Q1 2023 Barings BDC Inc Earnings Call
At this time I would like to welcome everyone to the Barings BDC incorporated conference call for the quarter ended March 31, 2023, all participants are in a listen only mode.
<unk> and answer session will follow the company's formal remarks.
Today's call is being recorded and a replay will be available 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'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 Companys quarterly report on Form 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission Barings BDC undertakes no obligation to update or revise any forward looking statements.
As required by law at this time I would like to turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC.
Yes.
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 first quarter 2023 earnings presentation.
Is it on the Investor Relations section of our website.
Barrington capital solutions and co portfolio manager Brian .
And the Bdc's Chief Financial Officer, Lucas sorry.
During today's call, Brian and what's been told you details of our portfolio first quarter results in a moment.
I'll start off with some high level comments about the quarter.
Let's begin with the market backdrop shown on slide five of the presentation.
The continued increase in phase III has contributed to elevated volatility and BDC share prices and it's clear that investors remain concerned about rates inflation and economic weakness.
Even in this challenging environment. The BG portfolio continued to deliver strong returns are strong performance from water from our focus on the top of the capital structure and we've been more defensive industries and we believe the BDC remains well positioned for any further volatility and uncertainty in the market going forward.
Turning to the first quarter highlights on slide six.
Net asset value per share was $11 17 compared to the prior quarter of $11 a box.
That's an increase of one 1% our NAV increase quarter over quarter was driven by unrealized depreciation on our investment portfolio of 10 cents per share.
Our net investment income for Q1 was 25 cents per share compared to 35 cents per share last quarter the quarter over quarter decrease in NII and a function of our shareholder friendly fee structure Barings did not earn an incentive fee last quarter, given the total return hurdle and our incentive fee.
Turning to new investments, we had gross originations of $145 million in the first quarter that was offset by $54 million of sales and repayments.
Our debt portfolio increase of $91 million, our investment portfolio continued to perform well in the first quarter and what is the acquired Sierra and MVC assets. Our total non accruals are three 8% of the portfolio on a cost basis, and one 1% on a fair value basis.
Through investments in the job for less than 0.1% of the fair value of the portfolio were placed on nonaccrual in the quarter.
Acquired portfolios and therefore covered by our credit support agreements.
Turning to the earnings power of the portfolio increasing base rates continued to look the yields on our predominantly floating rate portfolio with weighted average yields on our middle market and cross platform investments increasing to $10 six and 10, 8% respectively.
We expect the heightened revenue contribution to continue given the inherent lag in base rates flowing through the portfolio of assets typically reset our coupons every three to six months.
We remain conservative on our base dividend policy and our board declared a second quarter dividend of 25 cents per share equating to a 9% yield on our net asset value of $11 17.
Slide seven outlines summary financial highlights from the previous five quarters as I mentioned continued strong investment performance and higher base rates drove total investment income meaningfully or to $67 2 billion up 6% quarter over quarter.
Below the line net unrealized depreciation of $22 million was primarily a function of higher valuations for several several cross platform investments and stability within our portfolio broadly.
Looking at liquidity net leverage which is leverage net of cash and unsettled transactions was $1. One nine times. This is within our target leverage ratio of 0.9 to $1. Two five times, we continue to prioritize risk management, while balancing the deployment of capital in order to become a very attractive environment for private credit.
While opportunities to deploy capital are extremely attractive today. It is investments that were originated over the last few years that will dictate current performance. We remain confident confident that our conservative approach to underwriting and portfolio construction and believe our portfolio is well positioned to deliver strong results for shareholders over the long term.
So we remain confident the bdc's investment positioning, particularly amid a shifting economic background backdrop.
With respect to the portfolio, we continue to align our interest with those of our investors going forward leverage permitting we will remain focused on stock repurchases as we believe current trading levels offer a compelling opportunity to purchase high quality assets at a discount.
And lastly, I want to make a point about personnel changes following some recent departures we've had over the last six months I'd like to officially welcome Elizabeth Murray to our role as Chief Financial Officer of Bvd seat and I'm also brought together additional teammates with related functional and deep investment expertise to support Bbc's day to day operations and portfolio management.
Ryan Hi, Hello, bearings capital solutions will take on expanded leadership role overseeing portfolio construction of Barings BDC, Brian joined bearings in 2007 and has extensive experience in public and private credit distress debt special situations and private equity Brian will be supported by my point managing director of our private Finance group.
Who will join the Barings BDC GM to lead portfolio management that brings 30 years of experience executing underwriting and monitoring North American private finance investments.
Joe Mazzoli will also be joining the BDC team and brings more than 11 years of BDC research and credit market experience to the team. This adds to the continuity continuity of Jeff and Albert and our team based approach and we look forward to continued alignment with our shareholders I'll now 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 mentioned previously our middle market portfolio increased by $57 million on a net basis in the quarter with gross fundings of 89 million offset by repayments of 33.
The increase in interest rates has had a very real impact on the amount of debt private equity buyers can undertake to support new investments.
And as a result, many sellers have remained on the sidelines anchored to 2021 valuations.
This naturally has led to lower repayment activity and fewer investment opportunities in the first quarter of 2023.
With that said our backlog continues to grow as sellers likely come to terms with valuations and begin to harvest some of their stronger performing assets.
Despite the general market headwinds new middle market investments included 10, new platform investments.
$56 million and $33 million of follow on investments in delayed draw term loan fundings.
We continue to deploy capital at a very attractive risk return profiles and partnership with longstanding sponsors.
Our cross platform portfolio increased by $43 million on a net basis in the quarter with $55 million of new originations versus $13 million of repayments.
One specific highlight I'd like to call to your attention to is barings BDC purchase of an equity stake and Brocade Holdings LLC.
One of the country's leading litigation finance platforms and specializes in providing financing to plaintiff law firms engaged in matched tour and other civil litigation.
During the quarter Barings BDC, along with other affiliated funds invested approximately $45 million in preferred and common equity and this investment. This investment provides a strategic benefit to barings BDC investors and allows the company to participate and uncorrelated asset classes that offer.
It's differentiated income returns as compared to directly originated loans.
<unk> generates a pik dividend at sulphur, plus 6% with a 2% floor.
This investment further enhances barings BDC already very wide investment frame of reference, which we believe is key to navigating competitive markets.
Rotation out of MVC, and Sierra investments continues with $8 million of sales and repayments in the quarter.
Slide 10 updates of data we show you each quarter on middle market spreads across the capital structure.
After a brief spike in a broad slowdown in the broadly syndicated loan market BSL spreads have reverted below middle market spreads.
Bridge of our investment portfolio from December 31 to March 31st as shown on Slide 11 on Slide 12, you can see a breakdown of the key components of our investment portfolio as of March 31st.
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.
Legacy MVC capital in Sierra income portfolios as well as our cross platform investments.
The middle market portfolio remains our core focus and makes up 61% of our portfolio in terms of total investments at fair value.
Our bearings originated middle market exposure is heavily diversified amongst.
<unk> is a 240 portfolio companies with a geographic diversity diversification across the U S.
Europe and APAC regions.
Underlying yield at fair value on our middle market investment portfolio was 11%.
From 10, 5% last quarter weighted average first lien leverage of five two times.
With no loans on non accrual is.
Is it reflective of our borrowing 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 $325 million of investments in our legacy MVC and Sierra portfolios and $671 million across platform investments.
Turning to our stress credits to portfolio or two bearings originated assets to MVC assets and five tier assets remain on non accrual.
MVC and tier assets are covered by the credit support agreements.
As Eric previously mentioned, we have two new non accruals this quarter, which account for 1% of the portfolio on a fair value basis.
We continue to have very little restructuring pick in our portfolio, even as borrowers cope with higher base rates wage pressures and raw material costs restructured.
The restructured tech is what we'd call a loan that was originally underwritten as a fully cash pay loan where the bar is asked for relief by converting a portion of the cash interest coupon to pik.
For a period of time, we view restructured picked as one of the early signs that can foreshadow potential future problems.
Slide 13 provides a further breakdown of the portfolio from a C&I perspective, the core bearings originated portfolio of 73% first lien notes.
The combined MVC interior portfolios are comprised of senior secured second lien mezzanine debt and equity investments, which brings the first lien component of the total portfolio down to 69%.
Our top 10 investments are shown on slide 14, our largest investment at 6% of the total portfolio.
And the top 10 investments represented 20% of the total portfolio.
Recall, our largest investment eclipse business capital is backed by a large portfolio of asset backed loans considerably structured inside of the collateral that liquidation value.
Eclipse portfolio remains diverse from an industry perspective, as well with 44 investments spread across 17 industries.
And that business continues to perform quite well contributing healthy dividend distributions for the BDC as well as sustained business growth.
Finally, I would like to speak to our credit performance and portfolio broadly.
The portfolio remains healthy and the number of watch list names in the private credit portfolio is not materially moved as higher rates take hold.
Businesses that were challenged prior to the increase in interest rates remain challenged.
Importantly sponsors appear supportive of underlying companies and are contributing capital directed by liquidity challenges.
Any forward leverage will continue to be tempered relative to the levels exhibited in 2021, and 2022 and the market remains lender friendly.
We had been investing in private credit markets for decades, and our long institutional memory, that's given us the discipline to construct portfolios that offer significant downside protection protection through a cycle.
I'll now turn the call over to Elizabeth to provide additional color on our financial results.
Thanks, Dan turning to slide 16.
Our NAV per share.
The first quarter.
Our net investment income.
25 cents per share.
Even with this quarter's higher.
Net unrealized depreciation.
CSI.
Sure.
Which was partially offset by net realized losses.
Oh, yes.
For sure.
We are very pleased with our portfolios performance amid a backdrop of economic uncertainty and its highlights conservative approach to underwriting and portfolio construction.
Additional details on the deck.
I appreciate it.
On slide 17.
At the 22 million unrealized appreciation in the first quarter approximately 8 million.
Credit.
The cross platform portfolio contributed $13 million credit related appreciation driven by core science and eclipse the majority of the price driven write ups in the middle market portfolio.
The legacy MVC portfolio.
Depreciation 6 million tied to underlying credit performance.
Cm portfolio.
Relatively flat quarter over quarter.
Near the bottom of slide 17, you can see that the crew.
This important agreement increased approximately $6 million as a result of decreases.
Slide 1918, and 19 show.
And balance sheet for the last five quarters, our net investment income per share was 25.
Driven by a 6% quarter ever quarter increase in total interest income where some of the revenue.
That's a higher incentive.
Unrealized gains in the quarter any incentive fee look back.
Calculation.
From a balance sheet perspective on slide 19 total debt to equity was one four times at March 31st our net leverage ratio was one nine times up from one <unk> and we view that measure it's more reflective of true leverage position of the vehicle, which currently sits within our long term target.
One nine to 125.
We will continue to manage the capital structure in a manner that is consistent with our investment grade rating.
Turning to slide 20, you can see how our funding mix timeshare.
In terms of seniority and FX.
Including a significant level of support provided by $725 million of unsecured debt in our capital structure.
Sales of each of our borrowings are included on slide 21.
The evolution of our debt over the last year.
And at the first quarter roughly half of our funding was comprised of fixed rate unsecured debt with a weighted average coupon of 379% and.
And we have over 10 years until the next bond maturity in August 2020.
Turning to slide 22, you can see the impact to our net leverage and using our available liquidity.
Yes.
<unk> currently has $305 million.
Next chart portfolio company as.
That's why it was 67 million of remaining commitments to our joint venture investments.
Salable cushion against our leverage limits to meet the entirety.
Got it.
As well as over $351 million of available dry powder between cash on hand, and availability on our revolving credit facility slide 23 updates our paid and announced dividend Barings took over as the advisor to the BDC.
As Eric mentioned earlier, the board declared a second quarter dividend.
At 25 cents per share and 9% distribution on that.
But the current environment.
Yesterday's range will remain higher for longer we continue to prefer setting a dividend payout is achievable through market cycles and not ever correct based on temporary market factors related to tax rate. We believe our portfolio will continue to earn at the high hurdle and a normalized rate environment and we expect several.
All of our cross platform investments, including Eclipse and our joint venture to coffee will continue to generate significant distributor bumps.
These investments help highlight the important that's less correlated assets.
First the portfolio.
The ability of our phase III dividend should be thought of as an anchor and complemented three special distributions over time.
We of course are aligned with our shareholders in the way that we approach.
And we continue to believe that share repurchases at accretive levels placement quite involved and our long term capital allocation policy.
Believe current BBC trading level presents a compelling opportunity and in the coming quarters and he loves to prioritize stock repurchases, while balancing target leverage.
Moving to slide 25. This shows a graphical depiction of relative value triple B double b and single B asset classes spreads across many classes.
And from their highs in private credit spreads remain attractive, especially when considering the labor elaborate and tighter documentation available and this is mark <unk>.
26 outlines the premium spreads on our new investments relative to liquid credit benchmarks.
Bleeding certain equity investments in the corner.
Barings BDC to $89 million and all in spread at 832 basis points, which represents 270 basis point spread premium to comparable liquid market.
At the same risk.
I'll wrap up our prepared remarks on slide 27, which summarizes our new investment activity. So far during the second quarter of 2020, our investment pipeline.
The pace of new investment activity has slowed in recent times in concert with its way down middle market M&A activity.
Thus far in <unk>, we have made $3 million of Ethernet of which $2 million of placement.
The weighted average origination margin or I'm, sorry, a date yet.
So 7% we have also funded $16 million previously.
Tony facility.
Current barings glib at global private finance investment pipeline is approximately <unk> eight.
Haynesville Ian on a probability weighted.
Predominantly first lien senior secured investments.
As a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipeline.
With that operator, we will open the line for questions.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Q1 moment. Please while we poll for questions.
Thank you. Our first question is from Finian O'shea with Wells Fargo. Please proceed with your question.
Yeah.
Hi, everyone. Good morning.
I appreciate the detail you gave Eric on.
Management fortification and those.
Those are some fine additions.
First question has to do those folks still have their day jobs or will they be fully dedicated to <unk>.
The BDC matters.
And.
Then does the.
The new organizational lineup hold across the BDC franchise, including the privates or does the makeup in those parts look different.
So.
So I appreciate your question and I appreciate you highlighting that we're the fortification of the management that was clearly a focus.
So Brian as you know has led our capital solutions business wishes represented call it 2025% of the assets that come into the BDC. He will continue his responsibility running our capital solutions business, but add to us.
Responsibilities all the BDC franchise. So that will include the BDC as well as the other two bdcs to perpetual in the private that we manage that youll have leadership responsibility over.
Secondly, so.
Spending a lot of his time on PC, but not exclusively on the BDC that Freud, who will move over from E. M salaries team, which is our global private finance team will be 100% dedicated to the Bdcs and focus on the portfolio management and investments selection within the BDC. So it will be 100% dedicated to the Jo mill.
As always we will move over will also be 100% dedicated to the BDC franchise and focus there and then Elizabeth Murray as you know it was a 100% focused on that as as Albert as as Jeff. So excluding Brian everybody else is 100% focused on the BDC franchise.
And then as I mentioned earlier there also similar for the responsibilities for the other two bdcs.
Answer your question clearly driven.
Yes. Thank you so much and a follow up on.
The MVC related.
DSA.
Is there a line of sight on when this might settle I know the I.
I think the final.
The settlement date would be in 2031, that's obviously some time from now.
Any color you can give us on what the.
Turning assets are.
Too you know.
Finalize our terminate before that.
Before we move on from that part of the portfolio.
Thanks for the question. So we have six remaining assets in the portfolio.
And we do anticipate over the next few quarters more of them to either repay or Sam Zell I do believe so.
Security Holdings will be one that we called out longer term.
So to give you an exact date as to when the TSA will settle and get that.
The 10 year term.
Kieran holdings will probably be a lag.
Remaining over the next couple of years.
Okay. Thanks, so much.
Thank you. Our next question is from Casey Alexander with Compass point. Please.
Please proceed with your question.
Yeah. My first question Eric is regarding the share repurchase there was a significant lag between the end of the last share repurchase and the new share repurchase the new share repurchase doesn't have a turnkey pipe one you didn't repurchase any shares during the quarter.
And despite.
<unk> comment that you intend to use it without the 10 B five one with the stock at historically low.
Price to NAV.
I mean shareholders with without that clear expectation of the <unk>. One would have ample reason to suggest that perhaps this repo repurchase authorization is not operating.
In the same shareholder friendly fashion as before can you can you give me some color on that.
Happy to.
So what happened in the first quarter as we had a limited amount of time, where we were not in a blackout period. It was about a two week period of time, if I recall correctly that we had.
We balance that at the time with some commitments we've made on the origination side for deploying capital combined with our net leverage which we saw creeping up a little bit up into around that one two times level that we wanted to keep again in a range of <unk> nine to $1. Two five times. So given the small time frame in the first quarter combined with where our <unk>.
<unk> work for new deals that we were going to deploy combined with our leverage.
Difficult time to make sure that we I made a comment as did Elizabeth definitively at this earnings call that we intend to make share repurchases in the coming quarters and I expect.
You and other people to hold us accountable to follow through on that as we fully intend to do that given where the trading levels are.
Are you getting engaged you tend to be five one program now.
It's not it's not going to be systematic it's going to be more strategic fitness and Casey I'll tell you as soon as the blackout period is over and you can anticipate share repurchases will begin.
Okay, Secondly, Ah.
Eric given that that all of these personnel changes are internal movements.
You know shareholders could be forgiven for thinking that this is less of a strategic process at more shuffling. The deck chairs can you speak to that please.
Yeah.
I guess, what I'd ask is.
Joe just going forward to judge me going forward I would say that my intention is I looked at the changes in what the skills I wanted to bring in I wanted to bring people with a with a more investment focused experience into the BDC franchise I felt like Thats a place that we could benefit from having more people that had true investment experience.
<unk> there are complemented by people with BDC experience.
Versus the past, where we've had more BDC experience, but less investment experience in leadership roles. So that that was my focus and I can tell you when they looked at the people that have been brought in Brian Bad Elisabeth who you already know Joe.
Within bearings or some of our best people that we have in some of our most experienced people from an investment perspective. So.
I understand your perspective.
Would've gone outside and made some hires I felt like knowing the people that we have internally and the competencies with them and the skills of them and frankly the way they work together with other people on the platform.
But bringing the team together, which is now it's a much more broader team was going to be the best thing to deliver returns on behalf of shareholders going forward.
At this question is for Ian and you made the statement that it's your expectation that the.
The sponsors will start to harvest their better performing assets, but I would simply ask why would sponsors harvests there better performing assets at this point in time when valuations are at such low levels.
Yeah, So Casey actually valuations it just actually just cracked a bit so if you look at.
Sort of the average.
We're just price multiple who were at the peak it was in the 13 times. It's dropped to 12 I think what we're seeing is that if you have a good platform. That's performing well you have a lot of sponsors that.
Are looking to raise their next fund they need realizations and so I wouldn't say that it's like a watershed of of great opportunities coming to the market at this particular moment, but I think that at some point with all the dry powder on the side you've got.
One side, you've got sponsors who have to put money to work on the other side, you've got sponsors that have to get realizations and we do see some really attractive new platforms that come to the market and so we will take advantage of those but we're not we're not chasing.
New platforms in the market, we continue to rely on our portfolio, which really is generating at this point probably over 70% of our origination.
Alright, thank you for that.
And my last question is with brocade, such a differentiated asset of $45 million allocation to an investment that it's clearly sort of outside the bounds of normality for a BDC can you speak to why the sizing of that position is so large.
Yes, I think Casey, it's Brian as we think about.
That platform on a go forward similar to eclipse, we're looking at it as a long term play where we can get differentiated origination and ultimately be able to have a diversified portfolio underneath that similar to eclipse.
So we brought over a portfolio basically.
Set up a platform brought in a team and brought in an existing portfolio to get us started and will continue to originate.
New loans through that platform. So I would think of it similar to eclipse and that it is a diversified pool of assets inside a specialty finance company that that will be a long term platform for this franchise.
Alright, Thank you for taking my questions.
Thank you. Our next question is from Sean Paul Adams with Raymond James. Please proceed with your question.
Hey, guys.
While your dividend coverage looks promising for the remainder of FY2023 will there be a new leverage target for 2024 to accommodate the quality so for her.
I think at this time, our legacy leverage target will remain the same.
Okay perfect. Thank you.
Okay.
Thank you. Our next question is from Paul Johnson with <unk>. Please proceed with your question.
Yes, good morning, guys.
On the incentive fee this quarter.
Just wondering if you can potentially give any sort of guidance for future quarters I mean, it was the.
Incentive fee higher this quarter, just due to kind of previously deferred.
Fees, and I guess holding else all holding all else equal do you have any sort of.
As you know where that incentive fee may land future quarters, I'm kind of looking at like $6 million at full incentive fee is there any potential for.
Yeah, more recapture I guess it was deferred fees.
Yes, so in this quarter.
The incentive fee was higher was because of the unrealized depreciation so going forward. If next quarter, we have unrealized depreciation again.
There is there is a likelihood that there will be more recapture so all else being equal the portfolio remaining flat and six to 7 million I think is a good range for you to think about that going to.
To give you a guess on unrealized appreciation is we just we can't do that and that's I'm sure what makes it difficult for you to model the incentive fee.
Sure I understand.
That's helpful and then.
I'm just kind of curious at a higher level trying to understand mass tort law suit financing, maybe if you could just potentially provide kind of like a brief explanation of how that works and then Europe and then second to that.
Your investment in that company.
It seems like it's obviously a long term investment I mean, do you kind of intend to potentially grow.
So your investment there, where you see that it's pretty much six today.
Yeah, I would think of it as later storage later stage mass tort litigation so towards the end of the case.
Abiding financing to litigation firms waiting for ultimate settlements to pay out.
At attractive what we believe are attractive risk adjusted returns.
In terms of.
We've made a commitment to sort of.
Grow that platform over time with a partner in.
Our open to continuing to do that.
Any way that we can raise capital around that platform on a go forward.
So for your modeling purposes, we have invested an additional $10 million post quarter end, which leaves us with about 30 million of unfunded commitments.
Okay.
Got it okay, so theres unfunded commitment.
Your return on that investment I mean, it's a preferred equity investment that you made.
So for plus 600, and I thought I heard you say.
But as the preferred equity investment.
Just curious I mean is there are there opportunities for I guess higher returns from essentially like preferred dividends and as such.
Coming out of route gainers.
600 kind of what we should think about for our for the return.
Yeah. So the the cash investments into the business are at a preferred level with the contractual returns that you just referenced and then in addition to that we will end the.
City of the equity underneath that preferred instrument.
And there can be special dividends made.
DNS security overtime.
We began the alignment with the preferred so not it's all it's all together within the BDC is where the equity is correct.
Got it okay. That's helpful.
Yeah. Thanks, that's all for me thank you.
Yeah.
Thank you there are no further questions at this time I'd like to hand, the floor back over to Eric Lloyd for any closing comments.
Thank you operator, and thank you for everybody who participated on today's call stay safe and have a great weekend.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.