Q2 2022 Barings BDC Inc Earnings Call
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At this time I would like to welcome everyone to the Barings BDC, Inc Conference call for the quarter ended June 30th 2022, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone.
Key pad 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 Barings BDC Dot com under the Investor Relations section. Please note that this call may contain forward looking statements that include statements regarding the company.
[noise] goals beliefs strategies future operating results and cash flows although the company believes these statements are reasonable actual results could differ materially from those projected in forward looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including though.
As disclosed under the sections titled Risk factors and forward looking statements in the company's annual report on Form 10-K for the fiscal year ended December 31st 2021, and the quarterly report on Form 10-Q for the quarter ended June 30th 2022 each as filed with the Securities and Exchange Commission.
Yeah.
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 operator, and good morning, everyone. We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our second quarter 2022 earnings presentation.
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 capital solutions, and comfort oil 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 second quarter results in a moment, but I'll start off some high level comments about the quarter.
To begin with the market backdrop shown on slide five of the presentation.
With significant economic uncertainty probably syndicated loan spreads increased due to increased macroeconomic fears talked about underlying inflation and the potential of a fed overreaction.
Loan prices, probably and BCC equity prices, specifically, we're also not immune from increasing risk premiums down 4% and 9% from the end of Q1 through July 31, respectively looking.
Looking at second quarter highlights on slide six.
The value per share was $11 41 compared to the prior quarter of 11, 86 down three 8% driven primarily due to unrealized write downs tied to macro market factors and spread widening as opposed to fundamental credit related factors are.
Our net investment income decreased to 29 per share compared to 23 cents per share last quarter as a result of increasing interest and fee income as well as the elimination of our income incentive fee due to our shareholder friendly fee structure, specifically the incentive look back feature which includes realized and unrealized gains and losses.
Regarding new investments, we had gross originations of $352 million in the second quarter. This was offset by $299 million of sales and prepayments our investment portfolio continued to perform well in the second quarter with no new loans on non accrual and total with the Sierra and MCC assets, our total non accruals or two 9%.
Of the portfolio on a cost basis, and <unk>, 8% on a fair value basis.
Ian will highlight later, our focus on select asset sales and restructurings and the acquired MVC as Europe portfolios as we continue to maximize shareholder value while benefiting from the protection added by the credit support agreement.
Additionally, our board declared a third quarter dividend of 20 <unk> per share equating to an eight 4% yield on our net asset value of $11 41.
Slide seven outlines summary financial highlights for the previous five quarters in the second quarter continued strong investment performance drove total investment income higher quarter over quarter to $56 million and net investment income to $32 million, both up from $44 million and $19 million in the first quarter.
Realized losses of $10 million, we're principally a result of FX moves on assets that were repaid at par in the quarter with a corresponding offset in the unrealized depreciation associated with foreign currency borrowings under our credit facilities.
Net unrealized depreciation of $45 million was primarily a result of mark to market on our assets as a result of higher spreads as.
As a result of the unrealized depreciation bearings incentive fee, Jeff eliminated the quarterly incentive fee further lowering expenses and increasing net investment income to 29 per share net.
Net leverage which is leveraged net of cash short term investments an unsettled transactions was one eight times, which is currently towards the lower end of our target leverage of <unk> nine to $1. Two five times. This attractive liquidity position allows us to remain steady partners regard existing sponsor clients as well as look towards investment opportunities that present themselves.
In the face of economic uncertainty.
Now I'll turn the call over to Ed 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.
Our middle market portfolio increased by $3 million on a net basis in the quarter with gross fundings of $227 million offset by sales and repayments of $224 million.
New middle market investments included 22, new platform investments totaling a $156 million.
And $171 million of follow on investments and delayed draw term loan fundings.
We also had $108 million of net cross platform investments in the quarter.
Slide 10 updates the data we show you each quarter on middle market spreads across the capital structure.
Is it as easy to reference that investment spreads across public and private asset classes have widened.
Noticed the degree of spread widening in the private credit category has a much more a lagged effect when compared to broadly syndicated loan spreads which are outlined in red.
That said, we continue to see spread widening in our core market as a welcome benefit to long term investment return, particularly for those who have flexible investment capital.
Turning to slide 11.
Many of you have heard me outline the competitive dynamic at play in the unit tranche transactions I am pleased to see as a result of emerging under what underwriter disciplined tied potential.
Potential economic fears that spreads began to widen ever so slightly and may likely continue their upward trend.
While underlying covenant light activity in these transactions remain high we also continue to see improvements in loan documentation that tilt towards peak patient investors.
In many years in this asset class outlined that these changes are slow and gradual but they do occur.
And the key remains keeping focus and pricing discipline across your origination footprint.
A bridge of our investment portfolio from March 31 to June 30, as shown on slide 12.
On slide 13, Youll see a breakdown of the key components of our investment portfolio on June 30.
As we have discussed in the past the goal of this slide is to provide details on the key categories of our portfolio, which are the bearings originated middle market portfolio. The legacy legacy MVC capital in Sierra income portfolios as well as our cross platform investments the.
The middle market portfolio remains our core focus and continues to grow it makes up 56% of our portfolio in terms of total investments at fair value.
48% of our portfolio in terms of revenue.
Contribution.
Our bearings originated middle market exposures heavily diversified amongst obligor is of 199 portfolio companies with a geographic diversification across the U S Europe and APAC regions.
Underlying yields on our middle market investment portfolio of seven 9% up from 7% last quarter and weighted average first lien leverage of five three times remain reflective of our boring is beautiful approach to credit and.
In addition to our middle market exposure, we continue to draw upon barings' wide investment frame of reference to complement our core portfolio with $441 million of investments in the legacy MVC and CRE portfolios and.
$612 million of cross platform investments.
Two NBC assets and <unk> assets remain on non accrual unchanged from last quarter as.
As mentioned previously total non accrual assets as a percent of fair value or <unk>, 8%.
All of which are covered by the respective credit support agreements with berries.
Our liquidation and redeployment efforts on the MVC and Sierra portfolios remain ongoing.
Bearings onboard at $627 million of assets from those two acquisitions.
To date, we've generated $121 million of repayments across both portfolios.
Turning to the bearings portfolio.
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 seniority perspective.
The core bearings originated portfolio was 72% first lien.
Note the combined NBC Sierra portfolios are comprised of senior secured.
Lien mezzanine debt and equity investments, which brings the first lien component of the total portfolio down to 65%.
Our top 10 investments are shown on slide 15.
Our largest investment is five 3% of the total portfolio in the top 10 investments represented 23% of the total portfolio.
Recall, our largest investment eclipse business capital is backed by a large portfolio of asset backed loans.
<unk> structured inside of the collateral net liquid liquidation value.
The overall portfolio remains diverse from an industry perspective, as well with 294 investments spread across 31 industries.
I'll summarize my market comments with the simple side at that point is beautiful investment favors patients.
And most importantly pricing discipline with.
With an increased level of macroeconomic uncertainty, we expect private equity sponsors to be highly selective with regard to new investments and instead favre supportive existing investments.
A strong set of portfolio incumbencies across our U S and European sponsor universe allows us to be patient with our sponsors providing growth capital to existing investments.
Also believe there is a set of circumstances, where certain private lenders will be in need of liquidity.
And this creates both stressed and distressed sellers as well as stress and distress portfolio of companies are.
Our wide investment frame of reference across the capital stack allows us to target and underwrite these opportunities.
And this gives me confidence in the future as I know, we have both the investment acumen patient and flexible capital base to drive attractive returns.
I'll now turn the call over to John to provide additional color on our financial results.
Thanks, Ian and turning to slide 17, Here's the full bridge of NAV per share movement in the second quarter.
Our net investment income exceeded our dividend by <unk> <unk> per share net realized losses on our investment portfolio and foreign currency transaction drove a decrease of nine cents per share while our unrealized depreciation totaled 41 cents per share additional details on this net unrealized depreciation or.
Shown on slide 18.
Of the total $45 million in unrealized depreciation in the second quarter, approximately $32 million was attributed to price or spread widening.
Of this our cross platform investments that total depreciation of approximately $20 million and notably the legacy NBC portfolio saw total depreciation of $11 million with the majority tied to underlying credit performance, while the CRE portfolio had total depreciation of $16 million.
<unk> million dollars of which was attributed to price movements predominantly tied to CLO equity positions and the Sierra joint venture near the bottom of Slide 18, you can also see that the credit support agreements decreased $13 million as a result of increasing rates and discount rates.
Slides 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 29 for the quarter driven by $12 million increase in total investment income as well as the elimination of the income incentive fee, resulting from <unk>.
Realized marks on the investment portfolio from a balance sheet perspective on slide 20.
Total debt to equity was 123 times at June 30, although this levels artificially high given the timing of certain asset sales and was one times after adjusting for cash cash equivalents and unsettled transactions.
Turning to slide 21, you can see how our funding mix toward asset mix, both in terms of seniority and asset class and compare it to the end of 2020, our reliance on secured bank debt has decreased with the issuance of $725 million of unsecured debt in the public and private markets and we have continued.
Diversify diversify our balance sheet to match our diverse portfolio of assets.
Details of each of our borrowings are shown on slide 22.
Which shows the evolution of our debt profile over the last three quarters and jumping to slide 23, you can see the impact of our net leverage using our available liquidity to fund our unused capital commitments bearings.
Barings BDC currently has $212 million of delayed draw term loan commitments to our portfolio companies as well as $67 million of remaining commitments towards joint venture investments.
The table shows how we have the available capacity to meet the entirety.
Of this 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 the board declared a third quarter 2022 dividend of 24 per share and eight 4% distribution on net asset value.
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 and as Ian outlined we saw improved spreads in the quarter across all asset classes. As a result of increased fears of stagnation or stagflation and for reference.
Single B liquid loan spreads are.
LIBOR, plus 643 basis points up from LIBOR, plus 439 basis points last quarter rising base rates and improved spreads across liquid markets also correlates to private markets as demand for private alternatives hauls in the face of rising risk free rate said definitely many.
Investors, who tend to migrate towards a nominal investment hurdle often have less demand for the exotic when their return objectives can be met with traditional public assets as a result managers like ourselves need to maintain strict investment discipline in how this illiquidity premium to public markets is price.
Just over cycles and.
And we speak often of our pricing premiums relative to liquid credit in our calls and this translates into the actual results shown on slide 27.
Outlines a spread premium on our new investments relative to liquid credit benchmarks.
Notice that our investment illiquidity premiums in the second quarter fell.
Rising spreads in liquid loans caused by fear was not fully repriced into the direct lending assets given those loans were originated and committed to prior to the spread widening.
Excluding certain equity investments Barings BDC deployed $338 million at an all in spread of 836 basis points, which represents an 11 basis point spread premium to comparable liquid market indices at the same risk profile. However in the previous quarter, we deployed $281 million at all.
And spread of 768 basis points, which represented a 293 basis points spread premium to comparable liquid market indices at the same risk profile.
All in investment spreads increased which will have a positive income benefit, but as we look forward to our new transactions in the pipeline, we expect to see improvement in spread pricing as new transactions modeling increased risk premiums, which will drive D. BDC investment income higher and as Ian said.
Both patients and pricing discipline define long term investment performance and at Barings BDC demonstrate both now I'll wrap our prepared remarks, with slide 28, which summarizes our new investment activity. So far during the third quarter of 2022, and our investment pipeline.
The pace of new investments remained steady compared to the last two quarters with $215 million of new commitments of which a $171 million of closed and funded and all of these new commitments, 93% are first lien asset senior secured loans.
19% are in cross platform investments and 23% are European or Asia Pacific originations. The weighted average origination margin was roughly 676% and we've also funded approximately $12 million of previously committed delayed draw term loans. The current barings global private finance investment.
Pipeline is approximately $2 6 billion on a probability weighted basis and is predominantly 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 I'll now turn the call over to Eric.
Thank you John I want to take a moment to highlight there.
The BDC board approved a number of promotions in recognition of the work done on behalf of Barings BDC shareholders.
<unk> September 1st I'll assume the title of executive Chairman of Barings BDC Johnson.
Jonathan Bock, who will become the Bdc's Chief Executive Officer.
Jonathan Landsberg will become the Chief financial Officer and.
And a little bit Murray will become the Bdc's, Chief operating officer, and remainder Chief Accounting Officer.
In Valor will remain president of Barings BDC.
Sure and the board's confidence in the Bdc's management team.
Grateful for their leadership and dedication to the Barings BDC shareholders with that operator, we'll open the line for questions.
At this time, we'll be conducting a question and answer session. 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 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 keys. Please limit yourself to one question and one follow up one moment, while we poll for.
Questions are.
First question comes from the line of Kyle Joseph with Jefferies. You May proceed with your question.
Hey, good morning, guys. Thanks for taking my question.
Start with congratulations debacle Endo and Elizabeth on the promotion.
Yes.
Before we dig into it.
Let me start on so just obviously volatility has increased casino to questions. As we think about originations should we think about a rotation towards cross platform and then in terms of the.
Acquired portfolios, how does this impact your outlook for potential repayments there.
I'll start with just that you can expect to see the same level of cross platform investment as you've seen in the past and I think we've outlined about 30% give or take generally speaking, which is right around where we're at.
So in terms of additional velocity or prepayment velocity on either of those investments are importantly, the acquired investments we're continuing to see an uptick and the reason we're doing so we're very active and repositioning ourselves out of a number of those loans and so you saw that last quarter with roughly $57 million coming off of Sierra and you can expect to see that.
In the future really is the performance of that portfolio has surpassed our expectations.
Got it and then just.
Digging into credit a bit obviously with.
Higher rates and higher debt servicing levels for our company.
I want to pick your brain given you guys a must have.
<unk> portfolios within your portfolio in terms of the middle market Cross platform MCC and Sierra.
Give us a sense for the underlying trends of portfolio companies in terms of Rev and EBITDA growth and margins that youre seeing across the board.
I'll start with the two acquired portfolios and lobby over too.
Lateral over to Ian as it relates to the all in.
Barings originated portfolio.
But generally speaking our credit performance on the underlying acquired portfolios are still very attractive what you will find though is the added alignment that came from a result of the credit support agreement, which is unique to bearings.
Just to give folks and more importantly, investors more confidence right that not only do we have the patients and the ability to work out those assets, but also the timeframe and the proper shareholder protections to do so even in the case of the Stagflationary stagnation environment, but Ian can speak directly to the <unk> portfolio.
Yes, so in terms of the portfolio and we've done a lot of proactive work in the last couple of quarters going through all of our portfolio companies, which obviously includes the BDC complex and really focused on wage inflation rising rates and input cost inflation.
And I think I mentioned this at the last.
Earnings calls most of our portfolio.
Around 70% or more.
Defensive service sectors software.
Managed services Info services financial services professional services, so I'm really not impacted.
Bye.
Cost inflation, and where we do have manufacturing, it's more light niche.
High margin.
Manufacturing more light assemblers versus heavy manufacturing so feel very good about the portfolio. The way it's positioned we still see revenue growth.
A number just given the fundamental value of those businesses the strength of those businesses and the leadership in the industry of those businesses are able to pass through.
Cost increases now there have been a few that have lagged in terms of putting through price increases and we've seen a little margin degradation on those but that would be a minority.
Got it very helpful. Thanks, a lot for answering my questions and congrats on a good quarter in our evolving market.
Our next question comes from the line of Finian O'shea with Wells Fargo Securities. You May proceed with question.
Hi, everyone. Good morning.
Just to follow up on alright.
Part of <unk> question, there can you give us a sort of state of the union on the.
The CSA.
MDC.
Is that above water.
And can you remind us how how that plays out.
For that to ultimately settle if applicable.
Yes sure. So if you were going to think about the <unk>.
Present, the future value of the payment just given as we continue to work through one investment in specific right that would future value payment would be close to the $23 million.
Fully utilized CSA, if you were to liquidate everything at this moment right. So that's where we'd be if you fast forward to eight years and nothing changed however.
The reason you see a level of depreciation essentially on the credit support agreement is simply because as rates and discount rates have risen.
Future value payments right.
Kind of back to the present has a lower present value as a result of rising rates and so on a go forward basis as we continue to manage a number of strong investments with.
Attractive equity upside in addition to continuing managing existing investments there with both that.
And I towards the exit and repositioning well.
While also being good fiduciaries for our capital and for the trust you've placed in us.
I'm very confident that overtime, we will exit without a high degree of credit support premium or credit support payment made.
But in the future that's really the math if you were to kind of just stop today and assume nothing of the hit occur you'd be close to the 23 million fair value.
But then they discount that back to the present, which is why you see it down a little bit quarter over quarter.
Great. Thanks, so much.
Our next question comes from the line of Casey Alexander with Compass Point, you May proceed with your question.
Yes, good morning, everybody.
Let me.
Charlie and Mike Congratulations on the personnel changes.
I speak for the analytical community.
I think we all take great comfort in knowing that we are now somebody highly qualified and capable in the CFO seat. So.
<unk>.
Okay.
Just messing with your congratulations John and Elizabeth and John .
I think it's all very well deserved I have a couple of questions.
Yes.
Going to slide 15.
I noticed a new entry in that top 10 in core scientific.
That is.
A name that's had some.
A number of articles written about it has arranged for $100 million.
<unk> line.
With an investment bank.
Is that and equipment finance structure or is that a term loan structure.
How has that particular, one kind of set up just because it's one that sort of been in the news.
Sure.
I'll go with that because I know, we don't speak too much about individual portfolio companies, but what I tried to outline is that structure is going to be an equipment.
Financing and is it fairly.
Fairly familiar with the Nexus of companies here full set ourselves as well as our parent has a very large and successful equipment lessor and then that investment would have been done in partnership with that group, but tied to the underlying machines sprite at a strong amortization schedule.
And clearly a strong net return.
Yes, that's right.
What I guess it was good.
Yeah.
Rolling up a couple to my favorite slide Slide 13.
If we look at the yield at fair value of investments of the four sleeves.
You point to there and this is really just a math question can you give us a sense of if you were talking about today, where each of those sleeves yield at fair value would be by the end of the quarter and I'm guessing cross platform would have less movement than the other three ended it has more.
Bespoke type investments many of them some of which are more fixed rate in nature.
Brian perhaps on the cross platform, if you want to speak to the potential for.
Yield increase as a result, the majority of what you will focus on there are quite a bit of floating rate components and cross platform investments and then.
And then we can go to and as it relates to the fact that everything we do there has a floating rate and we will also increase but Brian do you want to provide a little bit of color on those points.
Sure I think on the traditional sort of debt instruments in the portfolio a lot of them are floating rate.
So you would see some increase there, but clearly clips isn't that isn't that column.
Our return on equity effectively and theirs.
If you think about their portfolio that the benefit of LIBOR floors going away. So there's a lot of puts and takes there is what I would say.
Casey So I think youre right in that the other three columns are <unk>.
Much more floating rate in nature just across the board.
So they would probably move more so than the cross platform as a whole, but I would say that.
Still the majority of the investments on a cross platform side are floating rate as well just lower percentage yet.
I have some degree of.
On the on the three on the middle market NBC in Sse's leaves about how much you think they would move quarter over quarter.
Okay NBC wouldn't move much.
As a result, there is a little bit of fixed rate more fixed rate exposure, there, but granted it's very small.
Of course on the CRE portfolio predominantly floating rate, so you'd see that net benefit there.
Okay Alright.
Alright, Thank you for taking my questions and again, congrats on the personnel movements well done thanks.
Thanks.
Our next question comes from the line of Robert Dodd with Raymond James You May proceed with your question.
Good morning, everybody.
Congratulations everybody on.
The new positions I think it might be.
But when if this means he doesn't have to deal with earnings calls as much anymore.
More potentially.
But.
Moving on to <unk>.
So yeah, I mean, as you said I think it was $57 million.
And repayments this quarter, a fair chunk of that seems to have been a reduction.
To market and the size of bad loan JV.
Repayments within the actual sales within that.
Can you give us any I mean, it generated $1 6 million and dividend income.
Positively exposed to floating rates.
But.
How fast do you expect to wind that down.
Given given again it is the Seattle asset on the other hand.
It's potentially got some some some decent prospects in the near term.
So I'll start with the first.
First the way the JV was effectively levered it was less than efficient.
Then what barings was able to both put in place a structure with.
Our lender partners. So you had the ability to effectively.
Designing a loan structure backed by all that collateral that made it.
It's more efficient from a financing perspective does that effectively pull dollars out.
In terms of the wind down it will move fairly quick and the reason why.
Robert is because.
Our approach to joint venture investments is that they are here to expand the frame of reference and add to diversification right just simply to buy a liquid collateral and then over lever it.
In order to hope that it pays a better a better yield profile, that's really how.
Choose not to do things and so you can expect it to move fairly rapidly.
Two the collateral and us to continue to invest and then redeploy yes, it's generated an 8%, 8% plus ish net return, which is great. But if you start to look across the investment opportunity sets across E&S business in Brian's business.
The yield and net return profiles are there are higher with much less underlying price volatility.
Understood and I am a big fan of cross platform.
<unk>.
And diversification, which brings me to those.
If we look at.
Clips I mean, obviously was marked down a little bit this quarter, but still.
Return on average equity just looking at the dividend not internally to eclipse.
Looks to be almost 10%.
Thomson delivered is almost 15%.
These things are generating.
Maybe hybrid tenants Colin Lee with <unk>.
Potential floating rate swap.
I mean, those kind of returns sustainable.
For those businesses E X the CLO dividend maybe.
Is the dividend didn't come from those businesses sustainable.
Maybe ticking up or have they been benefiting from some some.
Yeah.
One time distributions.
Either Q1 or Q2.
Oh I'll take a clips here for a moment.
So there you have the benefit of when macroeconomic uncertainties increase.
So too do you folks tend to whole loan outstandings.
And so the growth of that book has been very very strong because not only is the interest income highest because folks are holding their loans out longer.
Credit performance remains very very good and the ability for the eclipse team in terms of their partnership with.
Brian in the Caf solutions team at Barings their ability to partner and provide solutions on a number of bespoke transactions has only increased and so.
I'd say you can bias returns higher not only through both a rate benefit but also through an underlying growth benefit as when stresses occur people turn to their assets to borrow and so thats been very very positive.
Across the rest of the the network you are starting to find at a much higher net return as a result of increase in base rates, which is what you would expect for US right. We also have to compete with the substitute.
Or increase in spread on liquid markets. So we remain very positive looking forward on both interest income contribution from our private markets businesses in direct lending as well as the cross platform and the joint ventures.
Thank you I appreciate that and again congrats on the new loan.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Eric Lloyd for closing remarks.
Thank you operator, and thank you to all of you who participated on today's call I'm very proud of the promotions that we put forward from what we've done in the last four years and I'm confident the new management team will build on that with great success.
So you can have a great day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation during the rest of your day.
Okay.
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Okay.
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