Q2 2024 Barings BDC Inc Earnings Call
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Operator: At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended June 30, 2024. All participants are currently in a listen-only mode.
Speaker Change: At this time I would like to welcome everyone to the Barings BDC, Inc Conference call for the quarter ended June 30, 'twenty 'twenty four all participants are currently in a listen only mode. A question and answer session will follow the Companys formal remarks at which time, we ask that you limit your.
Operator: A question and answer session will follow the company's formal remarks, at which time we ask that you limit your questions to one with a follow-up. 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.baringsbdc.com under the Investor Relations section. At this time, I will turn the call over to Joe Mazzoli, Head of Investor Relations for Barings BDC.
Speaker Change: Questions to one with a follow up.
Speaker Change: Today's call is being recorded and a replay will be available approximately two hours. After the conclusion of the call on the company's website at Www Dot bearings B D C Dot com under the Investor Relations section at this time I will turn the call over to.
Joe Mazzoli: Joe Mazzoli head of Investor Relations for Barings BDC.
Joe Mazzoli: Good morning, and thank you for joining the call. 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 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, 2024, as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.
Joe Mazzoli: Good morning, and thank you for joining the call. 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 flows. Although the company believes these statements are reasonable actual.
Speaker Change: <unk> 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.
Joe Mazzoli: Unformed 10-Q for the quarter ended June 30th 'twenty 'twenty four is filed with the Securities and Exchange Commission.
Barings BDC: Barings BDC undertakes no obligation to update or revise any forward looking statements unless required by law.
Eric Lloyd: I will now turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC.
Eric Lloyd: Thanks, Joe. And good morning, everyone.
Eric Lloyd: Thanks, Joe 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 2024 earnings presentation that is posted on the Investor Relations section of our website.
Eric Lloyd: We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our second quarter 2024 earnings presentation that is posted in the investor relations section of our website. On the call today, I'm joined by Barings BDC President Matt Freund, Chief Financial Officer Elizabeth Murray, and Barings Head of Global Private Finance and BBDC Portfolio Manager Bryan High. In the second quarter, BBDC delivered another strong set of results fueled by best-in-class credit performance and the strength and stability of our franchise.
Speaker Change: On the call today I'm joined by Barings, Bdc's, President, Matt Froind, Chief Financial Officer, Elizabeth Murray, and Barings head of global private finance and B B D C portfolio manager, Brian Hi.
Speaker Change: In the second quarter <unk> delivered another strong set of results fueled by best in class credit performance and the strength and stability of our franchise our focus on the top of the capital structure investments and sponsor backed middle market issuers continues to serve investors well I.
Eric Lloyd: Our focus on top-of-the-capital structure investments and sponsor-backed middle market issuers continues to serve investors well. I want to take a moment to note that in this market, unlike the larger cap end of direct lending, we are not competing with investment banks for broadly syndicated loan issuance, and we generally see stronger documentation, meaning some of the BSL-style covenant package you may have heard of in other direct lenders' portfolios are not present in ours.
Speaker Change: I wanted to take a moment to note that in this market. Unlike the larger cap and a direct lending we are not competing with investment banks for broadly syndicated loan issuance and we generally see stronger documentation, meaning some of the BSL style Covenant package, you may have heard of and other direct lenders portfolios are not present nurse or focus on the core of the middle market.
Eric Lloyd: Our focus on the core of the middle market is reflective of lower leverage levels and more attractive risk-adjusted returns, which is why we find this to be the best segment of the market for BBDC and our shareholders. That corporate portfolio is complemented by a selection of non-sponsored and platform investments that we believe benefit our shareholders in the form of higher potential returns and diversification. Our portfolio strategy is outlined in greater detail on slide five, and we continue to successfully invest throughout the market and deliver compelling returns to our shareholders. As we reflect on the first half of 2024, the performance of BBC Worldwide has been strong against a relatively benign economic backdrop.
Eric Lloyd: Is reflective of lower leverage levels and more attractive risk adjusted returns, which is why we find this to be the best segment of the market for B B C and our shareholders.
Eric Lloyd: That corporate portfolio is complemented by a selection of non sponsored and platform investments that we believe benefit our shareholders in the form of higher potential returns and diversification.
Eric Lloyd: Our portfolio strategy as outlined in greater detail on slide five we continue to successfully invest throughout the market and deliver compelling returns to our shareholders.
Speaker Change: As we reflect on the first half of 2020 for the performance of BBC has been strong against a relatively benign economic backdrop inter.
Eric Lloyd: Interest rates, while elevated, have been stable for several quarters, and credit performance appears to be holding up broadly across the industry, save for a few idiosyncratic examples. While we have done well in the stable economic and interest rate environment, the market activity of the past week suggests change may be afoot in the lending ecosystem. These changes may include a decrease in interest rates, which we think will have an overall positive impact on our business as it further improves credit metrics in the existing portfolio and sparks a sentiment shift among sponsors and may spur further deal activity, which in turn may drive higher spreads and additional transaction fees.
Eric Lloyd: Interest rates, while elevated have been stable for several quarters.
Speaker Change: The performance appears to be holding up broadly across the industry say for a few.
Speaker Change: Idiosyncratic examples.
Eric Lloyd: While we have done well in the stable economic and interest rate environment the market activity over the past week suggests change maybe a foot in the lending ecosystem. These.
Eric Lloyd: These changes may include a decrease in interest rates, which we think will have an overall positive impact on our business as it further improves credit metrics in the existing portfolio and sports a sentiment shift amongst sponsors and base for a.
Eric Lloyd: Further deal activity, which in turn May drive higher spreads and additional transaction fees.
Eric Lloyd: Turning to some specifics of BBDC, net asset value per share was $11.36 compared to $11.28 for the prior fiscal year-end, reflecting an increase of 0.7% and a testament to the portfolio stability. Net investment income for the quarter was $0.40 per share and meaningfully out-earned our dividend of $0.26 per share. Perhaps, most importantly, in a metric that we are particularly proud of, our non-accruals as a percent of fair value were unchanged quarter over quarter at 0.3%.
Eric Lloyd: Turning to some specifics of BDC.
Eric Lloyd: That asset value per share was $11 36 compared to $11.28 for the prior fiscal year end, reflecting an increase of 0.7% and a testament to the portfolio stability.
Eric Lloyd: Net investment income for the quarter was <unk> 40 per share and meaningfully out earned our dividend of 26 cents per share perhaps most importantly, the metrics that we were particularly proud of our non accruals as a percentage of fair value were unchanged quarter over quarter is 0.3%.
Eric Lloyd: As our investors know, the stability of our performance is a result of our focus on thorough and conservative underwriting at the top of the capital structure and within more defensive industries. With a more uncertain landscape ahead of us, we are confident the BBDC strategy and portfolio are well suited to deliver strong results for our valued shareholders across a wide range of economic and market conditions. Digging a bit deeper into the portfolio, we continue to actively maximize the value of legacy holdings acquired from MVC Capital and Sierra.
Eric Lloyd: As our investors know the stability of our performance is the result of our focus on thorough and conservative underwriting at the top of the capital structure and within more defensive industries.
Eric Lloyd: With a more uncertain landscape ahead of US we are confident the BDC strategy and portfolio are well suited to deliver strong results for our valued shareholders across a broad range of economic and market conditions.
Eric Lloyd: Digging a bit deeper into the portfolio. We continue to actively maximize the value in legacy holdings acquired from N B C capital in Sierra.
Eric Lloyd: Our goal remains to divest these assets at attractive valuations, as we did this quarter. Barings' originating positions are now 90% of the portfolio at fair value, up from 76% of the portfolio at the beginning of 2022. Also, just to remind you all, potential losses from these assets are protected by credit support agreements limiting downside risk for BBDC investors. Our investment portfolio continued to perform well in the second quarter. There is no substitute for fundamental credit analysis, which has always been at the core of our investment philosophy and is reflected in the health of the BBDC portfolio today, including the acquired Sierra and NBC assets. Our total non-accruals are an industry-leading 0.3% on a fair value basis and 1.5% of the portfolio on a cost basis.
Eric Lloyd: Our goal remains to devote divest these assets at attractive valuations as we did this quarter.
Eric Lloyd: Barings originated positions are now 90% of the portfolio at fair value up from 76% of the portfolio at the beginning of 2022.
Eric Lloyd: So just to remind you all potential losses from these assets are protected by credit support agreements limited downside risk for BDC investors.
Speaker Change: Our investment portfolio continued to perform well in the second quarter. There is no substitute for fundamental credit analysis, which has always been at the core of our investment philosophy is reflected in the health of the B B D C portfolio today <unk>.
Eric Lloyd: Including the acquired year, an M D C assets, our total non accruals are an industry, leading 0.3% on a fair value basis, and 1.5% of the portfolio on a cost basis. This is down for 1.5% on a fair value basis, and two 5% on a cost basis as of December 31 2023.
Eric Lloyd: This is down from 1.5% on a fair value basis and 2.5% on a cost basis as of December 31st, 2023. Turning to the earnings power of the portfolio, the weighted average yield at fair value was 11.1%. We remain conservative on our base dividend policy, and our board declared a third-quarter dividend of $0.26 per share, consistent with the prior quarter. On an annualized basis, the dividend level equates to a 9.2% yield on our net asset value of $11.36.
Eric Lloyd: Turning to the earnings power of the portfolio the weighted average yield at fair value was 11, 1%.
Eric Lloyd: We remain conservative on our base dividend policy and our board declared a third quarter dividend of <unk> 26 cents per share consistent with the prior quarter.
Eric Lloyd: On an annualized basis, the dividend level equates to a nine 2% yield on our net asset value of 11 three six.
Eric Lloyd: We believe the best measures of the portfolio's performance, non-accruals, net asset value, and NII were extremely compelling for the June quarter and anticipate continued strength in the quarters ahead. Before I turn the call over to Matt, I want to highlight that while the future operating environment may be uncertain, the long-tenured team we have here in the North American global private finance business, coupled with the capabilities of teams across Barings, who also contribute to our asset sourcing and underwriting, we are extremely confident in our ability to continue delivering compelling value to our shareholders.
Eric Lloyd: We believe the best measures of the portfolio's performance non accruals net asset value and NII were extremely compelling for the June quarter, and anticipate continued strength in the quarters ahead.
Speaker Change: Before I turn the call over to Matt I want to highlight that while the future operating environment may be uncertain. The long tenured team. We have here in the North American global private finance business, coupled with capabilities of teams across bearings will also contribute to our asset sourcing and underwriting we are extremely confident in our ability to continue delivering compelling value to our shareholders. We are.
Eric Lloyd: We have designed our portfolio to have resiliency, to weather economic stress, and to have the liquidity and expertise to play offense in what we believe will be an even more attractive environment for middle-market direct lending in the second half of the year. I'll now turn the call over to Matt.
Matt: Our portfolio to have resiliency to weather economic stress and who have the liquidity and expertise to play offense and what we believe will be an even more attractive environment for middle market direct lending in the second half of the year.
Eric Lloyd: Now I'll turn the call over to Matt.
Matt Freund: Thanks, Eric. Recall that BBDC is managed by Barings LLC, a credit-focused asset manager with nearly $410 billion of assets under management as of June 30. The bulk of the portfolio is sourced from the Global Private Finance Team, an organization with more than 100 investment professionals located around the globe, providing financing solutions to high-quality, market-leading, middle-market companies sponsored by top-tier private equity firms. BBDC deployed $78 million of capital this quarter, offset by $195 million of sales and repayments, resulting in net deployments of $117 million. Net, I'm sorry, net sales and deployments of $117 million.
Matt: Thanks, Eric recall that BDC is managed by Barings LLC, a credit focused asset manager with nearly $410 billion of assets under management as of June 30, the bulk of the portfolio is sourced from the global private finance team and organization with more than 100 investment professionals located around the globe, providing financing solutions to high quality market.
Matt: Leading middle market companies sponsored by top tier private equity firms.
Speaker Change: <unk> deployed $78 million of capital this quarter offset by a $195 million of sales and repayments, resulting in net deployment of $117 million.
Speaker Change: I'm, sorry, net sales into plants of $117 million repayment activity skewed towards noncore acquired positions with assets determined to be non core to our strategy experiencing an $80 million reduction in fair market value quarter on quarter.
Matt Freund: Repayment activity skewed towards non-core acquired positions, with assets determined to be non-core to our strategies experiencing an $80 million reduction in fair market value quarter on quarter. As Eric noted, we are executing the strategy we have been telegraphing for the past year and a half, simplifying the portfolio and selectively investing in what we believe are the most compelling middle market, direct lending opportunities in the market. Consistent with what we observed a quarter ago, we continue to see a tale of two markets when discussing deployment, largely bifurcated on size.
Speaker Change: Eric noted we are executing the strategy, we have been telegraphing for the past year and a half simplifying the portfolio and selectively investing in what we believe are the most compelling middle market direct lending opportunity in the market.
Speaker Change: Consistent with what we observed a quarter ago, we continue to see a tale of two markets when discussing deployment largely bifurcated on size it'll.
Matt Freund: LBO activity in our core markets, defined as sponsor-backed lending to sponsor platforms with $15 to $75 million of EBITDA, remained muted during the second quarter. We have experienced some level of refinancing activity within the portfolio, but at levels significantly lower than our broadly syndicated counterparts. As we approach the long-awaited rate-cutting cycle, we are optimistic that a change in the interest rate environment will have a catalytic effect on transaction activity. Our team is constantly in touch with a significant number of middle-market sponsors and has heard a consistent drumbeat of optimism for a busy second half of the year, which has been echoed by investment bankers as well.
Speaker Change: <unk> activity in our core markets to find a sponsor backed lending to sponsor platforms with $15 $75 million of EBITDA remained muted during the second quarter, we have experienced some level of refinancing activity within the portfolio, but at levels significantly lower than our broadly syndicated counterparts.
Speaker Change: As we approach the long awaited rate cutting cycle, we are optimistic that a change in the interest rate environment will have a catalytic effect on transaction activity. Our team is constantly in touch with significant number of middle market sponsors and had heard a consistent drumbeat of optimism or a busy second half of the year, which has been echoed by investment bankers as well.
Matt Freund: We have continued to see an increase in the number of early stage opportunities within the platform, but conversion rates through June were relatively modest. That said, we continue to support a wide range of borrowers executing add-ons for their existing portfolio companies and on more strategic acquisitions, demonstrating the benefit of our longstanding relationships and incumbency in our core area of focus. Turning to the portfolio, 75% of the portfolio consists of secured investments, with approximately 66% of investments constituting first lien securities.
Speaker Change: We have continued to see an increase in the number of early stage opportunities within the platform, but conversion rates through June were relatively modest.
Speaker Change: We continue to support a wide range of borrowers executing add ons for their existing portfolio companies and on more strategic acquisitions, demonstrating the benefit of our long standing relationships and incumbency in our core area of focus.
Speaker Change: Turning to the portfolio, 75% of the portfolio consists of secured investments with approximately 66% of investments constituting first lien securities.
Matt Freund: BBDC experienced a stabilization of interest coverage during 2024 and finished the quarter with a weighted average interest coverage of 2.1 times above industry averages, demonstrating the merits of our approach to focusing on leading companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions. Given the current shape of the forward SOFR curve, we believe the portfolio now reflects the full negative impacts of an elevation of rates, and credit and cash flow metrics are likely to benefit from any decline in base rates going forward.
Speaker Change: <unk> has experienced a stabilization of interest coverage during 2024 and finished the quarter with a weighted average interest coverage of two one times above industry averages and demonstrating the merits of our approach to focusing on leading companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions.
Speaker Change: Given the current shape of the forward Sofer curve, we believe the portfolio now reflects the full negative impact of an elevation of rates and credit and cash flow metrics are likely to benefit from any decline in base rates going forward.
Matt Freund: Furthermore, as rates decline, our hurdle rate structure will continue demonstrating shareholder alignment with our managers. The median gross margin in the North American Global Private Finance portfolio, a portfolio similar to BBDC, stood at 50%, up from 47% one year earlier, demonstrating that companies we invest in have strong market positions, enabling them to successfully increase prices to combat inflationary pressure. Furthermore, adjusted EBITDA margins for the same sample set were 22%, up from 21% in the prior year's period.
Speaker Change: Furthermore, as rates decline, our hurdle rate structure will continue demonstrating shareholder alignment with our manager.
Speaker Change: The median gross margin in the North American Global private finance portfolio, a portfolio similar to bvd fee stood at 50% up from 47% one year earlier, demonstrating the companies, we invest and have strong market positions, enabling them successfully increased prices to combat inflationary pressure. Furthermore, adjusted EBITDA margins for the same samples.
Speaker Change: <unk> were 22% up from 21% in the prior year's period.
Matt Freund: These results from our portfolio companies demonstrate the merits of our focus on lending to market leaders and defensive industries at reasonable leverage levels and our avoidance of cyclical industries, oil and gas, restaurants, retail, metals, and metalworking among them. The portfolio composition remains highly diversified, with the top 10 issuers accounting for 24% of fair market value. Recall that the top two positions within the portfolio, Eclipse Business Capital and Rockade Holdings, are strategic platform investments that we own and provide BBDC shareholders with access to differentiated, compelling opportunities to invest in asset-backed loans and litigation funding solutions, two specialized areas we believe provide attractive total return and diversification benefits, especially given Rocade's lack of correlation to broader financial markets.
Speaker Change: Results from our portfolio companies demonstrate the merits of our focus on lending to market leaders in defensive industries at reasonable leverage levels, and our avoidance of cyclical industry oil and gas restaurants, retail and metals and mining metals and mining among them.
Speaker Change: The portfolio composition remained highly diversified with the top 10 issuers accounting for 24% of fair market value where call. It the top two positions within the portfolio eclipsed business capital and <unk> holdings, our strategic platform investments that we own and provide bvd shareholders with access to differentiating.
Speaker Change: Compelling opportunities to invest in asset backed loans and litigation funding solutions two specialized areas, we believe providing attractive total return and diversification benefits, especially given rotate lack of correlation to broader financial markets.
Matt Freund: Turning to portfolio quality, risk ratings exhibited minimal movement during the quarter as our issuers exhibited the most stress, classified as risk ratings 4 and 5, or 9% on a combined basis quarter over quarter and compared to 8% in the immediately preceding quarter. Non-accruals accounted for $6 million of the fair market value of the portfolio and 0.3% of assets, which we believe is one of the lowest levels of non-accruals across the industry.
Speaker Change: Turning to the portfolio quality risk ratings exhibited minimal movement during the quarter as our issuers exhibited the most stress classified as risk ratings, four and five 9% on a combined basis quarter over quarter and compared to 8% in the immediately preceding quarter non accruals accounted for $6 million of the fair market value of the portfolio and 0.3% of assets.
Speaker Change: Which we believe is one of the lowest levels of non accruals across the industry. We remain confident in the credit quality of the underlying portfolio.
Matt Freund: We remain confident in the credit quality of the underlying portfolio. We expect BBDC's differentiated reach and scale, coupled with our focus on the core of the middle market, to continue driving positive outcomes for shareholders in the quarters to come. The BBDC portfolio is a through-the-cycle portfolio designed to withstand a variety of economic environments and prevailing interest rate levels. To this end, BBDC was structured to align both feed and credit performance hurdles, as outlined on slide 14.
Speaker Change: We expect <unk> differentiated reach and scale, coupled with our focus on the core of the middle market to continue driving positive outcomes for shareholders in the quarters to come.
Speaker Change: The bvd portfolio is that through the cycle portfolio designed to withstand a variety of economic environments and prevailing interest rate levels to this.
Speaker Change: <unk> restructured to align both feed and credit performance hurdles as outlined on slide 14.
Matt Freund: With the increase in base rates experienced over the past two years, effectively all publicly listed BDCs have delivered earnings in excess of their hurdle rates, the relative distinction between hurdle rate levels has fallen out of focus. However, as base rates begin to fall, BBDC investors will again benefit from the impact of a high hurdle rate at BBDC compared to other industry participants. BBDC's hurdle rate of 8.25% compares to an industry average of 7.03% among externally managed public peers, with some managers having significantly lower hurdles.
Speaker Change: With the increase in base rates experienced over the past two years effectively all publicly listed Bdcs have delivered earnings in excess of their hurdle rates the relative to sanction between hurdle rate levels have fallen out of focus at.
Speaker Change: Base rates begin to fall the BDC investors will again benefit from the impact of a high hurdle rate at D V D C compared to other industry participants bvd.
Speaker Change: <unk> hurdle rate of eight 5% compares to an industry average of 7.3% among our externally managed public peers with some managers, having significantly lower hurdles.
Matt Freund: We anticipate this hurdle rate will differentiate relative value for BBDC shareholders in the quarters to come. To the extent BBDC's pre-incentive fee returns fall between 8.25% and 10.3%, shareholders can expect the stability of an 8.25% return, while BDCs with lower hurdle rates will experience the same pre-incentive fee returns but would receive lower net returns. The second component of BBDC's fee structure that I want to comment on is the total return hurdle, sometimes referred to as a look-back.
Speaker Change: We anticipate this hurdle rate will differentiate relative value for <unk> shareholders in the quarters to come.
Speaker Change: To the extent DVD pre incentive fee returns fall between 8.25% and 10, 3% shareholders can expect a stability of an eight to eight 5% return.
Speaker Change: While the BDC, while bdcs, a lower hurdle rates will experience the same pre incentive fee returns would receive lower net returns.
Speaker Change: The second component to be Bdcs fee structure I want to comment on is the total return hurdle, sometimes referred to as I look back. The look back is designed to align credit performance of BDC with incentive fees paid to the manager Barings LLC as we all know credit performance is foundational to our BDC, but less than 50% of externally managed publicly traded bdcs have.
Matt Freund: The look-back is designed to align credit performance of BBDC with incentive fees paid to the manager, Barings LLC. As we all know, credit performance is foundational to a BDC, but less than 50% of externally managed publicly traded BDCs have a look-back that incorporates losses into their return hurdle. When our hurdle rate structures are combined with a strong stock buyback program and credit-supported agreements covering a portion of our assets, we feel that the shareholder focus at Barings is among the best in the market. I'll now turn the call over to Elizabeth.
Speaker Change: I look back that incorporate losses into their return hurdle.
Speaker Change: When our hurdle rate structures are combined with a strong stock buyback program and credit supported agreements covering a portion of our assets we feel that the shareholder focus at Barings is among the best in market.
Speaker Change: I'll now turn the call over to Elizabeth.
Elizabeth Murray: Thanks, Matt. On slide 15, you can see the full bridge of the NAB per share movement in the second quarter. NAB per share was $11.36 as of June 30, which is a decrease of 0.6% over the prior quarter and an increase of 0.2% year over year. Our net investment income exceeded the $0.26 per share dividend by $0.14 per share, or 35%. Net unrealized depreciation from investments, CSAs, and FX equaled $0.29 per share and was partially offset by net realized gains on the portfolio and FX of $0.07 per share.
Elizabeth: Thanks, Matt on Slide 15, you can see the full range.
Speaker Change: Yeah.
Elizabeth: Second quarter NAV per share was $11 36 as of June 30, which is a decrease 6%.
Speaker Change: Third quarter, and an increase of 2% year over year.
Speaker Change: Net investment income exceeded the 26 cents per share dividend by 14% or 35% net unrealized depreciation from investment CSA and ethics equaled <unk> 29 per share and was partially offset by net realized gains on the portfolio.
Speaker Change: Seven cents per share and net realized gain in the portfolio was predominantly due to the exit of our investment in <unk>.
Elizabeth Murray: The net realized gain in the portfolio was predominantly due to the exit of our investment in Core Scientific, partially offset by our exit in Highland, a Sierra investment which was covered by the CSA and was primarily reclassed from unrealized depreciation. As you may recall, during the first quarter, we recognized a loss of $7.6 million on the restructuring of our debt investment in Core Scientific into equity. During the second quarter, as I previously mentioned, we fully exited our investment in Core Scientific and recognized a gain on the sale of the equity of $8 million.
Speaker Change: Partially offset by accident.
Speaker Change: Year, indefinite which is covered by the TSA with primarily reclassifying unrealized depreciation you may recall during the first quarter, we recognized a loss of $7 6 million on the restructuring of our debt.
Speaker Change: Unfortunately.
Speaker Change: During the second quarter as I previously mentioned, we fully exited our investment in core scientific and recognized the gain on the sale of equity and $8 million. We are pleased to say we experienced full recovery of this investment.
Elizabeth Murray: We are pleased to say we experienced full par recovery of this investment plus a $0.4 million gain on equity. However, the valuation of the credit support agreements decreased by approximately 0.9 million. The fair value of the CRSA decreased from $35.4 million in the first quarter to $32.6 million as of June 30th.
Speaker Change: But the point 4 million gain on accident.
Speaker Change: The valuation of that credit support agreement decreased by approximately 9 million at fair value. This.
Speaker Change: This year, our CSA decreased from $35 4 million in the first quarter to $32 6 million as of June 30. During the second quarter of this year portfolio had sales and repayments of approximately 32 million and had 29 positions remaining in the portfolio down from 36 position as at March 31st the fair value.
Elizabeth Murray: During the second quarter, the Sierra portfolio had sales and repayments of approximately $32 million and had 29 positions remaining in the portfolio, down from 36 positions as of March 31st. The fair value of the MVC CFA increased from $16.1 million to $18 million as of June 30th, driven by unrealized depreciation in the underlying portfolio, with four positions remaining. Our net investment income was $0.40 per share for the quarter, compared to $0.28 per share in the prior quarter and $0.31 per share for the second quarter of 2023.
Speaker Change: NBC CSA increased $16 1 million to.
Speaker Change: $18 million as of June 30, driven by unrealized depreciation in the underlying portfolio with four positions remaining our net investment income was <unk> 40 per share for the quarter compared to 28% in prior quarter and 31 cents per share for the second quarter of 2023 investment income in the quarter.
Elizabeth Murray: Investment income in the quarter was primarily driven by dividends from joint venture and platform investments, and our incentive fee expense was lowered quarter over quarter due to unrealized depreciation fueled by acquired positions and incentive fee caps. Our net leverage ratio, which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions, was 1.07 times at quarter end, down from 1.17 times in the quarter ended March 31, and currently sits within our long-term target of 0.9 to 1.25%.
Speaker Change: Merely driven by dividends from joint venture platform.
Speaker Change: Incentive expense was lower quarter over quarter.
Speaker Change: Depreciation fueled by acquired position an incentive fee cap.
Speaker Change: Our net leverage ratio, which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions was one seven times at quarter end down from 117 times in the quarter ended March 31st currently.
Speaker Change: Currently sits within our long term target.
Speaker Change: <unk> nine to 125 times.
Elizabeth Murray: Our current leverage provides ample capacity to seize opportunities and pursue attractive deployment opportunities in the quarters to come. Our funding mix remains highly defensible both in terms of seniority and asset class, including the significant level of support provided by the unsecured debt in our capital structure. At June 30th, our unsecured debt accounted for a billion of our funding and equated to approximately 70% of our outstanding debt balances. We continue to maintain significant flexibility in our capital structure with the next bond maturity in the second half of 2025 and maintain a ladder of maturities out to 2029. Barings BDC currently has $215 million of unfunded commitments to our portfolio companies as well as $65 million of outstanding commitments to our joint venture investments.
Speaker Change: Our current leverage provides ample capacity to seize opportunities and pristine attractive deployment opportunities in the quarters to come our funding mix remains highly defensible fast in terms of seniority and asset class, including a significant level of support provided by the unsecured debt in our capital structure at June 30th or unsecured debt.
Speaker Change: Accounting for a 1 billion of our funding and equated to approximately 70% of our outstanding debt balances.
Speaker Change: We continue to maintain significant flexibility in our capital structure with the next bond maturity in the second half of 2025 maintain a ladder of maturity out to 2020 now bearing.
Speaker Change: Barings BDC currently has $215 million.
Speaker Change: This chart portfolio companies as well as 65 million in outstanding commitments to our joint venture investments.
Elizabeth Murray: We have an available cushion against our leverage limit to meet the entirety of these commitments called a. As mentioned earlier, the board declared a third quarter dividend of $0.26 per share, a 9.2% distribution on net asset value, and it's consistent with our second quarter 2024. During our earnings call in February, we disclosed the board authorized a $30 million share repurchase plan for 2024. We continue to be active users of our share repurchase plan.
Speaker Change: <unk> cushion against our leverage limit to meet the entirety of these commitments.
Speaker Change: As mentioned earlier the board declared a third quarter dividend <unk> 26 cents per share and nine 2% distribution, our net asset value and is consistent with our second quarter 2024 dividend during our earnings call in February we disclosed the board authorized a $30 million share repurchase plan for 2024, we continue to.
Speaker Change: The active users of our share repurchase plan.
Speaker Change: Second quarter with no exception as we repurchased more than 190000 shares during the period and have repurchased a total of 310000 shares in the first half of 2024, our focus on share repurchases is one example, and be bdcs thoughtful approach to aligning our interests with shareholders I'll wrap up our prepared remarks.
Speaker Change: But the net definite timeline, thus far in the third quarter, we have made 56 million of new commitments and funded $46 million.
Elizabeth Murray: The second quarter was no exception, as we repurchased more than 190,000 shares during the period and have repurchased a total of almost 310,000 shares in the first half of 2024. Our focus on share repurchases is one example of BBDC's thoughtful approach to aligning our interests with shareholders. I'll wrap up our prepared remarks with a note on our investment pipeline. Thus far in the third quarter, we have made $56 million in new commitments and funded 46 companies. With that operator, we will open the line for questions. If you would like to ask a question at this time, please.
Speaker Change: With that operator, we will open the line for questions.
Operator: If you would like to ask a question at this time, please press star then the number 1 on your telephone keypad now. You will be placed in the queue in the order received.
Speaker Change: If you would like to ask a question at this time. Please press Star then the number one on your telephone keypad now you will be placed in the queue in the order receipt. Please be prepared to ask your question when prompted and we do ask that you limit your questions to one with a follow up.
Operator: Please be prepared to ask your question when prompted, and we do ask that you limit your questions to one with a follow-up. Once again, if you would like to ask a question, please press star then the number 1 on your telephone keypad now. Once again, to ask a question, please press star, then the number one on your telephone keypad now. Your first question comes from Robert Dodd with Raymond James. Your line is open.
Speaker Change: Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad now.
Speaker Change: Once again to ask a question. Please press Star then the number one on your telephone keypad now.
Speaker Change: Your first question comes from Robert Dodd with Raymond James Your line is open.
Robert Dodd: Good morning.
Robert Dodd: Good morning, Eric. You talked about disruption in the market, which obviously we've seen over the last week. And then, Matt, you talked about there being a drumbeat of optimism about activity in the second half. So can you... Can you kind of reconcile those two things? Generally, you know, market disruptions and volatility and things like that result in a slowdown in activity, but the activity, the thought had been it would rebound, but the last week, how much has that changed your thinking on where you think activity could go in the second half of the year?
Speaker Change: I mean, you talked about.
Speaker Change: Disruption in the market, which I mentioned, we're seeing that.
Speaker Change: Over the last week and then Matt you talked about this that does that drumbeat optimism about activity in the second half so can you.
Speaker Change: Can you kind of reconcile those two.
Matt: Generally in the market disruptions and volatility and things like that result in a slowdown in activity, but the activity.
Speaker Change: The thought had been that.
Matt: Believe that it would rebound, but the last week, how much has that changed.
Matt: On one way you think.
Speaker Change: Activity could go in the second half.
Speaker Change: Okay.
Bryan High: Hey, Robert, this is this is Bryan. Good morning.
Speaker Change: Hey, Robert This is this is Bryan.
Robert Dodd: Good morning.
Bryan High: You know, in terms of the volatility market, I do think that one of the benefits of private credit, and we've seen some deals pulled from the broadly syndicated market this week, just given some of that volatility, is, you know, better execution at the end of the day. So if I sort of anecdotally talk about our pipeline, we've definitely seen an increase in activity. Whether or not that ultimately ends in, you know, deals being closed is sort of to be determined.
Robert Dodd: Turning to the volatility of the market I do think.
Speaker Change: That one of the benefits of private credit and we've seen some deals pulled from the broadly syndicated market. This week.
Speaker Change: Just just given some of that volatility is.
Speaker Change: Better execution at the end of the day, so if I, if I sort of anecdotally talk about our pipeline, we've definitely seen an increase in activity, whether or not that ultimately ends in deal.
Speaker Change: <unk> is being closed as sort of to be determined but I do think that there is there is a natural tension of of our need for liquidity in private markets and folks looking to monetize maybe.
Bryan High: But I do think that, you know, there is a natural tension of a need for liquidity in private markets and folks looking to monetize. Maybe not at the ideal time, but because they want to raise a new fund, they're looking to ultimately sell platforms to a new sponsor, to a strategic. So we are seeing more activity, again, from a pipeline perspective. Whether or not that ultimately closes, we'll have to wait and see.
Speaker Change: Maybe not at the ideal time, but because they want to raise a new fund theyre looking to ultimately.
Speaker Change: <unk> platforms.
Speaker Change: New sponsor to a strategic so.
Robert Dodd: So we are seeing more and more activity again from a pipeline perspective, whether or not that ultimately closes. We'll we'll have to wait and see yeah. The other comment that I would add Robert maybe I should've been more specific in my prepared remarks, I think that we feel that we're closer now to a rate cut cycle than we ever have been and as we think about the private equity firm.
Eric Lloyd: Yeah, the other comment that I would add, Robert, maybe I should have been more specific in my prepared remarks. I think that we feel that we're closer now to a rate cut cycle than we ever have been. And as we think about the private equity firms that we're interacting with, while they've all consistently told us that the cost of debt capital doesn't move the needle for them, I think that we're actually going to test that theory because as rates start to come down, I just think the cost of capital for the overall capital structure is going to reset, and when that happens, we would expect more sponsor-to-sponsor LBO activity to pick up
Speaker Change: That we're interacting with while they are all consistently told us that the cost of that capital doesn't move the needle for them I think that.
Speaker Change: We're actually going to test that theory, because as rates start to come down I, just think the cost of capital for the overall capital structure is going to reset and when that happens we would expect more sponsor to sponsor LBO activity to pick up.
Robert Dodd: Got it. Got it. Thank you.
Speaker Change: Got it got it. Thank you and then just on credit I mean, your non accruals.
Eric Lloyd: And then just on credit, I mean, yeah, you're not a really good course, you know, 0.3 on fair value and low on a cost base as well. I mean, how would you expect that to evolve over the next? I mean, this is very much a gut feel kind of question, to be fair.
Speaker Change: Really good point.
Speaker Change: Fair value and low on a cost basis as well.
Speaker Change:
Speaker Change: How would you expect that to evolve over the next I mean this is very much a gut feel kind of question to be flat over the next say 12 24 months I mean, there may be rate cuts, which is good on the interest coverage et cetera.
Robert Dodd: Over the next, say, 12, 24 months, I mean, there may be rate cuts, which is good for interest coverage, et cetera. But the economy is a little softer, and rates have been high for a long time. So liquidity reserves at portfolio companies might be smaller than they were. So can you give us any thoughts on how you expect credit in your portfolio, right, to evolve over the next couple of years? Yeah, kind of an unfair question, but there you go.
Speaker Change: The economy is a little soft and rates have been high for a long time some liquidity.
Speaker Change: With a portfolio of companies might be smaller than they were so can you give us any thoughts on how you expect credit in your portfolio too to evolve over the next couple of years.
Speaker Change: Kind of answer that question, but.
Eric Lloyd: Yeah. I'll start and then turn it over to Bryan.
Speaker Change: Yeah.
Speaker Change: I'll start and then turn it over to Brian look I think that you are kind honestly to give us part of the answer to your question in the way that you asked and so.
Eric Lloyd: Look, I think that you were kind, honestly, to give us part of the answer to your question in the way that you asked it. And so, as we think about projecting out credit quality, we feel like we're in a very good position today. As we think about any sort of catalytic events that may accompany a rate reduction or perhaps economic volatility and or weakness, we just don't know what the causes of that uncertainty might be.
Brian: As we think about projecting our credit quality, we feel like we're in a very good position today as we think about any sort of catalytic events that may accompany a rate reduction or perhaps economic volatility and our weakness like we just don't know what the causes of that uncertainty might be and so while we feel that the portfolio is very well positioned now.
Eric Lloyd: And so, while we feel that the portfolio is very well positioned now, it's really hard to prognosticate. A different set of scenarios would create a different constitution for the portfolio, but I feel very comfortable with where we are from a diversification perspective, as well as from a quality of underwriting perspective that we've implemented over the past several years that's resulted in the portfolio we have today. Bryan, I don't know if you have any other thoughts, macro.
Brian: It's really hard to prognosticate.
Speaker Change: Different set of scenarios, creating a different constitution to the portfolio.
Brian: I feel very comfortable with where we are from a diversification perspective as well as from a quality of underwriting perspective that we've implemented over the past several years. That's resulted in the portfolio. We have today, Brian I don't know give me thoughts macro I mean macro wise, obviously, you know Robert you probably have seen more than we have from all the various portfolios in the market, but it certainly feels.
Bryan High: I mean, macro-wise, obviously, you know, Robert, you probably have seen more than we have from all the various portfolios in the market. But it certainly feels like there is an uptick in stress across the marketplace. That being said, I do think our portfolio is held relatively well, and we've got the resources to deal with the issues if and when there's a broader macro softening that, you know, is sort of unavoidable at that time.
Brian: There is an uptake uptick in stress across the marketplace that being said I do think our portfolio is held in relatively well.
Brian: And we've got the resources to deal with with the issues if and when.
Brian: There is a broader macro softening that.
Brian: Sort of unavoidable avoidable at that time.
Eric Lloyd: Yeah, I mean, I would highlight what Matt hit on earlier, too, which is, despite the increase in base rates, our interest coverage still is just over two times, which we feel really grateful and great about. And so, barring an idiosyncratic kind of event on specific credits, the overall portfolio health remains very strong.
Speaker Change: No I mean, I would highlight would not hit on earlier too which is.
Brian: Despite the increase in base rates or interest coverage still is just over two times, which we feel really great about and so barring an idiosyncratic pains event on specific credits.
Brian: Overall portfolio health remains very strong.
Brian: Okay.
Robert Dodd: Yeah, I understand. Thank you.
Speaker Change: Yeah understood. Thank you.
Finian O'shea: Your next question comes from Finian O'Shea with Wells Fargo. Your line is open.
Brian: Your next question comes from Finian O'shea with Wells Fargo. Your line is open.
Unknown Executive: Hey everyone, good morning. A question on the, I forget which one is which, but the private to public BDC. Can you give us an update on where that is in its investment period or whatnot, and now that it seems like there's some precedent to merge these into the public, regardless of price to NAV, seeing your appetite to do that. Thank you. Yeah, thanks, and...
Finian O'shea: Hey, everyone. Good morning.
Speaker Change: And on the.
Finian O'shea: I forget, which one is which but the private to public BDC.
Finian O'shea: Can you give us an update on where that is and it's.
Speaker Change: Investment period or whatnot.
Speaker Change: And now that it seems like there's some precedents too.
Speaker Change: Merge these into the public's regardless of price to NAV.
Brian: Seeing your appetite to do that thank you.
Unknown Executive: I can't provide specifics on private funds, but we don't have any anticipation, at least currently, of funding, doing anything in BBDC, or asking BBDC shareholders to consider anything at this time.
Speaker Change: Yes, Thanks Ben.
Speaker Change: I can't provide specifics on on private funds, but but we don't have any anticipation at least currently have.
Speaker Change: Doing anything in BDC or asking the BDC shareholders to consider anything at this time.
Speaker Change: Thank you.
Casey Alexander: Your next question comes from Casey Alexander with Compass Point. Your line is open.
Speaker Change: Your next question comes from Casey Alexander with Compass point Your line is open.
Casey Alexander: Hi, good morning, and thanks for taking my questions. And Matt, I got kind of a tricky one for you here. And maybe this is for Matt or for Elizabeth, because it's kind of a math question: at what degree of, you know, decline in base rate would bring the high end of the hurdle into play? And, you know, and to what extent would that fully protect the current dividend?
Casey Alexander: Hi, Good morning, again, and thanks for taking my questions and Ed Matt I I got kind of a tricky one for you here and maybe this is for Matt or for Elizabeth because it's kind of a math question.
Speaker Change: And what degree of you know decline in base rates would.
Speaker Change: Would bring the high end of the hurdle into play.
Speaker Change: You know and and to what extent would that fully protect the current dividend.
Unknown Executive: At this time, I would like to welcome everyone to the Barings BDC Inc, conference call for the quarter ended June 30, 2024. All participants are currently in a listen only mode. A question and answer session will follow the company's formal remarks, at which time we ask that you get your questions to one with a follow-up. 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.bearingsbDC.com under the Investor Relations section.
Speaker Change: Yeah.
Speaker Change: <unk>.
Matt Freund: Yeah. Casey, I appreciate your anticipation that I might be prepared for math-related questions, so thank you for that. But I think that the numbers that we've been running, kind of assuming all else equal with respect to credit quality and the composition of the portfolio from a leverage perspective, are somewhere between, call it, four and four and a half. That's kind of how we think about the impact of the hurdle rate being kind of preserved.
Speaker Change: Casey I appreciate your anticipation that I might be prepared for math related questions. So thank you for that.
Speaker Change: Hi.
Speaker Change: I think that the numbers that we've been running kind of assuming all else equal with respect to.
Speaker Change: Credit quality and the composition of the portfolio from a leverage perspective.
Speaker Change: Somewhere between call. It four in four and a half is kind of how we think about the impact of that the hurdle rate being kind of preserved and then I think that where we where we personally feel that the math starts to make <unk> look significantly more attractive than those with lower hurdle rates as we start to approach.
Matt Freund: And then I think that where we personally feel that the math starts to make BBDC look significantly more attractive than those with lower hurdle rates is as we start to approach, call it, the high threes. I think that's where you see a lot more differentiation.
Joseph Mazzoli: At this time, I will turn the call over to Joe Mazzoli, head of Investor Relations for Barings BDC. Good morning, and thank you for joining the call. 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 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.
Speaker Change: The high Threes, I think is where you see a lot more differentiation.
Casey Alexander: And but when you model that out, you know, when the hurdle rate starts to take away the incentive fee instead of net investment income, right, is that still at a level that you think preserves the current dividend?
Speaker Change: But when you model that out you know when that when the hurdle rate starts to take away incentive fee instead of net investment income.
Speaker Change: Is that still at a level that you think preserves the current dividend.
Matt Freund: We anticipate that that's our case. Okay, great. Secondly, you know, given the kind of personnel turnover earlier this year, can you, and maybe I missed this, I got on a minute or two late, can you discuss any personnel updates as it relates to the origination team?
Speaker Change: Yes.
Speaker Change: We anticipate that that market.
Speaker Change: Okay great.
Speaker Change:
Speaker Change: Secondly, you know given the kind of personnel turnover earlier this year.
Speaker Change: Can you.
Speaker Change: Maybe I missed this I got on a minute or two late can you discuss any personnel updates as it relates to the the origination team.
Joseph Mazzoli: In the company's quarterly report on form 10Q for the quarter ended June 30, 2024, as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law.
Casey Alexander: Yeah, Casey, it's Bryan. Good morning.
Speaker Change: Yes, Casey, it's Brian good morning.
Brian: Yes, I think on the last call Eric had mentioned that we had.
Speaker Change: <unk> brought in a senior individuals that they used to be a part of the platform and with co head of North America. When he was here before so including.
Eric Lloyd: I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC. Thanks, Joe. Good morning, everyone. We appreciate you joining us for today's call. Please note that throughout today's call will be referring to our second quarter, 2024 earnings presentation, that is posted on the Investor Relations section of our website. On the call today, I'm joined by Barings BDC's president, Matt Freund, Chief Financial Officer, Elizabeth Murray, and Barings Head of Global Private Finance and BBDC Portfolio Manager, Brian High.
Speaker Change: Including that person, we've made three new hires and work and we're not done.
Speaker Change:
Bryan High: We, you know, I think on the last call, Eric mentioned that we had brought in a senior individual that used to be a part of the platform and was co-head of North America when he was here before. So, including that person, we've made three new hires, and we're not done. Two other Managing Directors are scheduled to join us in the early fourth quarter, who have been in the core middle market where we focus for 20 to 25 years.
Speaker Change: Two two other managing directors are scheduled to join us in the early fourth quarter. So.
Speaker Change: Who have been in the middle of the core middle market, where we focus for $20 to 25 years.
Eric Lloyd: I think it's important too, Casey, on that, the guy we brought back in who co-headed the business in North America was also the chairman of our North American Investment Committee for a number of years, so there's the consistency there, and, you know, we wanted to be prudent but timely in our hiring, but also make sure we got the right fit and the right people.
Speaker Change: I think it would be great on that.
Speaker Change: We brought back in who co head of the business in North America was also the chairman of our North American investment Committee for a number of years, so theres the consistency there.
Eric Lloyd: In the second quarter, BBDC delivered another strong set of results, fueled by best-in-class credit performance, and the strength and stability of our franchise. Our focus on the top of the capital structure investments and sponsor backed middle-market issuers continues to serve investors well. I want to take a moment to note that in this market, unlike the larger cap ended direct lending, we are not competing with investment banks for broadly syndicated loan issuance, and we generally see stronger documentation, meaning some of the BSL style covenant package you may have heard of and other direct lender portfolios are not present in ours.
Speaker Change: No.
Speaker Change: We wanted to be prudent, but timely in our hiring but also make sure we got the right fit and the right people.
Speaker Change: Okay.
Casey Alexander: Thank you for that. Lastly, across the space, both cash flow and venture debt BDCs, there have been growing difficulties in the software vertical. And when I look at your mix, I'm guessing that business services is a fair amount of software. So I'm curious how the interest coverage is faring with your software investments and what you're hearing from them about their software spending plans, and if there are any particular verticals that might be edgier than others.
Speaker Change: Thank you for that lastly, you know across this space, both cash flow and venture debt Bdcs. There's there's been growing difficulties in the software vertical and when I look at your at your mix I'm guessing that that that business services is a fair amount.
Speaker Change: A software so I'm curious how the interest coverage is bearing with your software investments and what you're hearing from them about software spending plans.
Eric Lloyd: Our focus on the core of the middle market is reflective of lower leverage levels and more attractive risk-adjusted returns, which is why we find this to be the best segment of the market for BBDC and our shareholders. That core portfolio is complemented by a selection of non-sponsored and platform investments that we believe benefit our shareholders in the form of higher potential returns and diversification. Our portfolio strategy is outlined in greater detail on slide five, and we continue to successfully invest throughout the market and deliver compelling returns to our shareholders.
Speaker Change: And if theres any particular verticals that that might be edgier than others.
Matt Freund: Yeah, Casey, that's a great question. I think that software has been a focus for the industry for some time now. And as we think about kinds of other industries, you noted business services, but I wouldn't even limit it to business services. There's a variety of what folks are referring to as tech-enabled services and tech-enabled businesses that really are foundationally built around some software apparatus. And so, as I think about our portfolio today, the overwhelming majority of the portfolio is a conventional cashflow lending portfolio. I can think of very few examples where that's not the case.
Casey Alexander: Yes, Casey Thats.
Casey Alexander: Great question I think that software has been a focus for the industry for some time now and as we think about kind of other industry. You noted business services, but I wouldn't even limit it to a business services. There is a variety of what folks are referring to a tech enabled services and tech enabled businesses that really are foundational Lee built around some software.
Eric Lloyd: As we reflect on the first half of 2024, the performance of BDC has been strong against a relatively benign economic backdrop. Interest rates, while elevated, have been stables for several quarters. Credit performance appears to be holding up broadly across the industry, safer, few idiosyncratic examples. While we have done well in the stable economic and interest rate environment, the market activity of the past weeks suggests change may be a foot in the lending ecosystem.
Casey Alexander: Operators and so.
Speaker Change: And as I think about our portfolio today.
Speaker Change: Well majority of the portfolio as a conventional cash flow lending portfolio I can think of very few examples where that's not the case, if I were trying to parse apart a different portfolio or industry wide portfolio is the question I would ask would be around <unk> based facilities, because I think that <unk>.
Casey Alexander: If I were trying to parse apart a different portfolio or industry-wide portfolios, the question I would ask would be around ARR-based facilities because I think that ARR is often, I mean, almost all ARR loans are software loans, but not all software loans are ARR loans. And so, I think that where we've seen a little bit of divergence from a cashflow coverage perspective are some of the issuers that are reporting ARR-style facilities that have not converted to cashflow levels.
Eric Lloyd: These changes may include a decrease in interest rates, which we think will have an overall positive impact on our business, as it further improves credit metrics in the existing portfolio, and sparks a sentiment shift among sponsors, and may spur of further deal activity, which in turn may drive higher spreads and additional transaction fees. Turning some specifics of BBDC, net asset value per share was $11.36, compared to $11.28 for the prior fiscal year end.
Speaker Change: As often.
Speaker Change: Almost all our loans are software loans, but not all software loans or <unk> loans, and so I think that where we've seen a little bit of divergence from a cash flow coverage perspective, or some of the issuers that are reporting <unk> styled facilities that have not converted to cash flow cash flow levels and so in terms of kind of how the portfolio is performing.
Casey Alexander: And so, in terms of how the portfolio is performing, specifically as it relates to software, we're feeling very encouraged. Our portfolio of software issuers is not performing any differently than our non-portfolio of issuers, but I do think that that's a very fair question, and it's something that isn't easily discernible whenever you're looking at an SOI, for example.
Speaker Change: Specifically as it relates to software, we're feeling very encouraged our portfolio of software issuers is not performing any differently than our non portfolio portfolio portfolio.
Eric Lloyd: Reflecting an increase of 0.7%, and a testament to the portfolio stability. Net investment income for the quarter was $0.40 per share, and meaningfully out-earned our dividend of $0.26 per share. Perhaps, most importantly, the metrics that we are particularly proud of are non-accurals as a percent of fair value where unchanged quarter of a quarter is 0.3%. As our investors know, the stability of our performance is the result of our focus on borough and conservative underwriting at the top of the capital structure, and within more defensive industries.
Speaker Change: But I do think that that's a very fair question and it's something that isn't easily discernible whenever you're looking at in Soi for example.
Casey Alexander: Alright, thank you for taking my questions.
Speaker Change: Alright, Thank you for taking my questions.
Operator: Of course, thank you for the time.
Speaker Change: Of course, thank you for the time.
Eric Lloyd: At this time, there are no further questions in queue. I'd like to turn the call back over to Eric Lloyd.
Speaker Change: At this time there are no further questions in queue I'd like to turn the call back over to Eric Lloyd.
Eric Lloyd: I just want to thank everybody for dialing in, listening to our update for this quarter, and we look forward to finishing the year strong on your behalf. Thanks very much. This concludes the Barings BDC second quarter 2024 earnings call. Thank you for attending, and have a wonderful rest of your day.
Eric Lloyd: Just want to thank everybody for dialing in listening to our update for this quarter and we look forward to finishing the year strong on your behalf. Thanks very much.
Speaker Change: Yeah.
Eric Lloyd: With a more uncertain landscape ahead of us, we are confident that the BBDC strategy and portfolio are well suited to deliver strong results for our value shareholders across a range of economic and market conditions. Being a bit deeper into the portfolio, we continue to actively maximize the value and legacy holdings, acquired from MBC capital and Sierra. Our goal remains to divest these assets at attractive valuations as we did this quarter. Bairings originate positions are now 90% of the portfolio at fair value, up from 76% of the portfolio at the beginning of 2022.
Speaker Change: This concludes the Barings BDC second quarter 2024 earnings call. Thank you for attending and have a wonderful rest of your day.
Speaker Change: Okay.
Eric Lloyd: Also, just to remind you all, potential losses from these assets are protected by credit support agreements limiting downside risk for BBDC investors. Our investment portfolio continues to perform well in the second quarter. There is no substitute for fundamental credit analysis, which has always been at the core of our investment philosophy, and is reflected in the health of the BBDC portfolio today. Including the acquired Sierra and MBC assets, our total non-accurals are an industry leading 0.3% on a fair value basis and 1.5% of the portfolio on a cost basis.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Uh-huh.
Speaker Change: [music].
Eric Lloyd: This is down from 1.5% on a fair value basis and 2.5% on a cost basis as of December 31st, 2023. Turning to the earnings power of the portfolio, the weighted average yields at fair value was 11.1%. We remain conservative on our base dividend policy, and our board declared a third quarter dividend of 26 cents per share consistent with the prior quarter. On an annualized basis, the dividend level equates to a 9.2% yield on our net asset value of 11.36.
Eric Lloyd: We believe the best measures of the portfolio's performance, non-accurals, net asset value, and NII, are extremely compelling for the June quarter, and anticipate continued strength in the quarter's ahead. Before I turn the call over to Matt, I want to highlight that while the future operating environment may be uncertain, the long tenured team we have here in the North American global private finance business, coupled with capabilities of teams across bearings, will also contribute to our asset sourcing and underwriting, we are extremely confident in our ability to continue delivering compelling value to our shareholders.
Speaker Change: Okay.
Eric Lloyd: We have designed our portfolio to have resiliency to weather economic stress and to have the liquidity and expertise to play offense in what we believe will be an even more attractive environment for middle market foreclinning in the second half of the year.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Matthew Freund: I'll now turn the call over to Matt. Thanks, Eric. Recall that BVDC is managed by bearings LLC, a credit focused asset manager with nearly $410 billion of assets under management as of June 30th. The bulk of the portfolio is sourced from the global private finance team, an organization with more than 100 investment professionals located around the globe, providing financing solutions to high quality, market leading, middle market companies sponsored by top tier private equity firms.
Matthew Freund: BVDC deployed $78 million of capital this quarter, offset by $195 million of sales and repayments, resulting in net deployments of $117 million. Met, I'm sorry, net sales and deployments of $117 million. Repayment activity skewed towards non-core acquired positions, with assets determined to be non-core to our strategies experiencing an $80 million reduction in fair market value quarter on quarter. As Eric noted, we are executing the strategy we have been telegraphing for the past year and a half, simplifying the portfolio and selectively investing in what we believe are the most compelling middle market direct lending opportunities in the market.
Speaker Change: Yeah.
Speaker Change: [music].
Matthew Freund: Consistent with what we observed a quarter ago, we continue to see a tale of two markets when discussing deployment, largely bifurcated on size. LBO activity in our core markets defined a sponsor back lending to sponsor platforms with 15 to 75 million of EBDA remained muted during the second quarter. We have experienced some level of refinancing activity within the portfolio, but at level significantly lower than our broadly syndicated counterparts. As we approach the long awaited rate cutting cycle, we are optimistic that a change in the interest rate environment will have a catalytic effect on transaction activity.
Matthew Freund: Our team is constantly in touch with significant number of middle market sponsors and have heard a consistent drum beat of optimism for a busy second half of the year, which has been echoed by investment bankers as well. We have continued to see an increase in the number of early stage opportunities within the platform, but conversion range through June were relatively modest. That said, we continue to support a wide range of borrowers executing add-ons for their existing portfolio companies and on more strategic acquisitions, demonstrating the benefit of our longstanding relationships and encompassing in our core area of focus.
Matthew Freund: Turning to the portfolio, 75% of the portfolio consists of secured investments with approximately 66% of investments constituting first-line securities. BBBC has experienced a stabilization of interest coverage during 2024 and finished the quarter with a weighted average interest coverage at 2.1 times above industry averages and demonstrating the merits of our approach to focusing on leading companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions. Given the current shape of the forward sofa curve, we believe the portfolio now reflects the full negative impacts of an elevation of rates and credit and cash lometrics are likely to benefit from any decline in base rates going forward.
Operator: [music] K. K. K. K. K. K. K. K. K. K. K. K. K. Hernandez, [music] [inaudible] [music] relaxing music , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , [inaudible]. ... [music] [inaudible] [music] [inaudible] , , , , Alexander, David Miyazaki, Robert Dodd, Eric Lloyd, Joseph Mazzoli, Bryan High, Unknown Executive, Kyle Joseph, Ian Fowler, [music] [inaudible] Hey Touron men say, if you really wanna fight, you better listen to me. It's me. [music] Music, [music]
Matthew Freund: Furthermore, as rates decline, our hurdle rate structure will continue demonstrating shareholder alignment with our manager. The median gross margin in the North American Gold Prize Finance portfolio, a portfolio similar to BVDC, stood at 50% up from 47% one year earlier. Demonstrating the companies we invest in have strong market positions, enabling them to successfully increase prices to combat inflationary pressure. Furthermore, adjusted EVDA margins for the same sample set were 22% up from 21% in the prior years period.
Matthew Freund: These results from our portfolio companies demonstrate the merits of our focus on lending to market leaders in defensive industries at reasonable leverage levels, and our avoidance of cyclical industries, oil and gas, restaurants, retail, metals and mining among them. The portfolio composition remains highly diversified, with the top 10 issuers accounting for 24% of fair market value. Recall that the top two positions within the portfolio, Eclipse Business Capital and Rocaid Holdings, are strategic platform investments that we own and provide BVDC shareholders with access to differentiating, compelling opportunities to invest in asset back loans and litigation funding solutions.
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Matthew Freund: Two specialized areas we believe provide attractive total return and diversification benefits, especially given Rocaid lack of correlation to broader financial markets. Turning to the portfolio quality, risk ratings exhibited minimal movement during the quarter. As our issuers exhibited the most stress classified as risk ratings 4 and 5 were 9% on a combined basis quarter over quarter and compared to 8% in the immediately preceding quarter. Nonacruals accounted for 6 million of the fair market value of the portfolio and 0.3% of assets, which we believe is one of the lowest levels of nonacruals across the industry.
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Matthew Freund: We remain confident in the credit quality of the underlying portfolio. We expect BVDC differentiated reach and scale, coupled with our focus on the core of the middle market, to continue driving positive outcomes for shareholders in the quarters to come. The BVDC portfolio is a through the cycle portfolio designed to withstand a variety of economic environment and prevailing interest rate levels. To this end, BVDC was structured to align both B's and credit performance hurdles as outlined on slide 14.
Matthew Freund: With the increase in base rates experienced over the past two years, effectively all publicly listed BDCs have delivered earnings and excess of their hurdle rates. The relative distinction between hurdle rate levels has fallen out of focus. As base rates begin to fall, BVDC investors will again benefit from the impacts of a high hurdle rate at BVDC compared to other industry participants. BVDC's hurdle rate of 8.25% compares to an industry average of 7.03% among our externally managed public peers, with some managers having significantly lower hurdles.
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Matthew Freund: We anticipate this hurdle rate will differentiate relative value for BVDC shareholders in the quarters to come. To the BVDC's pre-incident fee returns fall between 8.25% and 10.3%, shareholders can expect the stability of an 8.25% return. While BVDC's lower hurdle rates will experience the same pre-incident fee returns would receive lower net returns. The second component to BVDC's fee structure I want to comment on is the total return hurdle, sometimes referred to as a lookback.
Matthew Freund: The lookback is designed to align credit performance of BVDC with incentives paid to the manager, bearings LLC. As we all know, credit performance is foundational to a BVDC, but less than 50% of externally managed publicly traded BDCs have a lookback that incorporates losses into their return hurdle. When our hurdle rate structures are combined with a strong stock buyback program and credit supported agreements covering a portion of our assets, we feel that the shareholder focus at variance is among the best in market.
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Elizabeth Murray: I'll now turn the call over to Elizabeth. Thanks, Matt. On slot 15, you can see the full bridge of the Nav per share movement in the second quarter. Nav per share was $11.36 as a June 30, which is a decrease of 0.6% over the prior quarter and an increase of 0.3% over 2% year over year. Our net investment income exceeded the 26% per share dividend by 14 cents per share or 35%.
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Elizabeth Murray: Net unrealized depreciation from investment, CSA and FX equal 29 cents per share and was partially offset by net realized gains on the portfolio and FX of 7 cents per share. The net realized gain in the portfolio was predominantly due to the exit of our investment and core scientific partially offset our exit and Highland, a tier investment, which is covered by the CSA, was primarily reclass from unrealized depreciation. You may recall during the first quarter, we recognize the loss of 7.6 million on the restructuring of our debt investment and core scientific into equity.
Elizabeth Murray: During the second quarter, as I previously mentioned, we fully exit our investment and core scientific and recognize the gain on the sale of the equity of $8 million. We are pleased to say we experienced full power recovery of this investment plus a 0.4 million gain on exit. The valuation of the credit support agreements decreased by approximately 0.9 million. The fair value of the CSA, the CSA decreased from 35.4 million in the first quarter to 32.6 million as a June 30.
Elizabeth Murray: During the second quarter, the CSA portfolio had sales and repayments of approximately 32 million and had 29 positions remaining in the portfolio down from 36 positions as of March 31st. The fair value of the NBC CSA increased from 16.1 million to 18 million as of June 30, driven by unrealized depreciation and the underlying portfolio with 4 positions remaining. Our net investment income was 40 cents per share for the quarter compared to 28 cents per share in the prior quarter and 31 cents per share for the second quarter of 2023.
Elizabeth Murray: Investment income in the quarter was primarily driven by dividends from joint venture and platform investments and our incentive to expense was lower quarter over quarter due to unrealized depreciation fueled by acquired positions in an incentive to cap. Our net leverage ratio, which is defined as regulatory leverage net of unrestricted cash and net and settle transactions was 1.07 times by quarter end, down from 1.17 times in the quarter ended March 31st and currently sits within our long term target of 0.9 to 1.25 times.
Elizabeth Murray: Our current leverage provides ample capacity to seize opportunities and perceive attractive deployment opportunities in the quarter's income. Our funding mix remains highly defensible both in terms of seniority and asset class, including the significant level of support provided by the unsecured debt and our capital structure. At June 30, our unsecured debt accounted for a billion of our funding and equated to approximately 70% of our outstanding debt balances. We continue to maintain significant flexibility in our capital structure with the next bond maturity in the second half of 2025 and maintain a ladder of maturity out to 2029.
Elizabeth Murray: Baring PDC currently has 215 million of unfunded commitments to our portfolio companies, as well as 65 million of outstanding commitments to our joint venture investments. We have available cushion against our leverage limit to meet the entirety of these commitments.
Elizabeth Murray: Opon. As mentioned earlier, the board declared a third quarter dividend of 26th per share, and 9.2% distribution on net asset value and is consistent with our second quarter 2024 dividend. During our earnings call of February, we disclosed the board authorized the $30 million sharing purchase plan for 2024. We continue to be active users of our sharing purchase plan. The second quarter was no exception as we repurchased more than 190,000 shares during the period, and have repurchased a total of almost 310,000 shares in the first half of 2024. Our FAFSA sharing purchases is one example of BBDC's thoughtful approach to aligning our interest with shareholders.
Unknown Executive: I'll wrap up our prepared remarks with the net on our investment pipeline. Thus far in the third quarter, we have made 56 million of new commitments and funded 46 million. With that operator, we will open the line for questions. If you would like to ask a question at this time, please press star than the number one on your telephone keypad now. You will be placed in the queue in the order received.
Unknown Executive: Please be prepared to ask your question when prompted, and we do ask that you limit your questions to one with a follow-up. Once again, if you would like to ask a question, please press star than the number one on your telephone keypad now. Once again, to ask a question, please press star than the number one on your telephone keypad now.
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Robert Dodd: Your first question comes from Robert Dodd with Raymond James. Your line is open.
Bryan High: Good morning. You talked about disruption in the market, which I was receiving last week, and then Matt, you talked about there's a drum beat of optimism about activity in the second half. So can you kind of reconcile those two things? Generally, in a market, disruption is volatility and things like that result in the slowdown in activity, but the thought has been it would rebound, but the last week, how much has that changed the thought on where you think activity could go in the second half of the year? Hey, Robert. This is Brian.
Eric Lloyd: Good morning. In terms of the volatility in the market, I do think that one of the benefits of private credit, and we've seen some deals pulled from the broadly syndicated market this week, just given some of that volatility, is a better execution at the end of the day. So if I sort of anecdotally talk about our pipeline, we've definitely seen an increase in activity, whether or not that ultimately ends in deals being closed is sort of to be determined, but I do think that there is a natural tension of a need for liquidity in private markets and folks looking to monetize, maybe not at the ideal time, but because they want to raise a new fund, they're looking to ultimately sell platforms to a new sponsor or to a strategic.
Eric Lloyd: So we are seeing more activity, again, from a pipeline perspective, whether or not that ultimately closes, we'll have to wait and see. Yeah, the other comment that I would add, maybe I should have been more specific in my prepared remarks, I think that we feel that we're closer now to a rate cut cycle than we ever have been, and as we think about the private equity firms that we're interacting with, while they've all consistently told us that the cost of debt capital doesn't move the needle for them, I think that we're actually going to test that theory because as rates start to come down, I just think the cost of capital for the overall capital structure is going to reset, and when that happens, we would expect more sponsored, sponsored, or LDO activity to pick up.
Eric Lloyd: I got it, got it. Thank you. And then just, oh, I'm a credit. I mean, yet you're not a cool sort of really good, you know, point three on fair value and low on across basis as well. I mean, how would you expect that to revolve over the next? I mean, this is very much a gut feel kind of question to be fair. Over the next 12, 24 months, I mean, there may be rate cuts, which is good on interest coverage, etc.
Eric Lloyd: But the economy is a little softer and rates have been high for a long time. So liquidity reserves that portfolio companies might be smaller than they were. So could you use any thoughts on how you expect credit in your portfolio, like to revolve over the next couple of years with kind of answer questions, but yeah. Yeah. I'll start and then turn it over to Bryan. Look, I think that you were kind, honestly, to give us part of the answer to your question in the way that you asked it.
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Eric Lloyd: And so as we think about projecting our credit quality, we feel like we're in a very good position today. As we think about any sort of catalytic events that may accompany a rate reduction or perhaps economic volatility and or weakness, like we just don't know what the causes of that uncertainty might be. And so while we feel that the portfolio is very well positioned now, it's really hard to prognosticate a different set of scenarios creating a different constitution to the portfolio.
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Eric Lloyd: But we I think I feel very comfortable with where we are from a diversification perspective as well as from a quality of underwriting perspective that we've implemented over the past several years. It's resulted in the portfolio we have today. Bryan, I don't know if you have any thoughts, macro. I mean, macro lines, obviously, Robert, you probably have seen more than we have from all the various portfolios in the market, but it certainly feels like there is an uptick in stress across the marketplace.
Eric Lloyd: That being said, I do think our portfolio is held in relatively well. And we've got the resources to deal with with the issues if and when there's a broader macro softening that is sort of unavoidable at that time. Yeah, I mean, I would highlight what Matt had on earlier too, which is despite the increase in base rates, our interest coverage still is just over two times, which we feel really good for great about. It's a Barian idiotic kind of event on specific credits. The overall portfolio health remains very strong. Yeah, I understand. Thank you.
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Unknown Executive: Your next question comes from Finneon O'Shae with Wells Fargo. Your line is open. Hey, everyone.
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Unknown Executive: Good morning. A question on the, I forget which one is which, but the private to public BDC. Can you give us an update on where that is in its investment period or whatnot? And now that it seems like there's some precedent to merge these into the public regardless of price to nav seeing your appetite to do that. Thank you. Yeah, thanks. I can't provide specifics on on private funds, but we don't have any anticipation, at least currently, of doing anything in BBDC or asking BBDC shareholders to consider anything at the time. Thank you.
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Matthew Freund: Your next question comes from Casey Alexander with Compass Point. Your line is open. Hi, good morning, and thanks for taking my questions. And Matt, I got kind of a tricky one for you here. And maybe this is for Matt or for Elizabeth, because it's kind of a math question. And what degree of decline in base rates would bring the high end of the hurdle into play? And to what extent would that fully protect the current dividend?
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Matthew Freund: Yeah, Casey, I appreciate your anticipation that I might be prepared for math related questions. So thank you for that. But I think that the numbers that we've been running, kind of assuming all else equal with respect to credit quality and the composition of the portfolio from a leverage perspective is somewhere between call it four and four and a half is kind of how we think about the impact of that the hurdle rate being kind of preserved.
Matthew Freund: And then I think that where we where we personally feel that the math starts to make BBDC look significantly more attractive than those with lower hurdle rates as we start to approach call it the high threes. I think it's where you see a lot more differentiation. And but when you model that out, you know, when the when the hurdle rate starts to take away incentive fee instead of investment income, right, is that still at level that you think preserves the current dividend? Yes, we anticipate that.
Bryan High: Okay, great. Secondly, you know, given the kind of personnel turnover earlier this year, can you and maybe I missed this? I got on a minute or two late. Can you discuss any personnel updates as it relates to the the origination team? Yeah, Casey Brian. Good morning. We, you know, I think on the last call Eric had mentioned that that we had brought in a senior individual that used to be a part of the platform with co head of North America when he was here before.
Bryan High: So including that person, we've we've made three new hires and we're and we're not done. Two other managing directors are scheduled to join us in the early fourth quarter. So who have been in the middle mark, the core metal market where we focus for, you know, 20 to 25 years. I think it's great to see on that. The guy we brought back in who co headed to business in North America was also the chairman of our North American investment committee for a number of years. So there's the consistency there and you know, we we wanted to be prudent but timely in our hiring, but also make sure we got the right fit and the right people.
Matthew Freund: Thank you for that. Lastly, you know, across the space, both cash flow and venture debt BDCs, there's been growing difficulties in the software vertical. And when I look at your at your mix, I'm guessing that that that business services is a fair amount of software. So I'm curious how the interest coverage is varying with your software investments and what you're hearing from them about software spending plans. And if there's any particular verticals that that might be edgier than others.
Matthew Freund: Yeah, Casey, that's a great question. I think that software has been a focus for the industry for some time now. And as we think about kind of other industry, you know, to business services, but I wouldn't even limit it to business services. There's a variety of what folks are referring to as tech-enabled services and tech-enabled businesses that really are foundationally built around some software apparatus. And so as I think about our portfolio today, you know, the overwhelming majority of the portfolio is a conventional cash flow lending portfolio.
Matthew Freund: I can think of very few examples where that's not the case. If I were trying to parse apart a different portfolio or industry-wide portfolios, the question I would ask would be around ARR-based facilities because I think that ARR is often, I mean, almost all ARR loans are software loans, but not all software loans are ARR loans. And so I think that where we've seen a little bit of divergence from a cash flow covers perspective are some of the issuers that are reporting ARR-style facilities that have not converted the cash flow levels.
Matthew Freund: And so in terms of kind of how the portfolio is performing specifically as it relates to software, we're feeling very encouraged. Our portfolio of software issuers is not performing any differently than our non-portfolio portfolio, non-portfolio of issuers, but I do think that that's a very fair question. And it's something that isn't easily discernible whenever you're looking at an SOI, for example. Yep.
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Eric Lloyd: All right. Thank you for taking my questions. Of course. Thank you for the time. At this time, there are no further questions in queue. I'd like to turn the call back over to Eric Lloyd. I just want to thank everybody for dialing in. Listen to our update for this quarter and we look forward to finishing the year strong on your behalf. Thanks very much.
Unknown Executive: This concludes the bearings BDC 2nd quarter 2024 earnings call. Thank you for attending and have a wonderful rest of your day. Robert Dodd, Robert Dodd, Robert Dodd, Eric Lloyd,[inaudible] Robert Dodd, Robert Dodd, Robert Dodd, Robert Dodd,[inaudible] Robert Dodd, Robert Dodd, Robert Dodd, Robert Dodd[inaudible] Dodd, Robert Dodd, Robert Dodd[inaudible][inaudible][inaudible][inaudible][inaudible][inaudible]
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