Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter and year ended December 31st, 2022. All participants are in a listen only mode. A question and answer session will follow the company's formal remarks. If anyone should require operator assistance during the conference, 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 the 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, 2022. 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 would like to 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 fourth quarter 2022 earnings presentation that is posted on the investor relations section of our website. On the call today, I'm joined by Barings Co-Head of Global Private Finance and President of Barings BDC, Ian Fowler, Barings Head of Capital Solutions and Co-Portfolio Manager, Brian High, and the BDC's Chief Financial Officer, Jonathan Landsberg. As is customary, Ian, Brian, and Jonathan 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. Let's begin with the market backdrop shown on slide five of the presentation. In a market characterized by significant concerns around inflation, economic growth, and geopolitical risks, and one in which the unprecedented pace of global interest rate hikes elevates volatility in both leveraged loans and BDC equities, Barings BDC continued to generate strong economic results. Turn to the fourth quarter highlights on slide six. Net asset value per share was $11.05 compared to the prior quarter of $11.28. down by 2%. We had one new non-accrual in the quarter, Core Scientific, which we discussed on our last call in November, and on our unrealized write-down of the asset, contributed 17 cents of NAV reduction. Outside of Core Scientific, the reduction in our NAV was driven primarily by unrealized write-downs tied to macroeconomic factors and spread widening, as opposed to fundamental credit-related factors in our portfolio. Our net investment income was 34 cents per share, compared to 26 cents per share last quarter, an increase of 33% quarter over quarter, as our portfolio benefited substantially from the rise in base rates. In addition, Barings earned no income incentive fee in the quarter due to the incentive fee cap in our shareholder-friendly fee structure, which includes realized and unrealized gains and losses. Turning to new investments, we had gross originations of $240 million in the fourth quarter, This was offset by $113 million of sales and prepayments for our net portfolio increase of $128 million. Our investment portfolio continued to perform well in the fourth quarter, including the acquired Sierra and MVC assets. Our total non-accruals are 3.9% of the portfolio on a cost basis and 1% on a fair value basis. With the exception of Core Scientific, all of our non-accrual assets were from acquired portfolios and therefore are part of our credit support agreements. Turning to forward earnings power, the increase in base rates has increased the weighted average yields in our middle market and cross-platform investments to 10.2% and 11.1% respectively, more than 100 basis points higher than last quarter. We expect additional revenue contribution given the inherent lag and higher base rates flowing through our portfolio, particularly in our European portfolio, where it is customary for borrowers to elect a six-month base rate contract. As a result, our board declared a first quarter dividend of $0.25 per share, an increase of $0.01 from the prior quarter, equating to a 9% yield on our net asset value of $11.05. Slide 7 outlines some brief financial highlights from the previous five quarters. As I mentioned, continued strong investment performance and higher base rates drove total investment income meaningfully higher to $63.5 million, up 13% quarter over quarter. Below the line, net unrealized depreciation of $56 million was primarily a function of mark-to-market on our assets as a result of higher credit spreads, as well as the write-down of Core Scientific. This unrealized depreciation eliminated the quarterly incentive fee because of our total return incentive fee cap, further lowering expenses and elevating NII in the quarter to $0.34 per share. Turning to liquidity, net leverage, which is leveraged net of cash and unsettled transactions, was 1.12 times, which is in the middle of our target leverage 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 economic uncertainty, as we believe in environments like this are fantastic opportunities to prudently deploy capital at higher spreads, lower leverage, and with better structural protections. Looking ahead, we remain steadfast in our focus on risk management and prudent asset selection. The lagged impact of increasing rates will continue to work its way through the private markets with many credit stresses yet to come. We feel good about how our portfolio is positioned to weather a volatile environment with a diverse portfolio allocated across private asset classes and geographies, plus a best-in-class investor alignment and a dynamic low-cost liability structure that we believe positions us well for both current and future markets. 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 mentioned previously. Our middle market portfolio increased by $184 million on a net basis in the quarter, with gross fundings of $205 million offset by repayments of $21 million. It is not surprising that repayment activity has slowed in this environment as the market adjusts to the realities of higher interest rates and what that implies for company valuations and supportable capital structures. That said, new middle market investments included 21 new platform investments totaling $167 million and $39 million of follow-on investments and delayed draw term loan fundings. as we continue to deploy capital at a very attractive risk-return profile in partnership with longstanding sponsors. Our cross-platform portfolio decreased by $26 million on a net basis in the quarter, with $35 million of new originations versus $61 million of repayments. We continue to remain active with realizations and sales at both NBC and Sierra, and this quarter generated $30 million of liquidity via sales, paydowns, and prepayments. Slide 10 updates the data we show you each quarter on middle market spreads across the capital structure, and clearly investment spreads across public and private asset classes have widened. Most important, public market spreads continue to exceed those of private middle market loans. While it looks like the illiquidity premium, or the extra spread to take a deal private, to loan investors remains much smaller than in the past, there have been stretches where the liquid loan market has been effectively shut to new issuers, meaning the relative attractiveness of the direct lending solution in today's marketplace for private equity sponsors is very high. A bridge of our investment portfolio from September 30th to December 31st is shown on slide 11. On slide 12, you'll see a breakdown of the key components of our investment portfolio as of December 31st. 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 61% of our portfolio in terms of total investment at fair value. Our Barings originated middle market exposure is heavily diversified amongst obligors of 231 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 is 10.5%, up from 9.2% last quarter, and weighted average first lien leverage of 5.2 times with no loans on non-accrual. It is reflective of our boring as beautiful approach to credit. In addition to our middle market exposure, we continue to draw upon Behring's wide investment frame of reference to complement our core portfolio with $335 million of investments in the legacy MVC and Sierra portfolios and $611 million of cross-platform investments. Turning to credit, one Barings-originated asset, two MVC assets, and four Sierra assets remain on non-accrual. The MVC and Sierra assets are covered by the credit support agreement. Eric discussed the one Barings-originated non-accrual core scientific, which is currently working through the Chapter 11 process. Importantly, at a time when many borrowers are feeling the pinch of higher base rates and wage and raw material pressures, we don't have any assets with restructured PIC interest in our portfolio. Restructured PIC is what we call a loan that was originally underwritten as a fully cashed pay loan where the borrower has asked for relief by converting a portion of the cash interest coupon to PIC for a period of time. We view restructured PIC as one of the early signs that can foreshadow potential future problems. Slide 13 provides a further breakdown of the portfolio from a seniority perspective. The core Barron's originary portfolio is 74% first lien. 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 69%. Our top 10 investments are shown on slide 14. Our largest investment is 5.9% of the total portfolio, and the top 10 investments represent 21% of the total portfolio. Recall our largest investment, Eclipse Business Credit, is backed by a large portfolio of asset-backed loans, conservatively structured inside the collateral net liquidation value. The Eclipse portfolio remains diverse from an industry perspective as well, with 44 investments spread across 17 industries and that business continues to perform quite well, contributing healthy dividend distributions to the BDC as well as a sustained business growth. I'll summarize my market comments with a view as how we think about portfolio management and risk management in a challenging environment like the one we are currently in. The longer that base rates remain at elevated levels, naturally the more stress we expect to see across our portfolio and the broader market. That said, maintaining a vigilant focus on the tail risk in the portfolio can help lessen eventual pain by being more proactive with borrowers and sponsors. We have a weekly focus and watch list call across our direct lending platform, and there are currently 17 names in the BDC portfolio that comprise our focus and watch list, representing 3.6% of the BDC's portfolio at fair value. While there's no one common theme underpinning the names on this group, we have seen that it's not just a higher base rates alone that results in borrower stress. Rather, these names were experiencing pressure before the move higher in interest rates, whether from wage costs, raw input costs, or difficulty digesting recent M&A activity. The increased interest costs exacerbated pressures that already exist in these businesses. That said, we maintain a very diverse portfolio with 322 issuers, no middle market loans on non-accrual, no restricted PIC, and just two annual recurring revenue loans in the entire portfolio. We feel cautiously optimistic about what we see today, but of course, need to remain vigilant. We think success in this environment will favor those with investment discipline, and long institutional memory, deploying capital in inflationary environments at bearings 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 financial results.