Q4 2021 Barings BDC Inc Earnings Call
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Screening at this time I would like to welcome everyone to the Barings BDC, Inc Conference call for the quarter and year ended December 31st 2021.
All participants are in a listen only mode. A question and answer session will follow the company's formal remarks, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Today's call is being recorded and a replay will be available approximately two hours. After the conclusion of the call on the company's website at www dot bearing V. D C dot com under the Investor Relations section. Please.
Please note that this call may contain forward looking statements that include statements regarding the company's goals beliefs strategies future operating results and cash flow. Although the company believes these statements are reasonable actual results could differ materially from those projected in forward looking statements.
These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section titled risk factors and forward looking statements in the company's annual report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission.
Barings BDC undertakes no obligation to update or revise any forward looking statements unless required by law.
At this time I will turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC.
Thank you Lori and good morning, everyone. We appreciate you joining us for today's call and I Hope you and your families are doing well and staying healthy. Please note that throughout today's call, we'll be referring to our fourth quarter 'twenty 'twenty. One earnings presentation that was posted on the Investor Relations section of our website.
On the call today, I'm joined by Barings, Bdc's, President and Barings co head of global private Finance Ian Fowler.
Brian Hi, Barings head of U S special situations and co portfolio manager and the Bdc's Chief Financial Officer, Jonathan Bock.
As we typically do and Brian and John will review details of our portfolio in the fourth quarter results in a moment, but I'll start off some high level comments about the quarter as.
As you may have guessed with a reported dividend increase on February 1st yesterday's violence. It was an extremely active quarter, we experienced record originations issued our first private our first public investment grade bond issuance announced a dividend increase and continue to work towards close the Sierra income Corporation acquisition by the end of this month the tiny.
This call also affords us the opportunity to provide greater visibility into the first quarter of 2022, and you'll see that the strong finish to 2021 continues into the new year.
Let's begin with the market backdrop shown on slide five of the presentation.
The backdrop remained largely the same in the fourth quarter with elevated broadly syndicated loan prices tighter credit spreads strengthening BDC equity prices.
Markets remain competitive and we expect these competitive forces to intensify as demand for floating rate assets increases, particularly as a result of rising interest rate environment.
Jump to the fourth quarter highlights on slide six.
Net asset value per share was $11.36 per share compared to the prior quarter at $11.40 a share. Our net investment income remained 23 cents per share driven by strong capital deployment as well as accelerated fees and OID from repayments.
It is important to note.
Stability of our net interest income was further enhanced by our incentive fee structure as our earnings continue to exceed our 8% hurdle and remain in the investment catch up.
As a result of these trends our board elected to increase our fourth quarter dividend to <unk> 23 cents per share equating to an eight 1% yield on our net asset value of $11.36.
Regarding new investments, we had originations of $671 million in the fourth quarter. This was offset by $453 million.
Sales and prepayments of 198 million of which was sold to one of the Jb's.
Our investment portfolio continued to perform well in the fourth quarter with no new bearings loans on non accrual and remains valued above original cost we had one new non accrual investment from the acquired M. D. C portfolio equating to approximately two 2% of course he will highlight later, our focus on select asset sales and restructurings.
And the acquired M. D C portfolio as we continue to maximize shareholder value, while benefiting from their protection added other credit support agreement.
Slide seven outlines some refinance all highlights for the quarter.
The fourth quarter.
[noise] heightened investment activity increase dividend distributions and associated portfolio velocity continuing to drive total investment income and net investment income higher both on an absolute and a per share basis.
Net unrealized depreciation was $1 $9 million associated with select marks on the investment portfolio and realized losses totaled $1 8 million, which was primarily driven by our foreign currency hedges net.
Net leverage which is leveraged net of cash and short term investments an unsettled transactions was 1.49 times and remained above our target range of 0.9 to 1.25 times, our announced merger with Sierra is scheduled to close this quarter and pro forma for the Sierra transaction net leverage will be approximately one times.
Oh Wow like details with that I will not outlined details of that transaction on this call today and with direct any interested investors to our proxy statement that was filed on October 29.
That said this transaction is on track to close inside the time period, we have discussed and if further advances barings BDC towards the strong growth opportunities we have the bearings globally.
We remain the leader in our core markets with an extremely wide frame of reference that allows us to be selective when competitive forces increase.
Our commitment to investor alignment exhibited by our incentive fee structure provides an earnings cushion against unforeseen events when our net investment income exceeds our soon to be increased $8, two 5% hurdle rate recall, a declining earnings caused by nonaccrual loans are having to refinance assets at lower yields with first result in a lower incentive fee and selecting investors.
Some of those negative items.
Now I'll turn the call over to Ian to provide an update on the market and our investment portfolio.
Thanks, Eric and good morning, everyone. If you turn to slide nine you can see additional details on the investment activity that Eric mentioned, our middle market portfolio increased by 66 million on a net basis in the quarter with gross fundings of 100 503 million offset by sales right.
437 million new.
New middle market investments included 44, new platform investments totaling $375 million and $128 million of follow on investments and delayed draw term loan fundings.
We also had 152 million of net new cross platform investments in the quarter.
We continue to believe portfolio repayments will remain elevated across the market and in the fourth quarter Barings BDC experienced increase in repayments along with associated fee income acceleration.
Of our 437 million in middle market sales and repay prepayments.
86 million was associated with full repayments. This quarter 2 million was from partial pay downs and the remaining $346 million were sales.
Recall joint venture sales enable us to increase portfolio diversification, while maintaining a prudent leverage profile at barings BDC.
Slide 10 updates our data we show you each quarter on middle market spreads across the capital structure.
As Eric mentioned.
The potential for a rising interest rate environment leads to an increased demand for floating rate private credit assets.
As one would expect market conditions remain competitive.
As evidenced by spread compression loosening terms and higher leverage levels, all while the private credit markets experienced record investment originations.
Turning to slide 11.
As we outlined last quarter and continuing in the fourth quarter unit tranche executions remain near all time spread sites when compared to the first lien second lien traditional structures and the level of Cub light Unitranche volume again was an all time record.
This is simply a symptom to the wider problem associated with substantial capital inflows into private credit.
And I don't expect it to slow down anytime soon.
A bridge of our investment portfolio from September 30th two December 31st is shown on slide 12.
On Slide 13, you will see a breakdown of the key components of our investment portfolio on December 31st as.
As we have discussed in the past the goal of this slide is to provide details on the three key categories of our portfolio, which are now middle market portfolio.
The legacy M B C capital portfolio, and our cross platform and investments.
The middle market portfolio remains a core focus and continues to grow.
It makes up 66% of our portfolio in terms of total investments at fair value and.
And 66% of our portfolio in terms of revenue contribution.
Our middle market exposures heavily diversified amongst all the doors of a 168 portfolio companies.
With the geographic diversification across the U S Europe and APAC regions.
Underlying yields on our middle market investment portfolio of six 8% and weighted average first lien leverage of 5.5 times remain reflective of our boring is beautiful approach to credit.
In addition to our middle market exposure, we continue to draw upon barings' wide investment frame of reference and complement our core portfolio with $150 million of investments in the legacy N V seed capital portfolio and $470 million of cross platform investments, which have yielded.
Fair value of 10, 4% and nine 2% respectively.
As mentioned earlier two of the legacy M. D. C assets were on nonaccrual at quarter end.
Additionally, we report first quarter results lets see our assets will be included here. However, let me give you some high level data points on the CLO portfolio.
Recall as of June 30th CRA had 630 million of investments.
As a result of elevated M&A activity in 2021.
The portfolio experienced total repayments of 153 million since we announced the transaction.
The repayments were first used to eliminate all Sierra debt outstanding and subsequently added to the acquired cash balance.
The current 460 million portfolio spread across 66 Salvador's the majority of which is first lien.
The average spread at 687 basis points for a total yield of seven 7%.
The total portfolio had approximately 16 million at fair value on non accrual and will be supported by 100 million CSA.
Turning to the bearings portfolio no bearings directly originated loans are on nonaccrual.
And the total portfolio had no material modifications to cash payment terms of our debt investments during the quarter.
Our investment portfolio is now made up of 68% first lien assets.
Slide 14 provides a further breakdown of the portfolio from a seniority perspective.
The core bearings originated portfolio, which makes up 92% of our funded investments at 74% first lien.
This is down from 80% last quarter, driven largely by investments into income producing equity and joint ventures.
The M D. C portfolio is comprised primarily of equity.
Second lien and mezzanine debt investments.
Which brings the first lien component of the total portfolio down to 68%.
Our top 10 investments are shown on slide 15, our largest investment at five 5% of the total portfolio.
The top tenant investments represent 24% of the total portfolio.
Pro forma for the Sierra acquisition, we estimate the top 10 investments will represent 19% of the portfolio.
Recall, our largest investment eclipse business credit is.
Backed by a large portfolio of asset backed loans conservatively structured inside of the collateral net liquidation value.
The overall portfolio remains diverse from an industry perspective, as well with 212 investments spread across 29 industries.
I'll summarize my market comments by saying bearings broad investment scope across geographies and our scaled origination platform further drive our ability to generate attractive direct lending returns.
Since the formation of <unk>.
Action in 2018.
Barings BDC has deployed $2 5 billion into bearings originated middle market transactions.
With no non accruals.
That's an achievement, we are particularly proud of when one considers the COVID-19 related pressures of 'twenty 'twenty, but this isn't to say, we simply want threats on our laurels.
As the private indirect lending competition elevates, we will continue to drive unique risk adjusted return investing inside of our asset or collateral value with our cross platform investments.
Furthermore, our cross platform investments allow barings BDC to create an optimal and unique asset mix that is not.
Is not replicable in the current market.
We complement this unique portfolio with our aligned fee structure to drive strong shareholder returns as.
As I've said before being unique that's endemic to our culture and our platform and I believe it is a key ingredient to achieving long term success.
I'll now turn the call over to John to provide additional color on our financial results John .
Thanks, Ian and turning to slide 17, Here's a full bridge of net asset value per share movement in the third quarter.
Our net investment income outpaced our dividend by one cent per share net realized gains and losses on our investment portfolio and foreign currency transactions drove a decrease of <unk> <unk> per share while our unrealized depreciation totaled three cents per share additional details on this net unrealized appreciation depreciation are shown on slide.
18th.
On the middle market portfolio price appreciation and credit performance netted to 2 million of appreciation.
Our cross platform investments that total appreciation of approximately $8 million largely driven by very strong operating performance and Thompson reverse joint venture and eclipse, our wholly owned asset based lender.
Recall in an effort to drive both dividend income and NAV appreciation bearings chooses to target an 8% dividend distributions on both of these investments, despite earning a row well above that level.
Which results in current NAV and price appreciation.
Legacy N D C portfolios, our total net unrealized depreciation of $11 million associated with the expected restructuring of two investments on nonaccrual.
Near the bottom of Slide 18, you can see the credit support agreement increased approximately $1 million from last quarter.
A logical question would be why do we have 11 million of unrealized depreciation on the legacy M. D C portfolio and only a million of appreciation on the credit support agreement as this TSA is intended to offset the losses in the legacy N D C portfolio.
The value of the CSA is determined based on a long term.
View of potential outcomes for the legacy M D C portfolio and while at any quarter end the value of those investments can fluctuate, particularly in positions that we plan to restructure.
The longer term view of the portfolio could lead to a different valuation outcome.
The valuation of the C yesterday this quarter not only takes into account the current valuations of the debt investments, but also the benefits of future equity realization above our cost.
Slide 19, and 20 show our income statement and balance sheet for the last five quarters as we've discussed our net investment income per share increased to 23 for the quarter driven by $1 6 million increase in total investment income higher dividend income associated with our investment in eclipse business capital and two of our.
Joint venture investments as well as increase in accelerated fees no idea repayments drove this increase.
The increase in total investment income was partially offset by higher interest and financing fees, which will which rose as a result of the increased borrowing levels.
The fourth quarter also saw the payment of an incentive fee to the manager as pre incentive fee net investment income exceeded our 8% hurdle rate.
From a balance sheet perspective on slide 20 total debt to equity was 1.86 times at December 31st now although this level was artificially high given the timing of certain asset sales and was 1.49 times after adjusting for cash cash equivalents and unsettled transactions.
Turning to slide 21, you can see how our funding mix ties to our asset mix, both in terms of seniority and asset class.
Paired to the end of 'twenty 'twenty, our reliance on secured bank debt has decreased coinciding with increases to our unsecured debt and private placements, which now are over 700 million as we've continued to diversify the balance sheet to match our diverse portfolio of assets details on each of our borrowings are shown on slide 22.
Which show the evolution of our debt profile over the last three quarters. We continue to have an additional commitment to raise up to 25 million of unsecured debt.
Plus we have available borrowing capacity under our $875 million senior secured credit facility and Furthermore, on November 18th Barings BDC issued its first public unsecured investment grade bond raising $350 million at a T plus 225 spread.
Jumping to slide 23, you can see the impact to our net leverage using our available liquidity to fund our unused capital commitments Barings BDC currently has $203 million of delayed draw term loan commitments to our portfolio of companies as well as $31 million of commitments to our joint venture investments. This.
Table shows how we have the available capacity to meet the entirety of these commitments if called upon while maintaining cushion against our regulatory leverage limit.
Now pro forma for our merger with Sierra which brings the additional issuance of an additional $524 million in equity cash on the balance sheet and no debt outstanding.
Net leverage as of 12 31 would fall from 1.49 times to 0.83 times and based on continued deal activity. This quarter, we expect to end the first quarter of 2022 with leverage around one types.
24 updates, our paid and announced dividends since barings took over as the advisor to the BDC.
As Eric mentioned, we previously announced our first quarter 2022 dividend will be 23 per share an increase of one cent per share compared to the second quarter and an 8.1% distribution on our net asset value and turn with me now to slide 26, which shows the graphical depiction of relative value.
Cross the Triple B double B and single B asset classes.
With spreads across the liquid spread spectrum at or near their three year types investors rightly outlined in excess spread per unit of risk is increasingly hard to find.
This drives investments in large dollar sizes to the private marketplace, the negative effects of which Ian outlined earlier in.
Now the best mitigates to competitive pressures remain one continued credit discipline in our core business seeking out attractive direct lending illiquidity premium per unit of risk.
To maintain an investment focus across a wide frame of differentiated cross platform investments that invest inside of asset value, which is asset based loans.
Three best in class shareholder alignment to ensure the manager can operate in all environments and make the right investments at the right price for the risk.
We speak often of our pricing premiums relative to liquid credit and this translates into the actual results shown on slide 27, which outlines the premium spread on our new investments relative to the liquid credit benchmarks.
Barings BDC deployed approximately 653 million and an all in spread of 815 basis points, which represents a 375 basis point premium to comparable liquid market indices at the same risk profile.
Diving deeper into our core middle market segment across Europe , and North America, we averaged 304 basis points spread relative to liquid market indices.
For cross platform investments the spread relative to liquid market indices was even greater at 705 basis points. We continue to believe our ability to invest across platforms and generate excess shareholder returns via illiquidity and complexity premiums will be a key differentiator for barings BDC.
This upcoming cycle.
I'll wrap our prepared remarks, with slide 28, which summarizes our new investment activity. So far during the first quarter of 2022 and our investment pipeline.
The pace of new investments remained steady compared to the last two quarters with $126 million of new commitments of which a $105 million of closed unfunded and of those new commitments, 72% are first lien, 13%, our cross platform and 26% are European or Asia Pacific originations the weighted average origination.
Margin or D and three was seven 1%.
We've also funded approximately $8 million of previously committed delayed draw term loans. The current barings global private finance investment pipeline is approximately $2 2 billion on a weighted average basis and is predominantly in first lien senior secured investments and as a reminder, this pipeline is estimated based on our expected closing rates.
For all deals in our investment pipeline and with that Hillary we'd like to open up the line for questions.
Thank you at this time, we'll be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if it really likes familiar questions in the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the stacking.
Please note we ask that you limit yourself to one question and one follow up per person one moment. Please I'll even call for question.
Yeah.
Our first question is from Ryan Lynch of K V. W. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
First one just has to do with you.
You your cross platform in that sense.
You know obviously that has been growing.
Pretty meaningfully over the last year and you really saw it really grow significantly this quarter and as a percentage of your overall portfolio.
Those investments have a different yield profile than your core middle market vaccinate. So.
My question is as you know longer term.
Do you guys have any sort of preference on what percentage of your portfolio. You can expect to have at least cross platform investments versus kind of your core middle market portfolio. I know closing this year is going to.
Reduced that exposure, but.
Just any thoughts on kind of that long term exposure preferences of cross platform investments as a percentage of your portfolio versus kind of the core middle market.
Sure Ryan This is bock I'll I'll take a stab and then and then lateral to my colleague Brian but.
But what I'd say is think of the cross platform investments truly as a compliment right. There's two types of premium that exist in the market today illiquidity premium right and I'll also a level of complexity premium and bearings has a scaled platform that prosecutes bolt origination premiums.
The actual amount you know can vary it always depends on the current environment, where you can say around 30% give or take it's very close to where we're at now and clearly as the book increases in size you can see that level of cross platform investments on a dollar basis grow but it really comes to how these two.
Types of investments inner play off of each other and so oftentimes you find the inside of asset value type investment strategy to be very complimentary and for that I'll just lateral it's my colleague Brian .
Yeah, Thanks, Jon I think that was.
Pretty well said I don't have a lot to add other than you know it is episodic we are looking at opportunities in the marketplace and turning them down.
Well a lot more than you know actually pursuing some of these deals but as John said, if we can find an interesting investment where.
We believe we're investing inside of asset value, but we can get paid a complexity premium by coming up with a capital solution that makes sense for that particular issuer, that's where I will spend a lot of effort and time to generate that complexity premium that the chance for epilepsy.
Okay.
That makes sense and then diving into it to one of those cross platform investments you know your second largest.
Holding on your balance sheet is constant rivers are constant river as you know has multiple billion cars.
Jamie made loans and so I would just love for you guys to provide a little color obviously interest rates have increased significantly over the last several months and you know the expectation that they may continue to rise can you just talk about how we should be thinking about that portfolio and how they act.
Spectation Saar for Bachelor form and in a rising mortgage rate environment.
Sure they'll try to I'll try to be brief on the explanation, but essentially the Ginnie Mae ABL market think of it as a a government guaranteed.
Home mortgage my under the FHA program and these are originated in separately managed by large servicers in one of those home loans when they default they effectively get kicked out and have to get into a a workout program that is run by the mortgage servicer.
We and our affiliates have invested inside this mortgage program for many years across the platform and what is particularly attractive about it is you're not taking long term rate risk, what's you're effectively taking is the timeframe from one government guaranteed loan to effectively return to paying status and then go back.
Into the Ginnie Mae program, and so that can generate a significant return because there's a high degree of velocity of turn on those mortgage assets and youre not owning those for long periods or in any event that there was a default on the FHA alone you effectively collect on the government guarantee with limited.
Last two principal value and so really the focus here is short duration Gov.
Government guaranteed paper and collateral that generates a high return on our investment that you'll notice Ryan we pulled a 8% dividend distribution out of the program right and you can see that as the fair value of that program continues to increase even as a result of the rising rate investment environment, what you're finding is that our return on that investment program foreign.
Exceeds our distribution, hence the Knapp increase so it's a very attractive compliment right as you start to think about the number of different markets and complexity premiums that complement our illiquidity portfolio does that give you a brief explanation I hope at that.
No John .
And really create a thorough explanation so I appreciate that.
Appreciate the time today.
Okay.
Our next question is from Robert Dodd of Raymond James. Please proceed with your question.
Hi, guys. This is kind of a follow up to that on the on the cross platform investments I mean, you said you'd like them to be about.
Will that target.
30%.
Would you say that the once you currently have between jacquard see it helps them.
Those are the ones are going to.
Makeup that third and they'll just move around the mix between them overtime.
Do you think you'll be adding.
More legs to the stool I mean, obviously, it's got three legs already but.
Would you be expanding the number of verticals within that cross platform, whether these kind of settled in a way that cannot be with us.
Yeah. So.
So I'll give you one additional shot in them and then also I think we can lateral to Brian on an ABL and also kind of cross platform investments as a complement more broadly.
The the vehicles that we have Robert R.
A fairly I'd say, a vast majority of what you can consider as our cross platform. A makeup. In addition to some of the episodic financings that we'll make as a result of our our crack specialty situations investment franchise.
What what I would what I would say is each of those verticals has a different type of risk return you have an asset based lender right. In eclipse you have our mortgage investment unit Alright S. P. V. That's called Thompson members and then effectively there's a focus on underlying consumer complexity premium that exists invest inside a whack.
That's a very wide investment frame did you see some additional a type of inside asset value type investments be originated.
That are not actively listed here the answers of course, but we're very focused on ensuring that you don't you don't hobby as Eric outlines in any type of investment and so the goal here is bearings and of course, our parent has a very very wide reaching range of origination capability inside these complexity premium.
Our investments and we're very pleased with the investments that we have and we can see them continue to grow on a dollar basis, but it really does match nicely in a lateral is to Brian for a discussion on eclipse as well as as well as how the cross that more investments matches nicely to our enterprise value of illiquidity premium I think Brian .
Yeah, Thanks, John and good morning, Robert I think.
As it relates to some of the key pillars that you referenced those those.
Investment vehicles, if you will we'll certainly pivot with the market along with ourselves and we're going to stick to our coordinating as John said, we're not looking to hobby and something new but we're bearings already has an expertise.
And the market provides an opportunity, particularly if we're moving into a more volatile session.
The overall investment profile and investment Universe, we will we'll go where the opportunity is and the way that we've kind of described it as if.
If you think about enterprise value investing.
And the analogy that I've used in the past as kind of a if you think about the ocean right. The top of the ocean. There's a lot of volatility being impacted by winter weather things, we cant control, but underneath the surface. There is a level of stability you can kind of predict how the water it's going to move and that's why we like the play, particularly in markets like today, where there's where there's a lot of volatility in.
Or where the enterprise value of some of these entities are.
But from an asset value perspective, we try to we try to state where there is some stability. It's less volatile you can you can kind of a.
Predict a little bit more what the outcomes can be and that's why we're where we're looking to move within our investment frame of reference across bearings, where does where do we have.
Interesting opportunities that we see in different silos of bearings that we can go leverage in this portfolio again as a complement to what Ian and his team are building on the middle market side.
I appreciate that color is very helpful. Thank you I mean, what one my second question, if I can [laughter] reading between the lines on.
I'll, let John about the CSA versus obviously I'm going to add a new nonaccrual got marked down a little bit.
This quarter the CSA didn't move that much is it fair to say then that while there was a markdown this quarter.
It does not reflect the long term.
Probability weight, what you always say that the bank's assessment of the long term.
But any way to the outcome for that asset in particular.
That's a great way to state it Robert I'm trying to think of the CSA. So you know.
Hum.
What we have to be careful is try not to measure something as a point in time.
As a proxy for the entire journey.
The CSA provide that opportunity to be patient and to effectively ensure that we are restructuring for the maximum value to barings investors over the long term, which we will intend to do and it will and intend to do and so are our long term perspective, while you might see one asset move in or out as we continue to look at some of the underlying.
Have a great reason to exist.
To develop a strong returns in the future.
That you'll see is a point in time, but then there are also a number of control equity investments, which you can find you know, we're always impacted by COVID-19 or or take your Geo political force. That's still have very strong reasons to exist with our view on potential forward long term appreciation potential that likely can offset.
You start to see is a point in time mark to market depreciation. So we see that in tax and the benefit of the CSA as we have the patience to do this right without providing any type of underlying volatility to our investors in terms of the navy because I think as a number of the analysts have outlined.
The best valuation, our that's our fetched diabetes either of those bdcs that have both steady and stable dividend profile.
And increasing and a stable net asset base.
Okay.
Yeah.
That that that there was something very.
Very clear.
We have reached the end of the question and answer session I will now turn the call back over to Eric Lane for closing remarks.
Yeah.
Thank you Laurie and thanks again for everybody, joining and everybody stay positive and help you out there.
Okay.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Right.
Yeah.
Okay.
Yeah.
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Yeah.
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