Q4 2024 Barings BDC Inc Earnings Call
and Aaron Sharkey.
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.
<unk> 31 2024.
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.
Speaker Change: I will now turn the call over to Eric Lloyd Chief Executive Officer of Barings BDC.
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 fourth quarter 2024 earnings presentation that is posted on the Investor Relations section of our website.
Speaker Change: On the call today I'm joined by Barings, Bdc's, President, Matt Floyd, Chief Financial Officer, Elizabeth Murray, and Barings head of global private finance and BDC portfolio manager, Brian Hi.
Speaker Change: In the fourth quarter of <unk> B in the fourth quarter <unk> delivered another strong and consistent set of results fueled by best in class credit performance and the strength and stability of our franchise.
Speaker Change: Consistent with broader industry trends lending activity during the first three quarters of 2024 with somewhat muted during the fourth quarter, we experienced a meaningful uptick in deployment mode.
Speaker Change: As part of add on transactions within the existing portfolio and for new buyouts by a number of our long standing sponsor clients.
Speaker Change: The result of this activity produced strong originations during the period that we're proud of.
Speaker Change: Strong deployment combined with the benign credit environment and our focus on the top of the capital structure of investments in the middle market.
Speaker Change: Goodbye to serve our investors well.
Speaker Change: Our focus on the core of the middle market is reflective of our lower leverage levels and more attractive risk adjusted returns, which is why we find this to be the best segment of the market for BDC and our shareholders.
Speaker Change: Insistent with how we have defined our strategy in past discussions our portfolio strategy as 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: As we reflect on the full year 2020 for the performance of <unk> has been strong.
Speaker Change: Total shareholder return during 2024 exceeded 24% and top quartile among publicly traded peers.
Speaker Change: These results were driven by a number of tailwind some of which are specific to the industry and some of which are specific to barings managed portfolios intra.
Speaker Change: Interest rates, while elevated have been stable for several quarters.
Speaker Change: <unk> performance has been has held up broadly across the industry, but it has been particularly durable within the BDC deployment opportunities as I previously noted improved during the December quarter compared to 2023, and the first half of 2024.
Speaker Change: While we close 2024 on a strong and stable footing. We have entered 2025 with caution economic data appears to be overwhelmingly positive credit fundamentals, namely cash flows revenue growth and margins are all exhibiting positive trends as.
Speaker Change: As Matt will discuss in great detail, we are optimistic that additional transaction activity will blossom in 2025. However, it is equally as clear that uncertainty, particularly regulatory and trade uncertainties have given private markets a pause.
Speaker Change: As our investors know, we're often investing in illiquid credit securities alongside private equity firms were investing in illiquid equity securities. The regulatory shifts that have occurred only in the first two months of 2025 make it difficult for private capital investors to assess the possible shifts they may experience.
Speaker Change: The coming three to five year holds for items. Consequently, we remain cautious on the pace of new buyout opportunities and expect the size of the existing portfolio to continue.
Speaker Change: Abiding compelling opportunities to invest.
Speaker Change: Add on transactions remain a compelling way for private equity firms to enhance the value of a portfolio of companies and all Barry to do.
Speaker Change: <unk> capital into companies, we already know well not anticipated to the extent volatility is on the horizon, we have confidence in our credit selection and believe our underwriting discipline will continue to provide stable returns in the quarters to come.
Speaker Change: Turning to <unk>.
Speaker Change: Turning to some specifics on BBC net asset value per share was $11 29.
Speaker Change: Substantially unchanged compared to $11 28 reported at the prior fiscal year end.
Speaker Change: Estimate to the portfolio stability.
Speaker Change: Net investment income for the quarter was <unk> 28 per share and out earned our dividend of <unk> 26 per share.
Speaker Change: Digging a bit deeper into the portfolio. We continue to actively maximize the value of the legacy holdings acquired from MPC capital and Sierra our goal remains to divest these assets at attractive valuations.
Speaker Change: Valuations as we did this quarter.
Speaker Change: Earnings originated positions are now 93% of the portfolio at fair value.
Up from 76% at the beginning of 2022 as a reminder, potential losses from the acquired assets are protected by credit support agreements limiting downside risk for BDC investors.
Speaker Change: Our investment portfolio performed well during the fourth quarter with a non accrual rate declining from a mere 50 basis points in September to 30 basis points as of December 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 BDC portfolio today, including the <unk>.
Speaker Change: Acquired Sierra and MCC assets, our total non accruals are the industry, leading 0.3% on a fair value basis, and one 6% of the portfolio on a cost basis. This is down from one 5% on a fair value basis, and two 5% on a cost basis as of December 31 2023.
Speaker Change: Turning to the earnings power of the portfolio the weighted average yield at fair value was 10, 4% we remain conservative on our base dividend policy and our board declared a fourth quarter dividend of <unk> 26 cents per share consistent with the prior quarter on an annualized basis, the dividend level equates to a 92% yield on our net asset value.
Speaker Change: <unk> of $11 29.
Speaker Change: As we have separately announced our board has also declared a 15 cent.
Speaker Change: Dividend of supplemental dividends that will be paid three quarterly installments taken together with our regularly scheduled.
Dividend the dividend level equates to 11% yield based on decembers net asset value. We believe the best measures of the portfolio's performance non accruals net asset value and NII.
Matt Floyd: We're extremely compelling for the year ended December 2024, and we anticipate continued strength in the quarters ahead, I'll now turn the call over to Matt.
Matt Floyd: Thanks, Eric <unk> is managed by Barings LLC, a credit focused asset manager with over $420 billion of assets under management. 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, leading middle market company sponsored.
Matt Floyd: By top tier private equity firms.
Matt Floyd: The BDC deploy $298 million of capital in the quarter offset by $222 million of sales and repayments, resulting in net sales and deployment to $76 million.
Matt Floyd: Reflecting one of the most active deployment quarters in recent history.
Matt Floyd: Payments during the quarter included various noncore positions acquired with Sierra income legacy portfolio.
Matt Floyd: As Eric noted we are executing on the strategy that we've been telegraphing for the past 24 months simplifying the portfolio and selectively investing in what we believe are the most compelling middle market direct lending opportunities in the market.
Matt Floyd: During our prior call. We noted that we had started seeing green shoots related to new deployment opportunities, our gross and net originations during the quarter validated data anticipation originations activity was fueled both by add on transactions as well as new issuer financings the mix of our funding did skew somewhat towards add on activity at a higher rate than historical averages.
Matt Floyd: Which we believe was largely reflected an industry results during the period for scale asset managers such as bearings.
Speaker Change: As we evaluate forward looking activity into the balance of 2025, we remain cautious as Eric noted, we're calling it the average transaction timeline from initial inbound activity to ultimate closed transactions typically ranges from three to six months initial inbound transactions. Initially increased following the November elections, but as we close 2020.
Speaker Change: For the volume of inbound inbound activity started to recede. The deal landscape appears primed to support M&A activity in 2025 supported by extended hold periods within private equity portfolios interest rate stability and a positive economic indicators that Eric mentioned.
Speaker Change: Juxtaposed against these favorable favorable characteristics, we have perceived in our private equity relationships and company management teams, an underlying sense of uncertainty related to the intermediate outlook. All of this is to say that we are cautiously optimistic for the year ahead.
Speaker Change: Turning to our current portfolio 72%.
The portfolio consists of secured investments with approximately 69% constituting first lien securities D. PDP has experienced stabilization of interest coverage during 2024 and finished the quarter with a weighted average interest coverage of two two times above industry averages and consistent with our results for the prior quarter. We believe strong interest coverage demonstrates the merits of our.
Speaker Change: <unk> focusing on leading companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions.
Speaker Change: The portfolio composition remains highly diversified with the top 10 issuers accounting for 23, 1% of the fair market value were call. It in the top two positions within the portfolio Eclipse business capital and arcade holdings, our strategic platform investments that we own and provide DVD shareholders with access to differentiated compelling opportunities to invest in asset backed securities and.
Speaker Change: <unk> vending solutions two areas, we believe to provide attractive total returns as well as diversification benefits for the broader portfolio.
Speaker Change: Turning to portfolio quality risk ratings exhibited minimal movement during the quarter as our issue is exhibiting the most stress classified as risk rating, four and five or 11% on a combined basis quarter over quarter compared to 10% in the immediately preceding quarter non accruals accounted for only $8 million of fair market value with the within the portfolio and <unk>.
Speaker Change: 5% <unk>, 3%, a fair market value, which we believe is one of the lowest levels non accruals across the industry. We remain confident in the credit quality of the portfolio.
Speaker Change: We expect the BDC differentiated reach and scale coupled with its core focus on the middle market credit and focus on shareholder and our focus on shareholders will continue driving positive outcome in the quarters and years to come the.
Speaker Change: The BDC portfolio with a through the cycle portfolio designed to withstand a variety of economic environments and prevailing interest rate levels do this and D. V D C restructuring to align both fees and credit performance hurdles with shareholders.
Speaker Change: Before turning the call over to Elizabeth I'd like to share an observation from an industry call I participated in earlier this week.
Speaker Change: Our presenters are focused on trying to dissect the causes of Pik interest income and specifically, whether <unk> signalled portfolio distressed that can manifest itself in the quarters to come I found the results to be confirmatory of our understanding but wanted to offer this anecdote to the audience.
Speaker Change: The presenters analyzed the presenters analyze a large pool of bones and noted that of the loans reviewed nearly 60% of those loans had a pick component during the fourth quarter of 2024 that did not have a pik component at the time of the original underwriting of this pool of loans with modified Tech EBITDA experienced a negative CAGR of approximately 20% and loan to.
Speaker Change: Value substantially increase and at the time of the original underwriting.
Speaker Change: We regularly get asked about our pick income and why do we feel it is a sign of stress in the portfolio. We will now take the opportunity to call out the bearings Pik interest income during the quarter was five 1% of total investment income and compared to our trailing five quarter average of five 7%. This.
This combination of data points serves as a reinforcement of the discipline and quality underwriting within the portfolio.
Now I'll turn the call over to Linda.
Linda: Now on Slide 15, you can see the full branch at the Nab persons named Matt in the fourth quarter NAV per share was $11 29.
Linda: December 31st like you said decrease absolutely key percent over the prior quarter and increased 1% year after year, our net investment income exceeded the 26 cents per share dividend.
Linda: Hershey are 8% net unrealized appreciation from investments CSI and.
Linda: And FX eight cents and was offset by net realized losses on the portfolio FX that keen sense persevere and that realized loss on the portfolio was predominantly due to this restructure of our investment in <unk>, which is re class from unrealized depreciation.
Linda: <unk> of the credit support agreements increased by approximately $12 million.
Linda: Thereby CFO.
Linda: <unk> increased from $32 2 million in the third quarter to $44 2 million as of December 31st during the fourth quarter. The key airports Oh, yeah. It sounds.
Linda: Great payments of approximately $12 5 million and had 20, great positions remaining in the portfolio down from 28 positions.
Linda: 10 of our 30 year every year, we rotated out of approximately $100 million of 45% at the remaining portfolio in 2020 for the fair value of the NBC CSI increase from 19 million to $19 2 million as of September 30, predominantly due to the rolling rolling maturity of the contract for one quarter.
Linda: With four acquisitions remain our net investment income was 28 cents per share for the quarter or <unk> 30 per share on a pre tax basis compared to 29 cents per share in the prior quarter and 31 cents per share for the fourth quarter of 2023.
Linda: For the year net investment income was $1 24 per share compared to $1 20 per share for 2023.
Linda: Net income in the quarter was primarily driven by dividends from joint venture and platform investments.
Linda: Associated with repayment activity this is <unk>.
Linda: Partially offset by slight decline in interest income associated with the impact of declining yields in our portfolio as base rates are lower at quarter after quarter incentive fee expense is slightly higher but continued to be at a normalized level. Our net leverage ratio, which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions.
Linda: It's like one six times at quarter end up slightly.
Linda: Nine in the quarter ended September 30, and it currently sits within our long term range of nine to one five times. 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 that sometime soon.
Linda: And asset class, including significant level of support provided by the unsecured debt in our capital structure at December 31st our unsecured debt accounted for 1 billion of our funding and equated to approximately 70% of our outstanding debt balances.
Linda: Maintain a diversified funding mix I'm, a charity counterparty and tight and have a limited near term maturities on our debt outstanding with our ladder of maturities extending to 2029.
Linda: BBB <unk>.
Linda: Currently has 323 million of unfunded commitment sharp portfolio company as well as 65 million of outstanding commitments strike joint venture investments, our overall liquidity remains strong with over $464 million of available capital.
Linda: We're well positioned to continue to support our unfunded commitments and new origination activity as mentioned earlier the board declared a fourth quarter dividend, our first quarter dividend at <unk> 26 cents per share in special dividends totaling 15 cents per share, 11% distribution, our net asset value.
Linda: The dividend will be paid in three equal quarterly installments of five cents per share in each of the first three quarters of 2025 and 2024, we continue to be active users of our share repurchase plan and purchased 150000 shares in the fourth quarter for a total of over 650000 shares during 2024.
In addition, the board authorized a new $30 million share repurchase plan for 2025, our focus on share repurchases is one example of BDC thoughtful approach to aligning our interests with shareholders I'll wrap up our prepared remarks with a net on our investment pipeline. Thus far in the first quarter, we have made $81 million of new commitments and funded 50 million.
Linda: With that operator, we'll open the line for questions.
Linda: Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Linda: You May press star two if you'd like to remove your question from the queue.
Linda: For participants using speaker equipment may be necessary to pick up your handset before pressing star one.
Linda: Once again Thats star one to be placed in the question queue.
Linda: And we do ask you. Please ask one question and one follow up then return to the queue.
Speaker Change: Our first question today is coming from Finian O'shea from Wells Fargo Securities. Your line is now live.
Linda: Hey, everyone. Good morning.
Speaker Change: I was looking at her name.
Speaker Change: <unk> another slight mark but it's.
Speaker Change: Sort of a parcel or pik non accrual and I was seeing if you could outline.
Speaker Change: Just the spirit of our Pik non accrual and how that compares to the regular definition of something.
Speaker Change: That you don't anticipate.
Speaker Change: Collection at a full interest and principal.
Speaker Change: Four thank you.
Speaker Change: Yes, Dan Thanks for the call and the way we determined that is when we meet with the investment team that was an investment that.
Speaker Change: Prior test putting on Pik non accrual it paid at full cash, which I believe at the time with a 15% interest rate.
Speaker Change: And we underwrite it where it would where it would pay them I believe half of that and so it's actually performing where we underwrite it and so when it was determined that they were going to start paying cash and they wanted to take a certain portion.
Speaker Change: Didn't believe that we would be able to recover the full value, including a pig that we knew we could with the cash.
Speaker Change: That's why we thought it was prudent to put it on nonaccrual, but it is performing now is it was underwritten at just for a certain period of time, it's performing above where it was underwritten.
Speaker Change: Okay, So let's see.
Speaker Change: It seems like you'll you'll collect the regular principal but not the pick part of it correct and we're gonna they're paying the cash current and we will collect the principle.
Okay. That's helpful. Thank you.
Speaker Change: Yeah.
Speaker Change: The the CSA marks can you run through with that or how much was it.
Speaker Change: Interest rate or timing related versus.
Fundamental.
Speaker Change: Yeah.
Speaker Change: Good question, it's overwhelmingly it was directly related to the marks on Black Angus Steakhouse, which is I'm sure you're reviewing them material Youll see that there is a sequential quarter on quarter valuation mark for associated with that position.
Speaker Change: And a corresponding increase in the value of the DSA. There there was as you alluded to impacts of interest rate and timing, but the bulk of the change quarter on quarter. It is going to associate with the black Angus Steakhouse Mark.
Okay, Great. That's all for me thanks, so much.
Speaker Change: Thanks, so much.
Speaker Change: Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Robert Dodd from Raymond James Your line is not a lot.
Speaker Change: Hi.
Speaker Change: Congrats on the quarter and congrats on the.
Speaker Change: Continued portfolio rotation.
Speaker Change: Got it.
Speaker Change: That's that's 2024, what are you going to do for us in 2025 on the portfolio rotation. So.
Any thoughts on how you expect that to progress.
Speaker Change: You soon.
Speaker Change: Through this year, especially with uncertainty.
Speaker Change: At this point.
Speaker Change: Yes.
Speaker Change: Portfolio and an active market.
Speaker Change: Inactive one though slower one I mean any thoughts on how that might progress.
Speaker Change: Do you have a really good job soap opera.
Robert Dodd: Yeah, Hey, Robert it's <unk>.
Brian Hi: This is Brian.
Speaker Change: Couple of thoughts and then obviously, Matt can chime in as well, but obviously, we're going to continue to try to rotate out of the non bearings names from the acquisitions with a focus on <unk>.
Brian Hi: Trying to.
Brian Hi: Move the non income producing assets.
Brian Hi: To the best of our ability while also trying to maximize value. So that we can get income producing assets, which will hopefully.
Brian Hi: Benefit from.
Brian Hi: ROE perspective, so that's that's kind of.
Brian Hi: Our goal of ours, obviously market timing is everything to your point on the overall market.
Brian Hi: The good news is this is fully ramped they were kind of within our leverage targets and so if there's not a lot of deal flow coming in there is typically not a lot of repayments at the same time, so it's relatively.
Brian Hi: Easy to manage from that perspective that being said as Matt alluded to in his comments, we do have a decent pipeline of.
Brian Hi: Of new opportunities and expect to continue to originate.
Brian Hi: Insistent with our strategy previously.
Brian Hi: Thank you.
Brian Hi: One on just kind of the comments about the uncertainty.
Matt Floyd: But Matt.
Brian Hi: We pulled back at me.
Matt Floyd: Yes.
All the economic metrics, but the overall economy look good right now.
Matt Floyd: Obviously tariffs.
Matt Floyd: Starting to be implemented.
Matt Floyd: Cost cutting et cetera. So can you give us any color on like where you have.
Matt Floyd: Exposure to those things I mean, you have some of that.
Matt Floyd: Transportation businesses, you have some more of them.
Matt Floyd: Et cetera, and then a lot of services, obviously, but.
Matt Floyd: But how much of that in the services side is exposed to government spending how much of that.
Matt Floyd: But the hard goods are exposed to tax any any color you can give us there.
Matt Floyd: Yeah. So.
Matt Floyd: We're pulling out the playbook from several years ago kind of running these analyses on the portfolio.
Matt Floyd: Ordinarily for all of Us if not the first time, we've done it.
Matt Floyd: We've done that kind of an initial frankly.
Matt Floyd: Perhaps to the team for proactively organizing some efforts around this analysis, our prelim indications into somewhere between 60 and 75% of the portfolio will be unimpeded by regulatory uncertainty.
Matt Floyd: And then I think the balance is going to be a sliding scale, depending on exactly what the underlying issuer dies and exactly where they are operating.
Matt Floyd: Obviously way too early to say in terms of where we're headed from a portfolio perspective, we do have and I'm sure. Many managers do we have our kind of top our top hits in terms of where we think kind of the 15 issuers are that might be the most impacted and as you can imagine we're staying in contact with them on a more regular basis, but certainly optimist.
Matt Floyd: Take that well managed businesses owned by relatively sophisticated.
Matt Floyd: But equity firms are are going to be in a position to modify their cost structures and adapt to a changing environment.
Matt Floyd: Perhaps equally as important is just the opportunity for net deployment on a go forward basis.
Matt Floyd: And that's where we've really seen a lot of uncertainty you know private equity firms we've talked to.
Matt Floyd: Early in 2025, elicit a slate of probable sales of their portfolio companies.
Matt Floyd: I would venture to say that that is kind of shrunk into a trickle in terms of where people have their heads now from a from a sales process perspective. So it's just a broader theme around uncertainty and we're obviously going to keep our ear to the ground on both fronts.
Matt Floyd: Got it thank you.
Speaker Change: Thank you next question is coming from Casey Alexander from Compass Point. Your line is now live.
Speaker Change: Yeah, I just wanted to ask.
Speaker Change: I'm, maybe asking the same question in a different way, okay, given Matt your comments regarding the.
Speaker Change: You know sort of uncertainty in the end the and the lack of of kind of deal proposals.
Speaker Change: Is it fair to think and actually fee and other income had a pretty good quarter in the fourth quarter, but is it fair to think of fee income as you look out across 2025 is likely to be.
Speaker Change: Flat to down as opposed to I think a lot of people were thinking it was going to be up in 2025, because I thought there was going to be very robust deal activity.
Speaker Change: Yeah, It's a fair question.
Speaker Change: Wouldn't say that it's going to be flat to down I think that our our current expectation is again, it's going to kind of be flat to flat and the reason for that is just the broader maturity dynamics within the overall portfolio and so while you may not see the OID acceleration associated with upfront fees. When I do think you will what.
Speaker Change: Yeah. This is here we are in February forecast in the whole year.
Speaker Change: Well my gut tells me that we're probably going to see some more activity with respect to amendment fees extension fees those sorts of things and so what you may lose from an OID acceleration perspective, you're probably going to make up from an amendment fee perspective.
Speaker Change: That's my gut in terms of where we are now of course, if if M&A activity picks up and then the reverse we will also be true, but with the kind of fully invested in seasoned portfolio. That's our operating base case right now.
Speaker Change: Well I mean, while you're on the phone you could take a crack at 2026, if you want to so.
Speaker Change: [laughter].
Speaker Change: But like I said that that fourth quarter number was a it was a bit high was there was there a one time or a single deal that contributed to a little bit higher fee and other income in the fourth quarter than we've seen in previous quarters I would say the answer to your question directly is yes, there was the transat.
Speaker Change: And that did have a more substantive fee component to it in the fourth quarter and I would tell you that.
Speaker Change: It did create a mood and outlier dynamic and so if you were looking for modeling purposes for the forecast that would suggest that you use kind of a trailing four quarter average as more of a baseline.
Speaker Change: Thank you very much you got it.
Speaker Change: Thank you we reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
Speaker Change: Thank you Kevin and thank you everybody who participated on today's call. Please stay safe and have a great day.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day.
Speaker Change: Thank you for your participation today.