Barings BDC, Inc.

At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended June 30th, 2023. 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 today, 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 of the website. At this time, I will now turn the call over to Jeff Gillogg, head of investor relations for Barrings BDC. Please proceed.

Thank you, operator, and good morning, everyone. Thank you for joining us on the call. 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 June 30, 2023, 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. I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thanks, Jeff. And good morning, everyone. I also want to apologize if you hear some background noise. We are having quite the thunderstorm here in Charlotte, North Carolina. So if you hear some thunder and stuff in the background, I apologize for any of that noise, but obviously not anything we can do about it. Appreciate everybody joining. Please note that throughout today's call, we'll be referring to our second 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 of the BDC, Brian High, and that's the thunder and lightning I was talking about, and BDC's Chief Financial Officer, Elizabeth Murray. During today's call, Ian, Brian, and Elizabeth will review details of our portfolio and first quarter results in a moment, but I'll start off with some high-level comments about the quarter. I'd like to start by expressing my enthusiasm for a very strong quarter at BBDC. Really, I was measured on a number of financial metrics. It's clear that investors remain concerned about rates, inflation, and economic weakness. Even in this challenging environment, BBDC's portfolio continues to deliver strong results for shareholders. Net asset value per share was $11.34 compared to the prior quarter of $11.17. That's a NAV increase of 1.5%. Net investment income for the quarter was 31 cents as compared to 25 cents in the prior quarter. Strong NII was fueled by a combination of really elevated yields from rising base rates, two, favorable dividends flowing from platform investments and JVs, and three, continued strong credit performance within the portfolio. Our performance is the result of a focus on the top of the capital structure and within more defensive industries. We believe BBC remains well positioned for any further volatility and uncertainty in the market going forward. Investment activity during the quarter reflected a modest degree of net repayments as returns of capital during the quarterly modestly exceeded originations. As our shareholders know, we're actively working to maximize the value in the legacy holdings acquired from NBC Capital and Sierra Income and rotate them into compelling bearings originated positions. Our investment portfolio continued to perform well in the second quarter, including the acquired Sierra and MVC assets. Our total non-accruals are 2% of the portfolio on a cost basis and 1.1% on a fair value basis. That's compared to 3.8% of the portfolio on a cost basis in the first quarter. Three assets were removed from non-accrual status and no new non-accruals were booked during the quarter, reflecting the strength of the portfolio. With the exception of one investment, All of our non-accrual assets were from acquired portfolios and are therefore covered by our credit support agreements. BBDC shareholders continue to benefit from the credit support agreements provided by the manager. For the current quarter, the CSA valuation was approximately $60 million on a combined basis for the Sierra and MDC credit support agreements, which are designed to insulate shareholders from realized losses in those portfolios. To date, less than 30 million of net losses have been realized at the acquired portfolios. The remaining mark-to-market losses within the portfolio are spread across a wide number of issuers and believed to reflect marked discounts to par rather than anticipated impairments. Recall that a bulk of the Sierra portfolio was comprised of semi-liquid broadly syndicated loans that trade infrequently. Turning to the earnings power of the portfolio, Increasing base rates continue to lift yields on our predominantly floating rate portfolio, with weighted average yields on floating rate investments increasing to 11.0%. We remain conservative on our base dividend policy, and our board declared a second quarter dividend of 26 cents per share, reflecting a 4% increase relative to the prior quarter's declared dividend. On an annualized basis, the new dividend level equates to a 9.2% yield on our net asset value of $11.34. Total investment income generated in the quarter was the highest income delivered by BBDC since we began managing the BDC five years ago. With the strong results we have demonstrated this quarter, we wanted to remind investors of the message we telegraphed when we began managing what was previously Triangle Capital. When we rotated out of broadly syndicated loans in late 2020, Behring stated that we would seek to employ a first lien-focused strategy to providing low volatility with a target dividend yield of 8% to 10%. Through the quarter ended June 2023, we have delivered a return inside this range. We will, of course, work to outperform these goals in the months and years to come. BBDC is committed to the alignment with our shareholders. During the second quarter, we repurchased 1.4 million shares of stock at an average price of $7.75. We have consistently maintained a share repurchase plan that provides BBDC the ability to strategically repurchase shares when the price is dislocated from the NAV. We recognize that we can create share price appreciation by simply investing in quality assets, even when the stock is trading at a discount. For this reason, we work to be judicious when we are repurchasing shares and balance it against leverage considerations and deployment opportunities. Looking at liquidity, net leverage, which is leveraged net of cash and unsettled transactions, was 1.15 times. This is within our target leverage range of 0.9 to 1.25 times. We continue to prioritize risk management while balancing the deployment of capital and what has become a very attractive environment for private credit. I'll now turn the call over to Ian.

Thanks, Eric. Recall that BBDC is managed by Barings LLC, a credit-focused asset manager with more than $350 billion of assets under management. The bulk of the portfolio is sourced from the Global Private Finance team, an organization with more than 85 investment professionals located around the globe providing financing solutions to preeminent middle market companies sponsored by private equity firms. BBDC's portfolio decreased by $70 million on a net basis in the quarter, with gross fundings of $66 million, offset by $135 million of repayments, and sales, which included $50 million of sales to Ducasse. Activity during the first half of the year has been tempered as private equity buyers take a pause in this rising rate environment to likely determine any impact on valuations. Regardless, the financial models have changed, and valuations have declined modestly as cost of leverage has increased dramatically. As a rough thumbnail, with reference rates at 0% in 2021, private equity buyers could reasonably leverage companies at 5 to 5 times, which supported purchase prices in the 13 to 14 times range. Today, with the increase in base rates and slightly higher spreads, those same businesses can support leverage in the 4 to 4.5 times range, which supports purchase prices in the 10 to 12 times range. The reality of the sponsor-backed market is that a significant portion of transaction volume is on sponsor-to-sponsor deal flow. Sponsors appear reticent to bridge the valuation gap between 2021 purchase price multiples and today's range based on financing costs. However, sponsors continue to execute on portfolio acquisitions, which makes sense as add-on multiples are below original platform purchase prices, in effect enabling sponsors to reduce their cost basis and hedge against any compression in exit multiples. Nevertheless, deployment from the Barings Global Private Finance Team is roughly on track with 2019 and currently tracking ahead of 2020. Recall that the impacts of COVID in 2020 significantly hampered activity in the first half of 2020, but ultimately produced one of the most active deployment vintages we've ever seen. All of this to say, the year-to-date trends cannot be a reliable indicator of future activity. The negative net deployment witness at BBDC is the result of a conscious managing of BBDC's leverage via sales to our joint venture and an intentional rotation of acquired assets. The global private finance investment pipeline has picked up significantly over the past few months and on a probability-weighted basis now stands at $1.7 billion. Slide 10, nearly 75% of the portfolio consists of secured investments with approximately 70% of investments constituting first-lane securities. We tracked the median interest coverage of our North American global private finance issuers on a quarterly basis. Not surprisingly, we recorded very strong interest coverage ratios in 2021 and in the first quarter of 2022 prior to the rise in interest rates. The median interest coverage in our portfolio at the end of the first quarter of 2022 was 2.9 times. As a proxy for the disciplined underwriting that permeates our BDC franchise, one year later, and 500 basis points of reference rate impact, the median interest coverage in the portfolio stands at 2.2 times. That is to say that with the impact of higher interest rates reflected for approximately nine months of issuers reporting, global private finance issuers still have considerable cushion before they are unable to make regularly scheduled interest payments. Our avoidance of various industries prone to economic volatility, oil and gas, restaurants, retail, metals among them, has proven to be a sound strategy against a backdrop of less economic predictability. One of the benefits to a predominantly sponsor-backed strategy has proven out over the past several quarters. Combined with what we believe reasonable going-in leverage multiples, the median gross margin in the North American global private finance portfolio stood at 44%, up from 42% one year earlier, and gives us confidence that our issuers are successfully pushing through price increases to combat inflationary pressures in their businesses. Adjusted EBITDA margins for the same sample were 19%, flat from a year earlier, believed to be a reflection of the fact that wage gains have consumed some degree of gross margin expansion previously noted. While not a perfectly comparable metric, period to period, as the volume of transaction activity in the past five quarters will skew these metrics somewhat, we believe we have reason to feel comfortable with the performance in the portfolio. BBDC is focused on investing in middle market companies throughout the economy. The largest portion of our funded assets are sourced from the global private finance team. Recall that this team focuses entirely on sponsor-backed financing and targets issuers with 15 to 75 million in dollars or euros, where appropriate. The flexibility of the broader Barings Capital base and focus on relative value allows the global private finance investment team to deploy capital in predominantly first-line solutions that the team feels is most compelling. We are not a forced buyer of assets in any market environment. Baring's capital solutions investment team accounts for the majority of the remaining assets within the portfolio, having led the underwriting for uncorrelated platform investments such as Eclipse and Rokage, in addition to making other middle market investments. The majority of assets originated by the capital solutions team are conforming middle market loans, but vary from the global private finance strategy and that these transactions may be non-sponsored and or have more flexible capital structures. We remain confident in the credit quality of the underlying portfolio, but we do see increased volatility heading into the second half of 2023. The uncorrelated nature and associated value of investments in Eclipse and Arcade should bolster the portfolio in the event the economy does enter into a long-expected recession. BBDC is committed to delivering an attractive risk-adjusted return to shareholders over a long time horizon. We are investors of credit and middle market companies. Our global reach and significant scale across asset classes gives BBDC a unique ability to select risk and return compared to other managers. But at our core, middle market credit is what we do. Turning to our stress credits, one bearings originated asset, one MVC asset and four CR assets remain on non-accrual. The MVC and CR assets are covered by the capital support agreements with our manager. As Eric previously mentioned, investments on non-accrual decreased to six from nine in the previous quarter. And I'll turn the call over to Elizabeth.

Thanks, Ian. Turning to slide 14, you can see the full bridge of the NAV per share movement in the second quarter. Our net investment income exceeded the $0.25 per share dividend by 24%, even with this quarter's higher incentives. Net unrealized appreciation from investments, CSAs, and FX lifted NAB per share by $0.51, which was partially offset by net realized losses on the portfolio of $0.45 per share. The $0.45 per share realized loss was predominantly due to the exit of our debt investments and custom outweighs. which was all reclassified from unrealized depreciation. We are very pleased with our portfolio's performance amid a backdrop of economic uncertainty, and this highlights our conservative approach to underwriting and portfolio construction. Additional details on the net unrealized appreciation are shown on slide 15. Near the bottom of the slide, you can see the credit support agreement increased approximately 2 million, which is driven by the acceleration of the expected timeline of exiting the NVC investment. Slide 16 and 17 show our income statement and balance sheet for the last five quarters. Our net investment income per share was $0.31 for the quarter, driven by a 12% quarter-over-quarter increase in total investment income, with some of the revenue lift offset by higher incentive fees due to unrealized gains in the quarter and the incentive fee look-back calculation. From a balance sheet perspective on slide 17, total debt to equity was 1.24 times at June 30th. Our net leverage ratio was 1.15 times, down from 1.19, and we view this measure as more reflective of the true leverage position of the vehicle, which currently sits within our long-term target of 0.9 to 1.25 times. In addition, as previously disclosed, in May, we were pleased to extend the maturity of our senior secured revolving credit facility out to February 2026, with all of our existing lending partners being included in the extension. We will continue to manage the capital structure in a manner that is consistent with our investment grade rating profile. Turning to slide 18, you can see how our funding mix ties to our asset mix, both in terms of seniority and asset class. including the significant level of support provided by the $720 million of unsecured debt in our capital structure. Details on each of our borrowings are included on slide 19, which shows the evolution of our debt profile over the last year. As of the end of the first quarter, roughly half of our funding was comprised of fixed rate unsecured debt with a weighted average coupon of 3.79%. And we have over two years until the next bond maturity in August 2025. Turning to slide 20, you can see the impact to our net leverage of using our available liquidity to fund our unused capital commitments. Barings BDC currently has $338 million of unfunded commitments to our portfolio companies, as well as $65 million of outstanding commitments to our joint venture investments. We have available cushion against our leverage limit to meet the entirety of these commitments if called upon. Slide 21 updates our paid and announced dividends since Barings took over as the advisor to the BDC. As Eric mentioned earlier, the Board declared a third quarter dividend of $0.26 per share, a 9.2% distribution on net asset value. Given the higher level of earnings and the fact base rates have remained higher for longer, shareholders should benefit and we have increased our quarterly dividend from $0.25 per share to $0.26 per share. We believe our portfolio will continue to earn above the high hurdle in a normalized rate environment, and we expect that our platform investments, Eclipse and Rokade, as well as our Jocasi joint venture, will continue to generate significant dividend income. These investments help highlight the importance of less correlated assets and the benefits of a diverse portfolio. We, of course, are aligned with our shareholders in the way that we approach this business, and we continue to believe that share repurchases at significant discounts to book value can play an important role in our long-term capital allocation policy. I'll wrap up our prepared remarks with a note on our investment pipeline. Thus far in Q3, we have made $36 million of new commitments, of which $24 million have closed and funded. The weighted average origination margin, or DM3, Of those new commitments was 7.4%. We've also funded $8 million of previously committed debt and equity facilities. The current Barings Global Private Finance Investment Pipeline is approximately $1.7 billion on a probability-weighted basis and is predominantly first lien senior secured investments. As a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipeline. With that, operator, we will open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.

Hey, good morning, guys, and thanks for taking my questions. I appreciate all the color you gave on the deal environment, but just trying to get a sense for the outlook for repayments, you know, particularly if we're, you know, on the cusp of a potential Fed pause.

Hey, Kyle. It's Ian. Good morning. I'll start with that and then let anyone jump in. So, like, I mean, look, I mean, obviously, as we discussed, it's been rather anemic in terms of volume this year. And I think the reason for that is M&A activity has just been soft as private equity firms are taking a pause to see in this rising rate environment what happens to multiples, enterprise values. And as we're getting through to the end of this rising rate cycle, and with only a modest decline in purchase prices, I think we're going to see a thaw in the second half of the year I'm not going to hold my breath, but, you know, and we have iBankers saying there's a lot of books that are going to come out. But, you know, sort of expect that to occur as we look at the remainder of the year. It's also a time everyone starts thinking about year-end and putting money to work. So I think there's going to be, you know, a lot of pressure to put deals to work and do deals. So, you know, highly, well, I'm cautious, we're cautious about the remainder of the year in terms of putting deals to work.

And part of the net number is really us managing leverage given the share repurchases we did also. So, you know, we were balancing deployment with leverage with share repurchases given where things were and all that. So, you know, it's never a perfect science within that, but that's kind of part of what impacted our net number from a repayment versus deployments perspective.

Yeah, and the other thing I would just throw out there, too, Kyle, I mean, look, we're not going to, and we mentioned this, right, we're not going to chase deals. We're not forced to do deals. We have a portfolio that's been very active, and I think any manager that has a large, mature portfolio is going to see a lot of activity from that portfolio, as add-on acquisitions has been a main source of adding creating value as part of the investment thesis and you know 70% of our volume is coming from our portfolio and these are you know less risky deals because they're going into companies we know and understand and helping those companies become bigger better stronger more diverse credits and so that's kind of like a no-brainer and you know I think we're out of the woods in terms of a recession but you know even economists are wrong and I'm not going to bet one way or the other and But is it really the time to back up the truck and just kind of do anything that comes to market right now? And our decision was not to do that.

Got it. Very helpful. Thanks. And then a follow-up, you know, with everything that's gone on with regional banks, just wanted to get your take how that impacts bearings, but also the industry more broadly. Is this just kind of a continuation of the theme of banks pulling back? Or do you think it's kind of a more material catalyst? Thanks.

Yeah, hey, Kyle. It's Brian. I would just say that clearly, you know, some of the ratings actions that Moody's have taken with smaller regional banks, we've seen a pullback across various markets. Not necessarily markets that would, you know, benefit the BDCs, but private credit in general, I think, in alternative capital has become a broader theme across what we've seen in the broader bearings pipeline, I guess I would say. But I don't know that what we've seen so far would be a great fit for a vehicle like bearings BDC.

And I'll just highlight from a liability perspective, as Elizabeth referenced, we extended our bank group. 100% of our partners in our bank group extended with us. And so from an exposure perspective on the liability side, we don't have that. And we're just, in this environment, you know, where banks are more challenging from a financing perspective, to have 100% of them continue to support us and see what we're doing, we view it as a real kind of testament to what we've done and how we've done it.

Great. Thanks for taking my questions.

You got it.

Thank you. Our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Please proceed with your questions.

Hey everyone, good morning. Question on the joint ventures, it sounded like Eclipse, Rokate, and Jocasi were highlighted as part of the key future game plan, at least more central to future differentiation. On all the other ones, it looks like Thompson Rivers is running down, but there are a few more. and seeing what the sort of game plan is for, you know, Thompson, Waccamaw, the SLP, and if you are running those down, how long that would take. Thank you.

Thanks, Ben. Listen, part of what we committed to when we kind of did a little bit of a reboot here from a management team perspective is to take out some of the complexity in the BDC and simplify things the best we could. So what I'd say is, yes, and I'll turn it over to Brian here in a second, we are running down some of those JVs. That's intentional, just to take out some of the complexity within the vehicle. We do believe that, and it's shown over time, that Eclipse, for now a number of years, Rokade recently, and Jokasi for a number of years, have generated really attractive returns for the BDC. And so I wouldn't say as much that they're central or core to what we do. I would say that we view them as very complementary to what we do and not as correlated to certain other credit assets to what we do. Eclipse is an example, is one where when cash flow lending could be more challenged in a certain economic environment, they're going to see an increase in opportunities for that type of business. So the core is going to be first lien senior secured deals generated and underwritten by Ian's team on the global private finance area. And then these other parts will be complementary that we think are within that. But as I've communicated about a quarter ago, you should not expect to see us do incrementally more deals that look like Eclipse or Rocade or anything like that in the near term. We're really focusing on taking out the complexity, simplifying the VDC, And then what we do believe what we have is really, really attractive between Jocasi, Rokade, and Eclipse. And yes, the other JVs will be managing those down over time. As far as how much time that takes, it's really hard to predict what that looks like, but you should continue to see a decrease in each of those JVs over time as it makes sense for the shareholders to do that over time. I'm a brown feud. add anything?

No, I think that was well said. The only thing I would add is if you think about Eclipse and Rokade Fin, the underlying loans in those portfolios are middle market secured first lien facilities at the end of the day. And Jocassee, the portfolio, it provides liquidity to what we're doing by being able to sell down loans. And that portfolio looks very similar to what would be in Barings BDC in the strategy that Eric just outlined. So As it relates to Thompson Rivers and Waccamaw, those don't look like what Barings BDC's overall portfolio looks like, and we would look to wind those down over time.

Great. Thanks so much.

Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Hello, everybody. Good morning. So just to follow on to that, what should we – can you give me the base level return to the BDC, not necessarily the internal return, i.e. the dividend distribution, for something like Eclipse? It's been a bit more volatile than some of the others from a smaller distribution in the fourth quarter of last year to quite a large one this quarter, 12% RLE right now. I mean, is that 12% ROE distribution, is that the kind of go-forward level for that, or is it going to continue to bounce around a little bit more than some of the others, which have been a little bit more staked, Jucassi particularly?

Yeah. Hey, Robert. It's Brian. And as it relates to Eclipse, We've tried to mirror the dividend more recently with what we're receiving from a plain middle market first lien loan. So 12% we felt was in line with what we're getting from the rest of the portfolio. The reality is it could dividend out a lot more, but it's performed incredibly well and we want to continue to grow that platform and allow them to diversify their portfolio And so we would like to try to keep it. Our goal would be to try to keep the dividend yield from that platform consistent with the rest of the portfolio, I guess is the way that I would describe it. So as base rates change, that may change, but it shouldn't be volatile relative to the rest of the portfolio, if that makes sense.

It does. That's really helpful. Thank you. Elizabeth, you said during your comments that the CSA valuation was impacted by an expected acceleration in the realization of the MVC assets. I mean, is that driven by just an estimate, or is that actual activity and I mean, how real is that expected acceleration, I guess is the way to put it?

Yeah, so, Robert, the way we think about it is that the CSA is either the lesser of when we exit the last investment or 10 years. We are now down to four assets, one of which, you know, we should exit close to the end of the year. It's a PE fund that's in wind-down mode. We have just hired somebody to help us exit the MVC auto, so we should exit that over the next couple years. And really what's left at that point is security holdings. And in talking with the team, we believe we will exit that sooner than that 10-year mark and likely sell that over the next, say, five to seven years or five years, I should say. So that's really where that acceleration and timeline came from.

Got it. Got it. Thank you. And then if I can, on the overall credit quality of the portfolio, the number of calls went down, et cetera, but maybe for Ian, appreciate the comment on the interest coverage, et cetera, but, I mean, What's the go-forward interest coverage, if we can? I mean, SOFA's, you know, the last 12 months, you know, they've been paying higher interest, but obviously SOFA's been on a pretty steep climb over that duration. So if you look forward, what's your expected interest coverage? And also kind of tied into that, I've been asking people, what proportion of your portfolio today has interest coverage below 1%?

Yeah, so great question, because obviously we are looking backwards, and, right, the reality is a majority of our investors or our borrowers provide monthly reporting. There's probably 20 percent that are quarterly. So, you know, we're looking – we haven't received all the quarterly for second quarter reporting packages yet. So what we're doing, and I think we've talked about this in the past, we started way back early in the year stress testing the portfolio for rates increasing to 5%. But obviously the numbers I'm talking about today, we're looking at, you know, for those that are quarterly reporters, we're taking first quarter and then we're factoring in those that are monthly. So just a couple things that I'd highlight in terms of the portfolio performance. Number one is the portfolio for the second quarter, and I reference this, and I think it's important, is that a vast majority have been minimally impacted by inflation. So I think, number one, when you look at margins, most of our borrowers have been able to pass through price increases. That goes to the composition of the portfolio. We've talked about this in the past that over 75% of our portfolio is service businesses versus manufacturing, which is also important because we don't have companies with a lot of CapEx. So that's number one. Over 50% of our portfolio is generating EBITDA growth. And in terms of those that are in GPF that have less than one times, it's less than five issuers. So it's a minority in terms of being under one to one. I do think that as we look at the full year impact of rate increases, which is as of like right now, and we may have another 25 basis points coming around the quarter, we'll probably see, and I think I indicated this, a little more volatility in the second half of the year where there will be some companies that are going to have some liquidity needs. But at the end of the day, and Robert, I've been doing this a long time, if you have good businesses with good sponsors and lenders and management teams that are all rowing in the same direction, these companies are going to get through a cycle and we expect our sponsors to put in equity and we'll consider picking some of our interests at a premium to get that company through to the other end.

Robert, to build on what Ian said, that's all if that environment hits us in the face. If you look at today, what we know is non-accruals were almost cut in half from the prior quarter. If you look at the only non-accrual that is from something that we didn't acquire within the portfolio, And so the bearings, we talk about rotating out of NBC and Sierra assets into bearings assets. And as we evaluate the portfolio and everything we've communicated to you, if you look from a bearings perspective, those assets have continued to perform extremely well. And to Ian's point, if you look at the average leverage in the portfolio, call it five to five and a half times within that. If you look at the interest coverage within that type of portfolio, even if you run it at 10% or so, you're running it still kind of two times interest coverage. And as Ian referenced, with the service businesses, they just typically have a lot less capex and other needs of free cash flow. So very importantly, your free cash flow coverage still stays very attractive relative to the interest on the company.

I really appreciate all that comment. Thank you.

Thank you. And our next question comes from Casey Alexander with CompassPoint. Please proceed with your question.

Yeah, good morning. And first of all, let me warn, I'm sitting in the same storm here in Charlotte, so if you hear the background noise, you'll have to forgive me. Secondly, I want to acknowledge and hope shareholders appreciate the material execution on the Share Repurchase Program. That was excellent follow through. I want to ask Brian, it sounds to me like what you're saying about the JVs is that you've, you know, setting the dividend at, you know, what you believe loans are earning in the portfolio. Does that mean that, are you still earning a higher ROE on those JVs and, you know, building NAV through retention of income in those JVs?

Yeah, thanks for the question, Casey. As it relates to Eclipse and Rokade, that is correct. Yeah, think high-teens type ROE, and we're retaining that and trying to build NAV within the portfolio with that capital.

And so Jocasi would be sort of at the mark then?

Correct.

Yeah, okay. Secondly, you gave sort of a cumulative review of it, but I was wondering if you could be more specific. What's the mark-to-market loss on MVC to date, SIC to date? What is each CSA currently marked at, and what are the caps to the CSAs on each of those individual blocks of business?

Yes, so for MVC, it's currently marked at 15.6, and that CSA is 23. The losses right now at MVC are 21, so again, fully covered. The mark on Sierra is around 45, and the losses are around 36. And that is up to a hundred million.

The losses are not 36. Oh, I'm sorry. The losses are like actual realized losses are like five million.

The 36 includes the unrealized.

The incremental 30 is unrealized.

Yep.

And so that total, if you take the full mark to market and you applied it, the 36 would be relative to the hundred, as Elizabeth said. So you'd be more than covered on any of that. We feel good about some of the mark-to-market stuff. So what we acquired, there was some CLO equity. There was some stuff around the JV that they had existing within there. Given what's happened with base rates and broadly syndicated loans, that's impacted both of those type of things. Obviously, CLO equity is going to be impacted by the underlying collateral within that. But we feel good about where the long-term recovery of those, but from a mark-to-market basis, again, think of it as 36 relative to 100. Okay. An actual five relative to 100.

Okay. That's all I wanted to know. That's perfect. Thank you. I appreciate you taking my questions.

You got it. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Eric Lloyd, CEO, for closing. Excuse me. We have a follow-up question from Finian O'Shea with Wells Fargo Securities. Please proceed.

Hi, thanks so much. Just one more on the JVEs, the topic du jour. You mentioned building retained earnings on Eclipse and Rokade. Just I guess to what extent, what are you thinking size-wise before starting to distribute the earnings? Is it about the scale opportunity and the returns opportunity today? And within that, what's the sort of path you see to getting those right-sized and distributing returns? Thank you.

Yes. And I think as long as we can continue to generate those types of ROEs, you know, we're going to – we could certainly distribute more, and we can be tactical around that to the extent – We want to do that from a portfolio perspective, but we think that those platforms have momentum, and so we want to continue to create sort of NAV for the overall portfolio over time. And so I don't think that there is a change in strategy or a timeline to get to that point, as long as they are sort of earning that ROE, we'll continue to let them retain. And to the extent we want to take special dividends to NAV, you know, bolster the income of BBDC, we can do that. So we can kind of use it to help to the extent there are other issues in the portfolio, if that makes sense.

Yeah, I mean, I would just build on that, Finn. I mean, think of a high-teens ROE. It's something we want to distribute where it's prudent, as Brian said, consistent with the rest of the portfolio. But retaining some investment within that to continue to support the growth of that is also a really attractive investment for the BDC because it's just – It's consistently throwing off kind of that high teens type of return. And again, we're something that we think is extremely complementary to the core part of the portfolio, which is going to be cash flow, first lien, senior secured assets.

Thanks so much.

Got it. Any other questions?

We have one more question from David Miyazaki with Confluence Investment Management. Please proceed.

Hi, good morning. I just wanted to share some appreciation for the CSA that you have in place. I think that it's proven to be something that is very helpful given that the losses, especially at NBC, are higher than what I'd expected. I'm curious how, as you're marching through the wind down of both NBC and Sierra, what has surprised you versus your underwriting and how does that shape your view toward future or possible consolidation or acquisitions going forward?

Dave, thanks for the question. And we're glad that we're providing more transparency around the CSA. And I appreciate your recognition that, you know, it's bearings bears that risk and the losses are not to shareholders. I would say on NBC, as you said, there were three large assets when we underwrote NBC. We referenced two of them that we still hold, which are equity positions. We had one that was a debt position. And we went into that The debt position, the custom alloy is the one that's had the realized losses that were significant, which is part of what Elizabeth referenced relative to the CSA. And so I would tell you when we underwrote it, we didn't expect the loss severity on that to be to the extent that it was. Obviously, when you underwrite a portfolio that you didn't originate and underwrite, you have a certain amount of information, but not the full type we would normally have in certain type of underwriting. The two equity positions, as Elizabeth referenced, one of them, we're in the process right now of beginning a process to look at an exit on that, whether that, you know, the timeline of that is kind of TBD. The other one, we believe a little longer hold on that will benefit for some of the, basically some macro reasons that are occurring in kind of the European area that we think will support infrastructure. Those equity positions can obviously come back and basically offset the losses that we've had to date on the MVC portfolio. But, you know, time will tell whether that happens or not. So I'd say on MVC, the short answer is the surprise, I guess, if you think of it that way, was on the one custom alloy asset, the loss severity as we underwrote it was higher than what we thought it would be to the extent it defaulted. The two equity positions, I would say, are performing in line or above what we thought they were going to perform. And therefore, I believe we look at the net-net, which got to the $23-ish million CSA. We think, as we look at it today, it should be inside of that number on a fully realized basis. But, you know, time will tell. The equity positions will really drive that. On Sierra, it was a more diversified portfolio when you look at that from the assets that were in there. I would say that the thing there, it's performed in line with what we underwrote in general, as we referenced kind of five-ish million of realized losses. The primary part of the 30-ish million of unrealized that Elizabeth referenced, it's almost, it's not perfectly this, but think of it as kind of half-ish or so as kind of CLO equity and half-ish or so as kind of the JV that's within that. Both of those are really just impacted by the significant increase in base rates, which led to broadly syndicated loan prices coming down, which really just impact the underlying equity value of your CLO equity or the underlying equity value of your JV. So I'd say the surprise there would only be that the actual realized part of the portfolio has been in line with what we expected from an underwriting perspective, maybe even a little bit better, frankly, than what we underwrote. then the unrealized part is just the impact of the rise in base rates, which I don't think, you know, as Ian referenced, we've kind of stress-tested portfolios assuming that. I think all of us wouldn't have underwritten a base case that would have had the type of base rate increases over the last 12 to 18 months that we've seen on kind of the pace of them or the significant increase in them. But again, from a realized perspective, we feel really good about that portfolio. I don't know if the team would add anything. Future M&A. Oh, future M&A, Dave. Sorry, I didn't hit that one. Thanks, Brian, for the reminder. I'd say you shouldn't expect us to do some M&A that would be in line with particularly what I'd say MVC. MVC was one that was a different type of assets than what we historically would generate here at Barings. At the time, we believe we got that at a really attractive value for shareholders. We believe over time that's going to continue to be true when you balance the CSA that Barings bears the risk on and the BDC does not bear the risk on, combined with the value of the underlying equity assets that are in there. We believe that will be an attractive acquisition for shareholders. Same with Sierra. But as I referenced earlier, really this year and next year and probably 2025, it's all about kind of refocusing, taking the complexity out of the BDC, simplifying the BDC, simplifying the story, and really just getting back to basics of focusing on first lien senior secured assets and rotating the Sierra and NVC portfolio out and really focusing on the Barings assets, which I referenced earlier. If you look at the entire portfolio, Barings originated assets represent one of our non-accruals. Every other non-accrual is stuff from what we acquired. And so we really believe that the quality of our originated deals over time will benefit shareholders, and that's going to be our focus.

Well, that's very helpful, and I know the CSA creates its own complexity, but at the end of the day, it is a good protection to have in place, and it certainly helps to remind all of us as shareholders that the parent is aligning itself with all of our interests. And I also would have to say, to echo the comments I'm following through on the share repurchases, I think that's also a good expression of alignment. So thanks for answering all the questions.

Absolutely, David. I really appreciate you recognizing that we're doing everything we can to align with shareholders. Again, I think between the two CSAs, we've got over $120 million of bearings risk, not BDC risk, to insulate shareholders. And we do believe, and we've tried to over time communicate, that we think that sends a message as to how we go about business and how we think about making sure we're insulate and protect shareholders from an alignment perspective.

Great. Well, thank you very much.

Thanks.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Eric Lloyd, CEO, for closing comments.

I guess I first wanted to say thanks. I know it's a busy time for everybody to take the time to join these calls, and I appreciate you taking the time to listen to our call and invest in us and ask the questions that you did. Thanks for putting up with everything from the sirens and the thunder and the lightning that were behind us during the call. And I just want to thank the team, too. With Elizabeth and Jeff and Albert and Ian and Matt and Brian and everything we've done, I really feel great about where we are, the team we have going forward. A number of you have seen some invites to some shareholder stuff that we want to do to get out there and make sure we're communicating with you and telling our story here over the course of time between now and the end of the year. And we're grateful for any time you're willing to invest in us and hear the story because we feel like there's a lot of compelling attributes we have right now that we believe will really benefit the stock price and shareholders over time. So with that, I'll just say thank you. Everybody be well. And I hope everybody's having a great summer.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.