Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barron's BDC Incorporated conference call for the quarter ended March 31st, 2023. All participants are in a listen-only mode. A question and answer session will follow the company's formal remarks. Today's call is being recorded and a replay will be available two hours after the conclusion of the call on the company's website at www.barronsbdc.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 quarterly report on Form 10-Q for the quarter ended March 31st, 2023, as filed with the Securities and Exchange Commission. Barron's 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 Barron's 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 first quarter 2023 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, Ryan Hyman, and the BDC's Chief Financial Officer, Elizabeth Murray. During today's call, Ian, Ryan, and Elizabeth will review details of our portfolio and first quarter results in a moment. 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. The continued increase in base rates has contributed to elevated volatility in BDC share prices, and it's clear that investors remain concerned about rates, inflation, and economic weakness. Even in this challenging environment, the BDC's portfolio continues to deliver strong returns. Our strong performance stems largely from our focus on the top of the capital structure, and within more defensive industries, and we believe the BDC remains well positioned for any further volatility and uncertainty in the market going forward. Turn to the first quarter highlights on slide six. Net asset value per share was $11.17 compared to the prior quarter of $11.05. That's an increase of 1.1%. Our NAV increase quarter over quarter was driven by unrealized depreciation on our investment portfolio of 10 cents per share. Our net investment income for Q1 was 25 cents per share compared to 35 cents per share last quarter. The quarter-over-quarter decrease in NNI is a function of our shareholder-friendly fee structure, bearing to not earn an incentive fee last quarter, given the total return hurdle in our incentive fee. Turning to new investments, we had gross originations of $145 million in the first quarter. That was offset by 54 million of sales and repayments for our net portfolio increase of $91 million, Our investment portfolio continues to perform well in the first quarter. Including the acquired Sierra and MVC assets, our total non-accruals are 3.8% of the portfolio on a cost basis and 1.1% on a fair value basis. Two investments that account for less than 0.1% of the fair value of the portfolio were placed on non-accrual in the quarter. With the exception of two investments, all our non-accrual assets were from acquired portfolios and therefore covered by our credit support agreements. Turning to the earnings power of the portfolio, increasing base rates continue to lift the yields on our predominantly floating rate portfolio, with weighted average yields on our middle market and cross-platform investments increasing to 10.6% and 10.8% respectively. We expect the heightened revenue contribution to continue given the inherent lag in base rates flowing through the portfolio, as assets typically reset their coupons every three to six months. We remain conservative on our base dividend policy, and our board declared a second quarter dividend of $0.25 per share equating to a 9% yield on our net asset value of $11.17. Slide 7 outlines summary financial highlights for the previous five quarters. As I mentioned, continued strong investment performance and higher base rates drove total investment income meaningfully higher to $67.2 million, up 6% quarter over quarter. Below the line, net unrealized depreciation of $22 million was primarily a function of higher valuation within our portfolio broadly. Looking at liquidity, net leverage, which is leverage net of cash and unsettled transactions, was 1.19 times. This is within our target leverage ratio of 0.9 to 1.25 times. We continue to prioritize risk management while balancing the deployment of capital into what has become a very attractive environment for private credit. While opportunities to deploy capital are extremely attractive today, It is investments that were originated over the last few years that will dictate current performance. We remain confident in our conservative approach to underwriting and portfolio construction and believe our portfolio is well positioned to deliver strong results for shareholders over the long term. We also remain confident in BBDC's defensive positioning, particularly amid a shifting economic backdrop. With respect to the portfolio, we continue to align our interests with those of our investors. Going forward, leverage permitting, we will remain focused on stock repurchases, as we believe current trading levels offer a compelling opportunity to purchase high-quality assets at a discount. And lastly, I want to make a point about personnel changes following some recent departures we've had over the last six months. I'd like to officially welcome Elizabeth Murray to her role as Chief Financial Officer of BBDC, and I've also brought together additional teammates with related functional and deep investment expertise to support BBDC's day-to-day operations and portfolio management. Brian High, head of Barings Capital Solutions, will take on an expanded leadership role overseeing portfolio construction of Barings BDC. Brian joined Barings in 2007 and has extensive experience in public and private credit, distressed debt, special situations, and private equity. Brian will be supported by Matt Freund, a managing director in our private finance group, who will join the Barings BDC team to lead portfolio management. Matt brings 13 years of experience executing, underwriting, and monitoring North American private finance investments. Joe Mazzoli will also be joining the BDC team and brings more than 11 years of BDC research and credit market experience to the team. This adds to the continuity of Jeff and Albert and our team-based approach, and we look forward to continuing alignment with our 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. If you turn to slide 9, you can see additional details on the investment activity mentioned previously. Our middle market portfolio increased by $57 million on a net basis in the quarter, with gross fundings of $89 million, offset by repayments of $33 million. The increase in interest rates has had a very real impact on the amount of debt private equity buyers can undertake to support new investments, and as a result, many sellers have remained on the sidelines. to 2021 valuations. This naturally has led to lower repayment activity and fewer investment opportunities in the first quarter of 2023. With that said, our backlog continues to grow as sellers likely come to terms with valuations and begin to harvest some of their stronger performing assets. Despite the general market headwinds, new middle market investments included 10 new platform investments, totaling $56 million, and $33 million of follow-on investments and delayed draw term loan fundings. We continue to deploy capital and have very attractive risk return profiles in partnership with longstanding sponsors. Our cross-platform portfolio increased by $43 million on a net basis in the quarter, with $55 million of new originations versus $13 million of repayments. One specific highlight I'd like to call to your attention to is Barron's B2C purchase of an equity stake in Rocade Holdings LLC, one of the country's leading litigation finance platforms that specializes in providing financing to plaintiff law firms engaged in mass tort and other civil litigation. During the quarter, Barron's B2C, along with other affiliated funds, invested approximately $45 million in preferred and common equity in this investment. This investment provides a strategic benefit to Barron's BDC investors and allows the company to participate in uncorrelated asset class that offers differentiated income returns as compared to directly originated loans. Rocade generates a PIC dividend at SOFR plus 6% with a 2% floor. This investment further enhances Barron's BDC already very wide investment frame of reference. which we believe is key in navigating competitive markets. Rotation out of NBC and Sierra investments continues with $8 million of sales and repayments in the quarter. By 10, updates to data we show you each quarter on middle market spreads across the capital structure. After a brief spike and a broad slowdown in the broadly syndicated low market, BSL spreads have reverted below middle market spreads. A bridge of our investment portfolio from December 31st to March 31st is shown on slide 11. On slide 12, you can see a breakdown of the key components of our investment portfolio as of March 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 investments at fair value. Our Barron's originated middle market exposure is heavily diversified amongst obligors of 240 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 11%, up from 10.5% last quarter. Weighted average first lien leverage of 5.2 times with no loans on non-accrual is reflective of our boring as beautiful approach to credit. In addition to our middle market exposure, we continue to draw upon Barings' wide investment frame of reference. to complement our core portfolio with $325 million investments in the legacy MVC and Sierra portfolios and $671 million of cross-platform investments. Turning to our stress credits, two bearings originated assets, two MVC assets and five Sierra assets remain on non-accrual. The MVC and Sierra assets are covered by the credit support agreements As Eric previously mentioned, we have two new non-accruals this quarter, which account for 0.1% of the portfolio on a fair value basis. We continue to have very little restructured PIC in our portfolio, even as borrowers cope with higher base rates, wage pressures, and raw material costs. Restructured PIC is what we call a loan that was originally unwritten. as a fully cash pay loan where the borrower is 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 bearings originate in portfolio 73% first lien, Note the combined MVC and 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 6% of the total portfolio. And the top 10 investments represent 20% 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, and that business continues to perform quite well, contributing healthy dividend distributions to the BDC as well as sustained business growth. Finally, I would like to speak to our credit performance and portfolio broadly. The portfolio remains healthy, and the number of watch list names in the private credit portfolio has not materially moved as higher rates take hold. Businesses that were challenged prior to the increase in interest rates remain challenged. Importantly, sponsors appear supportive of underlying companies and are contributing capital to rectify liquidity challenges. Going forward, leverage will continue to be tempered relative to the levels exhibited in 2021 and 2022, and the market remains lender-friendly. We have been investing in private credit markets for decades, and our long institutional memory has given us the discipline to construct portfolios that offer significant downside protection through a cycle. I'll now turn the call over to Elizabeth to provide additional color in our financial results.