effect in the fourth quarter as pent-up demand for transactions, both LBOs and add-ons, involving quality companies with a proven 2020 track record drove what was almost a full year's worth of activity in a single quarter. You can see on slide 10 that direct lending spreads continue to tighten across the different lending subsectors as volumes push higher. In terms of quality of the originations, I believe 2020 created a unique dynamic whereby the high fourth quarter volume could effectively be viewed as the result of an elongated due diligence process as companies needed to demonstrate their ability to manage through the crisis before entering into a transaction. Over 70% of our middle market fundings in 2020 occurred during the fourth quarter, and I take comfort in the fact that these new investments were underwritten under a COVID-focused lens. Slide 11 provides a bridge of our portfolio from September 30th to December 31st. In addition to the net deployments I just outlined, Unrealized depreciation of $25.4 million was a key driver of a portion of the increase in portfolio fair value. We did have $1.5 million of net realized losses primarily as a result of BSL sales. You can see a breakdown of the key components of our investment portfolio at December 31st if you turn to slide 12. With the rotation out of our initial BSL portfolio, In the closing of our MVC acquisition, this slide now breaks down our portfolio into middle market, MVC, and cross-platform components. We were invested in approximately $1.2 billion of private middle market assets at year end, which included $129 million of unfunded commitments and $223 million of cross-platform investments. which included the remaining $30 million of unfunded commitments to our joint venture investments. The MVC portfolio was valued at $180 million at year end, consistent with the original transaction value booked at closing. The $1.4 billion funded total portfolio was spread across 146 portfolio companies and 29 industries. One investment acquired from MVC was on non-accrual status, and we had no material modifications to the cash payment terms of our debt investments. In terms of cash conversion, 3.8 percent 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. For our middle market portfolio, weighted average first lien leverage was 5.2 times consistent with what we reported last quarter. Our total investment portfolio, excluding short-term investments, is now made up of 82 percent first lien investments, which is down from 92 percent at the end of the third quarter. Slide 13 provides a breakdown of the driver of this change, which is attributed entirely, as expected, to the MVC capital acquisition. Excluding the investments acquired from MVC in short-term investments, we ended the year with a portfolio comprised of 93 percent first lien assets, an increase from the third quarter given the high level of first lien deployments in the fourth quarter. The MVC portfolio, on the other hand, was comprised primarily of equity, second lien, and mezzanine debt investments. We believe this portfolio can initially serve as an attractive complement to the Barings-originated portfolio, and the acquisition was a unique opportunity to buy a large portfolio at a discount to NAB. As I mentioned before, we have been sizable payoffs of approximately $30 million since the deal was announced, and we will continue to drive toward the exit of non-core, lower yielding equity investments and increasing core earnings by redeploying this capital into higher yielding assets. Thus far, the portfolio has performed in line with our original expectations. Our top 10 investments are shown on slide 14, with no investment exceeding 2.5 percent of the total portfolio, and the top 10 representing only 21 percent of the total portfolio. Our portfolio remains diverse and with limited exposure to any single investment or industry. You can see that our two largest investments were acquired as part of the MVC capital transaction. Keep in mind that while these are large exposures, They are also supported by the credit support agreement in place with Barings LLC, thus reducing potential downside risk for these investments. Portfolio diversification is critical for many reasons, but we believe its importance will continue to be highlighted in the current environment. I'll now turn the call over to John to provide additional color on our financial results.