Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC Incorporated conference call for the quarter ended September 30th, 2022. All participants are in a listen only mode. A question and answer session will follow the formal presentation. If anybody should need 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 and 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. And the company's annual report on Form 10-K for the fiscal year ended December 31, 2021. and two quarterly reports on Form 10-Q for the quarter ended September 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 Jonathan Bock, Chief Executive Officer of Barings BDC. Please go ahead, sir.

thank you operator and good morning everyone we appreciate you joining us for today's call and please note that throughout today's call we'll be referring to our third quarter 2022 earnings presentation that's posted on the investor relations section of our website i'm on the call today joined by bearings co-head of global private finance and president of bearings bdc ian fowler bearings head of capital solutions and co-portfolio manager brian high and the BDC's Chief Financial Officer, Jonathan Landsberg. And as is customary, Ian, Brian, Jonathan, and I will review details of our portfolio and third quarter results in a moment. And I'd like to start off with some high-level comments on the quarter. Let's begin with the market backdrop shown on slide five of the presentation. In a market where the unprecedented pace of interest rate hikes elevates volatility in both leveraged loans and BDC equity, Barron's BDC continued to generate consistent, stable economic results. Jump to the third quarter highlights on slide six. Net asset value per share was $11.28, compared with our prior quarter of $11.41, down approximately 1.1%, driven primarily by unrealized write-downs tied to macro market factors and spread widening, as opposed to fundamental credit-related factors. Our net investment income was 26 cents per share compared to 29 cents per share last quarter, impacted by sales and repayments that occurred early in the quarter, as well as a partial income incentive fee capped by our shareholder-friendly fee structure, which includes realized and unrealized gains and losses. Turning to new investments, we had gross originations of $234 million in the third quarter, primarily funding later in the quarter. And this was offset by $241 million of sales and prepayments for a net portfolio decline of $7 million. Our investment portfolio continued to perform well in the third quarter, including the acquired Sierra and MVC assets. Our total non-accruals are 2.8% of the portfolio on a cost basis and 0.7% on a fair value basis, all assets that are covered by our credit support agreement. And turning to forward earnings power, The increase in base rates has increased the weighted average yields on our middle market and cross-platform investments to 8.9% and 9.6% respectively. And we expect additional revenue contribution as we continue to gradually increase leverage within our target range. And with that as our frame of reference, we expect fourth quarter net investment income of at least 27 cents per share with further expansion into 2023. Additionally, Our board declared a fourth quarter dividend $0.24 per share, equating to an 8.5% yield on our net asset value of $11.28, which matches our industry-leading hurdle rate, and I'll have Jonathan Landsberg provide additional detail on our approach to dividend policy later in the discussion. Slide 7 outlines summary financial highlights for the previous five quarters. And as I mentioned, continued strong investment performance drove total investment income slightly higher quarter over quarter to $56 million, though the percentage increase in total revenue was muted by, one, earlier portfolio sales and repayments in the third quarter, two, later than anticipated fundings, and three, non-recurring $2 million in revenue in the second quarter tied to a large distribution from a CLO and wind down. Looking forward, as the impact of base rates drives total portfolio yield higher, we anticipate total investment income to be in excess of $60 million. Now below the line, net unrealized depreciation of $26 million was primarily a result of mark to market on our assets as a result of higher credit spreads. This unrealized depreciation had a positive impact on net investment income as Barings' incentive fee cap curtailed the quarterly incentive fee, further lowering expenses and elevating NII in the quarter to $0.26 per share. Now turning to liquidity, net leverage, which is leveraged net of cash, short-term investments and unsettled transactions, was 0.99 times, which is currently toward the lower end of our target range 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 new investment opportunities that present themselves in the face of current economic uncertainty. And looking forward, we believe the investment environment to be ripe with opportunity. The delayed impact of increasing rates will continue to work its way through private markets, with many credit stresses yet to come, some of which are starting to arrive. That said, the ability of a manager to prosecute those opportunities will be directly correlated to how well they deployed capital in 2021. And our diverse portfolio approach and best-in-class level of investor alignment positions us well for both current and future market conditions, and we remain poised to take advantage of the current market. And with that, I'll turn the call over to Ian to provide an update on the market and our investment portfolio.

Thanks, John, and good morning, everyone. If you turn to slide 9, you can see additional details on the investment activity mentioned previously. Our middle market portfolio decreased by $14 million on a net basis in the quarter, with gross fundings of $163 million, offset by sales and repayments of $176 million. New middle market investments include 16 new platform investments, totaling $116 million, and $47 million of follow-on investments and delayed drop term loan fundings. We also had $51 million of net cross-platform investments in the quarter. We continue to remain active in our realizations and sales at both MVC and Sierra, and this quarter generated $44 million of liquidity via sales, paydowns, and prepayments. Slide 10 updates the data we show you each core on the middle market spreads across the capital structure and clearly investment spreads across public and private asset classes have widened. Most important, public market spreads now meaningfully exceed those of private middle market loans. This has two effects. On one hand, the illiquidity premium or the extra spread to take a deal private to loan investors remains much smaller than in the past. On the other hand, the relative attractiveness of the direct lending solution in today's marketplace for private equity sponsor is very high and more reliable. This relative attractiveness of direct lending loans can be shown on slide 11. Notice the current market clearing price for new issue leveraged buyout debt has averaged in the mid to low 90s, making the cost to issue and create this paper by banks and sponsors uneconomical. We expect this trend to continue given market uncertainties, which bodes well for future capital deployment across our origination footprint. A bridge of our investment portfolio from June 30th to September 30th is shown on slide 12. On slide 13, you will see a breakdown of the key components of our investment portfolio as of September 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 makes up 56% of our portfolio in terms of total investments at fair value. and 54% of our portfolio in terms of revenue contribution. Our bearings originate in middle market exposure. It's heavily diversified amongst all the goals of 211 portfolio companies with a geographic diversification across the US, Europe, and APAC regions. The underlying yield at fair value on our middle market investment portfolio of 9.2% up from 7.9% last quarter and weighted average first lien leverage of 5.2 times remain reflective of our boring is 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 $374 million of investments in the legacy MVC and Sierra portfolios and $652 million of cross-platform investments. To date, we have realized approximately $164 million in capital from both transactions and continue to drive realizations in today's environment. Turning to credit, two MVC assets and five Sierra assets remain on non-accrual. The total number of non-accrual loans is unchanged from last quarter. The one Sierra loan came off non-accrual as it was sold, while one new loan was added with a cost of $600,000. Additionally, subsequent to Core N, we place our debt investment in Core Scientific on non-accrual as the company undergoes a restructuring, with that position representing 1.2% of the portfolio costs. Slide 14 provides a further breakdown of the portfolio from a seniority perspective. The Core bearings originated portfolio 72% first liens. Note the combined MVC Sierra portfolios are comprised of senior secured, second lien, mezzanine debt, and equity investments, which brings the first lien component of the total portfolio down to 67%. Our top 10 investments are shown on slide 15. Our largest investment is 5.9% 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 Eclipse portfolio remains diverse from an industry perspective as well, with 44 investments spread across 17 industries. I'll summarize my market comments with the simple thought that preparedness for stress in today's market looks entirely different than it did in past cycles. EBITDA growth for portfolio companies, once thought always to be a secular phenomenon, will become more challenging. Expected acquisition synergies on deals may not materialize. Emphasis, which was once focused on growth and total addressable market, will now quickly shift to cash flow and liquidity. In short, the investment and social norms learned over the last 40 years will need to be unlearned. And this learning process will favor those with investment discipline and long institutional memory, deploying capital in inflationary environments. At Barron's, across our wide investment frame of reference, we demonstrate both. I'll now turn the call over to Jonathan to provide additional color on our financials.