Q4 2020 Barings BDC Inc Earnings Call
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greetings and welcome to the bearings fourth-quarter and full-year wage 2020 earnings conference call at this time. All participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad, a question-and-answer session will follow the formal presentation as a reminder. This conference is being recorded. It's not my pleasure to turn the call over to CEO Eric Lloyd, please go ahead.
Thank you, Kevin and good morning everyone. We appreciate you joining us for today's call and I hope that you and your families are doing well and staying healthy during this unprecedented time. Please note that throughout the week call will be referring to our fourth quarter 2020 earnings presentation that is posted on the investor relations section of our website.
On the call today. I'm joined by bearings BBC's president and and co-head of global private finance and Fowler Tom McDonald managing director and portfolio manager Brian. Hi Thursday, instead of special situations and co-portfolio manager and the BBC's Chief Financial Officer, Jonathan Bak.
As we typically do the in and John will will review details of our portfolio and fourth-quarter results in a moment of all start off some high-level comments about the quarter the way our earnings calendar fell down here. It's been almost four and half months since our last earnings call. And as you saw on our preliminary earnings release in February and yesterday's filings, we finished 2020 with an extremely active quarter between a record for origination completing the MVC Capital acquisition issuing new unsecured debt and announcing a dividend increase. We awful lot to cover today. The timing of this call also affords us the opportunity wage about greater visibility into the first quarter of 2021 and you will see the Strong finish that twenty-twenty has continued into the new year.
Let's start with the high-level on Slide Five of the presentation the macro Trends we saw in the third quarter continued into the fourth quarter as broadly syndicated loan prices continue to increase and ended up back at COVID-19 levels. And while BDC Equity prices were also up in the fourth quarter increases have lagged the BSL Market in BDC equities ended 2020 with a 21% off for the year.
Not turning two bearings BDC flip the slide 6 for a fourth-quarter financial highlights our net net asset value per share improves two cents in the quarter to ten ninety nine. I expect based on the market trends outline net unrealized appreciation in our Investment Portfolio drove nav per share higher, but this impact was partially offset by net dilution from the MVC Capital acquisition. When we announced the transaction last August we outlined at the 6 share exchange rate was based on bearings BDC for share as of June 30th, 2020 of $10 off given the increase in our nav per share since that time we did experience some nav per share dilution when the transaction closed in December this solution. However is expected to be a near-term impact long as we continue to believe both the drivers behind the transaction will certainly result in long-term nav per share accretion.
importantly our actual
Passive value increased from approx $526 million at September thirtieth two almost $780 million at December 31st. This expanded Equity base will provide for increased leverage investment capacity and the opportunity to reposition certain assets into directly originated Investments could help Drive nav per share and earnings accretion in the future.
Net investment income increased from $0.17 per share in the third quarter to $0.19 per share in the fourth quarter given that the MVC Capital acquisition closed on December 23rd. This increase was not driven a acquired assets, but rather the impact of net new bearings originated Investments, totaling $332, as we effectively completed the rotation out of our initial Broly syndicated loan portfolio this increase in core earnings drove the increase in our first quarter twenty-twenty dividend 20-21 dividend rather to $0.19 per share up from $0.17 per share in the fourth quarter Ian Walsh origination in more detail, but the first fourth-quarter Total deployments were record for both bearings and the overall barings Global middle-market Lending footprint.
Our existing Investment Portfolio continue to perform well in the fourth quarter as of December 31st, our total Investment Portfolio is carried slightly above original cost and no bearings Rishon originated a that's wrong nonaccruals set acquired through the NBC Capital transaction with the value of $3 was on non-accrual status, but overall that portfolios performance continues to be in line with our expectations outlined some additional financial highlights for the quarter here. You can see our our Investment Portfolio at fair value grew to almost 1.5 billion a year end off the $380 increase however included a $140 decrease in our short term cash Investments, thus are true Investment Portfolio actually increased $525 million dollar and a quarter as a result of the MVC Capital acquisition and the net deployments. I referenced earlier even with this increase in size our net debt-to-equity ratio is 1.04. Yep.
Paulson our target range for a leveraged the quality of our capitalization also improved with the issuance of a hundred and seventy-five million of unsecured notes in the fourth quarter and this focus on our capital structure continued in the first quarter of 21 with an additional $150 unsecured note issuance in February.
Let me wrap up my comments with a few high-level observations about 20 20 as a whole. It was an unprecedented year on many levels and the global pandemic created business and personal challenges too numerous to name. If you had told me in late March of 2020 or April 2020 the bearings BDC with end-of-year having completed its portfolio rotation out of Raleigh syndicated loans into directly originated assets. I know bearings originated assets on non-accrual receiving the investment-grade credit rating and completing the acquisition of a low lever BDC at a discount to nav. I certainly would have taken that in outcome in a heartbeat. This result was driven by a number of factors including the hard work and dedication of people across the entire band platform various investment teens and our internal Partners partnership with our private law firms and our portfolio companies and other partners.
Two other elements that we frequently discussed.
We're also critical to this outcome first bearings wide investment frame of reference allowed us to participate in a differentiated deal flow across public and private markets finding the most attractive risk-adjusted returns at different times during the year that certainly saw a high level of volatility each quarter of 2020 presented different investment Dynamics and bearings BDC was able to remain active throughout the year, June 2nd. We continue believe the alignment between Vesey and it's manager is critical or alignment was further evidenced by the credit support agreement that was put in place as part of the MVC Capital acquisition off as well as the lower base management fee that became effective on January 1st 2021 as well as a result of last year shareholder vote during challenging times. We believe this type of alignment is critical to achieving results for shareholders. Now turn the call over to Ian to provide an update on the market in our Investment Portfolio.
Thanks, Eric and good morning everyone. Let me begin on slide 9 with some additional details on the record level of investment activity that Eric mentioned Dead new Middle Market Investments totaled $393 million with gross funding from $528 million partially offset by sales and repayments of $135 billion Berg New Investments included 24 new platform Investments, totaling 418 million and 110 million of follow-on Investments and delayed broad Term Loan Fund wage.
Special situation Investments and Structured Products that would include Clarisse loan obligations and asset-backed securities.
Our Initial D S L portfolio decrease by $74 million and given that only fifteen million of that portfolio remained at the at your end and it has been further reduced to approximately 2 million today. We will no longer be reporting it separately going forward. We've included the assets acquired in the MVC Capital acquisition under cross Investments on this slide with a total of $185 million acquired at the closing of the transaction and five million a subsequent repayments before you're in you may have expected to see a dead tired number based on our initial discussion of the transaction, but NBC had over thirty million of assets repayments following our August announcement consistent with our expectations month.
Too logical questions when you have a corner with deployments of this level are one, why was volume so high and to how can you be confident with the quality of the origination Bank lending to middle-market companies effectively stopped in the second quarter as the focus shifted to Simply navigating the crisis as Government policies took shape and companies began to age to understand the implications of the pandemic the third quarter. Sorry to see a pickup and transactions involving Quality Companies that demonstrated an ability to navigate the challenging environment this Dynamic came into full effect in the fourth quarter as pent-up demand for transactions both lbs and add-ons involving Quality Companies with a proven track record drove. What was almost a full Year's worth of activity in a single quarter.
You can see on slide ten that direct lending spreads continue to tighten across the different lending sub-sectors as volumes pushed higher in terms of quality of the origination. I believe twenty-twenty created a unique Dynamic whereby the high fourth quarter volume could effectively be viewed as the result of an elongated due diligence process as companies needed to demonstrate their ability to manage through the crisis before entering into a transaction.
Over 70% of our middle-market fundings and 20/20 occurred during the fourth quarter and I take comfort in the fact that these new Investments were under written under a cult Focus lens.
Flight eleven provides a bridge of our portfolio from September 30th to December 31st.
In addition to the net deployments. I just outlined unrealized appreciation of 25.4 million was a key driver of a portion of the increase in portfolio fair value pack. We did have one point five million of net realized losses primarily as a result of BSL sales.
you
A breakdown of the key components of our Investment Portfolio at December 31st. If you turn to slide 12 with the rotation out of our Initial D S L portfolio and the closing of or MPC acquisition this slide now breaks down our portfolio into the middle Market NBC and cross-platform components. We were invested in approximately 1.5 billion a private Middle Market assets that you're in which included $129 million of unsent funded commitments and 223 million of cross-platform Investments office, which included the remaining Thirty million of unfunded commitments to our joint venture Investments. The embassy portfolio is valued at 180 million at year-end consistent with the original transaction value booked at closing.
The 1.4 billion funded total portfolio is spread across a $146 portfolio companies and 29 Industries one investment inquired for memory see wage nonaccruals status and we had no material modifications to the cash payment terms of our debt investments in terms of cash conversion, 3.8% of our revenues consisted of pick interest with no restructured pick Investments for portfolio companies facing liquidity challenges and unable to pay their cash interests.
For a middle Market portfolio weighted average first lien leverage was 5.2 times consistent with what we reported last quarter.
Our total Investment Portfolio, excluding short-term Investments is now made up of 82% first lien Investments, which is down from 92% off the end of the third quarter slice thirteen provides a breakdown of the driver of this change, which is attributed entirely as expected to the MVC Capital acquisition, excluding the Investments acquired from NBC in short-term Investments. We ended the year with a portfolio comprised of 93% first lien assets an increase from the third floor of given the high level of deployments in the fourth quarter.
MVC portfolio on the other hand was comprised primarily of equity secondly in a mezzanine debt Investments. We believe this portfolio can initially serve as an attractive compliment to the bearings Iraq a portfolio and the acquisition was unique opportunity to buy a large portfolio at a discount to nav as I mentioned before we have been sizable payoffs of wage approximately Thirty million since the deal was announced and we will continue to drive toward the exit of non-core lower-yielding equity Investments and increasing quarter earnings by redeploying its capital into higher-yielding assets. Thus far the portfolio is performed in line with our original expectations.
Our top ten Investments are shown on slide 14.
With no investment exceeding 2.5% of the total portfolio and the top ten representing only 21% of the total portfolio our portfolio remains diverse and with limited exposure to any single investment or industry. You can see that our two largest Investments were acquired as part of the MVC Capital transaction. Keep in mind that the that while these are large exposures. They are also supported by the credit support agreement in place with bearings LLC thus reducing potential downside risk for these Investments.
For flu diversification is critical for many reasons, but we believe it's it's importance will continue to be highlighted in the current environment. I'll now turn the call over to John to provide additional color on our financial results.
Thanks again and jump into slide sixteen here. You can see the bridge the company's net asset value per share since last quarter showing an increase of $0.02 per share the $10.99 off our net investment income outpaced our dividend by two cents per share while net unrealized appreciation on our Investment Portfolio and foreign currency transactions drove an increase of $34 per share. The appreciation included a sent a $0.10 per share reclassification adjustment to more than offset. The $0.02 per share of net realized loss on investments and foreign currency off. The unrealised appreciation was a $0.05 loss on extinguishment of debt and a net 28% $0.28 per share reduction due to MVC Capital. The MVC Capital transaction now is Eric mentioned earlier in the call BBC's nav appreciated since June Thirty and that drove this per share dilution, but the increase in nav on an absolute dollar
Base has should result in long-term accretion from the transaction what item you do not see on this nav waterfall is the impact of share repurchases as we did not make any in the fourth quarter given the choice merger as we announced in connection with the merger. However, our board affirmed the company's commitment to repurchase up to 15 million of common stock at then current market price off at any time shares trade below ninety percent of of varying species, then most recently disclosed net asset value. This program will begin after the filing of our form 10-q for the first choice of 2021 and is subject to compliance with Covenant and Regulatory Compliance, uh Covenant and regulatory requirements side Seventeen shows a further breakdown of own net unrealized appreciation for the quarter on both a dollar and per-share basis the $0.34 per share of net unrealized appreciation which equates to approximately 7 a.m.
A million dollars included appreciation of approximately nine million on our current Middle Market Investment Portfolio of this 9 million of appreciation five million was attributed attributable to lower spreads in the broader market for middle-market that Investments and six million was attributable to foreign currency appreciation, which was partially offset by a million attributable to underlying credit or fundamental performance while we did have two million of unrealized depreciation due to the underlying credit of Investments. It was isolated to a few specific names. We continue to be pleased with the resiliency and performance of the companies across the portfolio both the bearings originated assets. And those acquired in the MVC Capital transactions are cross-platform investments. So appreciation of approximately a million dollars eleven billion dollars and we had five million of reclassification adjustments that I mentioned that more than authors.
the two million of net realized losses that we
Include during the quarter slide eighteen shows our income statement for the last five quarters as we've discussed our net investment income per share increased to $0.19 a month for the quarter driven by a three and half million dollar increase in total investment income deployments into higher-yielding middle-market and cross-platform Investments help drive this increases the total investment income as well as a $9 million increase in fee income of which point five million was due to an increase in non-recurring fees. This increases the total investment income was partially offset by higher interest in financing fees, which rose as a result of hiring borrowing levels and higher interest costs associated with our unsecured debt issuance just from a balance sheet perspective on slide 19. I'd really point to key takeaways out.
The first is the overall increase in the size of bearings BDC in terms of both assets and Equity. We ended the year with 1.68 billion of total assets driven by net deployments in the quarter and the MVC Capital acquisition net asset value increased to $718 billion in large part due to the fact I went for the MVC Capital acquisition if you compare this to where things stood at December 31st, 2019 with 1.2 billion one point two five billion, total assets and 571 million in net asset value. It shows significant growth during the year second even with this significant growth the company remains well position from a debt capital of debt capitalization perspective ending the year with a debt-to-equity ratio of one point three two times or 1.04. * yep.
Adjusting for cash short-term Investments and then unsettled transactions the high aggregate amount of short-term investments in cash resulted really from the timing of certain sales late in the years as a result. They need to fund the new deployments in early twenties as well as the need to find new deployments in early 2021 more importantly you can also see in the liability section off the shift in our mix of debt to a higher Reliance on unsecured debt issuance. If you turn to slide twenty, you can see how this funding mix relates to our assets bulb in terms of seniority and asset class our goal spend to match a diverse portfolio of assets with a diverse capital structure of secured debt unsecured debt and Equity the recent increase in our equity and unsecured debt levels correspond to the increase in equity and Junior debt positions acquire through the embassy merger this Diversified log.
Ability structure better positioned bearings BDC to take advantage of the wide investment frame of reference across the bearings platform and provides more flexibility during periods of my life volatility details on each of our borrowings are shown on slide Twenty-One, which shows our debt profile for each of the last two quarters as well as pro forma for the new hundred and $50,000 unsecured debt private placement. We completed in February this new issuance included eighty million of 5-year notes with a coupon of 3.41% and 7 million of 7-year notes with a coupon of 4.06% or a blended coupon of 3.71% following this issuance. We now have total unsecured debt outstanding of $375 million maturing between 2025 and 2028 with an additional commitment to raise up to $25 million of unsecured wage.
jump to slide twenty-two
Barings TDC has available borrowing capacity under our 800 million senior secured corporate credit facility, which was further enhanced by the hundred fifty dollars again unsecured note offering in February as well as our remaining twenty-five million unsecured debt commitment the chart on slide twenty-two outlined the impact of using this available liquidity on our net leverage including the impact of funding are unused Capital commitments bearings BDC currently has $129 million of delayed broad term loan commitment with our portfolio companies as well as Thirty million of remaining commitments to our joint venture Investments. This table shows how we have the available capacity to meet the entirety of these commitments just called upon while maintaining cushion against our regulatory leverage limit
Flight 23 de pix are paid and announced dividends since bearings took over as the advisor to the BDC is Eric mentioned last month that we outlined off first quarter 2121 dividend was Nineteen cents per share an increase of $0.02 per share compared to the fourth quarter. Now that wraps up our comments on twenty-twenty results month, but I'd like to conclude our call with a brief discussion on our expectations for 20 21 and I'll frame this in the context of what we are expecting to see in the market and then how we believe we will be prepared to react to those expectations. So jump with me just like twenty-five these charts from refinitiv & Cliff water show recent Trends and institutional loan issuance as well as loan repayment to sales and the data points to a high likelihood of increased prepayment velocity in 20 21 relative to pass Cycles.
As with most things there are both positive and negative elements to a highlighted highlighted repayment trend on the positive side. There can be a near-term earnings lift off from the recognition of unamortized oid and fees which are taken into net investment income when an investment repays. So looking at bearings BBC's Middle Market Investment Portfolio off the balance of unamortized and fees is approximately 28 million dollars. So there's certainly the potential for increased fee income relative to the levels recognized in 2019 and 2020. Of course, the downside of repayments is the need to redeploy that Capital but bearings has two critical advantages that help us mitigate this risky first. The hurdle rate for our incentive is set at the Target dividend yield which means potential spread compression for redeployed. Capital will be born dead.
Investment manager not investors and second are wide investment frame of reference should help us redeploy that capital on a timely basis and maximize both are a t and complexity premiums. And if you look on slide twenty-six, you'll see the key strength of the bearings platform that can help facilitate redeployment of this Capital bearings BDC dead nikla positioned within the broader bearings Global fixed-income franchise to focus primarily on middle-market direct lending, but also take advantage of bearings wide investment frame of reference off in different markets cycles and periods of volatility just as it helped bearings BDC grow its initial portfolio. This multi-channel origination strategy should should be bearings BDC to redeploy Capital if the repayments materialize slide twenty-seven provides a quick updated view of our graphical depiction of relative value across
simple B BB and single BF
Asset classes and 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 meaningful benefit to BDC investors this translates into the actual results on slide twenty-eight which showed the premium spread on our new investments in the fourth quarter of relative to liquid credit benchmarks as we sought attractive illiquidity and complexity premium spread as outlined here bearings BDC deployed $566 billion dollars at an all in spread of 760 basis points, which represents a 297 basis points spread premium to comprable liquid market indices at that same risk profile diving deeper into our core Middle Market segment across Europe and North America. We averaged the 265 basis points spread relative to liquid market indices dead.
Within the cross-platform investment strategy, you can see the incremental premium that this asset category provides with premiums from 717 to 1026 basis points. The bottom line is in a period of increased repayment velocity. We and others expect to see in 2021 portfolio diversification in a wide frame of investment reference will be key. We believe our our ability to invest across platforms and generate excess shareholder returned via illiquidity and complexity premiums should be a key differentiator for bearings BDC in this upcoming repayment cycle now, I'll conclude with slide twenty-nine which summarizes our new investment activities so far off the first quarter of 2021 and our investment pipeline. Well note that record-setting pace of the fourth quarter. The first quarter has been extremely active with a dog.
Ultimately 224 million of new commitments of which 202 million is enclosed in funded of these new commitments 80% our first lien senior secured loans and 12% are in joint ventures and the weighted-average origination margin or dm3 was seven and half percent. We've also funded approximately twenty-seven million of previously committed wage a broad term loans the current bearings Global private Finance investment pipeline is approximately one point eight billion dollars on a probability weighted basis and is predominantly first lien and Senior secured Investments. As a reminder that pipeline is estimated based on are expected closing rates for all deals in our investment Pipeline. And with that Kevin Gates will turn the line back to you for a question-and-answer session.
Thank you, and I'll be conducting you a question answer session. We ask you please ask one question and one follow-up then return to the queue. If you like replacing the question queue, please press start one under telephone keypad. A confirmation tone will indicate your line as in the question queue. You may press start to if you'd like to remove your question from the Q4 participants using speaker equipment necessary to pick up your phone before pressing star one. And once again, please ask one question and one follow-up. They returned to the queue. Our first question today is coming from finia Noche from Volvo. Your line is now live.
Thank you. Everyone. Good morning. First question. I think and talked about the ability to to rotate still. Um, just looking at some portfolios. Obviously you're now out of BSL you have these very high-yielding assets from MVC. So I would have thought that rotation would be a headwind wage. Can you just provide a little more context there on on the on the benefit of rotation for the portfolio?
I think what I can do then is I'll talk about some of the sources of liquidity and the opportunity to to generate investment capital and then e n and the teams can outline kind of the spreads at which took one deploys. So if we we look at at the current MVC Capital assets, we've not seen material prepayment continue to accelerate those loans continue to perform as expected and we're off to see additional uhh portfolio opportunity for for rotation will come out of the ability to generate liquidity through transactions and sell Downs with our joint venture partner engine off and based on the the current opportunity set. We're starting to still see that there are attracted illiquidity premium to invest at in that current market and then I'll also leave open that overtime on an on, you know, our our non-core asset-based particularly as it relates to tune on you holding Equity that can be realized but it will be realized in an appropriate time to maximize. Yep.
That's that value but but I would turn it over to e and is it outlines, you know as we outlined the ability to invest the current spread and what the remainder of 20 21 looks like from an investment investment gud morning fin. So, you know, when we look at the third quarter and forth quarter, um, you know, we we saw spreads that were wider than first quarter of 2020 and fourth quarter 2019 anywhere from twenty-five to fifty basis points oid was was wider too because at that point, you know sponsors were looking for commitment and reliability and just based on the way our portfolio performed through Thursday. We we were in a uh offensive position in terms of pivoting to take advantage of opportunities in the market and pick up market share while a number
Our competitors were dealing with right side balance sheet Capital issues or or portfolio issues are quite frankly both. So we were able to take advantage of that and generates really attractive Investments. Now, I will say that as you look at twenty Twenty-One, we're definitely seeing compression and and yields. Um, we're not correlated to the liquid Market. We follow the liquid Market So eventually we'll head in the same direction and that's that's occurring now. So some of that will dissipate but you know, even in the beginning of 2021, they were pretty attractive yields. And and the thing I'll say also which I've never seen in in my career is just the the volume of activity at the end of last year with really high-quality assets, you know it cuz these assets were assets that obviously performed well through Thursday.
and
And uh, you know, we're under writable and and very attractive. So it was a really unique opportunity.
Okay, that's that's helpful. And then I I guess you know, it's just sort of similar topic you just address partially post quarter-page. You're you're finally getting some some repays which you haven't had helps the top-line. You haven't had material at least it looks like post quarter off. These are picking up. I don't know how much you know, we have most of the quarters data. I don't know how much this is expected to continue and and pressure the top line of your your job corps middle-market book. I assume it's mostly that. You know, I think you mentioned wide frame of reference most most managers will claim that but what do you think this environment does a net basis? Um, does the return compression um going forwards swallow this this fee income you'll start to receive I guess just on the core book club.
Thank you. Like this is John you'd like to see it it match and a couple of points. So what we what we point to a top-line level of potential we haven't seen a repayments materialized the point where you would which would jeopardize the the return profile offered and there is a a second Point as well. There's the issue as it relates to the lifeline offend. What happens is given we're total rates get set inside the BDC space that returned compression that occurs impacts the number of these as it relates to the bottom off cuz the colonel rate is set at a low level relative to relative to the dividend yield. So in our case what you find is to even if there is a level of month repayment compression on redeployment, which does get offset by the natural attrition of upfront fee income that's amortized the industrious don't feel that level of experience as a result of how the birth
Find that was effectively established in terms of the the frame of reference. I think he's going to see there. They there is a pretty wide berth where we focused with the opportunity that's generated. Uh, I said appreciation above our cost and that'll continue. But really we highlight the differentiators differentiation that shows stability on the top line, but that added layer of alignment and incentive protection that occurs on the bottom line. That's a bit differentiated relative to the field.
Thank you. Next question today is coming from Kyle Joseph from Jefferies. Your line is not live.
Hey, good morning guys congrats on a very very busy close to twenty-twenty and what looks like it gets start already in twenty one month. I think it'd be helpful, you know, obviously the portfolios gone through a big transformation particularly in the fourth quarter away from bsl's with with MVC and cross-platform. I think it'd be helpful. If you remind us of Georgia how you're thinking about the appropriate leverage for the BDC given the portfolio transition.
I'll take this with with the view that are leveraged expectations remain absolutely constant at a 1.251 to 1,200 times leveraged and in addition to the absolute leverage level a lot ties into the mix of what that leverage level is because on an absolute basis. It's one part of the story and so for us we have Lee value the flexibility that comes with the unsecured debt type of placements that were that were done and we appreciate that with our with our partners as long as in our work with the with the rating agencies. I'd argue that you'll likely see continued stability and both the mix and absolute level that you're seeing today with no intention to to move too far out of either band.
Hey, can you go back to our original put in place? And at the time going back a couple of years we ended up taking a couple hundred million dollars more than we originally looked for and really said at that time I was willing to pay the unused fee on that amount for that increased optionality or 5:30. And you've seen the Stuart here on the unsecured debt issuance write a higher cost. So a little bit of a drain from from a net perspective, but we believe that that nixes the right place to go. We really want to make sure we look at that cushion on our bar room based of are really for the most part hits our core middle-market assets and make sure we have plenty of cushion on that. So we never get into a difficult position on that said the liability side of this we spend a lot of time on and and we're willing to you know, give a little bit at times to make sure we maintain that kind of cushion of flexibility.
Very helpful. Thanks and I'll just ask one follow-up. Obviously, we know you know your credit in the in the bearings book. Is it solid, you know nonaccruals, but just want to get a sense for the revenue growth Trends you saw in the fourth quarter how that compared to the third quarter and any changes you here today?
So this is the account so I can say in terms of our our book and and again as you look at, you know, portfolios construction for us and and credit philosophy one of the areas that we tend to avoid and be emphasized as consumer-facing businesses, especially those with uh, you know, uh consumer discretion risk, and so a lot of the businesses that was dealing with consumers such as Jim's wage retail restaurants. We're all areas that we avoided the other thing I would I would note is that most of the businesses that we have in our portfolio and that's pretty much all the businesses in the portfolio. We're Dean at some point to be essential businesses. So if you if you look at you know, the tire entire bearings platform,
you know there there is an
Yeah, it all depends on the industry and and uh the the recovery ugh through um, shelter-in-place and and lockdowns, uh, but in terms of entertainment value feel very confident about all the businesses that we have in the portfolio terms of liquidity same. Um, there are some businesses that lost two or three months of of Revolution like Dental management practices, but they've come back so overall, um, and then obviously we have businesses that actually performed really well during COVID-19. So if you look back from a portfolio perspective, um, it's it's definitely, you know, flagged up on on both, uh, seven. Ooh and Eva.
Tech out there. I would just add what even said in the portfolio characteristics deck. We laid out December 31st. If you look at that Middle Market portfolio phone number numbers off top of my head. I think we were five point two times through the first lien 5.6 times through the total and that's really pretty consistent with what you've seen over time. That's a metric. We we track making sure that you know, we don't get to Extended on either the the senior leverage which is primarily where we are from a truant perspective or the total leverage and the endpoint. I think, you know the fact we've had no nonaccruals is a real positive on our on our core book and then I'd say businesses are are impacted differently. So I don't have a good index for you. As far as the exact percentage could you know you have some businesses I discovered is really benefited and then there's plenty of others I'd say in general they're kind of flattish, but she Blended up the ins point it it's up meaning from a from a revenue any birth.
Perspective and I think it's representative in in some of those statistics. You see their understanding that we put a lot of new assets on the books so that 5.2 if you compared to the third quarter, which I believe is a similar number at that time, it can be skewed can't just look at it as assuming that that the portfolio companies all stayed at the same leverage because we put on a bunch of new assets in the fourth quarter.
Yeah, and I would just add that the interest coverage is over four times, which is a pretty pretty good metric.
Patron next question is coming from Ryan Lynch from your line is now live.
Hey, good morning guys. First question. I had was you mentioned kind of one area that that could really help offset on a strong level of prepayments. It could be coming down. The road is your guys diversity in your platform and the ability to do cross platform Investments which which have a much higher yield. But I look at at least the the fourth quarter activity you guys only had 38 million into origination and only thirteen million of the net increase in cross-platform Investments. That's a pretty small number in you know, probably the most robust quarter that we're going to have in a long time. For for that vertical. So can you just talk about the expect that wage increase and and and why would why would that be so
right, this is
The way I look at it first. Goodbye. I'd say it and we can we can complement if I'd argue that really it depends on in in space-time and what we outlined in in the discussion is it relates to repayment is is another rail that we believe are important for investors to to prepare for now you you prepare for the worst and hope for the best. Our expectation is the fourth quarter had a significant amount of liquidity premium that was being generated inside the core middle-market category that's continued to move into the first quarter. And as you think about the the repayment Spectrum where we focus in the court middle of the Middle Market you find more insulated roll payment trends that can occur as opposed to the differentiation of the upper end of the Middle Market or in more Junior debt style transactions at that upper end of the Middle Market. So is it off
Our view is it in the fourth quarter and also continue to the first quarter. We continue to drive materially the amount of opportunity inside the tour direct Channel and to the extent that either Ebbs and flows or we see more prepayments, right? You have the opportunity to invest in other channels at the same time, but really it's what presents the best illiquidity premium or the best complexion premium to date and so it's it's a little less of one's great one's not it's all kind of seen it one point in time and you can kind of get a sense that to the extent. There were three payment velocity increasing wage. There is a lot of the additional places to make sure that we can retain Focus. The bearings does very well, but I'll turn it to aric.
Yeah, I would I would look at a couple of old one and then cross platforms about 15% of the portfolio right now. And so in any one quarter, it may be more or less depending on what we say Brian. Hi who's on the phone runs our special situations business here in the US Paul McDonald who's on the phone. It's one of our senior portfolio managers and liquid credit which also ties into our structure Products off. So we look at that relative value pretty very actively to see where that value is in frankly in the in the fourth quarter. We saw a better value in the Direct business than we did and some of those other cross-platform opportunities that would be different and sometimes in the in the second or third quarter of this past year when you saw a real volatility and the liquid markets we saw the value there and I think it's evidenced by thinking of reference to about 11 million dollars of unrealized or gained in our cross-platform investments. And that's really a result of some of that volatility. We saw earlier in the year for the most part cuz you go back off.
You know two years ago. We weren't really talking about cross-platform. We were talking about the core part of the business. I'd say the second part of it would be when we saw the volume coming in in the fourth quarter. So if you think of you know, we did 24 new platforms and the fourth quarter, that's a pretty incredible statistics in our in our Core Business and we weren't really want to make sure we we manage our leverage appropriately when we saw that pipeline coming in to make sure that you know, we didn't put on too many other assets of cross-platform and then when this went all these new platforms and then get our leverage as we reference, we kind of want to keep that number between 1 and 1/4 and we also look at the leverage assuming that we have all the commitments. We have have to get drawn mean our delay draw term loans and our JV is John reference there. It's about 1300 balancing that Dynamic of Leverage given the opportunity set is another one that we put everything through.
Okay, I understood that's helpful color on that, you know kind of on that that same theme you all have a I have a a pretty strong International.
Prizes and I think that that really was visible in fourth-quarter with with a good amount of capital deployed in Europe and in Asia Pacific. Can you maybe just talk about uh from from the the the Middle Market lending standpoint? How did those markets and again, I'm sure each of those different markets whether it's different countries in Europe or obviously, you know different countries in Asia, but but how long is Marcus from a high-level look relative to to middle-market, uh from a kind of a term structure is just just uh favorability of of of a blending in there versus
Okay, I'll take a crack at first and then turn it over to Ian to add some color to it. So we do have balance businesses in the US and Europe and if you look at the some of the latest statistics in Europe, depending on what service you want to use, um, we were kind of the number to provider of capital or direct lending to our sponsors in Europe. So it's a place that we are believe we have a position in the marketplace and we're and we're very active I would say Europe was came out of it came out of the cobit little quicker than the US should be think of the fourth quarter activity that we saw wage and the US market I'd say we saw you know that kind of begin to happen in the third quarter in Europe and it's in reference to earlier at really attractive spreads and upfront fees in the US the same would have been true age. And so I'd say let's kind of a quarter ahead at the fourth quarter remained very strong for us to as you saw and continues to be strong here in the first quarter on our European business dead.
Europe for us is not exclusively. But primarily UK France Germany Benelux and the nordics that's primarily where we operate UK's our largest market Frances our second largest market of those make up the majority of the portfolio in the European market. The business is the the financing is different than the us what we see in the u.s. Is primarily a sponsor will you know work with us and then they'll Club us up with one or two or three other part parties in Europe. It's almost exclusively kind of bilateral or one provider a capital arrangements. So it's kind of a winner-take-all market for the most part in European in your European business. Last thing I'd say is is from Europe perspective is you know, how long the performance of that those assets in that portfolio of our European business would be consistent with our North American Business meaning it's had really strong credit performance through cycles and really good job.
I'm going to the asia-pacific cuz that can be you know, people can say what are you doing there? It's really based in Australia. So Adam wheeler who is co-heads of our Global direct link up business with in Valor and based in London leaves our business outside of the US he relocated from Sydney to London and number of years ago and we have a team on on the ground and I'm going home and I think this is our eleventh year that we we've had business in Australia. Uh, I have to go back and check that for sure. So it's a market we've operated direct lending and consistently off last thing I'd say is if you think of these markets, Europe which you seen activity it's very similar in philosophy to what we do in the US the middle part of the Middle Market. So I think of it as twenty-five to Thirty million dollars Euros pounds pick your pick your term and all private equity-backed primarily so very consistent philosophy across the two portfolios. In fact if you looked at Arthur's
Films in our portfolio management system are are screening memos. You name it? You took a deal from Europe and you took a deal from the US you wouldn't other than the currency you wouldn't be able to tell the difference between the two and not management.
System they're all on a common portfolio management system that we're able to integrate and provide reporting and every everything else. We need to investors institutional ordered the BDC. And what did I miss their life? Would you add like you did a great job. The only thing I had fraud is that on a total leverage basis European deals are typically less leveraged. You don't really see Junior wage people over there in the LED is lighter. So it's a pretty attractive risk-adjusted return and then from a credit perspective, which really interesting over there A lot of times. Yes, you do have that companies that are in different markets meaning different countries, but a lot of times you're dealing with a company that's focused in a market. That's one country and basically that that creates a very strong defensive position. And and so they really become, you know, delightfully or or you know, a a major player in in that country and its dead.
For other kinds of other businesses in face in other countries to penetrate that market. So we we like that kind of diversification from a from an investment perspective.
Bank your next question is coming from Robert Dodd from Raymond James. Your line is now live.
Hi guys. Congratulations on a very very active account on first one the JV. I mean, I mean you mentioned that it could be an opportunity for to enable location. But I mean the bigger question than I guess is it's it's been quite a good performer. I mean it's it's it's generated a return package for you in terms of return on Capital but not in the form of dividends so far. So, can you give us any any color on when or even if we should expect you can see. Paying dividends to the BDC and obviously admin independent board, but you know any color you can give us on that point.
Sure, you you made the point on the independent board to the extent that a dividend were to be paid, you know, it would be that decision and maybe it might be important to take just a higher level of how we looked at JD's. What we want to do is make sure that it runs contrast to perhaps a a previous View that that one should put as much ugh item or as much in it off liquid credit or otherwise over-leveraged and then overly rely on that cash flow stream to pay dividends and even in a stress situations, right? Well, you know, our view is joint ventures allow for material diversification bearings has a wide frame of reference and having that strong joint venture partner participate in a number of those ass alongside the BDC helps manage for diversification purposes of clarity purposes. It gets to the fundamental question. If one view that there was great opportunity to retain earnings inside dog.
Central and it does not
Compromise the earnings profile of either partner right the BDC or or the pension provider then retaining Capital inside the Venture maybe a great course of action cuz you also get Equity built on the reinvestment of that capital in those attractive assets. So it kind of hearkens to a point that I think you've you've made which is Thursday. It's you know that both demonstrate dividend stability and growth and nav growth are often the best ones to generate Perpetual premiums above nav. And so no set policy as it relates to the to the dividend or distribution from d c but the the view is pretty simple that if you have the ability to reinvest your capital and grow in a V inside that Venture that's a positive outcome. I appreciate the color on that and another one if I can on kind of the the combo birth.
Excuse a lot of information which I find very very useful. If we look at the combo of kind of slide twelve and slide twenty-eight. I mean the median ebitda in the BDC is about 24. The the divorce is is twenty-three million. That's you know, the median for an average BBC's In general is probably double that the medium for the BSL markets probably 10 times that page so when I look at it's like 28 and I look at your Middle Market Landing North America, you know Slightly North of 700 spreads. Well above the liquid. Can you give us any color of how much that comes from the illiquidity premium how much of that comes from size of the borrowers and maybe how the Dynamics in a competitively spread no idea Etc. They shipped how those are going in in your twenty plus million dollar ebitda versus the the the the larger engine.
Private credit vs. The syndicated market so they realized that was a lot of a question. So Robert I'll start and then you know Eric is John jump in where I've talked. I've missed something but um like just at a high level, you know our view when you look at relative value, it's always been in the middle of of the Middle Market and and in that is both from the risk and return perspective from from a risk perspective, you know, you're dealing with companies with greater size than than the small end of the market and actually the the pricing wasn't all that different between the low end and the Middle Market and then with the large end of the of the Middle Market, maybe it's great that you can put more money out of the door, but the surge protection is pretty unattractive or has been unattractive and so, you know from the risk-return per second, we like that middle and actually from the repayment side and John mentioned this month.
so we feel like uh, we're somewhat
Insulated but not immune from the payments are going to occur. Eventually you'll reach us but it's going to hit the large end of the market first regarding the the premium and the size. It's really attractive about that size of business is for us. It's typically a platform company and I would say over eighty percent of the time the investment thesis from the primer pretty firm is to grow that platform by consolidating within an industry. So, you know that allows us to um, you know, because of our ability to write checks up to you know, the $50 million we can we can provide the capital up front the the sponsor doesn't have to worry about that. Um, so they know they're going to get the capital they need that puts us in a driver spot in terms of the the documentation and we get paid for it through the ID and then you also get a better spread than you would at the larger end of the market and we can take that platform company and we've had exam
Steven companies lower 10 million V but that you know, we've been able to help grow the 50 or 60 and then as the incumbent lender provides financing to the next buyer and grow it to a half million in ebitda done and to me from a risk perspective and origination perspective. That's what's really attractive about the private Equity Market.
Eric John was something I will set. The only thing I would add is, you know, I wouldn't say you know for us Robert. That's our strategy and I think the key is that we stick to our strategy and that we don't I call them Hobbies, you know, sometimes it's style drift the people then various times. They kind of go out there and say oh that's that looks like an interesting place to go or that looks like an interesting place to go example for us is you know, they do energy in our direct lending business and when energy is had some volatility and spreads have been really wide people come in and said to us, why aren't you investing in energy right now and I might cuz we didn't do it before or reason we're not going to do it now just cuz it appears Jeep cuz we're not we're not excellent at that. So are we trying to go where we think we're excellent where the attractive return is Andy and said it very well. That's the starting point watch the companies grow. There's something with the upper end of the market that do it extremely well to their part of the market and they're and they're excellent at that part of the market. And so I think the key is to make sure you know, you know what you're good at. You know what your focus is, you know your phone number.
Ideas, and you stay intact intentionally disciplined on that and if you do that, I think then that's the key part for us. We think it's the better place to be it doesn't mean some of the other places are bad choice is the one that the lunch that's what we believe is the best value.
Thank you. And that's question. Today is coming from me kis lene from Whataburger lines online. Yes. Good morning.
Wanted to ask a high-level question. Just thinking about the outlook for this year and next year because we're starting to see some meaningful wholesale price inflation and some tightness off at least parts of the labor market despite what we're reading about unemployment. So I'd like to understand how you feel about your borrower's ability to pass those cost increases onto their customer and protect their margins and their ability to service the debt that they have with you.
I can I can start and make sure you'd see in and then uh, Eric want to jump in I mean so, you know, we mentioned that the high-quality assets that that we saw last year. That was the starting point of our underwriting and I think you gotta break it out into if the company was benefiting from the question is is that sustainable and and so, you know, maybe you got a strip that away and and look at a a normalized run rate as you underwrite that business. Um, and and you know, every single deal that we look at we still continue even though they were high-quality assets that performed wealth ruko, but the reality is we actually don't know the geometry of the recovery here. Like you said, there's there's things out there. There's definitely some inflationary pressures out there, you know on the flipside. You've got the government from a fiscal standpoint dead.
Providing a law stimulus. You've got monetary support. Um, so you have those those big picture factors macro factors in there. So when we underwrite these companies, you know that analysis of you know, that companies ability to maintain those margins and and being able to do it in a number of different ways including passing on um price increases is is part of our ongoing analysis. But as we looked at all these deals that we've under written in the last forever, but like certainly we didn't give it up in the last month or two quarters were also focused on a downside case and and looking at these companies through a recession and and that obviously includes things like pressure of margin pressure and things like that. So, um totally agree with you can't just say that these companies cuz they performed well and drink. Oh but aren't going to have any issues down the road.
Thank you. Thank you for that that that's interesting insight and in terms of the uncertainty about the geometry of the recovery. I mean, I I can't agree with you more and there's still uncertainty just how the, you know pendemic will progress and it looks like it'll take longer than anybody would have hoped so apart from Industries like software. There are still companies that are under severe stress and I think in your prepared remarks, you mentioned that overall you're you're you're fairly pleased with liquidity amongst your Bowers, but in those industries that are strep whether it's hospitality or restaurants or Jim's you know, how do you how do you feel about the level of those borrowers ability to sustain themselves through the pandemic in terms of their liquidity and and I need for you to provide additional support to them.
Well making fortunately for you I can sleep at night because we don't have exposure to em Industries. I mean, I think you're right. I mean there are some there are some broken or impaired business models out there and I I don't know how they're going to recover certainly ought to the the position. They were pre COVID-19 and so again and this was just this is just part of our philosophy as as a middle-market direct lender off, you know those industries that you're referring to are just really tough Industries to to underwrite and and we weren't underwriting it because of really the the consumer discretion and how you underwrite that like with retail and restaurants for example, and and so we avoided that and that obviously worked out well for us during code.
The only thing I'd add that.
Because we actually are a provider of revolvers too many of our portfolio companies which is different than a number of other direct lenders that maybe aren't aren't in a position to provide those Revolt extent that we are and so that liquidity is something that you know, we have really direct oversight of you know, daily information on what those borrowings are. It's not like we're going on a local bank that's providing the revolver and we're just providing the term debt. And so I think that we use as an attractive risk mitigation tool that access to that revolver knowledge and what's going on that wage and the fact that it sits here with us. We think it's a positive.
Thank you. We reached out of our question answer session. I'd like to turn the floor back over there for any further or closing comments.
Thank you Kevin, and I just I guess I want to conclude by just saying thank you to everybody on the phone. You know, he started this journey a couple of years ago when we purchased TCAP and externalized the manager and we told both of you that are following us and and they're on the call now then what our plan was and we hope we, you know proved out that that was the plan and we stuck true to what we said we were going to do and I want to also include by thinking the team here at bearings as I referenced, you know, the fourth quarter 24 new platform companies the level of work and dedication that that came from from our teammates on our internal teams. Not just our direct lending, but are totally across the platform our partners and legal operations and all the other areas. It was a really proud moment for bearings in the fourth quarter, and I think it's really going to benefit shareholders going off. So thanks everybody for joining and we look forward to talking to you next quarter.
Thank you that does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.