Q1 2022 Barings BDC Inc Earnings Call
[music].
At this time I would like to welcome everyone to Barings BDC, Inc Conference call for the quarter and year ending March 31st 2022.
Participants are in a listen only mode. A question and answer session will follow the companys formal remarks.
If anyone should require operator assistance. Please press star one 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 bearings P. P C dot com under the inverse.
The relations section.
Please note. This call may contain forward looking statements that include statements regarding the company's goals beliefs strategies.
Future operating results and cash flows although the company believes these statements are reasonable actual results could differ materially from those projected in the forward looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the SEC.
Actions titled Risk factors and forward looking statements in the company's annual report Form 10-K for the fiscal year ended December 31st 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 would like to turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC. Please go ahead Sir.
Thank you operator, and good morning, everyone.
Appreciate you joining us for today's call I Hope you and your families are doing well. Please note that throughout today's call, we'll be referring to our first quarter 2022 earnings presentation. That's posted on the Investor Relations section of our website.
On the call today, I'm joined by Barings, Bdc's, President and 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 Ian Brian and John will review details of our portfolio and fourth quarter results in a moment, but I'll start off with some high level comments about the quarter.
After a record 2021, we carried that momentum into the first quarter of 2022 with strong net portfolio growth and expanded equity capital base. Following the close of the Sierra acquisition and <unk>.
Performance from our direct lending across platform investment strategies.
Let's begin with the market backdrop shown on slide five of the presentation.
The rapid change in the geopolitical and market landscape broadly syndicated loan prices began to price and increased risk tied to both underlying inflation as well as concerns of an overly aggressive federal reserve.
<unk> equity prices also we're not insulated from the current value of market volatility and we believe it is in these periods were well capitalized disciplined and highly selective managers can source attractive risk adjusted returns.
Moving to the fourth quarter highlights on slide six net net asset value per share was $11 86.
Compared to the prior quarter of $11 36.
Our net investment income remained at 23 cents per share unchanged from last quarter. This is despite raising approximately $527 million in new equity with the close of the CRA transaction.
It is important to note the underlying stability of our net investment income is further enhanced by our incentive fee structure as our earnings continue to exceed our new $8, two 5% hurdle rate and remainder of the investment catch up.
As a result of these trends our board elected to increase our second quarter dividend to <unk> 24 per share equating to an eight 1% yield on our net asset value of $11 86.
Regarding new investments, we had gross originations of $330 million in the first quarter on top of the $443 million portfolio acquired from CRE income.
This was offset by a $173 million of sales and prepayments at a 132 million of which were sold to our jv's.
Our investment portfolio continued to perform well in the first quarter with no new bearings loans on nonaccrual and the portfolio remains valued above original cost.
The Onboarding of your assets total non accruals increased to 3% of cost from two 2% of cost last quarter. However, on a fair value basis total non accruals or just one 8%.
Ian will highlight later, our focus on select asset sales and restructurings and the acquired <unk> portfolios as we continue to maximize shareholder value while benefiting from the protection added other credit support agreements.
Slide seven outlines summary financial highlights for the quarter and the first quarter robust investment activity and continued strong performance from cross platform investments offset negative earnings drag associated with the increased share count and total net investment income per share was that the <unk> 23 per share level net unrealized depreciation was $3 five.
Associated with select marks on the investment portfolio and realized losses totaled $1 4 million.
Following this year acquisition net leverage which is leveraged net of cash and short term investments and unsettled transactions with 0.89 times, which is currently below our target leverage range of <unk> nine to 125 times. This attractive liquidity position allows us to look.
Towards future growth with our portfolio companies as well as selective opportunities in the current market environment.
In these periods of market uncertainty you can expect us to remain disciplined keeping a focus on our core markets. Our incumbencies across 287 portfolio companies and our cross platform strategy. Additionally, our commitment to investor alignment further differentiates our focus on strong industrial returns recalls at Barings BDC incentive fee structure.
<unk> provides an earnings cushion against unforeseen events, when our net investment income exceeds our hurdle rate, which increased to $8 two 5% in connection with this year close.
The decline in earnings caused by non accrual loans or yield compression with first result in a lower incentive fee insulating investors from those negative items I will.
Now I'll turn the call over to Ian to provide an update on the market and our investment portfolio.
Thanks, Erica 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 $125 million on a net basis in the quarter with gross fundings of $261 million offset by sales and repayments of $136 million.
New Middle market investments include 16, new platform investments totaling $164 million and $997 million of follow on investments and delayed draw term loan fundings.
We also had $69 million of met New cross platform investments in the quarter.
Slide 10 updates of data we show you each quarter on middle market spreads across the capital structure, while we have witnessed volatility in the public markets. It is well understood that the private markets react to market volatility at a much slower pace and further the strength of the capital flows into the direct lending asset class.
<unk> may also offset the potential spread widening effects of a more fearful marketplace.
As a result market conditions remained generally competitive across direct lending as evidenced by generally stable spreads loosening terms and higher leverage levels.
On to slide 11.
It seem we outlined last quarter that continued in the first quarter.
Is that Unitranche executions remain near all time spread tight when compared to first lien second lien traditional executions and the level of Cub light Unitranche volume again was at an all time record.
This is again, a symptom of substantial capital inflows into direct lending and I don't expect it to slow down anytime soon.
A bridge of our investment portfolio from December 31 to March 31st as shown on slide 12.
On slide 13, you'll see a breakdown of the key components of our investment portfolio on March 31.
As we have discussed in the past the goal of this slide is to provide details of the key categories of our portfolio, which are now our bearings originated middle market portfolio.
The legacy MVC capital in Sierra income portfolios as well as our cross platform investments.
The middle market portfolio remains our core focus and continues to grow.
It makes up 53% of our portfolio in terms of total investments at fair value and 50% of our portfolio in terms of revenue contribution.
Our bearings originated middle market exposure is heavily diversified amongst obligor is about 184 portfolio companies with a geographic diversity create diversification across the U S Europe and APAC regions.
Underlying yields on our middle market investment portfolio of 7% and weighted average first lien leverage of five five 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 to complement our core portfolio with $579 million of investments in the legacy and we'd see and Sierra portfolios and.
$546 million of cross platform investments.
Yeah.
As mentioned earlier two of our legacy MVC assets were on nonaccrual at quarter end.
With the close of the Sierra transaction, we on boarded five additional assets on non accrual.
As mentioned previously total non accrual assets as a percent of fair value or one 8%.
All of which are covered by the respective credit support agreements with barings.
Recall, the Sierra transaction closed on February 25th raising $527 million in new equity along with the Onboarding of $443 million in new assets and $102 million of cash.
The portfolio continues to perform well with continued pay downs in both the first and second quarters with the proceeds being redeployed into bearings originated transactions.
At quarter end, the current 430 million Sierra portfolio is spread across 55 albacores.
The majority of which is firstly, when including the senior loans in the Sierra JV.
The average spread is 669 basis points for a total yield of 8%.
The Sierra portfolio is approximately $14 6 million at fair value of nonaccrual and is supported by 100 million CSA.
Turning to the bearings portfolio no.
No bearings directly originated loans are on nonaccrual and the total portfolio had no material modifications to the cash payment terms of our debt investments during the quarter.
Our total investment portfolio is now made up of 65% first lien assets.
Slide 14 provides a further breakdown of the portfolio from a senior perspective.
The core bearings originated portfolio, which makes up 76% of our funded investments.
73% first lien.
This is down from 74% last quarter, driven largely by additional joint venture investments.
Note. The combined <unk> portfolios are comprised of senior secured equity second lien and mezzanine in mezzanine debt investments, which brings the first lien component of the total portfolio down to 65%.
Our top 10 investments are shown on slide 15, our.
Our largest investment is five 2% of the total portfolio.
And the top 10 investments represent 23% of the total portfolio.
Recall, our largest investment clubs 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 287 investments spread across 31 different industries.
I'll summarize my market comments by saying when high levels of market uncertainty persists.
Managers are best served by being both highly selective and highly diverse.
It is also a time to further drive benefit.
In origination from our incumbency advantages investing in names, we know well.
Furthermore, the strong performance of our cross platform strategies, creating.
Create an optimal unique asset mix.
It's difficult to replicate in the current market ranging from unique infrastructure investments to attractive risk adjusted returns in asset base loans.
We complement this unique portfolio with our aligned fee structure to drive strong shareholder returns.
As I said before.
Dean unique it'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.
Thanks, Ian turning to slide 17, Here's a full bridge of net asset value per share movement in the first quarter. Our net investment income matched our dividend net realized gains and losses on our investment portfolio and foreign currency transactions drove a decrease of <unk> <unk> per share while our unrealized.
<unk> totaled <unk> <unk> per share.
Sierra transaction, including the credit support agreement accounted for 28 cents a share additional details on this net unrealized depreciation are also shown on slide 18 on.
On the middle market portfolio price appreciation and credit performance resulted in $2 million of net depreciation with the remaining $4 million of depreciation due to FX moves which are offset in our borrowings.
Our cross platform investments, our total appreciation of approximately $11 million largely driven by the very strong operating performance and eclipse business capital our asset based lender.
The legacy NBC portfolio saw total net unrealized depreciation of $2 1 million.
Near the bottom of slide 18, you can see that the credit support agreements decreased by approximately 400000 from last quarter.
Slides 19, and 20 show our income statement and balance sheet for the last five quarters and as we discussed our net investment income per share remained stable at 23 cents per share for the quarter driven by a $4 million increase in total investment income.
The increase in interest income can be attributed to continued portfolio growth as well as the Sierra asked that's being added to the portfolio on February 25th.
Higher dividend income from our investment in Eclipse business capital in two of our joint venture investments were also strong contributors to earnings in the quarter the.
The increase in total investment income was also met with higher interest and financing fees as well as the increased share count following the close of the Sierra transaction. The first quarter also saw the payment of an incentive fee that the manager as pre <unk> pre incentive fee net investment income exceeded our new $8 two 5%.
Hurdle rate.
From a balance sheet perspective on slide 20 total debt to equity was 1.12 times at March 31st Although this level was artificially high given the timing of certain asset sales and was eight.
Eight nine times after adjusting for cash cash equivalents and unsettled transactions.
Turning to slide 21, you can see how our funding mix tied to our asset mix, both in terms of seniority and asset class.
Paired to the end of 2020, our reliance on secured bank debt has decreased as a result of the increases to our unsecured debt private placements, which are now over $700 million as we have continued to diversify our balance sheet to match our diverse portfolio of assets.
Tales on each of our borrowings are shown on slide 22, which shows the evolution of our debt profile over the last three quarters. Following the close of the Sierra transaction in February we extended the maturity of our revolver and expanded the credit line from $875 million to 965 million via incremental commitments from <unk>.
All of our existing lead banks and subsequent to quarter end, we further upsized, our revolver by $100 million.
To its current size of 1.65 billion.
With the addition of a new lender to the bank group at a top tier commitment.
We continue to have additional commitment to raise up to $25 million of unsecured debt unless we have the available borrowing capacity under our senior secured credit facility and jumping to slide 23, you can see the impact of our net leverage of using our available liquidity to fund our unused capital commitments bearings.
PDC currently has $201 million of delayed draw term loan commitments to our portfolio companies as well as $20 million of remaining commitments to our joint ventures.
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.
Slide 24 updates, our paid and announced dividends since barings took over as the investment adviser to the BDC and as Eric mentioned, we previously announced our second quarter dividend. Our second quarter 2022 dividend will be 24 cents per share an increase of a penny per share compared to this.
Third to the second quarter, and an eight 1% distribution on net asset value now turn with me to slide 26, which shows a graphical depiction of relative value across the triple B double b and single B asset classes, even with the near term market volatility.
Spreads across the liquid credit spectrum remain at or near their three year types and this drives investment in large dollar sizes to the private marketplace, the negative effects, which Ian outlined earlier.
To further mitigate the negative effects of private market competition and remain prepared for the uncertain markets of the future will emphasize the following one we will seek to maintain credit discipline in our core business seeking out attractive direct lending illiquidity premium per unit of risk.
Two we will ensure that both our liquidity and capital profile is sized to take advantage of the market opportunities as they present themselves and three we maintain an investment focus across a across a wide range of cross platform opportunities.
We speak often of our pricing premiums relative to liquid credit and this translates into the actual results shown on slide 27, which outlined the premium spread on new investments relative to the liquid credit benchmarks Barings BDC deployed 281 million at an all in spread of 768 basis points, which.
<unk> 293 basis points spread premium to comparable liquid market indices at that same risk profile and diving deeper into our core middle market segment across Europe , and North America, we averaged 249 basis points spread relative to the liquid market indices for cross platform investments the spread.
Relative to liquid indices was even greater at 387 basis points and we continue to believe that our ability to invest across platforms and generate excess return via illiquidity and complexity premiums will be a key differentiator for barings BDC in this current cycle.
I'll wrap up our prepared remarks, with slide 28, which summarizes our new investment activity. So far during the second quarter of 2022, and our investment pipeline the pace of new investments remained steady compared to the last two quarters with $174 million of new commitments of which $141 million.
It closed and funded.
Of these new commitments, 78% are first lien senior secured loans, 20% are in cross platform and 35% are in European or Asia Pacific originations, the weighted average origination margin or DM three was 7% and we've also funded approximately $15 million of previously committed delayed draw.
Term loans.
Current Barings global private finance investment pipeline is approximately $2 billion on a probability weighted basis and is predominantly first lien senior secured and as a reminder, this pipeline is estimated based on our expected closing rates for all deals in the pipeline and with that operator, we'd love to open the line for questions.
Thank you if you 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 he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Please ask one question and one follow up question and then re queue for additional questions.
Our first question is from Finian O'shea with Wells Fargo Advisors. Please proceed.
Hi, guys.
And today.
I was hoping you guys could give us little more context about.
Eclipse business capital it looks like its been.
Since performing well it looks like you took a bigger dividend. This quarter. So is there anything you can add.
There on how that's performing.
Whether this is kind of a run rate to vendor may be able to catch up.
Sure.
I'll start with one item and then lateral to my colleague Brian for the second as it relates to kind of the synergies between both ourselves and eclipse, but the short line is Jordan in periods of market uncertainty or geopolitical volatility what youll find is these underlying alba doors, they keep higher outstandings.
So as you have a higher level of outstanding plus a continued level of measured growth.
The opportunity or profit effectively falls down to the bottom line our expectation on run rate here, we were operating under Levered and so we had the ability to increase the dividend pay out typically we like to profile at around an 8% cash distribution and so you can kind of expect that that will probably normalize over time, but the underlying <unk>.
Cash generation or the navy or the business still remains intact and also continues to be amplified by our strong partnership with eclipse and our cross platform and special situations team and Brian If you just want to outline.
That partnership and the growth in deals and that'd be very worthwhile.
Sure. Thanks, John Yes, I think I think generally speaking the thesis is playing out on the eclipse they have a strong management team in China.
Platform that's.
<unk> has a niche in the market and there is a growing non bank market, which is helping.
To them with a little bit of wind behind ourselves generally speaking and then as John mentioned, the strategic fit from an origination perspective for both eclipse and bearings frankly.
<unk> new deal flow that they otherwise wouldn't see has been.
A consistent theme in the pipelines for both of US are growing as a result of that.
And then if you just sort of think about the resilient performance that they do.
<unk> has had and will have given the underlying collateral base that backs their loans.
We think it's sort of a great place to be given where we are in the cycle and they should continue to benefit from a rising rate environment as well.
Okay. Thanks, that's helpful and then.
It looks like you guys inherited maybe another JV this quarter from that.
Sierra transaction is that something that we can expect to you know.
The permanent asset that will join the adjoining joined the group a JV that you have or is that something that maybe.
Now wound into another one.
Just any color on how youre going to manage that given your kind of against your.
Non qualifying bucket.
Yes.
And you can expect us to slowly wind that down what we'll do is maximize oh, sorry, minimize drag and maximize profitability off of the venture, but you can slowly expect it to be returned to us as those loans pay back. So this was an offshoot and you can expect it to fall over time.
Thank you that's all my questions.
Our next question is from Casey Alexander with Compass point. Please proceed.
Yes. Good morning first of all congratulations on closing this year attracts transaction on a timely basis.
My first question is.
If you were to see spreads start to really blow out in the liquid credit markets in the broadly syndicated loan market.
Do you still be open to taking advantage of that as a way of getting a little more deeper into your leverage ratio and then kind of waiting to directly originate when the directly originated names markets kind of square up with the liquid credit markets is that still an opportunistic strategy that the company would improve.
Hi.
Hi, Casey this is John and then ill a lateral to Erik because when you think of the size and scope of barings across the liquid Pap platform that can be a great opportunity you saw us participate in the <unk>.
In the liquid credit category, particularly when spreads widened out as a result of Covid, we're not near those levels, but we rely heavily on the expertise and the close partnership with our liquid counterparts, both publicly and privately and that that continues to be a very very important part of our platform that we all are that we all benefit.
It greatly from but I know, Eric we always remain very opportunistic across all areas of bearings.
Thank you I would say the short answer is yes, we would look at that.
But as John said the levels aren't there right now, but if they were to get there we absolutely would look at that and.
Making sure that you pick up a true illiquidity premium is really important as we all know when these illiquid assets and when when spreads widen out, but let's just say theoretically right that liquid spreads robin probably syndicated loans.
700 over also the 100 to 150 basis point premium on illiquid credit isn't really attractive relative to when spreads were 300 over all liquid credit and then all of sudden you pick up 150 or 200. They are attractive. So it's making sure you really pick up a proportionate amount of that illiquidity premium so.
We stay very close to the liquid side.
Yes between Brian Hi, Tom Mcdonnell was involved the BDC, we absolutely would look at that if that were to occur.
Alright, great. Thank you that's very helpful. My second question is.
You picked up.
A number of I think five.
Companies that are on non accrual.
And I've, probably been on non accrual for quite some time I'm just wondering if in your guys' analysis diligence is there anything salvageable or are those pretty much just debt issues.
We we actually and you can kind of look at the underlying collateral believed that there are forward opportunities you had that you might you have.
Good company, but also a bad balance sheet and so with the number of the individuals that also joined us from the seer platform, they're very active and realizing.
That value and because of the scale and size of the platform with which we're working at similar to some of the other appears Casey that you follow the probability of further driving a successful outcome overtime not today, but not forever.
Not never is is much higher so, yes, and it's a slow and steady wins the race on those names at about $14 million of.
Our fair value.
Alright, great. Thank you for taking my questions and again congratulations on the transaction.
Okay. Thanks.
Thanks, Greg.
Our next question is from Paul Johnson with <unk>. Please proceed.
Yes, good morning, guys. Thanks for taking my questions.
Just following up on.
The assets that you inherited from Sierra not just the non accruals or really the entire book I think it's like $430 million or so that came over in the first quarter.
Is the focus I guess to rotate out of these assets as you've kind of identified these opportunities or are you pretty comfortable with basically sitting on these assets and kind of.
Allowing them to just sort of run off over time and focus on your other verticals that you've got going.
Yeah.
I'll give one initial thought when we underwrote the transaction you're always underwrite to hold an investor.
But at the same time, we were very focused in on shareholder alignment and so again brought to use to the innovative tool of the credit support agreements such that our manager retains the downside on that credit portfolio.
Believe it or not over time, we found even in the MVC portfolio here that there are going to be individual portfolio. Incumbencies you want to continue with and then there'll be ones where in certain instances if youre looking for the opportunity just to exit you can effectively raise your hand, and we've seen some of that as well I would expect it to be measured the yield profile that we're seeding off of.
Those loans is attractive right they were.
They were originated in prior time periods at relatively strong spreads and so we're starting to find at a good level of income contribution and so there's no immediate rush.
For some of the special situations, where we might find that we just don't like the underlying risk return and we've been cycling out of those.
Near term, it's not necessarily a dollar base question to answer for you, Paul but more philosophical one we're happy to own them, but we also find that theyre going to be select assets, where over time. We're just looking forward to the exits and we're starting to see that as well.
Hey, Paul.
I think the good news is when we announced the deal over six months ago, and then we have inherited the portfolio that the portfolio is performing at least in line with what we expected probably a little bit better than what we expected from a from the asset underwriting that we did and as John said, something a little worse, a little bit better.
Some of them probably rotate out of some other ones, we're very comfortable with that.
Company were to refinance with Stefan and continuing to support that company. So I think the good news on a blended basis as the portfolio is performing at least consistent with if not better than what we originally underwrote when we announced the deal six months ago.
Got it I appreciate that thanks for that.
And then just going back to the I know you touched on what kind of drove the write up for the eclipse business and how things are going pretty well there.
I'm curious do you kind of see the increased dividend income that we got in the first quarter is something thats.
Sustainable from here on out.
Or is that more kind of like a temporary effects just based on what's sort of going on in the ABL markets.
I think what it will outline is the underlying profitability of the investment.
And that profitability shows up and be Bdcs income statement to our shows up in Bvc's financials, two way can be through dividend distributions or it can also be through NAV growth and.
And oftentimes, we like to target on our cross platform investments generally or JV, typically an 8% distribution or cash distribution. It was higher this quarter just given the fact that we were operating from a under Levered base, given the 500 million.
New equity that was issued with the Sierra deal.
And so I'd say you can expect to see the dividend income moderate, but the view into eclipses, an operating business or subsidiary.
Is that the underlying profitability is very strong and so while you might not see less in dividend income you can see it also growth in NAV and that underlying instant investment due to retained earnings.
Thanks for that appreciate it.
Last question.
Just kind of a bigger picture question, but wondering to get your guys' views on basically Europe versus the U S. I know you played a little bit of capital there this quarter.
How do you think about the spread opportunity versus peers, just given obviously the recent.
Invasion in the military buildup of Europe in proximity to the conflict over there is just any kind of color on the <unk>.
Your piece.
The value opportunity there.
Yes.
And I'll I'll take this and anyone else can can jump in.
It's interesting in the first quarter.
In terms of deal flow and just being more robust in terms of the quality of the credits.
In terms of the higher OID lower leverage and higher spreads Europe was just on a relative value basis.
A much more attractive market than the U S and.
To your comment regarding the geopolitical risk you would you would think that wouldn't be the case.
But we're seeing really good businesses in Europe .
But our new platforms that are coming to market and just given our position as one of the top leidy.
Lenders to private equity firms were really well positioned to take advantage of them and that really.
Brings and the benefit of our platform and our wide range of opportunities that we can.
Pursue so I don't know how long that lasts.
But just on a relative basis, it's just been more attractive than the U S. Unfortunately on the US side, we have our portfolio, which has been really instrumental in terms of driving origination for our business.
And quite frankly going into a potential recession.
Being able to rely on an add on acquisitions, you're basically looking at a portfolio that's becoming.
Larger in scale in terms of the business themselves and more diversified so from a from a credit perspective, that's very attractive.
I appreciate that thanks for thanks for the color and thanks for asking the question today.
Thanks, Paul.
Our next question is from Robert Dodd with Raymond James. Please proceed.
Hi, guys and congratulations on getting the deal closed in the quarter.
First question on the.
The cross platform sounds that I mean, it's about a third of revenues now I mean, it's.
You are starting to bump up.
Against the BDC limits about how much you can have it in all these different JV switch.
The <unk> have a big advantage to get you into markets that are potentially less competitive as crowded with some of the enormous pools of capital out there.
Sure.
Is it <unk>.
You'd like to continue expanding the cross platform mix.
The portfolio and if so what are you going to take them all obviously some.
I don't want to call it a gimmick, but there was some ways to manage around the BDC.
Nonqualified.
Buckets with balanced end of quarter balance sheet management and things like that is that something we should expect to see or do you want to keep everything kind of claims and below on that.
I think maybe.
Just to dive in to what the cross platform investment bucket.
You can find that there is a healthy amount of which is qualified right and so the jv's, which which you correctly pointed out would be nonqualified given that's how they are across all of the BDC space, but a number of the operating company or in specific some of the special situation of our infrastructure opportunities.
They certainly they certainly are.
So you'll find us continue to manage diversification and the way we always have but.
But at the same time I think there are some growth opportunities that exist, Brian when you start to think of the infrastructure opportunities that exist in some certain areas of cross platform that are worth mentioning and at the same time qualified investments Brian .
Yes, I think.
In the infrastructure space, specifically, I think where we're very interested in finding opportunities that.
Similar to eclipse have had real asset value behind them.
Especially in this sort of part of the cycle, where for late stage and you have you have some real collateral sort of clean on and that can be across multiple different silos in the infrastructure space.
It's something that is a decent chunk of our pipeline today and has been a place where we've been deploying capital more recently.
The underlying fundamental value supporting those investments make them attractive risk adjusted return when Youre, China sort of maximizing return per unit of risk.
I appreciate that thank you if I can one more since.
Ian mentioned the recession, what what's.
What's the.
<unk>, maybe on the economic outlook.
Uh huh.
Obviously with eclipse with APL that can do as you pointed out in volatile periods and the security is really good that.
Some of the middle market.
Yes, I'm upset.
Pure cash flow loan tends to be say less recession resistant than an ABL loan, but what's what's the the.
Institutional view economic.
The economic outlook since the I'll work with that.
Do you want to go through a little bit.
How would you characterize the portfolio from a.
The impact of potential rate rises or inflation, because I think that gives a good idea as to how this portfolio.
Physician and before does that maybe Robert I'll, just say that.
Every time, we underwrite an asset whether it be today six months ago six years ago, given the illiquidity nature of the asset we always assume theres going to be some type of economic or credit cycle. During the course of that asset.
How we underwrite credit and if you go back over time, I think you said that.
The average.
Leveraging the portfolio right now is about five five times.
Through our asset if you go back over time, it's kind of ways around that kind of five and a quarter to five five times and we're not going to chase it up into the sixes and we're not going to see us got down into the fours.
Feel like those type of companies.
Whether kind of a market cycle or economic cycle, well, obviously besides.
Recession the rate environment is a positive as asset prices are up.
Yields are up based on the range of negative interest coverages are down for the borrowers.
Combined with inflationary pressure that they have on inputs. So.
That's kind of when we look at it overall, but maybe you can cover some of that stuff, we talked about yesterday.
Yes.
Sure.
Sorry, Robert I guess, how you opened a can of worms I said.
Recession, I didn't I didn't say that.
But no.
Good question and look I mean.
Obviously, when we're underwriting these deals were very much focused on where we think.
Yields spreads could go in base rates could go.
And the impact to those companies.
Ability to.
Make their payments I think just stepping back one of the key things in this asset class.
As really being on top of portfolio and I think.
For me just looking at previous cycles right.
It's not an inefficient market you really have to be in touch with management teams you need to find out how companies are performing.
There's a lot of leg work that has to has to be done and you've got to have the team to to get in there and and connect with your management teams. We did this during COVID-19 and I think we were pretty proactive in terms of the way we were able to manage COVID-19 and the impact on our portfolio right now are.
<unk> teams have been actively and contact with with management teams and.
And obviously, we're focusing on not just inflationary pressures, but theres still some supply chain disruptions or slaver availability issues freight and commodity risk and.
As we've gone through the portfolio.
Just in terms of breaking out into labor and then input costs on a labor basis.
71% of our portfolio, we believe it's very low risk to any labor market challenges.
And then 26% would be medium probably the biggest issue with labor right now, it's just low skilled laborers and that's often associated with.
Lower EBITDA margin businesses, and we just don't have those types of businesses in our portfolio. So think of like restaurants retail things like that.
On the input costs.
We've looked at our portfolio and we believe three quarters, it's really low in say inflationary risk because these companies are predominantly professional services businesses. So think of.
The cost of product is not tied or linked to a physical good in any material way.
It's more of a service business quite 5% is I would say medium where there is.
Some tie to a physical goods so you've got the.
Management to drive changes in pricing for example.
In dealing with potential inventory exposure, but at the end of the day, just going into any type of potential downturn.
Look at our interest coverage, it's over three five times.
I remember.
Great financial crisis, where.
Average interest coverage was in that one to two times, so I feel like we're much better positioned.
Now than we were back then also in terms of inventories just actually a positive the supply chain disruption is that inventories are pretty lean. So the carrying cost are low with with inventory and borrowing costs that support that.
And then also what we've noticed is a lot of our private equity firms who are proactively hedging there.
Their interest rate.
Costs and so.
Again, I think we feel pretty good about where we are from a defense of a pause.
<unk>.
If we ended up in our environment.
Okay.
That's really helpful.
Thanks, a lot go by detailing if I can break the rules and ask one more because it relates to all of this and the comment you made earlier that.
How do you balance.
If spreads start to move it.
Potential recession likelihood does increase.
But we'll be syndicated spreads are likely to want move wider.
It creates that opportunistic potential, but how do you balance the fact that with.
Liquid public credit you get data quarterly with a lag probably versus middle market loans you get it.
It's getting a monthly and you could just call. The CEO in many cases right. So you can get much more dynamic up to date data in the middle market than you can in the liquid credit markets and whats the value of that data early.
We're in a recession.
Recession, while elevating more current data I would think would be worth.
More.
The relative premium between middle market and.
Liquid market.
Against.
Change a little bit in dynamics is that is that how do you manage that.
Because I think Thats, a very fair Robert I think it's a balance of things right to your point the information as sooner as you maybe have a more intimate relationship with the management team.
That being said we have.
Got dozens and dozens of research analysts on the liquid side, we're also doing their industries and their portfolio companies and their management team is extremely well.
And so I wasn't trying to insinuate that we would go.
Way way way into the broadly syndicated market. If there were so but part of the benefit I think of the Barings platform is that we do have such a deep liquid credit team and an experienced and a great track record that on the margin, where we see those opportunities we would step into them that doesn't mean that youre going to see us again.
Our wholesale change or anything like that but on the margin, where we see those attractive opportunities. We can step in taking into account information flow value price relative value.
We will look at credit and all those other factors.
I appreciate that thank you.
And sorry for asking the question.
Thanks, Alright.
The problem I mentioned onward.
We reached that never heard a question and answer session I would like to turn the conference back over to Eric for closing comments.
Thanks, operator, and I appreciate it thank you all for participating.
Participating on the call today, please stay safe and have a great day.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
Yeah.
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