Q2 2023 Barings BDC Inc Earnings Call
[music].
At this time I would like to welcome everyone to the Barings BDC, Inc Conference call for the quarter ended June 30th 2023.
All participants are in a listen only mode.
A question and answer session will follow the company's formal remarks.
If anyone should require operator assistance during the conference today. Please press star zero on your telephone keypad.
Today's call is being recorded and a replay will be available approximately two hours. After the conclusion of the call on the company's website at Ww Dot Barings BDC Dot com under the Investor Relations section of the web site.
Yeah.
At this time I will now turn the call over to Jeff Chiller head of Investor Relations for Barings BDC. Please proceed.
Thank you operator, and good morning, everyone and thank you for joining us on the call. Please note that this call may contain forward looking statements.
Such 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 forward looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled risk factors and forward looking statements in the company's quarterly report on Form 10-Q.
For the quarter ended June 30th 2023, that's filed with the Securities and Exchange Commission.
Barings BDC undertakes no obligation to update or revise any forward looking statements unless required by law I will now turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC.
Thanks, Jeff and good morning, everyone. I also want to apologize if you hear some background noise, we are having quite the thunderstorm here in Charlotte North Carolina. So if you hear some thunder and stuff in the background I apologize for any of that any of that noise, but obviously not anything we can do about it.
I appreciate everybody joining please note that throughout today's call, we'll be referring to our second quarter 2023 earnings presentation posted on the Investor Relations section of our website.
On the call today I'm joined by Barings co head of global private finance and President of Barings BDC, Ian Fowler Barings head of capital solutions and co portfolio manager of the BDC, Brian Hi.
And that's the Thunder and Lightning I was talking about and Bdc's Chief Financial Officer Barry.
During today's call Ian Brian and Elizabeth will review details of our portfolio and first quarter results in a moment, but I'll start off with some high level comments about the quarter.
I'd like to start by expressing my enthusiasm for a very strong quarter at P. B D. C. Really is measured on a number of financial metrics. It's clear that investors remain concerned about rates inflation and economic weakness even in this challenging environment. The bdc's portfolio continues to deliver strong results for shareholders.
Net asset value per share was $11.34 compared to the prior quarter of $11.17.
That's a net increase of one 5%.
Net investment income for the quarter was 31 cents as compared to 25 cents in the prior quarter strong NII was fueled by a combination of really elevated yields from rising base rates to favorable dividends flowing from platform investments in jbs and three continued strong credit performance within the portfolio.
Yeah.
Our performance is the result of our focus on the top of the capital structure and within more defensive industries. We believe <unk> remains well positioned for any further volatility and uncertainty in the market going forward.
Investment activity during the quarter reflected a modest degree of net repayments as reserve that's returns of capital during the quarter poorly.
Honestly exceeded originations.
Our shareholders know, we're actively working to maximize the value and the legacy holdings acquired from MPC capital in CRE income and rotate them into compelling bearings originated positions.
Our investment portfolio continued to perform well in the second quarter, including the acquired Sierra and N. B C assets. Our total non accruals are 2% of the portfolio on a cost basis at one 1% on a fair value basis, and that's compared to three 8% of the portfolio on a cost basis in the first quarter three.
Three assets were removed from non accrual status and no new non accruals were booked during the quarter, reflecting the strength of the portfolio with the exception of one investment all of our non accrual assets were from acquired portfolios are therefore covered by our credit support agreements.
BBB C shareholders continue to benefit from a credit support agreements provided by the manager for the current quarter. The CSA valuation was approximately $60 million on a combined basis for this year and M. D. C credit support agreements, which are designed to insulate shareholders from realized realized losses in those portfolios.
To date less than $30 million of net losses have been realized at the acquired portfolios. The remaining mark to market losses within the portfolio are spread across a number of.
Across a wide number of issuers and believed to reflect more discounts to par rather than it anticipated and impairments.
Recall that a bulk of the senior Sierra portfolio was comprised of semi liquid broadly syndicated loans that trade infrequently.
Turning to the earnings power of the portfolio, increasing base rates continued to lift yields on our predominantly floating rate portfolio with weighted average yields on floating rate investments increasing to 11.0% we remain conservative on our base dividend policy and our board declared a second quarter dividend of <unk> 26 cents per share.
<unk>, a 4% increase relative to the prior quarters declared dividend on an annualized basis, the new dividend level equates to a nine 2% yield on our net asset value of $11.34.
Total investment income generated in the quarter was the highest income delivered by D. B D. C. Since we began managing the BDC five years ago with.
With the strong results we have demonstrated this quarter, we wanted to remind investors of the message. We telegraph we began managing the port.
It was previously triangle capital.
When we rotated out of broadly syndicated loans in late 2020 bearing stated that we would seek to employ a first lien focused strategy, providing low volatility with a target dividend yield of 8% to 10%.
During the quarter ended June 2023, we have delivered a return inside this range. We will of course work to outperform these goals in the months and years to come.
[noise] Bvd, she is committed to the alignment with our shareholders. During the second quarter, we repurchased one 4 million shares of stock at an average price of $7 75, we have consistently maintained a share repurchase plan that provides <unk> the ability to strategically repurchase shares when the price is dislocated from the AAV we read.
Is it that we can create share price appreciation by simply investing in quality assets, even when the stock is trading at a discount for this reason we worked to be judicious when we were repurchasing shares and balance that against leverage considerations and deployment opportunities.
Looking at liquidity net leverage which was leveraged net of cash and unsettled transactions was 1.15 times. This is within our target leverage range of <unk> nine to 1.25 times, we continue to prioritize risk management, while balancing deployment of capital and what has become a very attractive environment for private credit I'll now.
I'll turn the call over to Ian.
Thanks, Eric recall that P. B D. C is managed by Barings LLC, a credit focused asset manager with more than 350 billion of assets under management.
Bulk of the portfolio are sourced from the global private finance team and organization with more than 85 investment professionals located around the globe, providing financing solutions to preeminent middle market companies sponsored by private equity firms.
B bdc's portfolio decreased by $70 million on a net basis in the quarter with gross fundings of 66 million offset by a 135 million of repayments.
Sales, which included $50 million of sales to do Cassie.
Activity during the first half of the year has been tempered as private equity buyers to take a pause in this rising rate environment to likely determine any impact on valuations.
Regardless of financial models have changed and valuations have declined modestly as cost of leverage has increased dramatically.
As a rough some now with reference rates at zero percent in 2021 private equity buyers could reasonably leveraged companies at five five times, which supported purchase prices in the 13 to 14 times range.
Today with the increase in base rates and slightly higher spreads those same businesses can support leverage in the four to four and a half times range, which supports purchase prices in the 10 to 12 times range.
The reality of the sponsor backed market is that a significant portion of the transaction volume is a sponsor to sponsor deal flow sponsors appear reticent to bridge the valuation gap between 2020, one purchase price multiples and todays range based on financing costs.
Never sponsors continue to execute on portfolio acquisitions, which makes sense as add on multiples are below original platform purchase prices in effect, enabling sponsors to reduce their cost basis and hedge against any compression in exit multiples.
Nevertheless deployment from the Barings Global private finance team is roughly on track with 2019 and currently tracking ahead of 2020.
Recall that the impacts of Covid in 2020 significantly hampered activity in the first half of 2020, but ultimately produce one of the most active deployment vintages, we've ever seen.
All of this to say a year to date trends cannot be a reliable indicator of future activity.
The negative net deployment witness a P. B D. C is the result of a conscious managing of B B D. CS leverage via sales to our joint venture and an intentional rotation of acquired assets. The global private finance investment pipeline has picked up significantly over the past few months and a proper.
Ability weighted basis now stands at $1 7 billion.
Slide 10, nearly 75% of the portfolio consists of secured investments with approximately 70% of investments constituting first lien securities.
We track the median interest coverage of our North American Global private finance issuers on a quarterly basis.
Not surprisingly, we recorded very strong interest coverage ratios in 2021 and in the first quarter 2022 prior to the rise in interest rates.
The median interest coverage in our portfolio at the end of the first quarter 2022 was two nine times.
As a proxy for the disciplined underwriting that terminates or BDC franchise, one year later and 500 basis points of reference rate impact.
Median interest coverage in the portfolio stands at 2.2 times.
That is to say that with the impact of higher interest rates reflected for approximately nine months of issuers reporting.
Global private finance issuers still have considerable cushion before they are unable to make regularly scheduled interest payments.
Our avoidance of various industries prone to economic volatility oil and gas restaurants retail metals among them is proven to be a sound strategy against the backdrop of less economic predictability.
One of the benefits to predominantly sponsor backed strategy has proven out over the past several quarters combined with what we believe reasonable going in leverage multiples. The median gross margin in the North American Global private finance portfolio stood at 44% up from 42% one year earlier and.
It gives us confidence that our issuers are successfully pushing through price increases to combat inflationary pressures in their businesses.
Adjusted EBITDA margins for the same sample were 19% flat from a year earlier to be believed to be a reflection of the fact that wage gains have consumed some degree of gross margin expansion previously noted.
Well not a perfectly comparable metric period to period as the volume of transaction activity in the past five quarters. The skew these metrics somewhat.
We believe we have reason to feel comfortable with the performance in the portfolio.
B B D. C is focus on investing in middle market companies throughout the economy. The largest portion of our funded assets are sourced from the global private finance team.
Call that this team focus is entirely on sponsor backed financing.
And targets issuers with 15 to 75 million in dollars or euros, where appropriate the flexibility of the broader barings capital base and focus on relative value allows the global private finance investment team to deploy capital in predominantly first lien solution set the team feels is most compelling.
<unk>.
We are not a forest fire of assets in any market environment.
Barings capital solutions investment team accounts for the majority of the remaining assets within the portfolio, having led the underwriting for uncorrelated platform investments such as eclipsing. Okay. In addition to making other middle market investments.
The majority of assets originated by the capital solutions team, our conforming middle market loans, but very from the private the global private finance strategy and that these transactions may be non sponsored and or have more flexible capital structures.
We remain confident in the credit quality of the underlying portfolio, but we do see increased volatility heading into the second half of 2023.
And correlated nature and associated value of investments in eclipse arcade should bolster the portfolio in the event the economy does enter into a long expected recession.
D. C is committed to delivering an attractive risk adjusted return to shareholders over a long time horizon, we are investors of credit and middle market companies, our global reach and significant scale across asset classes gives P. B D. C. A unique ability to select risk and return compared to other manager.
Yes.
But at our core middle market credit is what we do.
Turning to our stress credits one bearings originated asset one N V C asset enforce your assets remain on nonaccrual.
M. B C. NCR assets are covered by the capital support agreements.
With our manager as Eric previously mentioned investments on nonaccrual decreased to six from nine in the previous quarter.
I'll now turn the call over to Elizabeth.
Thanks, Dan turning to Slide 14, you can see the full branch at the NAV per share in the second quarter, our net investment income exceeded the 25.
Davidson.
4%, even with this quarter's higher incentive.
Net unrealized appreciation from investments CSA and FX lifted NAV per share by 51 cents, which is partially offset by net realized losses on the portfolio at 45 cents per share and 45 cents per share realized loss was predominantly due to the exit of our debt.
And casting alloy.
All reclassified from unrealized depreciation.
We're very pleased with our portfolios performance amid a backdrop of economic uncertainty and this highlights our conservative approach to underwriting and portfolio construction.
<unk> will detail.
The net unrealized appreciation are shown on slide 15 near the bottom of the slide you can see that credit support agreement increased approximately $10 million.
Which is driven by the acceleration.
Timeline.
And exiting the MVC investment.
Slide 16, and 17 show our income statement and balance sheet for the last five quarters. Our net investment income per share was 31 cents for the quarter driven by a 12% quarter over quarter increase in total investment income with some of the revenue lift offset by higher incentive fees due to unrealized gains in the quarter.
The incentive fee.
Thanks, Jim.
Our balance sheet perspective on slide 17 total debt to equity was one four times at June 30, our net leverage ratio was 1.15 times down from 1.19, and we view. This measure is more reflective of the true leverage possession of the vehicle, which currently sits within our long term target.
Two 1.25 times. In addition, as previously disclosed in May we were pleased to extend the maturity of our senior secured revolving credit facility out to February 2020, with all of our existing lending partners being included in the extension, we will continue to manage the capital structure in EMEA.
That is consistent with our investment grade rating profile.
Turning to slide 18, you can see how our funding mix ties to our asset mix, both in terms of seniority and asset class, including the significant level of support provided by the $720 million of unsecured debt in our capital structure.
Details on each of our borrowings are included on slide 19, which shows the evolution of our debt profile over the last year.
As at the end of the first quarter roughly half of our funding with comprised of fixed rate unsecured debt with a weighted average coupon of 379%.
We have over two years until the next bond maturity in August 2025, turning to slide 20, you can see the impact to our net leverage of easing our available liquidity to fund our unused capital commitment.
Thanks, PDC currently has 338 million of unfunded commitments to our portfolio companies as well as $65 million of outstanding commitments to our joint venture investment we have available cushion against our leverage limit to meet the entirety of these commitments if called upon.
Slide 21 updates, our paid and announced dividends.
Thanks, Jay for the advisor to the BDC.
Eric mentioned earlier, the board declared a third quarter dividend at <unk> 26 cents per share and nine 2% distribution on net asset value given the higher level of earnings and the fact base rates have remained higher for longer shareholders should benefit and we have increased our quarterly dividend from <unk> 25 cents per share to <unk>.
Six cents per share we believe our portfolio will continue to earn about the high hurdle and a normalized rate environment, and we expect that our platform investments eclipse and <unk> as well as our coffee joint venture will continue to generate significant dividend income.
And Beth investments help highlight the importance of less correlated assets and the benefits of a diverse portfolio.
We of course are aligned with our shareholders and the way that we approach this business and we continue to believe that share repurchases at significant discounts to book value can play an important role in our long long term capital allocation policy.
I'll wrap up our prepared remarks with a note on our investment pipeline. Thus far in Q3, we have made $36 million at new commitments of which 24 million have closed and funded the weighted average origination margin RDM three of those.
Commitments with seven 4%. We've also funded $8 million of previously committed debt and equity facilities. The current Barings Global private finance investment pipeline is approximately $1 7 billion on a probability weighted basis and is predominantly first lien senior secured investments.
As a reminder, this pipeline is estimated based on expected closing rates for all deals in our investment pipeline.
With that operator, we'll open the line for questions.
Thank you.
We'll now 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 that your line is in the question queue.
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One moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.
Hey, good morning, guys and thanks for taking my questions.
I appreciate all the color you gave.
On the deal environment, but just trying to get a sense for the.
The outlook for repayments, particularly if we're on the cusp of a potential fed pause.
Hey, Kyle it's Ian.
Good morning, I'll start with that and then.
Jump in so.
Well I mean look I mean, obviously as we discussed it's been rather anemic in terms of volume. This year and you know I think the reason for that is you know M&A activity M&A activity has just been <unk>.
Soft as private equity firms are taking a pause to see in this rising rate environment, what happens to our multiples enterprise values and as we're getting through to the end of this rising rate cycle.
And with only a modest decline and purchase prices I think we're going to see us.
In the second half of the year not going to hold my breath, but yeah, we have I bankers, saying theres a lot of books that are going to come out, but sort of expect that that to occur.
As we look at the remainder of the year. It's also time everyone's start thinking about year end and putting money to work. So I think theres going to be.
A lot of pressure to.
But put deals to work and do deal. So being you know a highly well I'm cautious we're cautious about the remainder of the year in terms of putting deals to work.
And part of the net costs are part of the net number is really us managing leverage given the share repurchases. We did also so yeah, we were balancing deployment with leverage with share repurchases, given where things were and all that so.
There's never a perfect science within that but that's kind of part of what impacted our net number from a repayments versus deployments perspective, yeah and the other thing I would just throw out there to call I mean look.
We're not going to and that we mentioned this right, we're not going to chase deals.
We're not going to we're not forced to do deals we have a portfolio that's been very active and I think any manager.
That has a.
Large.
Mature portfolio is going to see a lot of activity from that portfolio as add on acquisitions has been a main source of adding and creating value as part of the investment thesis in 70% of our volume is coming from our portfolio and these are you know less.
Less risky deals because they're going into companies, we know and understand and helping those companies become bigger better stronger and more diverse credits and so that's kind of like a no brainer and yeah. I think we're out of the woods in terms of a recession, but yeah, even economists are wrong and I'm not going to have that one way or the other.
But is it really the time to backup the truck and just kind of do anything that comes to market right now and our decision was not to do that.
Got it very helpful. Thanks, and then and then a follow up with everything that's gone on with regional banks.
Just wanted to get your take.
How that impacts.
Darrin is but also.
Industry more broadly this is just kind of a continuation of the theme of banks pulling back.
Or do you think it's kind of a more material.
Yes.
Yeah.
Yeah, Hey, Kyle its Brian .
I would just.
Say that clearly some of the ratings actions that Moody's has taken with smaller regional banks.
We've seen a pullback across various markets not necessarily markets that wood wood.
Benefit the Bdcs, but private credit in general I think in the alternative capital has become.
Our broader team across what we've seen in the in the broader barings piped.
Pipeline, I guess I would say.
But I don't know that there what we've seen so far would be a great fit for a vehicle like like Barings BDC.
I would just highlight from a from a liability perspective.
So Elizabeth referenced we extended our bank group, a 100% of our partners and our bank group extended with us and so from an exposure perspective on the liability side, we don't have that and we're just in this environment, where banks are it's more challenging from a financing perspective to have a 100% of them continue to support us and see what we're doing.
Can you just a real kind of testament to what we've done and how we've done it.
Great. Thanks for taking my questions.
Yeah.
Thank you. Our next question comes from the line of Finian O'shea with Wells Fargo Securities. Please proceed with your question.
Hey, everyone. Good morning.
Question on the joint ventures, it sounded like.
Eclipse Brocade and Joe Cassie were highlighted as.
Part of the key.
Future game plan.
At least more central to.
Future differentiation.
On all the other ones at it it looks like Thomson rivers is running down but there are a few more and seeing what the sort of game plan is for them.
Thompson whack him off the S. L P.
And if you are running those down how long that would take thank you.
Thanks, Dan.
Part of what we committed to when we kind of did a little bit of a reboot here from a management perspective is to take out some of the complexity and the.
And the BBC and simplify things the best we could so what I'd say is yes, and I'll turn it over Brian here in a second.
We are running down some of those jb's, that's intentional just to take out some of the complexity within the vehicle.
We do believe that and it's shown over time that eclipse for now a number of years Brocade recently and your coffee for a number of years of generating really attractive returns for the for the BDC and so I wouldn't say as much as their central are core to what we do.
Say that we view them as very complementary to what we do and not as correlated to certain other credit assets to what we do eclipse as an example is one where when cash flow lending could be more challenged in a certain economic environment, they're going to see an increase in opportunities for that type of business. So.
The core is going to be first lien senior secured deals generated an underwritten by <unk> on the global private finance area and then these other parts will be complementary that we think are within that but as I've communicated a couple about a quarter ago, you should not expect to see us do incrementally more.
Deals that looked like eclipse or rotate or anything like that in the near term, we're really focusing on taking out the complexity simplifying the BDC and then what we do believe what we have is really really attractive between coffee brocade and eclipse and yes. The other JV will be managing those down over time as far as how much.
That takes its really hard to predict what that looks like but you should continue to see a decrease.
Each of those jv's overtime as it makes sense for the shareholders to do that over time I'm a brown.
No I think that was well said the only thing I would add is if you think about eclipse and located within those.
Those.
Underlying loans in those portfolios are middle market secured first lien facilities at the end of the day.
And Jay Kathy the portfolio as it provides liquidity to what we're doing by by being able to sell sell down loans and those that portfolio looks very similar to what would be in barings BDC and the strategy that Eric just outlined so as it relates to Thomson rivers and walk them. All those don't look like what Barings Bdc's overall.
It looks like and we would look to wind those down over time.
Okay.
Great. Thanks, so much.
Yeah.
Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.
Hello, everybody good morning.
So just to follow on to that.
What should we.
Can you give us any kind of like the.
This level of return.
The BDC not necessarily be until it tonight the dividend distributions.
So that's something like eclipse, it's been a bit more volatile.
Thanks.
A smaller distribution in the fourth quarter of last year too quite quite large one this quarter.
12% all of that with you right now is.
Is that 12 quite as.
Although we distribution.
Is that.
On a go forward level for that or is it going to continue to bounce around.
You know a little bit more than some of the others, which have been a little bit more stake to Cassie predicted.
Yeah, Hey, Robert it's Brian .
And as it relates to eclipse.
We've tried to mirror the dividend more recently with what we're seeing what we're receiving from Aw.
Plain middle market first lien loans. So so 12%. We felt was was in line with what we've what we're getting from the rest of the portfolio. The reality is it could dividend out a lot more but it's performed incredibly well and we want to continue to grow that platform and allow them to diversify their portfolio.
And so we would like to try to keep it our goal would be to try to keep.
The dividend yield from that platform consistent with the rest of the portfolio I guess is the way that I would describe it.
So as.
As a as base rates change that may change, but it shouldnt be volatile relative to the rest of the portfolio if that makes sense.
It does thats really helpful. Thank you.
And then another.
You said your.
The the CSA.
Hmm.
Evaluation was impacted by an expected acceleration in.
<unk> M D C assets I mean is that true.
And by just.
Estimate or is that actual activity.
Hum.
Uh huh.
How real is that expected acceleration I guess the way you put it.
Yes, so Robert the way, we think about it is that the CSA is either the lesser of when we exit the last investment or 10 years, we are now down to four assets.
One of which.
We should exit close to the end of the year. It's a PE fund that's in wind down mode. We have just hired somebody to help us exit that.
But NBC auto so that should we should exit that over the next couple of years.
And really what's left at that point is security holding.
And in talking with her team, we believe we will exit that sooner than that 10 year Mark.
And likely sell that over the next say five to seven years or five years I should say that that's really where that acceleration and timeline came from.
Got it got it. Thank you and then if I could on <unk>.
Overall credit quality of portfolio non accruals went down et cetera.
But maybe for Ian.
Appreciate the color on the interest coverage et cetera.
What's what's the go forward interest coverage, if we can like sofas.
Last 12 months, they've been paying higher interest that all of them.
So far it's been on a pretty steep climb up with activation.
So if we look forward.
What's your expected interest coverage and also kind of tied into that I've been asking people what proportion of your portfolio today and your interest coverage below one <unk>.
Yes, so great question, because obviously, we are looking backwards and right. The reality is.
A majority of our investors are borrowers.
Provide monthly reporting there's there's probably 20% that are quarterly.
So you know we're looking we haven't received all the quarterly for second quarter reporting packages, yet so what we're doing and I think we've talked about this in the past, where we started way back early in the year stress testing the portfolio.
For rates, increasing to 5%, but obviously the numbers I'm talking about today are we're looking at you know for those that are quarterly reporters, we're taking the first quarter and then we're factoring in are those that are monthly. So just a couple of things that I'd highlight in terms of the.
Portfolio performance.
Number one is the portfolio for for the second quarter.
And I referenced this in I think it's important is that the vast majority of the majority have been minimally impacted by inflation. So I think number one when you look at our margins.
Most of our borrowers have been able to pass through.
Price increases that goes to the composition of the portfolio. We've talked about this in the past that over 75% of our portfolio as service businesses versus manufacturing.
Which is also important because we don't have companies with a lot of capex.
So that's number one.
Over 50% of our portfolio is generating EBITDA growth.
And in terms of those that are.
And G. P. F that have you know less than one times, it's less than five issuers. So it's.
It's a minority.
In terms of.
Being under one to one I do think.
That as we look at the full year impact of rate increases, which is as of like right now and we may have another 25 basis points coming around the quarter.
We'll probably see and I think I indicated there's a little more volatility in the second half of the year, where there will be some companies that are going to have some liquidity needs, but at the end of the day and Robert I've been doing this a long time, if you have good businesses with good sponsors and learn.
<unk> and management teams are all rowing in the same direction. These companies are going to get through a cycle and we expect our our sponsors to put in equity in and will consider.
Picking some of our interest at a premium to get that company through.
Through to the other end.
Robert just to build on what Ian said I mean, that's all.
If that environment hits us in the face right. If you look at today, what we do as you know non accruals were almost cut in half from prior quarter right. As you look at the only one that non accrual that is from something that we didn't acquire within the portfolio and so the bearings, we've talked about rotating out of <unk>.
<unk> your assets into bearings assets.
As we evaluate the portfolio and everything we've communicated to you. If you look from a bearings perspective, those assets continued to perform extremely well Dean's point when you look at the average leverage in the portfolio of call. It five to five five times within that.
The interest coverage within that type of portfolio, even if you run it at 10% or so youre running it still kind of two times interest coverage and as Ian referenced we have with the service businesses. They just typically have a lot less capex. Another use of free cash flow Mark for very importantly, your free cash flow coverage is still stays very attractive.
Relative to the interest on the company.
Really appreciate all that color. Thank you.
Yeah.
Yeah.
Thank you and our next question comes from Casey Alexander with Compass Point. Please proceed with your question.
Yeah.
And first of all let me warn I'm sitting in the same storm here in Charlotte.
Background noise.
Yellow.
You'll have to forgive me.
Secondly.
I want to acknowledge and hope shareholders appreciate the.
Material execution on the on the share repurchase program.
That was that was excellent follow through I wanted to ask Brian .
It sounds to me like what you're saying about the Jbs is Jacobs setting the dividend at you know what you believe loans are earning in the portfolio does that mean.
Are you still earning a higher ROE on those Jv's and and you know building <unk> through retention of income in those jv's.
Yeah. Thanks for the question Casey.
As it relates to eclipse and rotate that is correct, yes, thank high teens type Roe.
And we're retaining that and trying to build NAV within the portfolio with with that capital.
And so <unk> would be sort of back.
At the Mark.
And.
Correct.
Yeah Okay.
Secondly, you gave sort of a cumulative.
Review of it but I was wondering if you could be more specific what's the mark to market loss on MVC to date.
To date, what are the ICH is each CSA currently marked at and what are the caps to the CSA is on each of those individual blocks of business.
Yeah. So for MDC is currently marked at 15.6.
And that CSA is 23 with <unk>.
Losses, right now at MDC, our 'twenty, one so again fully covered.
The Mark on Sierra is around 45.
The losses are around.
36.
And that is up to 100 million.
The losses are not 30, so I'm sorry that losses are like actual annualized fasteners are like 5 million 36.
A lot of incremental 30 as unrealized yet and so that total if you take the full mark to market and you apply that the 36 would be relative to the 100 as Elizabeth said, so you'd be brought more than covered on any of that.
We feel good about some of the mark to market stuff. So there what we acquired there are some CLO equity there are some stuff around the JV that they had existing within there given what's happened with base rates in broadly syndicated loans. That's impacted both of those type of things, obviously CLO equity as can be impacted by the underlying collateral within that but we feel good about where.
For the long term recovery of those but from a mark to market basis, you got to think of it as 36 relative to 100.
Five to 200.
Alright, okay.
All I wanted to know that's perfect. Thank you I. Appreciate you taking my questions you got thank you.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Mr. Eric Lloyd CEO for closing.
Excuse me, we have a follow up question from Finian O'shea with Wells Fargo Securities.
Please proceed.
Hi, Thanks, so much just oh, one more on the Jv's topic does your.
You mentioned.
Building retained earnings on the Eclipse and brocade.
Just a.
I guess to what extent.
What are you thinking size wise before starting to.
Distribute the earnings is it about the scale opportunity and the returns opportunity today and within that.
What's the what's the sort of path you see.
To getting those right sized and distributing returns. Thank you.
Yes.
And I think as long as we can continue to generate those types of roe's.
You know, where we're going to we get we get certainly distribute more and we can be tactical around that to the extent, we want to do that from a portfolio perspective, but we think that those platforms have momentum and so we want to continue to create sort of an EV.
For the overall portfolio over time, and so I don't I don't think that there is a change in strategy or a timeline to get to that point as long as they are are sort of earning that that ROE will continue to let them retain and to the extent, we want to take special dividends to bolster the income.
A BDC, we can do that so we can kind of use it.
To help to the extent there are other issues in the portfolio if that makes sense yeah.
I'll just build on that fan I mean think of a high teens Roe.
It's something we want to distribute where it's prudent as Brian said consistent with the rest of the portfolio, but retaining some some some investment within that to continue to support the growth of that is also a really attractive investment for the BDC because it's consistently filling off kind of that high teens type of return and again were something that we think is extremely complementary.
To the core part of the portfolio, which is going to be cash flow first lien senior secured assets.
Okay. Thanks, so much.
Got it.
Any other questions.
We have one more question from David Miyazaki with confluence investment management. Please proceed.
Hi, good morning.
Wanted to.
Sure.
Depreciation for the TSA that you had in place.
It was a it's proven to be something that is very helpful.
Given that the losses, especially at NBC or are higher than what I had expected.
And I'm curious how is your marching through the wind down of both NBC and Sierra what has surprised you versus your underwriting and how does that shape your view toward.
Future or possible consolidation of our acquisitions going forward.
Hey, guys. Thanks for the question.
We're glad that we're providing more transparency around the CSA and I. Appreciate your recognition that you know.
Its bearings bears that risk and the losses are not to shareholders I would say on NBC as you said.
There are three large assets when we underwrote a M D C.
We referenced two of them that we still hold which are equity positions. We had one that was a debt position and we went into that the debt position. The custom outweighs. The one that's had the realized losses that were significant which is part of what Elizabeth referenced relative to the CSA.
So I would tell you when we underwrote it we didn't expect the loss severity on that to be to the extent that it was.
Obviously, when you underwrite a portfolio that you didn't originate and underwrite you have certain amount of information, but not the full type we would normally have in certain type of underwriting.
The two equity positions as Elizabeth referenced one of them. We're in the process right now of beginning a process to look at an exit on that whether that you know the timeline of that as kind of a TBD.
The other one.
We believe that a little longer hold on that will benefit for some of them basically some macro reasons that are occurring in the European area that will we think will support infrastructure.
As equity positions cannot obviously come back and basically offset the losses that we've had to date on the NBC portfolio, but time will tell whether that happens or not so I'd say on NBC. The short answer is the the surprise I guess, if you think of it that place was on the one customer of ours.
Asset the loss severity as we underwrote it was higher than what we thought it would be to the extent it defaulted.
Two equity positions I'd say are performing in line or above what we thought they were going to perform and therefore I believe we look at the net debt, which got to the 23 ish million dollar CSA.
As we look at it today it should be.
Inside of that number on a fully realized basis, but you know time will tell because equity positions will really drive that on Sierra It was a more diversified portfolio. When you look at that.
From from from the.
The assets that were in there I would say the thing there. It's performed in line with what we underwrote in general as we referenced kind of five ish billion of realized losses. The primary part of the Thirtyish million of unrealized that was.
With reference it's almost it's not perfect, but think of it it's got a half ish or so was kind of CLO equity and half ish or so is kind of the JV. That's within that both of those are really just impacted by the significant increase in base rates, which led to a broadly syndicated loan prices are coming down which really just impact the.
Buying equity value of your CLO equity or the underlying equity value of your JV. So I'd say the surprise there would only be that the actual realized part of the portfolio has been in line with what we expected.
From an underwriting perspective, maybe even a little bit better frankly than what we underwrote then the unrealized part is just the impact of the ryzen based rates, which I don't think we cause he referenced we've kind of stress tested portfolios, assuming that I think all of us wouldn't have underwritten a base case that would've had a type of base rate increases.
Over the last 12 to 18 months that we've seen on kind of the pace of them or this significant increase in them, but again from a realized perspective, we feel really good about that portfolio.
The team would.
Okay.
Germany, Oh future M&A I'm, sorry, it didn't hit that one thanks, Brian .
I would say you shouldn't expect us to do some M&A that would be in line with particularly what I would say M. B C. M. D. C was one that was no different type of assets than what we historically would generate here at barings at the time, we believe we got that at really attractive value for shareholders.
<unk>, we believe over time, that's going to continue to be true when you balance the CSA that barings bears the risk on in the BDC does not bear the risk on combined with the value of the underlying equity assets that are in there. We believe that will be an attractive acquisition for shareholders seamless Sierra and as I referenced earlier.
Really this year and next year.
Probably 2025, its all about focus kind of refocusing, taking the complexity out of the out of the BDC simplifying the BDC simplifying the story and really just getting back to basics are focusing on first lien senior secured assets and rotating the sheer NBC portfolio out and really focusing on the bearings assets.
Which I referenced earlier, if you look at the entire portfolio right bearings, our bearings originate assets represent one of our non accruals every other non accruals stuff from the what we acquired and so we really believe that the quality of our originated deals overtime will benefit shareholders and that's going to be our focus.
Well, that's very helpful and I.
I know the CSA creates.
The complexity, but at the end of the day it is.
Good protection to have in place and that certainly helps.
Helps to remind all of us as shareholders.
Parent is aligning itself with all of our interest.
And I also would have to say.
To echo the comments on following through on the share repurchases I think Thats also a good expression of alignment.
Thanks for answering all the questions.
Absolutely David I really appreciate you recognizing that we.
We're doing everything we can to align with shareholders again I think between the two CSA as we got over $120 million of bearings risks not BDC risks to insulate shareholders.
We do believe and we've tried to overtime communicate that we think that sends a message as to how we go about business and how we think about making sure we insulate and protect shareholders from an alignment perspective.
Great well, thank you very much.
<unk>.
Thank you there are no further questions at this time I would like to turn the floor back over to Mr. Eric Lloyd CEO for closing comments.
Yes first of all I would just say thanks, I know, it's a busy time for everybody to take the time to join these calls and I. Appreciate you taking the time to listen to our call and invested in us and ask the questions that you did thanks for putting up with everything from the sirens in the Thunder and the lightning that were behind us during the call and I just want to thank the team too.
With with Elizabeth and Jeff and Albert E N, and Matt and Brian and everything we've done I really feel great about where we are the team we have going forward.
A number of you have seen some some invites to some shareholder stuff that we want to do to get out there and make sure. We're communicating with you in telling our story here over the course of talked me down at the end of the year.
And we're grateful for anytime youre willing to invest in Austin here in the stores, because we feel like Theres a lot of compelling attributes. We have right now that we believe will really benefit the stock price and shareholders over time, so with that I'll. Just say, thank you everybody be well and I hope everyone have a great summer.
Okay.
This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
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