Barings BDC, Inc.

Greetings. At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended September 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 call, 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 quarterly report on Form 10-Q for the quarter ended September 30, 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. I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barron's BDC.

Thank you, operator, and good morning, everyone. With it being Veterans Day tomorrow, I want to start off by thanking all the veterans that are on the phone and any of their family members or loved ones who've supported veterans over the years. We're very grateful for your service and everything you've done for our country. We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our third quarter 2023 earnings presentation that's 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, the BDC's Chief Financial Officer, Elizabeth Murray, and the BDC's Co-Portfolio Managers, Brian High and Matt Freund. I'd like to start by acknowledging that we have refreshed some of the presentation of our financial information and portfolio statistics. Over the course of the past several months, the team has been intentional about presenting information in a manner consistent with how we review and manage the portfolio. The strategy has not changed. Barings BDC was and remains an investor in the credit of companies engaged in the middle market. Our portfolio is predominantly sponsor-backed and is complemented by a selection of non-sponsored and platform investments. Our portfolio strategy is outlined in greater detail on slide five. We will not spend time this morning discussing our approach. We hope our investors and partners understand that this strategy serves as our guiding light and as we continue to successfully invest throughout the market and deliver compelling returns to our shareholders. And with the acknowledgement of a new stylistic feel out of the way, we'll shift our attentions to the important matters at hand in discussing performance during the quarter. BBDC exhibited stability and strong operating results against the backdrop of significant economic uncertainty and macroeconomic volatility during the quarter ended September 30th. Our focus on the top of the capital structure investments sponsor-backed issuers is serving investors well in these uncertain times. Net asset value per share was $11.25 compared to the prior quarter of $11.34 and $11.05 at December 2022, reflecting a year-to-date increase of 1.8%. Net investment income for the quarter was $0.31, unchanged from the prior quarter. Consistent NII was fueled by normalization of yields from rising base rates, Secondly, continued strong credit performance within our portfolio. And third, lower incentive fees due to the incentive cap in our shareholder-friendly structure. Our performance is the result of a focus of the top of the capital structure and within more defensive industries. We believe BBDC 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 deployments, as we viewed certain opportunities in the market as some of the most compelling reviews during the year. As our shareholders know, we are actively working to maximize the value in our legacy holdings acquired from NBC Capital and Sierra Income and rotate them into compelling Barings-originated positions. Our investment portfolio continues to perform well in the third quarter. Including the acquired Sierra and NBC assets, our total non-accruals are 2.5% of the portfolio on a cost basis, and 1.6% on a fair value basis with one new non-accrual book during the quarter. With the exception of two investments, all of our non-accrual assets were from acquired portfolios and therefore are 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 $54 million on a combined basis for the Sierra and MVC credit support agreements. They're designed to insulate shareholders from realized losses in the portfolio. The reduction in the CSA valuation quarter over quarter is primarily due to unrealized appreciation related to positions in the underlying Sierra portfolio. As investors know, when the issued collateral improves in value, the value of the insurance declines and vice versa. To date, less than $35 million of net losses have been realized at the acquired portfolios. The remaining unrealized depreciation within the portfolio are spread across a wide number of issuers and are believed to reflect market discounts to par rather than anticipated impairments. Recall that a bulk of the Sierra portfolio was comprised of semi-liquid broadly syndicated loans that traded infrequently. Following the end of the quarter, two Sierra positions on non-accrual were fully realized. 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 11.2% from the prior quarter of 11.0%. We remain conservative on our base dividend policy, and our board declared a fourth quarter dividend of 26 cents per share, consistent with the prior quarter. On an annualized basis, the dividend level equates to 9.2% yield on our net asset value of $11.25. Looking at liquidity, net leverage, which is leverage net of cash and unsettled transactions, was 1.18 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 into what has become a very attractive environment for private credit. Before turning over the call, as many of you know, Barings BDC hosted our 2023 Investor Day in early October. We are grateful that many of our investors and partners were able to attend. The presentation shared at that event and replays of the content are available under the investor relations section of our website for those of you who are unable to attend. We encourage you to review that if you are able. 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 $300 billion of assets under management. The bulk of our portfolio is sourced from the Global Private Finance Team, an organization with more than 100 investment professionals located around the globe, providing financing solutions to preeminent middle market companies sponsored by private equity firms. BBDC's portfolio increased by $34 million on a net basis in the quarter, with gross fundings of $138 million, offset by $104 million of repayments and sales which included approximately 50 million of sales to our Jocassi joint venture. Activity during the year has been tempered as private equity buyers take a pause in this rising rate environment to likely determine any impact on valuations. Investment bankers who serve as the tip of the spear in a sell-side buyout have indicated they are sitting on record backlogs of new transaction opportunities. The messaging has been consistent for the past 12 months, as more and more opportunities are being added to the backlog. However, sponsors appear reticent to bridge the valuation gap between 2021 purchase price multiples and today's range based on financing costs. The deluge of opportunities is being held up by the dam that is buttressed by a resetting of the cost of capital and general economic unease. We have seen an increase in the number of early stage opportunities within the platform, but unfortunately conversion rates to closed deals are trending towards historic lows. Sponsors continue to execute on add-ons for companies already within their portfolios, which makes sense as add-on multiples are below the original platform purchase price, in effect enabling sponsors to reduce their cost basis and hedge against any compression in exit multiples. Investors in Barron's BDC benefit by having a seasoned portfolio that provides opportunities to deploy capital into issuers we already know well. We are not in a position to call the bottom. There is a logical reason to believe transaction volumes improve in the months to come, namely a record backlog of sell-side mandates among the investment banking community and a need for private equity managers to show distributions to their LPs. Counter to those facts is a high level of uncertainty created by two armed conflicts persistently high inflation, a rapid increase in interest rates, and the forthcoming political cycle. When opportunities ultimately do convert into an increase in closed transactions, we will continue to use our disciplined underwriting strategy to invest capital in the most compelling opportunities. Turning to our current portfolio, 74% consists of secured investments, with approximately 67% of investments constituting first lien securities. Interest coverage within the portfolio stood at 2.3 times, a modest decline from 2.5 times a quarter earlier. We are forecasting that steady state weighted average interest coverage for the portfolio will ultimately fall between two times and two and a quarter times as the full impact of higher rates is reflected in issuers' financials and performance. 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 sponsored-backed strategy has proven out over the past several quarters, combined with what we believe were reasonable going-in leverage multiples, the median gross margin in the North American global private finance portfolio, similar to the BDC portfolio, stood at 49% up from 44% 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 21% 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 of the portfolio. The portfolio composition remains highly diversified. The top 10 issuers accounting for 21.8% of fair market value. Recall that the two top positions within the portfolio, Eclipse Business Capital and Rokade Holdings, are platform investments originating middle market loans. These positions have a number of underlying issuers. Assets included in the other classification include structured positions and certain acquired positions that will not be originated on a new issue basis going forward. We anticipate rolling out of these positions as market conditions allow in the quarters to come. In addition to the new formatting, we are publishing a risk rating schedule for our shareholders. Risk ratings exhibit minimal movement during the quarter, as our issuers exhibiting the most stress, classified as risk ratings four and five, were unchanged at 6% on a combined basis quarter over quarter. Encouragingly, we are We also experienced some positive movement as certain issuers performing consistent with expectations at underwriting have outperformed during third quarter. We remain confident in the credit quality of our underlying portfolio, but we do see increased volatility heading into 2024 for the reasons previously mentioned. The uncorrelated nature and associated value of investments in Eclipse and Rokage should bolster the portfolio in the event the economy enters 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 our core mill market credit is what we do. I'll now turn the call over to Elizabeth.