Q3 2020 Barings BDC Inc Earnings Call

[music].

At this time I would like to welcome everyone to the bearings BDC Inc. conference call for the quarter ended September Thirtyth 2020.

All participants are listen only mode.

A question and answer session will follow the Companys formal remark.

If you would like to ask a question. During today's event you may do so by pressing star one on your telephone keypad anyway.

Anyone on the phone Tonys, operator assistance, we signal an operator by pressing star zero.

Today's call is being recorded and a replay will be available approximately two hours. After the conclusion of the call on the Companys website at <unk>.

B U W. W. Dot pharynx BDC stock called under the Investor Relations section.

Please note that this call may contain forward looking statements that include statements regarding the companys 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.

Putting those discussed disclosed under the section titled Risk factors and forward looking statements in the company's annual report on form 10-K for the fiscal year ended December 31st 2019.

Quarterly report on form 10-Q for the quarter ended September Thirtyth 2020.

Each is filed with the Securities and Exchange Commission bearings.

Bearings PTC 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 Mr., Eric Boyer Chief Executive Officer, Barry BDC.

Ladies and gentlemen, please standby we need to bring Mr with Oh.

[music].

Mr. White. Please go ahead.

Thank you and I guess this goes with 2020 restart conference calls with the challenging situations like that so, but we'll just forgot I got dropped. Thank you Donna good morning, everyone.

We appreciate you joining us for today's call I Hope you and your families are doing well and staying healthy and positive during these times.

Please note that throughout today's call, we'll be referring to our third quarter 2020 earnings presentation. That's posted on our Investor Relations section of our website.

On the call today, I'm joined by bearings, Bdcs, President and bearings co head of global private finance in power.

Tom Mcdonnell managing director and co portfolio manager.

Brian Hi, bearings head of U.S. special situations and co portfolio manager and the Bdcs Chief Financial Officer, Jonathan Bock.

Yeah, John will review details of our portfolio and third quarter results in a moment, but I'll start off with a few high level comments about the quarter.

Turn with me to slide five of the presentation. We've shown this slide in the last several quarters to provide a sense of the volatility or broadly syndicated loan prices and the correlation to BDC equity prices.

In the third quarter broadly syndicated loan prices continued to increase with spreads down over 100 basis points.

BD she equity prices, however remained relatively flat quarter over quarter, largely driven by factors such as select dividend reductions and increased non accruals for some companies.

Turning to our third quarter financial highlights on slide six.

Bearings Bdcs net asset value per share improved by 74 cents in the quarter by 7.2% increase to $10 or 97 cents.

Unrealized appreciation on our investment portfolio was the primary driver of this increase as market and credit driven improvements continued to help reverse some of the unrealized depreciation we experienced in the first quarter.

As of September Thirtyth, our total investment portfolio was carried at 98.3% of cost compared to 87.4% six months ago at March 31st.

We had no non accrual assets at the end of the quarter. That's all of our investments remain current on both interest and principal payments well.

Well at some point every direct lender, including also experienced nonaccruals.

I'm, especially pleased with the portfolio's performance during the strike here, which I view as a testament to both our original underwriting and our ongoing portfolio management.

Our investment teams.

Our net investment income per share was 17 cents up from 14 cents per share in the second quarter and above our third quarter dividend of 16 cents per share right.

We continue to take advantage of market conditions to rotate out of our initial b cell portfolio and redeploy that capital into higher yielding middle market and cross platform investments.

Total sales and repayments of 252 million included 210 million or from our initial B S. O portfolio, which was redeployed into 145 million of new originations with a weighted average all in spread of 921 basis points yeah.

Yeah. That's a pipeline has remained very healthy in Q4 as John will discuss in more detail later and we now expect by the end of the year driven largely completed our rotation from our initial BSL portfolio into primarily on middle market portfolio.

Based on these results and expectations for the coming quarter, we announced yesterday that our board increased our fourth quarter dividend payable in December to 17 cents per share.

Turning to slide seven you'll see some additional financial highlights for the quarter.

John will go through the details of the financial shortly but I do want to make one key point you.

You can see on the first line of slide seven, but our investment portfolio increased $82 million for the quarter. This increase however included a 153 million increase in our short term cash investments for MBS all sales.

There were used to repay debt after quarter, thus, our true investment portfolio actually decreased $70 million during the quarter as a result of our portfolio rotation that I referenced earlier. Despite this decrease in portfolio size you can see that our total investment income actually increased slightly during the quarter.

Even with continued downward pressure on waterborne the rotation out of initial b cells into higher yielding middle market and cross platform investments those drove an increase in total investment income and better positions. The portfolio for continued growth going forward, while still maintaining a high quality predominantly first lien portfolio.

Slide eight outlines the key strengths are bearing spot platforms that help facilitate this portfolio rotation.

Bearings BD she is uniquely positioned within the broader bearings global fixed income franchise to focus primarily on middle market direct lending, but also take advantage of bearings wise investment frame of reference to participate in a differentiated deal flow across both public and private markets to find the most attractive risk adjusted returns and different market cycles.

Sales of volatility this.

This multi channel origination strategy has enabled bearings BDC to grow its cross platform investments over the last six months as a complement to the middle market direct lending portfolio and as I mentioned previously increased our dividend to 17 cents per share for the fourth quarter. It.

It is this large experienced and global platform that we believe will continue to drive long term shareholder returns.

I'll wrap up my comments by providing a brief update on our planned merger with NBC capital.

The transaction is progressing in accordance with our original timeline as we have filed our preliminary an amended proxy statements with the FCC.

We still expect the shareholder meetings to approve the transaction to be held in December with a targeted closing date for the merger in mid to late December make or encourage all of our shareholders to review the BD She's registration statement on form and 14 and the definitive proxy materials once made publicly available on our website at <unk>.

The fccs at your page.

I'll now turn the call over to you and to provide an update on the market in our investment portfolio.

Thanks, Eric and good morning, everyone focusing first on the broader market. Please turn to slide 10 of the presentation.

As you would expect middle market activity is down in the U.S. this year compared to 2019 with a focus on add on acquisitions.

This is where eric's comments of a wide frame of reference our particular importance. If there is a limited universe of quality transactions in the market firms with the ability and experience to execute across investment types will be in the best position to take advantage of the quality opportunities.

Jump to slide 11.

The credit Suisse single B leverage loan index continue to tighten in the third quarter and is now back inside middle market levels. As we saw an increase in activity direct lending spreads were generally within a 25 basis point range across the different sub sectors relative to the second quarter.

Switching gears to the bearings BDC portfolio on slide 12, we show a summary of our investment activity for the third quarter. So we are on the same page, let me define cross platform investments we.

We are categorizing investments here, but take advantage of the breadth of the Barrington investment platform, including items, such as opportunistic liquid loan and bond investments special situation investments and structured products that would include seal lows and asset backed securities.

Relative to a slow second quarter to the third quarter was much more active in terms of both middle market and cross platform investments.

Net new middle market investments totaled 53 million with gross fundings of 96 million, partially offset by sales and repayments of 43 million new.

New investments included seven new platform investments totally 80 million and $16 million follow on investments and delayed draw term loan fundings.

We also had $50 million of additional cross platform investments and continued the rotation out of our initial BSL portfolio.

Slide 13 provides a bridge of our portfolio from June Thirtyth to September Thirtyth, which includes increases in the values of our portfolio investments that Jon will describe in more detail shortly.

At a high level I will say that overall, our portfolio has performed well during the pandemic and you can see some of the key components of that so if you turn to slide 14.

Here you can see an enhanced view of our total investment portfolio at September thirtyth, including key portfolio characteristics such as revenue contribution.

In certain credit statistics.

The goal of this slide is to provide further details on the three primary components of our portfolio.

Which our initial BSL portfolio, our middle market portfolio, and our cross platform investments.

Here are a few high level points of note.

Our initial BSL portfolio, which at one point totaled roughly 1.2 billion is.

It is now down to 96 million.

With further reductions reductions expected in the fourth quarter.

In terms of our core portfolio, we were invested in roughly 758 million a private middle market assets at quarter end, which included 92 million of unfunded commitments and 186 million a cross platform investments, which included the remaining 42 million of unfunded.

Thanks to our joint venture investments.

The 906 million funded total portfolio was spread across 125 portfolio companies and 28 industries as we continue to focus on diversification within our portfolio.

As Eric mentioned, we have no investments on nonaccrual status.

And just as importantly, we had no material modifications to the cash payment terms of our debt investments.

For any lender. It is ultimately the conversion of investment income into cash those key which is why I want to draw your attention to the income contribution section of this chart.

Here, you can see that only 2% of our revenue consisted of Pik interest.

With no restructured pic investments four portfolio companies.

They seem liquidity challenges and unable to pay their cash interests.

In addition to the strong performance of the current investment portfolio I.

I believe it is worthwhile to outline the premium spread on our new investments relative to liquid credit benchmarks.

Jump to slide 15.

As many investors have become accustomed to bearings.

They understand we as a team seek attractive your liquidity and complexity premium across our wide investment frame of reference.

This enhanced diversification drives improved investor outcomes.

And allows us to remain disciplined and not over allocating to one core market.

As outlined here bearings BDC deployed 145 million at all and spread of 921 basis points.

Which represents a 372 basis point spread premium to comparable liquid middle market indices at the same risk profile.

Diving deeper into our core middle market segment across Europe, and North America, we averaged 207 basis point spread relative to liquid market indices.

And within the cross platform investment category, you can see the incremental premium that this asset category provides with premiums ranging from 500 to almost 100 basis points.

We've discussed the benefits of our wide investment frame of reference and slide 16 provides a graphical depiction of relative value across the triple b that will be and single B asset classes. It continues to show the relative value opportunities that can exist for investors.

Different levels of credit risk and how the value of choice across markets provides a meaningful benefit to BDC investors leading to the actual results I outlined on the prior slide.

Our top 10 investments are shown on slide 17.

No investment exceeding 3.1% of the total portfolio.

The top 10, representing only 24% of the total portfolio our portfolio remains diverse and with limited exposure to any single investment or industry.

With that I'll turn the call over to John to provide additional color on the financial results John.

Thanks, Dan on Slide 19, you can see the bridge of the company's net asset value per share since last quarter, showing an increase of 74 cents per share.

While our net investment income outpaced our dividend by one penny per share. The primary driver of the increase was net unrealized depreciation on our investment portfolio and foreign currency transactions of $1.17 per share. This depreciation included 59 cents per share reclass adjustment to more than offset the 40.

Three cents per share net realized loss on investments in foreign currency. These net realized losses were driven primarily by sales of investments in our initial sell portfolio with roughly 80% of those losses coming from the complete exit of concessions and field with energy and men's wearhouse.

You can see a further breakdown of our net unrealized depreciation on both a dollar and per share basis on slide 20.

Dollar 17 per share of net unrealized appreciation, which equates to approximately 56 million included an appreciation of approximately 17 million on our middle market investment portfolio of which 14 million was attributable to lower spreads in the broader market for middle market debt investments and.

Which was attributable to underlying credit or fundamental performance.

Both our cross both our cross platform investments and our initial BSL portfolio stock appreciation of $7 million.

And we had $28 million reclassification adjustment I mentioned that more than offset the 21 million of net realized losses, we incurred in the quarter I'd like to point out that slide 20 provides a further breakdown of the values of our cross platform investments and.

In a special situation.

Opportunistic liquid structured products and our joint venture investments as we continue to look for ways to increase the clarity and transparency around our investment portfolio.

Slide 21, and 22 show our income statement and balance sheets for the last five quarters as we've discussed our net investment income per share increased 17 cents for this quarter. In addition.

To the total investment income element that Eric mentioned I'd like to point out that our fee income included only 91000 of non recurring fee income. So our growth in net investment income for the quarter was not driven by one time fees that will go away in future quarters. We also saw a point 9 billion decrease in our interest expense.

For the quarter as a result of lower LIBOR floor, and the lower spread on our senior credit agreement due to the investment grade credit rating, we received in the third quarter.

From a balance sheet perspective on slide 22, the high level of short term investments driven by sales within our initial BSL portfolio was fully used to repay our debt securitization on October 15th.

We also issued 50 million in our first series of unsecured notes during the quarter. This 50 million issuance was the first series of draws under our $100 million unsecured debt commitment we announced in early August our debt to equity ratio at September Thirtyth was 1.32 times or.

Seven four times after adjusting for cash short term investments and unsettled transactions.

Details on.

Each of our borrowings are shown on slide 23.

Which shows our debt profile for each of the last two quarters as well as pro forma for certain financing activity that occurred subsequent to quarter end. In addition to the full repayment of both classes of CLL notes in October last week, we completed a new 175 million dollar unsecured debt.

At issuance comprised of 62, and a half million five year notes with a coupon of 4.25% and 112.5 million up seven year notes with a coupon of 4.75% for a blended coupon of 4.57% as part of this new issuance the remaining 50.

<unk> 50 million commitment from our August unsecured debt issuance was reduced to 25 million and following both issuances. We now have a total unsecured debt outstanding of 225 million split evenly between five year seven year maturities with an additional commitment to purchase up to 25.

Millions of unsecured debt.

This diverse liability structure better positions bearings to take advantage of the wide investment frame of reference across the Barents platform.

And provides more flexibility during periods of market volatility jumped.

Jump now to slide 24 bearing.

Parents BDC has available borrowing capacity under our $800 million senior secured corporate credit facility, which was further enhanced by the 175 million unsecured note offering as well as our remaining $25 million unsecured debt commitment. The chart on slide 24 outlines the impact of using this available liquidity on our.

Leverage, including the impact of funding our unused capital commitments, while Barry BDC does not have any revolver exposure, we have 92.4 million of delayed draw term loan commitments to our portfolio companies as well as 41.9 billion of remaining commitments to our joint venture investments. This table shows how we.

I'll be available capacity to meet the entirety of these commitments if called upon well maintained cushion against our regulatory leverage limit.

Slide 25 updates are paid and announced dividends since bearings took over as the advisor to the BDC as Eric mentioned, we announced yesterday that our fourth quarter 2020 dividend will be 17 cents per share an increase of a penny per share compared to the third quarter, Oh wrap up with two final points starting on slide 20.

Seven which summarizes our new investment activity, so far during the fourth quarter and our investment pipeline. We've been active since October 1st with approximately 155 million of new commitments of which approximately a 131 million have been closed end fund it all these new commitments 98%.

Were in first lien senior secured loans and the weighted average origination margin a margin or the M. Three was 8.2%. We've also funded approximately 9 million of presumed previously committed delayed draw term loans. The current bearings global private finance investment pipeline is approximately 2.4 billion on a proud.

The probability weighted basis, and it's predominantly first lien senior secured investments as a reminder, this pipeline is estimated based on an expected closing rates for all deals in our investment pipeline and finally I believe it's important to highlight the incentives point that we've discussed on previous calls as many of you know bearing seeks.

To ensure that its incentive fee structure provides adequate latitude to make the right loan in the REIT structure throughout credit cycles and this is the concept, we often like to outline his investment math, whereby we seek to answer an important question asked by LP.

What do you need to lend to act.

In order to generate the Aro, we promised as a part of the NBC transaction bearings is seeking to lower its base management fee to 1.25% down from 1.375% as one compares this investment math relative to that of other fee structures that becomes clear that bearing BDC can't sufficiently profit.

The Q, it's 8% targeted oral we now have while maintaining the freedom to invest in lower splits collateral relative to other examples posted here.

In our view the high degree of industrial alignment when combined with our wide frame of reference can lead to a superior industry outcome overtime as it limits the requirement to stretch for yield in income only just the NAV degradation in the future also.

Also related to the NBC merger as we continue to work towards the closing we have not made any share repurchases under our repurchase plan for 2020 and as a reminder, in connection with the merger bearing BDC has committed up to 15 million in share repurchases. Following the closing of the transaction that.

That was 2020 challenges will follow us and follow the market into 2021.

Before the meeting those challenges with enhanced liquidity, a quality investment portfolio and a strong origination outlook centered on investment discipline and a multi channel origination approach, but it's very wide investment frame of reference and with that operator, we'd like to open up the line for questions.

Thank you, ladies and gentlemen, the floor is open for questions.

If you would like to ask a question you may do so by pressing star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the Q.

For participants using speaker equipment, it may be necessary.

Sorry to pick up your handset before pressing the star key.

In the interest of time, we do ask that participants limit themselves to one question and one follow up before rejoining the queue for additional questions.

Once again Thats Star one to register questions at this time.

Our first question is coming from fin O'shea of Wells Fargo. Please go ahead.

Mr. Okay I will.

Sorry about that thanks appreciate.

Appreciate everybody that the opportunistic strategy breakouts and now it looks like you'll have.

More of an unsecured debt profile.

So I guess first question for Eric does this mean, we'll see.

A shift in strategy.

Or perhaps a more fluid strategy on the origination side obviously.

Obviously, the BDC started out mostly.

Oriented.

Middle market, but but it looks like you started to get opportunistic in the in the volatility this year, which is obviously, great and now we're seeing you know more clear language. So Eddie just high level on on what this means for.

For how we look at the BDC going forward.

Thanks, Ben So those you who joined US almost two years ago now a little over two years ago. When we were able to execute on the triangle transaction, we were new to the BDC space and I said at that time on our initial goals that you know the first job order was frankly to establish credibility with our shareholder.

Her base with the analyst community and within the industry and do what we say, we're going to do and the focus then and continues to be the core part of the portfolio to be directly originated first lien senior secured loans to John's point, we think the fee structure allows us to do that at levels that are very sound.

From a credit perspective, as evidenced by the lack of <unk>, we have no non accruals on our in our portfolio right now and the BDC. While also kinda preserving the return that we're targeting for investors.

That being said as we've kind of evolved over the course of the past quarters. We've tried to share at times kind of the insights into bearings in the platform you saw some European deals would you go back a year ago, and then we'd start to introduce some of our other capabilities.

Into the into the BDC it from an investor return perspective.

That's not intended to be in any way shape or form a shift in strategy, but I do think when we think of that 30% bucket that we have no. It is our obligation as a manager to make sure that we're looking for the best risk adjusted returns across our wide spectrum of investment capabilities, we have at bearings and bring those to bear for our investors of which.

RBC bearings were by far the largest investor in the BDC. So.

No shift in strategy, we're still going to say, we know we call boring is beautiful decor. The portfolio is going to be directly originated first lien senior secured but you will continue to see some portion of that 30% bucket do what I believe were being paid to do which is find the best risk adjusted returns returns region, particularly in parts market volatility and we're agnostic.

To where that comes within bearings. This is a bearings BDC not just our project finance platform.

That's fair that's very helpful. Thank you.

And.

Another one on a platform verticals that.

On middle market Europe that appears to have been a very.

Very robust this quarter.

A lot of that was sold to the downside the JV.

Just trying to get a feel as if that was that for.

The bdcs appetite or was that to create.

Space for MDC, I know they have Europe as well, but.

Just on a higher level.

Allocation.

How does the the.

The BDC and JV fit in line like are they both equals in claiming allocation to Europe deals or does the BDC.

It's Phil and then the JV gets its Phil that any color on on how we can think of.

Where Europe fits and for for for I guess, essentially the BDC shareholders.

Sure sure fence, so what we'll start with kind of a high level view of where we believe that the joint ventures can make a quite a deal of sense. So did manage the 30% bucket. It's always important to realize that the JV. It's about diversification of return across a wide investment frame not overly.

Very middle market or over levering b cell investments in order to generate a risk return.

Just try to solve a problem and so what what happens is when they when the BDC participate the BDC participates in Europe than the U.S. loans on the exact same frame is all our clients.

But remember the BDC cannot hold a vast majority of European loans because of a result of the of the 30% limitations. So what you'll see is there is there is a level of diversification will call loan transfers or sell downs to the joint venture. So that the BDC can still have exposure to the space, but at the end the day not end up.

Over allocating the 30% bucket into let's say just a few a few names across Europe. It's nice to have a very diversified portfolio. So on on a go forward basis. You know 10, you'll see you referenced the transfer sales would have been European loans that were done in a previous they take two quarters ago right and then they were effectively transferred down.

And then you can expect to see transfers in the future I kind of keep into the view that the BDC, while it wants to have some level of European exposure.

It does always make sure to watch that diversity level appropriately so from a participation perspective. It all starts with the BDC is what gets onboarded inside the BDC and then gets transferred down to the JV as both the partners agreed it if it's an attractive opportunity to transfer down and so really it's about diversity.

Occasion, it's about maintaining what we saw at least in this quarter was it is the ended outlined at attractive DM, but.

But also making sure that diversification bright widely occurs both in the joint venture and then the the BDC portfolio itself in that 30% bucket.

Thanks, and I think you can you remind us of the the Jvs target.

Leverage.

Leverage profile.

I think when we announced the the transaction you know nearly a quarter and a half or start nearly a year and a half ago. Yeah. There was an expectation of about roughly two times right across the across the equity position note that this is a JV that they know that BDC participates in with roughly $50 million.

Capital investment in our JV partner at roughly 500 million.

In equity.

Okay. That's helpful. Thank you everybody.

Thank you. Our next question is coming from Robert Dodd Freeman James. Please go ahead.

Oh, hi, guys good morning.

Congratulations on the quarter and also on on that.

The disclosures.

Other things in.

Incredibly helpful to us so, but I think investors I mean.

Like the restructured PICC line I mean, it seems as though you.

But that element is something that's extremely difficult to tease out the schedule of investments.

But provides a really compelling picture.

So your portfolio in contrast to some of those out in the market.

Just just on all that.

The spreads et cetera that you saw youre seeing I mean on on page chart.

Chart 14, if I look at.

The middle market.

Which led to the middle market business Ness 536 at the end of 19 it was 528.

So its only moved up very modestly while leverage obviously has has ticked up the leverage in that portfolio was was for seven at the end of 19. It's it's it's five to now in the context of what's going on on on chart 15, where your deployments with 730 meaningfully higher spreads can you.

'cause, who I'm kind of the change there in terms of spreads to leverage and how that relates to kind of the much wider spreads you saw in the deployments that acute so the answer is that 200 basis points. Why does have you asked which for the quarter just trying to get.

Philip of Miss.

Risk leverage pricing et cetera, and how that's playing out.

Hey, Robert It's it's Ian I'll, I'll start and you know, Eric and Eric or or John can jump in so couple of things going going on here first of all.

As you look at the at the portfolio and you look at Europe versus U.S. typically and in Europe. The deals are bilateral deal. So there's one tranche of debt.

And and typically that that is a little higher than than the U.S. market.

But at the same time, the B O I D and the spreads can be higher as well so on a relative value basis.

It can be a very attractive investment.

And then in terms of the B the U.S. market.

The way I would I would look at it is in this market and any company that certainly in the third quarter.

And now that's getting finance and attracting new capital is a high quality company, it's it's cobot lights or cobot green.

It's it's performed well and it's and underwrite a bull through.

A recovery that we I don't know what that geometries going to look like and so.

If you look at the <unk> and you're right. If you look at the at the spread the spread is pretty much flat.

In the U.S., a little different than than Europe. The leverage has actually come down about a quarter of a turn ish.

But what has changed in the in the North American market is the O I D and that really reflects.

The fact that in this market with scarce deal flow sponsors are trying to take deals off the table, where the third proprietary in nature or it's a it's a.

A limited adoption.

And it's highly competitive and so sponsors are looking for financing partners that can provide a capital and reliability and responsiveness to help them take those deals off the table and so they're paying.

More for those deals through the O I D. So if you're an agent secured leading these transactions you're benefiting from that higher all I'd and you don't see on that portfolio chart that our Oh ideas is around 3%.

Which was definitely higher than than pre cobot, you add onto that in North America, a slightly lower leverage better documentation and really high quality deals and so you get to a point where.

You can look at a very attractive investment opportunity.

And you can look at it in terms of on a relative value to the liquid market. We talked about the illiquidity premium or are you can you can break it down to a return by a turn of leverage and look at it from that perspective as well.

Got it I appreciate that if I can kind of tying onto that the slide I guess 27 imaging nations soon.

In Q4 since I mean, the DMP DSP and spreads are not the same thing but that 8.2%.

That that seems to be holding in pretty well I mean, given given where spreads were in in in Q3 can you give us any color on for that that's.

For the origination of those Q4 originations so far I mean is any of that the valley hives that opportunistic stuff that you did in Q3 that we see on on slide 15 or is that more of the middle market type deals, where you still finding opportunities to capture quite.

Quite attractive spreads.

Spreads and margins, even in Q4, even with competition coming back.

Well I'll I'll start with the middle market, and then I'll, let Eric and and John jump in.

We continue to see the.

The deals that we are working on continue to be attractive from that perspective, now obviously, there's a lot of capital out there and so our expectation is that you know with with this competition you know you're going to see some of those returns.

Compress over time I think the other thing that you want to be focused on is.

Mentioned this earlier once you get through a dislocation, it's really the high quality businesses that can attract new capital clearly.

Clearly there are there companies coming out of the woodwork here that maybe aren't so high quality a nature, they're going to be looking for financing. So you want to make sure you pick the right ones and.

And so what we're not going to do is is start taking undue risk.

And and looking for that return.

And take on too much risk for for that return. So we're going to stay disciplined and I think we're in a really good spot because as we went through the whole cobot situation. While other platforms, we are dealing with capital issues and liquidity issues. We didn't have any of those issues. So the market saw us as a as a.

Stable and reliable source of capital and quite frankly, we're we're getting a lot of plant a lot of portfolio companies and new platform opportunities coming to us because of what some of these sponsors saw during the during the market and then a couple of cases, we've actually replaced existing agents so I see it.

Continuing.

Were extremely busy right now in terms of the pipeline, but you know nothing lasts forever.

So we expect things to that they get back to a you know fairly competitive environment, and Eric and Jon I don't know if you want to add anything to that.

I think you answered it very well the only thing I'd, just specifically Robert that that does referred to.

Not exclusively but very much our core directly originated middle market business. So think of those deals that were funded in October those were probably August type of initial due diligence and transaction time goes and so as Ian said nothing lasts forever. So I'd say you know that's a it's more competitive today than it was in August but.

We're still finding some really attractive opportunities.

Got it got to I appreciate that and one more if I can obviously leveraged coats warm up.

Ill catch at or short term investments and these deployments obviously it is in a pretty good spot. The NBC deal. If it is approved by shareholders would would de lever you, even more and even in the context of that leverage obviously earnings.

Oh very good.

And so I've been increased the dividend so given the that you don't see you have managed to to all the attractive spreads Youve got with <unk>. This leverage profile, there's been any thoughts that oh, yeah, maybe even targeting staying at a lower leverage given the if you can produce the earnings of the.

Lower leverage that no risk all in I mean any thoughts on that.

Yes. So you know we started at the beginning of this week one of our first call as I referenced while managing the liability side of our balance sheet was something we focused on and hopefully will be a differentiator.

For us and I think what you've seen with our cost of capital our unsecured debt issuances that you've seen here staggering out those maturities have all been positive when we looked at the pipeline, we saw coming and really dialogue August September timeframe.

The strength of the pipeline that we saw for October type of closings and as John referenced the probability weighted pipeline that exist now going forward combined with the return or the strength of the liquid market, we really viewed it as a time to frankly, so a lot of our liquid collateral at that time that that is some volatility.

Due to our underlying NAV.

Then move so shell, but that created the cash which makes the net leverage to your point you know at an attractive level. We saw the pipeline coming through we've said all along you know we are buying optionality on whether it be unsecured credit to go back to our original revolver, we ended up taking more but more revolver capacity than.

Initially went out for to buy that Optionality and so to the extent that we can generate the appropriate return for shareholders at a lower leverage is something we'll absolutely evaluate its really for us it's about maintaining that optionality and flexibility to make sure that when the market opportunity is there we have the leverage capacity to take advantage of it.

Benefit of shareholders.

Got it I appreciate that thank you and congrats on the quarter.

Thank you. Our next question is coming from Ryan Lynch of KBW. Please go ahead.

Hey, good morning, Thanks for taking my questions.

I know that this is just one quarter of data that we're looking at that I really appreciate that the break down to about the investments in the middle market persist Cross platform like this quarter you know two thirds of your your your originations were kind of in the middle market and third we're in that cross platform.

That deal is pretty high but they do you think youre going to sustain that type of breakdown or is it just given that there's this uncertain economic times, it's just creating a you know.

Increased you actually do not that cross platform and any sort of long term.

Right down of course, it depends on the market environment, the Japanese sort of long term break down to.

What percentage of that cross platform.

Strategy, you would like to make as a percentage of portfolio just given that you know a much higher yielding a strategy.

Thanks, Ron but there it really is just what the market opportunity provided us no. It wasn't a huge volume quarter. If you look at the middle market relative to the.

The cross platform, but we saw some good opportunities and across platform investments. When we thought you know to capitalize on them. If you look at the October number that we referenced there maybe you'd see that be a much much higher percentage of directly originated first lien senior secured and look at Q4, I would think of it as kind of a core stuff that we told you.

We were going to do.

Overtime. So no we don't have a target we don't we don't look at it and say, we want 25% of it to be that we looked at it and say you know you've got to manage that 30% bucket right. We don't want to get right up against it to Matt you know from a percentage basis. So if you think about the core part of the portfolio and I'd say that.

You can always going to be kind of 75 plus percent of what we do but I do think that you know when we see those opportunities and one of the benefits I think bearings brings to the shareholders is no between our really deep liquid team and U.S. in Europe, our structured credit team are private and public ABS teams. We just our deal flow is really.

Robust across various asset classes.

And as importantly, it gives us a relative value framework that I think if you go back to fourth quarter I think it was to your year and a half ago or so we had a really slow origination quarter and that was where we had a lot of volatility and the liquid markets and we didnt see a real illiquidity premium so we kind of put our foot on the brake on the middle market in that case.

Just because we didn't really see that as value and so where we do see value, we're going to we're going to step in there to benefit shareholders, but I wouldn't view it as a change in strategy in an order nor is it a a.

Target, we have but I would think of it as you know using that 30% bucket. Some portion of it for this type of investment, which I think can help differentiate ourselves versus other managers.

Okay understood.

Oh, just recently over the last several months you guys have done a really good job getting.

Radiant diversifying the liability structure, which with the simple.

Some unsecured notes, including you know more in the fourth quarter, obviously, there's a lot of benefits and I think that that's that that should be well received by the market. You guys diversification liability structure was unsecured notes are a little bit higher costs and your your your line of credit. So I'm just wondering as you sit here today with pro.

Former for issuance you guys have done it in the fourth quarter you feel good about the composition of your liability structure or would you still like to layer on additional unsecured notes in the future.

She is right.

Hi, Ryan This is Bob I'll argue that there is there's certainly an opportunity to layer in a more unsecured debt I just generally speaking because there is that a general expectation for data and that's the grade bdcs to have senior secured <unk> secured debt right it could be reversed.

There's no more than 30% of your total assets and so you can kind of look at our ratio and understand where we are versus where many I'd at Reagan Easter, our our targeted or kind of rank.

Honestly that the true north when it comes to how you think about unsecured debt issuance.

Comes out in <unk>.

Comes out in slide 28.

Because you know clearly everyone saw the benefits of unsecured debt issuance right. It helps.

Got a few respected peers navigate the timeframe and it also afforded avoided the immaterial dilutive rights offerings et cetera that occurred in more secure it'll oriented type debt structures.

That being said you don't want to let your liability structure become the tail wags the dog and so if you have a high focus on attractively priced debt and you make sure that that when when you put it together with your alignment your fee structure et cetera, and you are able to continue to prosecute across a wide array of assets with that required.

Redknapp that we reference.

Yes, it's it's attractive because it provides flexibility and protection during times of volatility, but at the same time it doesn't it doesn't force material yield seek to the detriment of investors. Because we you can see you can see that happened just as fast because it's a two edged sword. So for US. We're comfortable you can kind of see the math outlined on 28 and that's more of a.

A long term view.

For us and so you could expect a additional unsecured debt to be layered and while keeping a very important point on price and realizing that there can be downside. When you increase your unsecured debt too much not to the point, where it forces you into the wrong asset base at the wrong time, but right now we can expect more and still allow us to.

To achieve our objective returns.

When a very stable and a boring liability structure.

Okay understood.

Understood.

That's all I had today congrats on a really nice quarter guys.

Thanks, Ron appreciate it.

Thank you. Our next question is coming from Casey Alexander of Compass point. Please go ahead.

No. We only have a couple of minutes, but I just have two questions. He he was it at the point, where when you looked at the spread available on the broadly syndicated loan portfolio, which you said the yield at fair value was 480 versus your cost of capital is it simply didn't make sense to hold any of them anymore.

[noise] less the cost of capital decision Casey and much more of a of an opportunistic redeployment opportunity because clearly you know you can look at those two as the exclusive events and not necessarily connected because even a smart manager that might be.

Raising carry right I could still hold liquidity at a certain cost to the extent that they felt they were exiting those that proper fair value in redeploying them at widespread.

Yeah, Okay, and secondly, if you could give us some color in terms of.

You know.

When you talk about the cross platform investments and I understand Eric says you are still in bearings Lane, you're not in the normal lane of the normal BDC. So I think investors would benefit from understanding what type companies are these what type of opportunities are these that are creating this excess return so that they can get a better feel with some more.

Specificity about how you're investing in what you're investing philosophy is.

Well, we have Brian Hi, who's on the phone answer that he is one of our co portfolio managers. He runs our us special situations business. So maybe Brian if you're available to add a little color to that and then Ian you can conduct though.

Yes sure. Thanks, Eric So if you just have you turn back to slide 15.

You can see that the John broken out in that nicely in a few different buckets special situations investments being.

Think of them as as more of a rescue financing type of an investment good companies. They got caught up in coated running out of liquidity and we're looking for attractive ways to provide them capital with solutions that are maybe a little bit.

Not down the middle of the fairway, whether its a.

Dropdown of assets, the finance on a percent basis, or a super senior loan or something like that.

Opportunistic liquid is exactly what it what it would sound like it's just good intrinsic value based on dislocation in the market typically for this vehicle, we're looking for more off the run transactions that maybe.

Don't have the liquidity that in the market and we know them fairly well given the research platform that we have here at Barrington in the structured products. This is another form of.

Rescue financing the theme that I would point to I guess in the third quarter was well WTC is related to some of the the airlines providing capital with with some of the metal as a collateral, but but having the underlying risk of the of the airline as well. So we think we get a good risk adjusted return given the fact that we have those.

Hard assets and we can leverage RMBS team within bearings as well as our real assets team to really understand exactly what it is we're lending against and then take a broader view on the on the overall credit the airline as well.

Casey greater.

As well as you know.

It's kinda theme that you know Ryan had it been hit it.

From day, one we promised you transparency and communication so I want to take ones for me will be no. If we get to the point, we can have an investor day, we'll maybe it'd be virtual well sumit or something we'll do a real focus on these other areas because I think we spent a lot of time on our traditional first lien senior secured middle market business, but maybe we'll do some.

Time during that Investor meeting to really do some some deep dive in a couple of these areas. So that people can get really understand the teams the depth of the team that track record and all that so that there's no there's no concern around that.

Great. That's helpful. Thank you that's all my questions. Thanks.

Thanks, guys.

Thank you. Our next question is coming from Kyle Joseph of Jefferies. Please go ahead.

Good morning, guys, a nice quarter, thanks for taking my questions and ill.

The echo that.

I appreciate all the color in the deck I know you guys have a lot going on and I think that the deck does a good job really explaining it and making it.

Easy to understand so appreciate that most of my questions have been having to answer just just a few.

Obviously in terms of the portfolio yield obviously there was some.

Some kind of nuances in the quarter in terms of the build up of short term investments ahead of the debt pay down, but just want to get kind of a refreshed outlook given the portfolio rotation. We saw in the quarter. Some of the the new investments you are seeing in terms of ABS and opportunistic in and give us a sense for your kind of near term yield.

Outlook.

And then layer in how that looks yet.

With the theoretically in MDC portfolio on top of it into next year.

Hey, Kyle but I would do is is you know if you turn to the balance sheet. So so clearly you can I'm also looking at our subsequent events right.

The the D ends on average of 8.2%, so and as Ian and Eric outlined kind of the focus on the core.

Core direct lending at widespread expect that to continue.

You can expect the debt structure to change now that you know of course, we announced that the securitization pay down as well as the unsecured debt and so when you get to that kind of blending right. You can approach a certainly a leverage target I'm a bit higher than where we are now but before the de levering active.

The that would occur on the onboard of the NBC a merger.

Right. So all in all I think it was it was perhaps referenced previously that you can expect origination strength in the quarter from our from our from ourselves you can also expect earnings lift as it relates to a high earning portfolio that becomes Onboarded and you could also likely expect leverage to remain fairly.

Constant over this timeframe well not not a little bit higher than <unk> 0.74, clearly because you can imagine it's been a heavy deployment corner.

But at the same time with more than we'd be left with more than enough carrier dry powder capacity to take advantage of opportunities in the future while still generating.

A an improved our a week as a result of the rotation. So all those kind of factors come together and that to just point as a refresh of have improved our OE, we still improved ability to deploy capital to the extent volatility returns and middle market volumes stay robust moving its 2021.

Very helpful. And then I have one follow up for me I think it's it's been a lot that we're a little bit in the quarter, but obviously, we were you know we're still in a pandemic. There's a lot of companies struggling I know you guys referenced no non accruals and no increase in Pik income from restructuring and anything like that that can you give us a sense for.

Our.

And just broadly how you know how portfolio company performance is trended between second quarter and third quarter did you see ongoing recovery as did some continued to struggle and just kind of talk about the trends you're seeing in yeah. Yeah on on average in your portfolio.

I'll show you a couple of high level comment.

Turn it over to you and kind of give some specifics I'd say the first thing I'd say is the partnership approach I've seen with our private equity clients. During this situation has really been strong and I think that partnership from both sides I'm really is defining in other ways and I think will lead to enhance relationships.

Two I'd say management teams in general.

Adjusted business plans and business models.

Much more quickly and much more creatively than I would have expected and so I think you know just in general I'd say no. The partnership that the private equity firms and then also have worked in a constructive manner combined with management teams, who have been I'd say very impressive on their ability to adapt.

We have really pro reason or bloggers and while those portfolios continue to perform as it is an addition to our underwriting.

On the front end, but I'll turn it over to you and to give anything specific in kind of the second or third quarter.

Yeah, well first of all I would just.

Put a finer point on what Eric said I mean, one of the reasons why we like the sponsor business is because of that very fact that sponsors.

Sponsors if you pick the right sponsors and we underwrite the sponsors that we work with.

We expect them to be ahead of the curve and to be proactive and we definitely saw that during during colder than the dislocation caused from cobot and of course as you underwrite the issuers C.. We you know we underwrite the management teams and so the combination of both the efforts by the managed.

Mid teens in the sponsors to rightsize the business, but also in terms of communication and transparency that was really important for US you know you may recall that we discussed last quarter. We went through each company in the portfolio working with the sponsors and the Porco management teams to forecast for next.

Two quarters and obviously it was done at a time with a lot of uncertainty.

And.

Expecting the worst we were pretty proactive in I think conservative in terms of our internal risk rating. So we downgraded a number of companies expecting some.

Some.

Adverse impacts because of a shelter in place.

And the cobot dislocation, but you know at a high level recall that we limit and avoid many consumer facing businesses generally and especially those that are discretionary in nature, such as retail restaurants and James So the good news for US is you know our portfolio was comprised of mostly.

Central businesses with.

Yeah. They were some of that were impacted initially by shelter in place, but came out of that.

And we really avoided the industries that I think a lot of other people have had to deal with in a tough environment, where the business models been impaired because.

Because the cobot and they haven't been able to work their way through it. So third quarter. We just saw a lot of better financial performance than what we initially estimated when we had those initial conversations and we've reversed many of those downgrades that took place in the second quarter.

Very helpful. Thanks, again for answering my questions.

Thanks Dolphin for Tom.

Thank you our last question today is coming from Bryce Rowe of Robert W. Baird. Please go ahead.

Hi, Thanks, Good morning wanted to.

Maybe talk about a topic, we havent talked about for the last couple of quarters because of the ongoing acquisition, but.

With that expected to close here by the end of the year I'm, just curious what the appetite might be for more stock repurchases given given your action.

In the past I assume that there there's still up still up for for Grad So to speak.

Yes, So we announced as part of the transaction right that will do a $15 million of share buybacks.

The transaction the closing of the NBC.

And you know we work with our board on that strategy on an annual basis, depending on on factors and so it's always something that will be in a discussion that we'll evaluate no using basically.

The.

The equity as a form of return to shareholders. If the if it's attractive at the same time, we want to make sure rebalanced the scale and quality of the underlying corpus of equity too so that in combination with our board and something we look at it on an annual basis, but weve already committed to the 15 million post transaction.

Great. Thanks, Eric appreciate it.

You got it but.

Thank you at this time I'd like to turn the floor back over to Mr. Boyd for closing comments.

I just want to thank everybody for dialing in and your time I know could be for the analyst community. All are very busy at this time I appreciate the compliments on our transparency and the quality of the duck and Jonathan Bock and Elizabeth Murray and their team to really put a lot effort into that and so I'm glad it's recognized by people out in the in the Investor community.

If we can answer anything else always let us know we're always here just everybody stay healthy stay positive out there and thanks for your time in sport.

Ladies and gentlemen, thank you for your partner.

This concludes todays event you may disconnect your line.

At this time and have a wonderful day.

[music].