Q2 2020 Barings BDC Inc Earnings Call
At this time I would like to welcome everyone to the bearings BDC Inc. conference call for the quarter ended June Thirtyth 2020.
All participants are in listen only mode. A question and answer session will follow the company's formal remarks, if he would like to register a question for today. Please press star one on your telephone keypad.
So if you need any technical assistance you May press Star zero on your telephone keypad.
Today's call is being recorded at a replay will be available approximately two hours. After the conclusion of the call on the company's website at www dot bearings be DC dot com under the Investor Relations section.
Please note that this call may contain forward looking statements that are including 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 annual report on form 10-K for the fiscal year ended December 31st 2019.
And quarterly report on form 10-Q for the quarter ended June Thirtyth 2020, each is filed with the Securities and Exchange Commission.
Various 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 Eric Boyer Chief Executive Officer bearings BDC. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate everyone joining us for today's call I, just want to start off by saying that I Hope you and your families are doing well and staying healthy. So we continue to navigate these uncertain times that we're all living right now.
No that throughout todays call, we're going to be referring to our second quarter 2020 earnings presentation is posted on their investor Relations section of our website.
Somewhat older Cold we belong in the past I'm joined by bearings Bdcs, President and bearings go head of global private financing in power, all Mcdonnell managing director and portfolio manager.
Global high yield and Bdcs, Chief Financial Officer, John Baugh.
As we typically do you in a job movie details of our portfolio in second quarter results in a moment, but I'll start off with some high level comments about the quarter.
Before turning to the presentation I'd first like I mentioned, a recent development that we did not include our earnings release, but it was included as an well leased by Moody's Investor Service last night.
We're excited to we'd like the berries BD. She has received an investment grade rating a beat up away three with a stable outlook burdens and subsequent to the quarter in various BDC has also been entered into a commitment for a 100 million dollar private placement of unsecured debt.
We expect to draw on this 100 million commitment over the next 12 months.
First 50 million will be priced at a 4.66% coupon what the remaining 50 million to be priced at the time of borrowing.
Post this issuance, we believed that bearing strong capital profile as an investment grade issuer will provide a distinct advantage to bearings BDC throughout this period of market volatility.
Turning to slide five of the presentation.
You'll recall that in the first quarter, the liquid credit markets tend to be she stock prices experienced their worst quarter since the 2008 financial crisis.
We were all we used to see a meaningful rebound of both metrics in the second quarter and while there has been no not been a complete reversal from first quarter losses improvement has still been significant.
As you would expect the market improvement how to direct impact on our financial results.
Moving to slide six worse second quarter highlights our net asset value for sure increased by one dollar per share in the quarter or 10.8% to $10.23.
John will go through the NAV bridge later, but unrealized appreciation of our investment portfolio, what the primary driver of the increase.
Our total investment portfolio was carried at 93% of cost at June 30 versus 87.4% of cost at March 31st.
All of our middle market investments remain current on both interest and principal payments. We did have one broadly syndicated loan and fuel and Billboard energy It moved to nonaccrual status in the second quarter, but our overall broadly syndicated loan portfolio. It's all significant price improvement in the period.
Having our middle market and broadly syndicated loan portfolios spread across 155 investments with an average size of 6.3 million or 0.6% of the total portfolio provides strong diversity that is really critical and two more quick we're in today.
Our net investment income per share of 14 cents was two cents below our second quarter dividend second 60 cents per share. This was driven by the further impact of LIBOR declines and overall slowdown in middle market lending that started in March.
<unk> middle market deployments during the quarter were $21 million as we continued to selectively reduce our broadly syndicated loan portfolio by that amount of $67 million.
That's part of this continued rotation out of broadly syndicated loans, we did realize $16.6 million of losses, primarily on certain investments. We don't have more downside risk had been heavily impacted by the cobot, making.
Notable sales included Seadrill 24 hour fitness and hurts <unk>.
The impact of these realized losses, however had already been reflected in our NAV at the end of the first quarter.
Moving to slide seven we summarize some additional financial highlights for the second quarter. In addition to the portfolio value improvement our net debt to equity ratio decreased from 1.2 to one times as a result of both lower net debt and higher now this provides more cushe cushion to withstand additional pressure on asset values meter.
Contractual commitments for fun unfunded capital and importantly support existing and new investments with incremental capital.
Turning now to slide eight and our share repurchase plan you can see that we have repurchased approximately 2% of shares year to date under the plan, we announced in February versus our authorized started of up to 5%. That's generated five cents of NAV per share accretion for the year.
We would anticipate making additional share repurchases under this plan subject to regulatory and <unk> <unk> and liquidity constraints.
I'll now turn the call over to you provide an update on our investment portfolio and what we're seeing in the middle market today.
Thanks, There on slide 10, we show a summary of our investment activity for the second quarter.
Overall, it was a slow quarter across the market.
And we continue to be selective in terms of both of our deployments and be itself sale.
Net new middle market investments totaled 21 million, including two new platform investments.
While the BSL and structured products portfolio saw net decrease of 67 million based on selective dispositions.
As you can see on slide 11 at June Thirtyth, we were invested in roughly 668 million a private middle market loans in equity, which included 71 million unfunded commitments and 351 million of liquid broadly syndicated loans.
Portfolio leverage was up slightly compared to the first quarter, which you would expect this we're beginning to see the first impact of the uncertain economic environment come through reported portfolio company financials.
I will cover portfolio performance and the resulting valuation impact shortly.
The 597 million funded middle market portfolio was spread across 64 portfolio companies and 18 industries and sponsor backed transactions.
The 351 million BSL portfolio was spread across 81 portfolio companies and 26 industries.
We expect to continue to rotate out of the broadly syndicated loans in the third quarter with a net BSL portfolio declined likely to be even higher than what we saw in the second quarter.
Our top 10 investments are shown on slide 12, with no investment exceeding 2.4% of the total portfolio and the top 10, representing only 21% of the total portfolio.
Our portfolio remains diverse and with limited exposure to it any single investment or industry.
Slide 13 shows a bridge of our toll investment portfolio from March 31st the June Thirtyth.
Touched on the key origination and repayment components.
But this slide also shows the impact of unrealized depreciation on the portfolio as a whole, which told 66.5 billion for the quarter.
As we showed you last quarter. This unrealized appreciation is further broken out on slide 14.
You can see that approximately 32 million or 48% of the unrealized appreciation was attributable to our liquid investments well 9 million or 14% was attributable to our middle market loan portfolio.
Within the middle market loan portfolio 5 million was driven by lower spreads in the broader market for middle market that investments based on our observations of a combination of high yield and middle market indices.
And 3 million of the middle market portfolio unrealized appreciation as being attributable to underlying credit or fundamental performance.
Overall, our middle market portfolio has weathered the cobot 19 situation well and the credit improvement we saw this quarter was relative to conservative expectations.
We had last quarter during a period of extreme uncertainty.
We continue to monitor our portfolio closely having regular discussions with management teams and sponsors.
Stay abreast of the latest operating performance and liquidity trends.
Turning for a moment to the broader market. Please turn to slide 16 of the presentation.
The credit Suisse single B leverage loan index tightened considerably in the second quarter, although still remaining above middle market levels.
Direct lending spreads as expected were generally wider in the second quarter. Although the data is based on a smaller sample size than in prior quarters.
And is also reflective the bias of new investment activity toward names with minimal cobot impact.
Overall, I would characterize the market is improving.
As we are seeing more activity.
And more transactions involving quality companies that have demonstrated an ability to navigate the current environment.
Slide 17 provides an update of the new slide we show last quarter.
Providing a graphical a graphical depiction of relative value across the triple B.
That will be and single B asset classes.
Spreads were down this quarter compared to the three year highs, we saw across the spectrum last quarter.
More importantly, it continues to show the relative value opportunities that can exist for investors at different levels of credit risk.
And how the value of choice across markets.
Provides a meaningful benefit the BDC investors.
It is in this type of market at the broad investment frame of reference size and scale of bearing.
Can provide the greatest benefit.
With that I'll turn things over to John.
Wrap up the call with some additional color on our financial results.
Thanks, Ian and if you could turn to slide 19.
You can see the bridge the company's net asset value per share since last quarter.
And the dollar per share increase was due primarily to net unrealized depreciation on our investment portfolio of $1.36 per share.
Which was partially offset by roughly 34 cents per share from realized losses on sales of certain assets and our BSL portfolio.
You saw the breakdown of unrealized depreciation on an NAV per share basis. When you had discussed slide 14, what's included value improvements across all of our asset categories.
Now slide 20, and 2020 and 21 show our income statement and balance sheet for the last five quarters.
Well not spend too much time here given that we've already hit the highlights, but I'll point out that while we had lower investment income due primarily to a decrease in our weighted average yield on performing debt investment from 5.8 at March 31st% to 5.5% at June Thirtyth due to lower lie bore.
We also saw a decrease in operating expenses to help mitigate this impact from a net investment income perspective.
For the balance sheet perspective on slide 21, you can see that our investment portfolio. Excluding short term investments was up slightly in the second quarter.
Reflecting the net impact of our unrealized depreciation being offset by the rotation out of BSL investments. This rotation enabled us to repay debt during the quarter as our COO low debt balance decreased to 225 million at June Thirtyth.
We were also able to use cash to further repaid these notes in the quarter with a 48 million dollar repayment on July 15th made with cash and short term investments on hand at June Thirtyth.
Details on each of our borrowings are shown on slide 22.
Well it was subsequent to quarter end. This slide also shows the new 100 million dollar unsecured commitment that Eric referred to earlier in the call.
Our debt to equity ratio at June Thirtyth was 1.16 times or more importantly, one times after adjusting for cash short term investments and unsettled transactions I would also note that we voluntary voluntarily elected to fully repaid terminate our BSL credit facility during the quarter.
Now jump to slide 23.
From a liquidity perspective, our primary sources of liquidity continued to be proceeds from the continued rotation out of liquid BSL as appropriate and depending on market conditions as well as borrowing capacity under our 800 million dollar senior unsecured corporate credit facility.
Today's available borrowing capacity under this facility, which is subject to leveraged borrowing base and other financial conditions will be further enhanced by the 100 million dollar private placement commitment for Unsecure debt.
It's exactly this funding profile that allows bearing BDC to be both defensive in its liability structure.
But opportunistic in the asset composition of the investment portfolio on a go forward basis and as we showed you last quarter. The chart on slide 23 outline the impact of our net leverage of funding our and use capital commitments, while Barry BDC does not have any revolver exposure we have.
$70.5 million of delayed draw term loan commitments to our portfolio companies as well as 43.5 million of our remaining commitments to our joint venture investments, while we would expect limited usage of our can committed delayed draw term loans. This table shows how we have the available capacity to meet the entirety of these commitments if.
Called upon while maintaining cushion against our regulatory leverage limits. In addition, our $351 million liquid broadly syndicated loans provides additional liquidity if needed now while we could sell these investments to do reduce leverage well not impacting current in AG. We could also sell these investments in order to redeploy.
The capital into other investments with improved risk adjusted returns any sale of course would likely convert an unrealized loss to a realized loss.
But long term now could be improved with the incremental returns on these new investments.
Slide 24 updates are paid and announced dividend since bearing took over as adviser to the BDC, we announced yesterday that our third quarter 2020 dividend of 16 cents per share will be paid on September 16th 2020.
Lastly, slide 26 summarizes our new investment activity, so far during the third quarter and our investment pipeline. Since July 1st we've made approximately $61 million of new private debt commitments.
With approximately 16 million, having closed end fund it of these new commitments, 87% or first lien secured loans with 20 <unk>, 7% of the originations based in Europe.
The weighted average origination margin or DM three of these investments is 10.7% and we've also funded approximately 6 million a previously committed delayed draw term loans to performing companies.
The current bearings global private finance investment pipeline is around $937 million on a problem probability weighted basis and it is predominantly first lien senior security investments now you may recall that this pipeline was approximately $110 million last quarter. So we significant increase in the last three months.
And this is also supported the eons comments regarding improved market conditions were seeing as a reminder, this pipelines estimated based on expected closing rates for all deals in the investment pipeline and with that operator, we'd like to open the line for questions.
Thank you the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time.
Formation total indicate your line is in the question Q you May press star to if he would like to move yourself from the Q for participants you think speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Once again that is star one to register question. At this time. My first question today is coming from Finian O'shea of Wells Fargo. Please go ahead.
Hi, good morning, Thanks for having the on a.
First question for Ian.
On the on your commentary on portfolio improvement from a previous more conservative assessment is this related to.
<unk> liquidity or your your forward earnings outlook and in the case that go out or.
Does that mean that companies are de leveraging or that.
Earnings are actually.
I'm holding up or are going to hold up versus what you initially had underwritten and.
Anymore context on the you know qualitative context on the changed from last quarter.
Would would be helpful.
Yeah sure thing. Thanks, Yeah look let me try to a couple things when we looked at the first quarter, we really started working with management teams.
Before quarter end, knowing that that the cobot situation was fluid and it was gonna have an impact and and we were sort of expecting it to be somewhat similar to what other countries around the world. We're going through so what we really did was a prospective forecasts.
With those management teams and those sponsors are what they thought the next couple of months, we're gonna look like knowing that with all the uncertainty it was going to be really difficult to underwrite anything beyond that and I would say a couple of observations one I think some management teams where.
Overly pessimistic in terms of what they thought they're market was was gonna be like.
With with Covance.
We also saw some sponsors or I'd say generally most sponsors and management teams take aggressive actions in terms of cost reductions and adjusting their cost structure.
So I think that was that was helpful. And then I would say that I'm sort of the third set of of companies that had pessimistic out flux. Some of them actually have been able to pivot a in terms of their business model and pickup business.
Where they didnt think they were going to be able to pick up business. So it's hard to say that there was a a general trend other than when we had those discussions and we are working with those management teams looking at their forecasts and their liquidity needs. It was kind of it the darkest days.
Of this situation, which obviously remains fluid what I, what I will say on the on a on a broader basis is that as a portfolio. We are really well position because we just don't have companies that are what I would look I would call you know.
Covered red industries, which is retail restaurant.
And travel and leisure in the middle market portfolio and I'd, just say by by nature, we typically avoid or minimize consumer facing businesses anyway, because it's just really hard to underwrite consumer trends and so because of that we had no payment.
Faults in the middle market portfolio, we had no material modifications in the middle market portfolio.
That does not mean to suggest that we're not going to have some challenges. It is really going to depend on on what the next a 612.
18 months look like.
Oh, that's very helpful. Thank you and then.
A two part I'll start with a one at a time.
Jonathan here.
The.
Moody's rating.
Did you for the BDC commit to any change in.
Leverage ratios leverage composition anything of that sort that would.
Have you know constrain your your previous.
Strategic outlook.
Or approach and as sort of the second part to that or a roundabout way to ask that again does that change.
Youre does that change the bdcs investing approach to to a more aggressive strategies.
Oh, not just the first part of your question as it relates to change now and so what what I think is indicative of a have a have a high quality platform is that in the midst of a global pandemic receive an investment grade credit rating, which we believe is is that a show of of both the the strength of a balance sheet the strength of.
Portfolio.
And our forward outlook was the same for for many others that are investment grade rated right. So I think you can see you know our leverage target of roughly 1.25 times such reps. It's a inside of the scope of a what's been outlined a in the in the I'd Ah community.
In terms of of opportunity there, there's kind of too there's two points to that right first.
As you go through a period of uncertainty when you have the flexibility of of the capital structure to allow you to be both defensive that's important because we've seen several situations where.
To the extent there are material loan modifications or fear of them, there's been a dilutive capital raise the timed investors either on the debt or equity side. So there's a defensive purpose that here, having an energy credit rating I certainly helps <unk> and then from a an offensive.
A point of view.
Clearly as the in America that line, Yeah boring is beautiful a boring remains beautiful.
However, you can also see that if you have a wide frame of reference.
And the ability to invest it different asset classes as the vast majority of markets go through a period of unprecedented volatility. It's that's to have the capital structure to then invest in those opportunities when they come out. So so the answer is right on track with where we've been before but also.
Having that ability and that Optionality is valuable to us and also valuable to our shareholders.
Okay. Thank you and just a final small question.
Or anybody there and forgive me if you provided this it any guidance on your post quarter.
BSL sales.
Yes. So this is a this is John you could probably imagine that are our current quarter run rate for BSL reductions and again remember very focused on making sure that does BSL reductions are done so very close to our original purchase prices.
Well be very similar to that of last quarter right on a on a go forward basis clearly depending on the market environment right right now we've had seen some some relative strength, particularly in our high quality high quality BSL to sit on balance sheet and we continue to take advantage of that realizing that additional dry powder, an opportunity coming into the phase of wider spread.
Is going to be beneficial for us all but we're still very focusing on making sure. We do sell went out on a NAV on an NAV neutral basis.
That's all for me thank you.
Thank you. Our next question is coming from Bryce Rowe of National Securities. Please go ahead.
Thanks, everyone. Good morning for shape to yet [noise], taking the questions here you mentioned the no material modifications.
With respect to the middle market book.
And I'm curious if if if if you were maybe maybe getting some requests for waivers or modifications and maybe maybe push back on those event or you simply weren't getting many request at all.
[laughter]. Thanks, So yeah, I mean, we had a couple of companies that.
Yeah, we're looking for some modifications and and I would say a couple of things happened I mean.
And and look I mean, we have obviously a larger platform than just this portfolio and and so you know we were definitely working with or some other companies that they needed. Some modifications in that platform. So I don't think anyone could have constructed a portfolio that would be totally cobot proof.
But but in a in the BDC portfolio.
You know we had yeah. If you look at the industries that were most impacted by the shelter in place. It it was like dental management practices.
And so a lot of those businesses were completely shut down and so you know a lot of it really depended on how quickly those areas of geography of market.
Reverted back to normal and and Fortunately they were able to do that and you know the liquidity was there the.
For those companies not the need the material modification, so I'm not going to say that the weren't any but it wasn't it wasn't a large number of businesses that we're.
Thinking about are looking for a modification.
Okay. That's helpful.
And then then wanted to maybe talk about the the pipeline.
Relative to the level of does the DSL portfolio and that transition. So clearly good to see the pipeline, having built back up over over the past three months and you all talked in the past about.
You know that to the transition from BSL to middle market with you know with middle market originations at up at a certain pace over.
Over any given quarter.
So I'm curious how are we kind of back at that you know that preconceived pace that that was originally laid out and then yeah. When we think about some of these DSL sales you mentioned that sum it up the the heavier hit names were exited and you took the lost here.
In the second quarter. It sounds more like here you are seeing opportunities to to sell the ourselves closer to your you to your cost basis now with the what's a tightening of spreads and so I'm I'm wondering if the you know if the if the pace.
The middle market, it's really going to be it a driver of the transition away from DSL or if you will simply be opportunistic with this but the BSL sales to you know to exit close to a close to cost met at this point.
So this is Eric I'll take a first crack at it then the gene can jump in what I'd say is we never want to be in a position nor would we hub or middle market pipe, one dry or selling be ourselves at approach that we don't believes appropriate from an exit perspective.
And that's one of the reasons why are we continued to de leverage you know we were 1.2 last quarter deleveraging through this quarter and to offends question that that John referenced it's fair to say, we continued to sell into this market rally here post the second quarter from a b S. All perspective really to give us.
Flexibility around two things to the extent that the middle market pipeline, which all dressing second yeah turns into investment opportunities and or there's more market volatility that creates other investment opportunities there John referenced the deals that we did here in the quarter DM was over 10% and.
So those are really attractive from a risk return perspective I found the pipeline, it's great to see the pipeline haven't gotten back to our call to more normalized level from a pipeline perspective.
What I would characterize though.
His prior to the coated thing, we were averaging right around $100 million, a quarter plus or minus from middle market originations into the BDC, which were if he said offset by sales of be ourselves or increasing leverage depending on the opportunity at the time.
Still keeping that leverage really prudent and that's what we're going to continue to do I think it'd be hard to say right now that we could predict that kind of because you know the pace that we saw M&A. The last six 810 quarters. It's kinda back what I'd tell you is the pipelines beginning to build deal discussions are occurring how many of those actually.
Turning to transactions I'd say, it's still the jury's out a little bit on that but wouldn't want to say we're back to where we were but I'd say, we're certainly have a month or pipeline or what it looked like no for six to 12 weeks ago.
I'm not trying to Dodge question I, just don't want I wanted somebody in a model that elders as you know.
So we're kinda back, though that run rate, but I mean, there's a chance that up but we just haven't seen the behaviors in the consistency of Oh closure of M&A deals that would give you a high degree of confidence and that's what's going to happen are good.
That's that's helpful. Erik I appreciate it a night one last question.
You know around you know it but the pipeline having built built up here a little bit obviously I would I would assume the origination teams are more and more active here just curious how how they'll get to call. It is to conduct any level of due diligence at this point you know without the social distancing or.
Or maybe he didn't type type due diligence happening. It maybe you can you just talk talk to to talk to the talk to the process and what you've had to change to get comfortable with with that process.
I'll turn that.
You could imagine it's kinda, it's kinda unprecedented way, but due diligence even for US is done. This for 30 years. So I'll, let you didn't talk about kind of how we're approaching it yeah.
And I still think about the days of closing deals where you're you're all together and one room a working throughout the night looking at docs and negotiating deals.
But you know located in terms of the technology I I'd say that.
People are figuring it out there's a process around it we have been involved with sponsors doing diligence with management teams that is being done remote with us I've seen some private equity firms a in a boardroom with the management team social distance.
But we're not in there, but were where they're virtually.
I think if you just kind of look at what's happening obviously add on acquisitions have been fairly consistent and that kind of activity.
I think we'll continue to see most of that and one of the advantages of add ons is that you know a lot of because its consolidating within the industry, there's a lot of knowledge and relationships in that industry.
So that the buyer probably knows the management team.
The target I think we're saying.
Sponsored by companies that are they had previously looked at in the past and so they're familiar with those businesses and the and the management teams of of those businesses I really think and look the whole market over the last nine years, it's been a lot of sponsored research.
Answered transactions right as opposed to strategics coming in it or IPO and I wouldn't be surprised if you see some horse trading where sponsors are looking to put money to work, there's less worse, playing them money to work with a property that they've owned in the past.
And that sponsors looking for an exit and so I think you'll see some of those.
Appear as well kind of adding onto what Eric said, we're still at the early stages. I mean, if you think about it the lifecycle of our deals as you know around eight to 12 weeks are generally viewed from beginning to close funding and so anything that we're looking at right now really was there.
Originated Bakken in May and so it's still early days it it's difficult to say for sure.
Because there's not a lot of data points out there you know and we're still in this price and risk discovery of like really where the market is and how sustainable it is.
I think it feels pretty good.
But we just don't have visibility Intel.
Visibility and into what the rest of the year it looks like there might be some.
Focus on trying to get some transactions done because there might be a.
Administrative administration change and tax laws could change I've heard that are being a mention but these are only companies that are covered like or coated green businesses with no issues.
I'd say companies that don't fit that profile are really on on on the sidelines here.
And for Us in terms of our strategy.
We were not chasing RIS, we're not backing up the truck, but if we see good attractive businesses, yeah, we're going to chase them pretty hard.
Great. Thank you all for the time I appreciate it.
Thank you. Our next question is coming from Robert Dodd, a frame and James. Please go ahead.
Hi, guys first first one.
And then one.
Hi.
On the.
Obviously, I mean, the VSS terminated the BSL dedicated.
You still have a number [laughter] excuse for that obviously, but with the BSL portfolios like continuing to shrink.
What should we expect the old.
Solution to the capital structure, because right now you have to general the Volvo and have that hundredmg against them.
Private placement, but those a a time himself to the structures that exist right plus cash so.
So that exists Scott the middle.
The BSL declines if it declines you'll percentage if you will have secured financing on middle market go up so what's the the management process you get into.
Sure to keep the unsecured fixed.
Okay.
Yeah, Yeah makes complete sense. So so if you think about the mix of the liability stack you can imagine that one it'll be financed with both senior secured debt as well as an increase an unsecured outstandings as well over time.
Our view is a unsecure debt can be a very attractive.
Form of financing, it's just the timing in which you kind of the acquit issue. It is extremely important because if you fast forward or sorry, rewind, perhaps maybe six to six quarters. The go to the extent that you were issuing investment grade credit and forcing a you know based on incentives and fee math, which Robert we know you know very very.
Well It would force you will see into improper asset classes that might have introduced more NAV the tough volatility over time.
Hey, if you layer in the unsecured debt right as a part of the capital stack the investment opportunity overall senior secured loans and then if it's also Eric mentioned Barrick has a very wide frame a lot of an awful lot of other asset classes.
Not only are you able to diversify your liability structure, but you can grow earnings accretive only as a result, so forward outlook would be you know you will see utilization of both secured and unsecured sources with a view that in today's environment. The flexibility offered by unsecured debt and the strong returns.
That are available in a wide array of asset classes means that you can see that composition increase does that help Robert.
Yes. Thank you and then if I can offer.
Portfolio.
Well the pipeline I mean.
Okay hold them and so it sounds like Youre.
Confidence in any given pipeline deal closing is may be lower.
Hi, Thanks, a lot of these things early stage and it's a probability weighted pipeline. So how would you.
The spot how would you tell its highest kind of the gross pipeline.
It is that is that you see a lot more.
Stage opportunities, but with local produce at each one will actually close all how's that shaping out.
Yes, I also heard congrats at it go ahead.
No you go ahead you.
Well I wasn't as good.
Yes.
If you started Eric I'll jump in.
I would say this way Robert I would say that in the past probably three to five weeks, we've seen a material increase and perspective deal flow. So I'd say, it's a lot more early stage. Now then things that are you know the and said kind of <unk> are typical processes.
Eight to 12 weeks plus or minus so I'd say, it's more stuff in the early to mid stage than it is the latter stage I'd say the latter stage stuff is primarily add on acquisitions for existing portfolio companies. This you had referred to and what we call Cobot Green industries. So we've seen the underlying performance would that Patrick.
For a company how they've weathered this challenging times everybody's living in.
We've seen the same on the target so those opportunities I'd say or more progressed, but I'd say for a new platform transaction it'd be more in the early stage and that is which is why I would characterize it saying, it's a little harder to have a certain degree of confidence that all the things will align for an actual.
M&A execution to occur around that portfolio company.
Please jump in the add on anything.
Yeah, No I think you hit in the only thing I would add to that both in terms of new deals I think and especially if its horse trading activity sponsored a sponsor it's not a wide auction and so when you're in this environment, if you're well positioned from a competitive.
Standpoint, I think the likelihood of that deal.
Closing is a higher hit rate than we would normally see because in a normal market right. When you take a look at a at our portfolio. Our pipeline you know the hit rate somewhere between four and 6%.
And this in this environment, where it's it's low volume, but you've got to sponsors they're kind of negotiating a deal and work plugged in.
So our hit rate on that deal is going to be much higher than 4% to 6%. So that's a positive but like Eric said.
You know you factor in that kind of eight to 12 weeks, we're still pretty early so how some of those deals progressed really depends on the the transaction itself, how how it's going to market who's involved and in our position.
With those sponsors the one thing I will point out which is which is good as you have an attractive portfolio is from a a U.M. perspective in this environment, there's now a runoff.
Got it. Thank you know I cannot all up to that so would you.
Characterize the cotton business, it's the early stage once the title.
Coming it as a small characterized by.
Sponsor portfolio management.
And the liquidity seats box.
With that tend to indicate that.
Sure you might know.
Thanks.
Your final PV 10.
10.7% see no. So in Q2 with those new deals with common.
Yeah. So it's it's interesting right because.
Yeah, I mean, that's whole cycles interesting and having been through cycles before you know they're up there always different other than there is a beginning middle and and and and what's unusual about this one is not in a normal cycle. We would have seen a period of you know a distressed sellers right.
Platforms that are looking for liquidity.
Coming to market selling performing assets to get liquidity I'm, just talking about the middle market here, we would have seen.
Companies with broken balance sheet that.
If you need to GAAP capital or we would have seen some little are in some big our restructuring we really haven't seen that yet because I think a couple things one yeah, we had that quick rebound.
When say recovery, but we had a rebound and because of our assets by nature being illiquid.
And the platforms of today's market versus market to 15, 20 years ago, where there's probably more flexibility to kind of kick the can down the road I mean, we know there are companies out there that are paired we know there are companies out there that need liquidity.
But we're just not seen in the market yet and so really as long as this involvement the support by the fed in fiscal policy continues its going to push out that stuff.
And I don't know, whether you'll be able to outgrow it or not I expect that at some point, we'll probably see some of those opportunities.
The deals that were looking at right now, it's it's a they're attractive companies and their their sponsors are selling because.
Probably because they're looking for a they know they're in the money and even and I would say for companies that are covert green you know, we've even seen some purchase price multiple expansion. So why wouldn't you take some chips off the table.
As you look at your portfolio and so as you said it it's really looking at portfolio management from a sponsor perspective.
Got it I appreciate that covenant not just let me. Thank you guys.
Thank you.
Thank you. Our next question is coming from Casey Alexander of Compass point. Please go ahead.
Yeah. Good morning, I have two quick questions. One in your subsequent events you discussed the two investments that you made the which were first lien senior secured debt investments with a weighted average yield at 14%.
It sounds like [laughter], a weighted average yield that is unusual for first lien.
In in any environment. So I'm just kind of wondering what the nature of those investments were that allowed for such an elevated elevated return on them, especially given the fact that you guys try to target very senior first lien with you know lower leverage attachment point.
Sure So Uh huh.
You want to take that John I can provide some color.
Yes, so well just because remember it yourself so KC one of the one of the benefits of the wide frame of reference is bearing is that we can focus in on a different pockets of opportunity that exist and so for example, we have our core boring is beautiful direct lending mandate, which which you know yen and.
And our teams and Eric to always execute with the types of spreads and returned to more probably the risk profile that you'd expect but additionally, bearings operates a number of verticals, whether it's either structured credit when this case, a special situations where in certain instances where companies are finding themselves strapped for liquidity.
You are able to provide you know, perhaps a larger company a liquidity solution at a very attractive rate of return in credit profile and that benefit that affords us by the fact that bearings platform in credit so wide and global you can identify some of these larger companies that are going to be looking for those liquidity solutions.
And we can execute them with a team that has done this as their primary primary job for the last 20 year. So it's a it's a mix and these types of opportunities come there episodic.
But certainly attractive and great complement complements to the direct lending portfolio, but you know you can also expound as well.
No no you've got.
Well, if my recollection is that that those special situations, where ideally likely to ultimately find their way to the JV is that possible that these are being brought on balance sheet and then ultimately going to be sold down into the JV no. So so casey the broader point for Virgin.
The answer is we always execute in tandem with our partners with our JV partners.
But when you think of the joint venture.
There's a heavy focus as it relates to diversification.
So clearly that the BDC as well as the JV. A you know can can own you know both own a credit such as this one this is not gonna be considered a bad asset.
However for example, a European loan right you would not see the same level of of ownership largely because if a European loan comes on the BDC balance sheet. There's also diversification test that we have to be aware up. So it's at the end of the day clearly everybody moves in the same direction, but for something that sit the they is a good asset for b.
The BDC you can expect BBD C N. The JV to participate a at the end of the day still providing good risk adjusted return at appropriate levels of diversification. So it's not as if you know the JV drive this type of investment it's that the that BBD see is open to this type of investment as is the tape.
And clearly when these pockets opened up in which only bearings can execute on a we all participate in keeping keep it diversified as well.
Oh, Hey can you clarify let me.
Let me just make sure we're clear so.
Don't think of those investments, it's kinda, what I'll call, but the core of our portfolio right. We're not changing our strategy in any way shape or form when we do see a special situation. It may happen to be first lien may have to be you know technically personally, but we see a situation like that that we believe the risk adjusted return is really attractive we're doing.
To selectively in a modest size relative to other adjustments.
Take make investments in those areas. So although it's virtually don't think of it is all sudden we're changing our core first lien strategy to having these type of yield it's not that at all.
Right understood. Thank you secondly, since the last conference call there hasn't been any actual share change in the share repurchase program and the stock had been trading you know sort of in the 15% discount the NPV range, but with this increase in NPV, that's jumped to over 20% are we now.
At a level, where since you change the share repurchase program to something more discretionary that this looks like a better shot on goal to do some accretive share repurchases.
Casey This is Bob I'll kind of answer that but really when you. When we think about share repurchase overall I know this was kind of our commitment on our February call of 2000, and a nice team that this is always a part of our capital allocation philosophy and so you can expect.
See additional share repurchases and you can expect them to be accretive the timing of which can be a you know a certain certainly fluctuate, but but philosophically we said exactly in alignment because we do recognize that there's opportunities in the broader market as well as our own share base. You know if you look back to last quarter I can think he kind of see kind of a a general trend.
Were you know it there's some in the more there's some in the middle or some beginning the year the middle and then the yen and sometimes it just depends on the weightings, but but at the end of the day, we remain philosophically aligned and more importantly committed we believe that's an important part of capital allocation philosophy subject to and this is always important just that the the liquid brought.
Our liquidity constraints and or the regulatory environment.
Okay.
Thank you for that.
I'm done.
Thanks.
Thank you. My next question is coming from Ryan Lynch of KBW. Please go ahead.
Hey, good morning, Thanks for taking my question I just have one today.
You know as we look through credit cycles, you know if you could time men perfectly you know kind of at the height of cycles, they would make sense to reduce risk as much as you could move more into first lien you know secular growth businesses and then at the bottom of the cycles are coming out of cycles.
I would make sense stature to add on more risk or lean into it to more of a static movie move down the capital structure take on more cyclical businesses.
Obviously, you have to the time that cycle right to do that it doesn't sound like that's your guys approach you know as we're in the cycle and potentially coming out can you just talked about.
Why no no it doesn't seem like desire to to lean into more risk potentially coming out of out of the cycle.
I'll start with that and then maybe turn it over to Jim So.
You're right, we do not macro economic try and time or our investments we underwrite every our typical deal with somewhere between five and seven years and like from alone maturity perspective, we underwrite every single deal assuming there is gonna be some form of credit cycle or economic cycle during a life about asset so.
That would have been true two years ago five years ago, So it'll be true tomorrow, and so no listen on the margin do you understand the economic environment meeting when you've been in a very strong bull market you have to be potentially a little more cautious because you know at some point, you're just close through that cycle as you.
Come out of the cycle you can feel that twos on the margin you can no thing about margin enhancement for a company or margin expansion for a company being potentially more logical in that environment, but we don't read all indiscreet time or market timers <unk> economic cycle time.
Our investments.
Our view is it's very difficult to predict what those cycles will be how long the last and so we just assume there's going to be a cycle. During the life of every single best <unk>.
Oh, Yeah, if you want to add anything to that.
Yeah, I guess, the only thing I would add is just from a.
Capital.
Stack perspective and that is.
I mean look we are a capital solution provider, we've got a long history investing in junior capital and senior and we've been managing third party junior capital for for decades, and and experience through through cycles, and so like Eric said, where we don't change our.
Credit.
View based on where we are in the cycle, but every time, we look at an opportunity if its or if it's an attractive company. We do look at it from a relative value lands. You know, we focus on probability of default loss, given default and and and we can be agnostic in terms of where we play in that capital structure.
That is a competitive advantage that we have when we're talking to private equity firms.
Obviously, what we want to do is being the dumb money in the transaction. If there is some money and the transaction, but I'd say, what we did do over the last few years is just given how frothy the market was.
Yeah, we spent more what we focus more on the top of the cap structure in a defensive play.
And you know, obviously building a portfolio and the last two years of a cycle as you know, it's a really challenging a situation.
But we are you know if as we come out of this cycle to the extent that we see good junior opportunities that will definitely look at those I think right now the issue is.
We still have cobot flare ups, we still have the fed propping up the economy and so I don't know if you can really say that Weve you know what were we moved through the trough and we're headed up at this point.
I don't know if that helps at all.
No that's good color and definitely fair points.
Those are all my questions I appreciate the time today.
Thank you I think first to the end of the question and answer session I would like to turn the floor back over to Eric Lloyd for closing comments.
Well just want to say thanks, everybody for joining us today I know its busy time for particularly the analyst on there that there. Thanks for joining us and everybody bearings. We just hope everybody out there you know stays healthy stays positive and we can do anything major any questions for any of our shareholders analysts School Board you know how to get older but so.
Thank you again for your time.
Ladies and gentlemen, thank you for your participation you may disconnect your lines and lock up the webcast at this time and have a wonderful day.
[noise].