Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter-ended June 30, 2022. All participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero 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 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 sections titled Risk Factors and Forward-Looking Statements in the Company's Annual Report on the Form 10-K for the fiscal year ended December 31, 2021, and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, each as 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 Eric Lloyd, Chief Executive Officer of Barings BDC.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our second quarter 2022 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, Brian High, Barings Head of Capital Solutions and Co-Portfolio Manager, and the BDC's Chief Financial Officer, Jonathan Bock. As we typically do, Ian, Brian, and John will review details of our portfolio and second quarter results in a moment, but I'll start off with some high-level comments about the quarter. Let's begin with the market backdrop shown on slide five of the presentation. With significant economic uncertainty, Raleigh syndicated loan spreads increased due to increased macroeconomic fears tied to both underlying inflation and the potential of a Fed overcorrection. Loan prices broadly, and BDC equity prices specifically, were also not immune from increasing risk premiums, down 4% and 9% from the end of Q1 through July 31st, respectively. Looking at second quarter highlights on slide six, net asset value per share was $11.41, compared to the prior quarter of $11.86, down 3.8%, driven primarily due to unrealized write-downs tied to macro market factors and spread widening, as opposed to fundamental credit-related factors. Our net investment income increased to 29 cents per share compared to 23 cents per share last quarter as a result of increasing interest and fee income, as well as the elimination of our income incentive fee due to our shareholder-friendly fee structure, specifically the incentive look-back feature, which includes realized and unrealized gains and losses. Regarding new investments, we had gross originations of $352 million in the second quarter. This was offset by $299 million of sales and prepayments. Our investment portfolio continued to perform well in the second quarter, with no new loans on non-accrual. In total, with the Sierra and NBC assets, our total non-accruals are 2.9% of the portfolio on a cost basis and 0.8% on a fair value basis. Ian will highlight later our focus on select asset sales and restructurings in the acquired MVC and Sierra portfolios as we continue to maximize shareholder value while benefiting from the protection added by the credit support agreement. Additionally, our Board declared a third quarter dividend of $0.24 per share, equating to an 8.4% yield on our net asset value of $11.41. Slide 7 outlines summary financial highlights for the previous five quarters. In the second quarter, continued strong investment performance drove total investment income higher quarter over quarter to $56 million and net investment income to $32 million, both up from $44 million and $19 million in the first quarter. Realized losses of $10 million were principally a result of FX moves on assets that were repaid at par in the quarter, with a corresponding offset in the unrealized depreciation associated with foreign currency borrowings under our credit facilities. Net unrealized depreciation of $45 million was primarily a result of mark-to-market on our assets as a result of higher spreads. As a result of the unrealized depreciation, Barron's incentive fee cap eliminated the quarterly incentive fee, further lowering expenses and increasing debt investment income to $0.29 per share. Net leverage, which is leverage net of cash, short-term investments, and unsettled transactions, was 1.0 times. which is currently toward the lower end of our target leverage of 0.9 to 1.25 times. This attractive liquidity position allows us to remain steady partners with our existing sponsor clients, as well as look towards investment opportunities that present themselves in the face of economic uncertainty. 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. If you turn to slide 9, you can see additional details on the investment activity that Eric mentioned. Our middle market portfolio increased by $3 million on a net basis in the quarter, with gross fundings of $227 million, offset by sales and repayments of $224 million. New middle market investments included 22 new platform investments, totaling $156 million, and $171 million of follow-on investments and delayed draw term loan fundings. We also had 108 million of net cross-platform investments in the quarter. Slide 10 updates the data we show you each quarter on middle market spreads across capital structure, and it is easy to reference that investment spreads across public and private asset classes have widened. Notice the degree of spread widening in the private credit category has a much more lagged effect when compared to broadly syndicated loan spreads, which are outlined in red. That said, we continue to see spread widening in our core market as a welcome benefit to long-term investment return, particularly for those who have flexible investment capital. Turn to slide 11. Many of you have heard me outline the competitive dynamic at play in Unitron's transactions. I'm pleased to see as a result of emerging underwriter discipline tied potential economic fears that spreads began to widen ever so slightly. and may likely continue their upward trend. While underlying covenant-like activity in these transactions remain high, we also continue to see improvements in loan documentation that tilt towards patient investors. In many years in this asset class, I'll outline that these changes are slow and gradual, but they do occur. And the key remains keeping focus in pricing discipline across your origination footprint. A bridge of our investment portfolio from March 31st to June 30th is shown on slide 12. On slide 13, you'll see a breakdown of the key components of our investment portfolio on June 30th. As we have discussed in the past, the goal of this slide is to provide details on the key categories of our portfolio, which are the Barings Originated Middle Market Portfolio, the Legacy MVC Capital and Sierra Income Portfolios, as well as our cross-platform investments. The middle market portfolio remains our core focus and continues to grow. It makes up 56% of our portfolio in terms of total investments at fair value and 48% of our portfolio in terms of revenue contribution. Our Barings-originated middle market exposure is heavily diversified amongst obligors of 199 portfolio companies with a geographic diversification across the U.S., Europe, and APAC regions. Underlying yields on our middle market investment portfolio of 7.9%, up from 7% last quarter, and weighted average first lien leverage of 5.3 times remain reflective of our boring as beautiful approach to credit. In addition to our middle market exposure, we continue to draw upon Barron's wide investment frame of reference to complement our core portfolio with $441 million of investments in the legacy MVC and Sierra portfolios. and $612 million of cross-platform investments. Two MVC assets and five CR assets remain on non-accrual, unchanged from last quarter. As mentioned previously, total non-accrual assets as a percent of fair value are 0.8%, all of which are covered by the respective credit support agreements with Barings. Our liquidation and redeployment efforts on the MVC and Sierra portfolios remain ongoing. Barings onboarded $627 million of assets from those two acquisitions. To date, we've generated $121 million of repayments across both portfolios. Turning to the Barings portfolio, no Barings directly originated loans are on non-accrual and the total portfolio had no material modifications to the cash payment terms of our debt investments during the quarter. Our total investment portfolio is now made up of 65% first lien assets. Slide 14 provides a further breakdown of the portfolio from a seniority perspective. The core bearings originating portfolio is 72% first lien. Note the combined MVC Sierra portfolios are comprised of senior secured, second lien, mezzanine debt, and equity investments, which brings the first link component of the total portfolio down to 65%. Our top 10 investments are shown on slide 15. Our largest investment is 5.3% of the total portfolio, and the top 10 investments represent 23% of the total portfolio. Recall our largest investment, Eclipse Business Capital, is backed by a large portfolio of asset-backed loans conservatively structured inside of the collateral net liquidation value. The overall portfolio remains diverse from an industry perspective as well, with 294 investment spread across 31 industries. I'll summarize my market comments with the simple thought that Boeing's beautiful investment favors patience, and most importantly, pricing discipline. With an increased level of macroeconomic uncertainty, We expect private equity sponsors to be highly selective with regard to new investments and instead favor support of existing investments. Our strong set of portfolio incumbencies across our US and European sponsor universe allows us to be patient with our sponsors, providing growth capital to existing investments. I also believe there is a set of circumstances where certain private lenders will be in need of liquidity. And this creates both stress and de-stress sellers as well as stress and de-stress portfolio companies. Our wide investment frame of reference across the capital stack allows us to target and underwrite these opportunities. And this gives me confidence in the future as I know we have both the investment acumen, patience, and flexible capital base to drive attractive returns. I'll now turn the call over to John to provide additional color on our financial results.