Barings BDC (BBDC) 10 Aug 222022 Q2 Earnings call transcript

At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended June 30, 2022. [Operator Instructions]. Today's call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section. Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows.

these those reasonable, projected believes differ results company from materially in the statements actual are could Although forward-looking statements. based as uncertainties those report on are subject Forward-Looking Statements titled statements on company's assumptions, and underlying These annual Securities quarter the and the for year Risk to Factors numerous fiscal the Exchange the Form XX, ended and XX-Q under June on and disclosed including the report Form in ended risks the quarterly filed XXXX, Commission. each XX-K and for sections December the various with are XX, XXXX, Barings law. BDC obligation or update by forward-looking revise any undertakes no required statements unless to time, Chief this to will of over call Eric Executive At Lloyd, turn Barings I the Officer BDC.

We call. be for of the Thank posted you appreciate quarter Investor you, our operator, Please is section that we'll call, joining earnings today's and referring today's to XXXX on Relations throughout second everyone. morning, that note website. us presentation our good

call by the Head I'm joined Ian and Capital Bryan Jonathan High, BDC's Financial Bock. President Private Global Officer, Co-Portfolio Barings Finance, Solutions Chief today, and of and Baring's of the Fowler; On Co-Head Manager; BDC's

quarter but details high-level typically and in we Bryan and the quarter. John results about I'll comments moment, second will our As a start Ian, off portfolio some review do, of with

fears uncertainty, Let's of X% prices increasing end both begin QX to premiums, respectively. specifically also economic from spreads were overcorrection. the risk the July syndicated Barings with potential prices XX, the of and increased not X% a broadly tied and through significant the and market Loan equity BDC Fed down With loan macroeconomic backdrop due shown of on Slide underlying presentation. X increased inflation to immune from

to quarter factors. opposed highlights spread on tied $XX.XX, value X. to of market to fundamental Looking down prior the per credit-related factors share to at unrealized widening asset driven write-downs X.X% as was macro due and $XX.XX compared primarily second Net quarter Slide

increased fee includes $X.XX result to income $X.XX in which fee gains income look-back and and share as the to investment last as to fee incentive per elimination shareholder-friendly and our compared our income as per Our feature, incentive net the interest a realized structure, specifically quarter unrealized well increasing losses. due share of of

of investments, we was the of million had in new Regarding and gross offset originations quarter. prepayments. $XXX $XXX This second sales million by

basis. basis value added well in a asset as and Our highlight focus our MVC in we portfolios portfolio from and by support nonaccrual. benefiting will are the with perform MVC credit the on new quarter to nonaccruals the the select cost protection later, of total while agreement. fair shareholder Ian investment assets, no continued portfolio X.X% on loans total, second to X.X% sales the with and the our maximize In restructurings continue on a on value Sierra Sierra and acquired

Additionally, our to million $XX continued the share, with of repaid were principally on in quarter. of second income per of on $XX at in a $XX were million the to offset Slide a under losses yield Realized of X $XX of moves, foreign in Net the was currency both from $XX.XX. X income million, summary assets strong corresponding par facilities. with first our assets unrealized higher of $XX million borrowings quarters. as a $XX for Board declared up that credit total result FX a result associated a investment our spreads. quarter and mark-to-market result drove on million the higher depreciation primarily our net unrealized and depreciation the investment equating quarter, performance $X.XX previous quarter-over-quarter asset investment an third of net quarter highlights outlines value financial dividend X.X% In to million

to expenses target lowering cap our leverage and unsettled of eliminated depreciation, liquidity to well per investments net steady fee of result and X.X increasing short-term us opportunities to share. cash, our which X.XXx. position allows in the investment sponsor unrealized clients Net transactions, the income present a market fee X.Xx, towards end leveraged update which our incentive Barings leverage, of call quarterly investment with existing look remain an is on to of the debt was As further is the over the as This portfolio. lower now $X.XX and toward I'll incentive of themselves that currently to attractive as uncertainty. economic the investment face partners Ian turn provide

Thanks, good Eric, and morning, everyone.

that If additional activity details the you Eric X, on investment to can see turn mentioned. you Slide

$X Our gross increased million. repayments fundings offset basis of by million, $XXX with a in and net on of $XXX million by portfolio middle-market the quarter, sales

XX included platform delayed and $XXX investments and follow-on of loan $XXX totaling fundings. million middle-market million New new term draw investments investments

unitranche widen the that underwriter result I'm welcome potential private it to may spreads widening We emerging capital. have investment investment heard competitive also million show you XX. spread capital cross-platform we a fears likely have who tight Turn pleased is spreads credit across see have market continue reference economic a to said, so of long-term widened. outline particularly That we Slide slightly core degree the more to private upward data quarter syndicated effect investments you continue dynamic compared at outlined has those to middle-market of in XX Many much our winding $XXX return, when a the broadly updates began quarter. to and spreads, had discipline play and spread across as their spreads red. in to benefit public loan in in for the me and of are of investment lagged Notice that net asset flexible easy ever a to the Slide transactions. in classes on see category as structure, each which trend.

focus I'll we shown On outline XX. the class, footprint. keeping and investment they the light that asset across occur. our patient in documentation improvements June investors. activity Slide from these your to slow components see origination years in XX, but June of our covenant portfolio do you'll pricing portfolio tilt of continue changes that Slide on XX remains transactions XX. underlying loan high, March are on these key While And bridge many discipline in see remain also this towards gradual, a of investment to breakdown XX A key on is In

and and As portfolio, our portfolio discussed as categories revenue middle-market in of to terms of which we Income have in well legacy fair in contribution. our are the The of the our on terms remains the as our MVC up cross-platform XX% past, this is key slide core portfolio, portfolios It goal the of investments. details XX% Barings-originated provide makes Capital Sierra our the focus of continues portfolio investments middle-market at value grow. portfolio to and total of

exposure middle-market X.X%, market amongst companies a of approach X% quarter investment reflective diversified XXX geographic Our of our is heavily lien Underlying with last Barings remain yields obligors of across portfolio weighted the diversification on regions. boring portfolio beautiful is X.Xx APAC originated of up and our leverage U.S., mail to and Europe first from average credit.

draw and assets middle-market quarter. the MVC complement reference Two In investments. our to addition of legacy on million portfolio Sierra to $XXX investments to $XXX and core assets we from Sierra MVC frame in last Barings wide investment portfolios, our and X upon of remain of with million nonaccrual, exposure, cross-platform continue unchanged

are the total mentioned assets are of fair as by which credit of covered X.X%, Barings. support value a percent respective agreements all nonaccrual previously, As with

across liquidation repayments MVC date, portfolios $XXX both $XXX ongoing. onboarded of of Sierra generated million portfolios. those on X remain redeployment To efforts Our assets and the we've Barings and from million acquisitions.

portfolio Turning to the directly portfolio. are to no terms the cash during modifications of No quarter. total our the loans originated nonaccrual Barings the had and Barings debt payment investments material on

comprised debt equity of XX Sierra lien. lien a component investments, secured the portfolio XX% further The of which portfolio Note, made from breakdown XX%. of total senior combined is the up down XX% seniority core lien, second total first Slide Barings-originating MVC Our to lien is mezzanine provides portfolio and assets. investment a portfolios first now brings portfolio perspective. of first the the are

are XX. Our top Slide on investments XX shown

my level highly equity instead sponsors support XXX XX summarize Capital, the conservatively of of top the industries. new overall thought with net portfolio. industry a is from beautiful portfolio market I'll value. uncertainty, collateral regard and with portfolio total diverse The to of of remains expect selective With XX% favor most investments represent inside portfolio, large Business asset-backed Our comments and the boring an existing we the our spread backed patience a an is Recall favors largest investments. importantly, pricing Eclipse be and investments liquidation private of macroeconomic is to XX that loans investment investments total perspective well investment, structured simple largest across investment with X.X% of by discipline. as increased

there sponsors, incumbencies investments. well us this and portfolio U.S. as be universe a of portfolio to to growth providing of certain existing circumstances and creates lenders will capital set with companies. patient strong Our distressed sellers our of also be stressed stress as need sponsor set both is European liquidity, our distressed in and and believe private allows across where I

frame across base acumen, on patients over Jon in opportunities. allows I'll now know stack color provide to me the Our as capital returns. reference to results. drive the us additional investment we both wide I of confidence financial turn the and future these have gives this investment capital And target attractive the our to underwrite and flexible call to

Slide to XX. turning Ian. Thanks, And

Here's of per second NAV bridge quarter. full the the in movement share

net $X.XX losses Net while decrease our income on investment share. by totaled Our portfolio per drove per of $X.XX currency realized a and $X.XX dividend unrealized per depreciation share, investment exceeded share. our transaction our foreign

sheet credit price Near CLO or on the this, Sierra our tied was saw $XX you equity notably, total can quarters. shown majority tied are And total million rates. underlying Additional of the depreciation XX, million, in see spread legacy movements, price cross-platform $XX $XX portfolio agreements portfolio net a quarter, and to result the credit of $XX to and X discount of in venture. million. bottom approximately the second $XX total details rates last investments to and attributed the positions balance Sierra million approximately that XX of the Slide and unrealized as MVC of Slides of decreased performance the million widening. for Slide was predominantly had this a show $XX Of million to the Of XX. income which million also unrealized while support $XX XX depreciation attributed statement the on with our increasing total joint depreciation depreciation depreciation

million level is we've fee the balance per equity on high timing resulting was investment As income total And our and from for from at was portfolio. elimination debt and the $XX after XX, discussed, unsettled quarter the given the perspective increased incentive transactions. investment of as this the a artificially sales, share investment to asset by sheet in a on Xx well increase income marks equivalents XX, for as driven total net income unrealized to although certain X.XXx cash June of adjusting cash, $X.XX Slide

Slide to Turning XX.

currently mix impact And million debt the draw delayed in declared compared leverage are fund how investment took And both continued have of has a meet while can the can funding venture available distribution upon, investments. $XXX using X our third to unused portfolio to the to match which how the over available Slide public of million the commitments bank our as our of liquidity profile table per advisor last Barings remaining net $X.XX to and debt our And of You quarters. X.X% private called our ties and maintaining of quarter secured the our the to capacity the diverse term shows markets, of XX, shows our borrowings have you asset of to of and reliance to has XXXX, see the asset as issuance on announced mentioned, The $XX over companies of the XXXX class. we jumping $XXX and diversify XX, portfolio seniority each our in Slide our million decreased see to shown on our terms balance asset net sheet our debt leverage assets. our of the of of Details with evolution commitments Barings unsecured entirety against mix, BDC and to capital our end cushion as share commitments well loan these dividend to joint we since Eric Slide XX paid regulatory limit. if Board value. BDC. on as dividends updates commitments. our of

spreads increased of many XXX Now Rising B spreads XX, classes for LIBOR XXX from as shows across of plus spreads Said B basis private improved in turn rates also of asset for as loan basis outlined, met investment markets a less alternatives depiction graphical the up investors result points, BBB, quarter and And classes. nominal with who hurdle demand the a assets. single definitely, be with And private saw markets value all tend the improved base risk-free which often migrate fears last relative their me reference, stagnation to the LIBOR demand exotic a rate. in plus we to BB across are as or Slide towards can Ian for to rising asset stagflation. falls return liquid public quarter. points objectives across correlates face when traditional liquid have of and

liquid our this often to spread premium fear lending premiums assets shown premium in markets like Notice and maintain this on relative as to quarter outlines XX, into liquid on the ourselves not our prior priced premiums credit actual fully those which to cycles. the the and public spread to rising relative was we managers of into to loans Slide over investment new speak that were fell the committed result, investment widening. the to given repriced translates liquid in illiquidity a calls, need our investments is As second how strict in benchmarks. caused pricing loans spreads by our discipline, And originated direct credit in results illiquidity

profile. comparable all-in equity an million the points, at premium at certain basis BDC Excluding of liquid Barings deployed basis same market represents risk $XXX XXX point spread investments, indices an to XX which spread

we a investment which However, forward quarter, represented have we All-in million market will in to model But deployed premium both indices which look in expect to the positive previous investment basis pipeline, at transactions And a pricing same comparable spreads spread see XXX Barings as points we Ian said, XXX of drive in improvement basis $XXX at an point spread higher. risk as demonstrate which we pricing both. spread risk increased income as and in long-term all-in at increased the profile. define the discipline benefit. our BBDC income new transactions new premiums, will to investment And performance. patience BDC, liquid

$X.X or loans. Private loans. average secured European cross-platform XX% Pacific Finance is in are first and steady investments. far weighted which $XX with asset XX, which previously summarizes XX% senior was our funded. Now XX% The X investment these Barings approximately investments, approximately a lien predominantly the committed during with to and compared quarter our remarks of wrap And last of Global remained new quarters, draw million of I'll are third new also investments The prepared and of funded and Slide have new margin the $XXX million The and are investment so X.X%, $XXX delayed pipeline. on term investment our we've origination originations. XXXX, pace secured is of Asia billion senior probability-weighted activity closed pipeline basis, roughly of new million commitments, commitments, first lien current

closing our for our based all to in this turn a is on Eric. estimated As over rates now I'll expected investment reminder, deals pipeline. it pipeline

Jonathan Bock Chief BDC will I of the assume highlight Jon. the you, a of to done recognition September the BDC of Effective a Jonathan Barings Chief work become approved Officer, to Thank that Board want on title Lansberg BDC. promotions I'll BDC's Chairman become take X, behalf moment dedication and in shareholders. and their and Barings to Executive share Executive the remain of BDC Barings the the number of Barings will Fowler line I'm Officer BDC's management Board's will the grateful very for will operator, Chief we'll BDC. questions. and open Accounting shareholders. President become of Barings With I remain Elizabeth the leadership the team, that, the the Chief Officer. confidence Financial for Officer, and Murray BDC's Operating Ian

[Operator Instructions].

line Our first of question the from Jefferies. Joseph Kyle with comes

the before with and dig congratulations Start on to Elizabeth promotions, the it. Bock, we into

for repayments we -- terms this Let cross-platform. on has And X then increased of rotation portfolios, questions think start should as volatility originations, your me there? a does we towards about outlook think acquired the potential so obviously, impact just how about in --

-- XX%, at. you've And we're cross-platform which expect I'll the start with level in I is seen we've the just outlined give right take, or around past. to same of as about speaking, generally investment see you think can where

And of very ourselves repositioning or active terms velocity of so a either in number those on And velocity prepayment we're acquired we're of of or out to additional see is reason importantly, doing the investments so an we're continuing loans. uptick. those in investments, the

And with to as of surpassed you the that and so expectations. really in has the that off Sierra, coming roughly expect our $XX that you portfolio future saw can of million see last performance quarter

it. your rates really debt and middle terms a in that for terms a into and bit, pick And trends higher board? sense margins levels REV want portfolio credit give servicing you just for for EBITDA then have Got and to guys of obviously, in underlying just given just brain almost of you're digging within with us and of companies higher growth of kind the Sierra. portfolio companies cross-platform, your But the across market, MVC seeing portfolios and

protections support attractive. came to Ian portfolios, result portfolios or lateral I'll to lobby shareholder directly unique underlying the only stagnation more those credit speaking, acquired two our ability the find the we alignment also in patience and of start out and give acquired the to though, it that is but to portfolio. the over Barings originated even But speak which confidence not and do time a added folks investors agreement, environment. so have performance continues a the all-in the the portfolio. of frame to What on stagflation Ian and with to But proper more generally the the face assets, work importantly, credit Barings, can from you to are to right, as relates still Barings do will very is over that

Yes.

of done of and portfolio, the and last a couple really mentioned obviously software, portfolio services, rates earnings focused I we've of going quarters BDC defensive XX% our professional of includes most companies services, financial managed rising I of services, last which So terms input the wage And complex, lot call, more service our portfolio, the sectors, info inflation. all in through work in around proactive inflation, the IT this at are think services. on cost

So cost light have manufacturing, more niche high-margin where and impacted it's inflation input light more really we manufacturing. versus do manufacturing, not by assemblers heavy

feel the portfolio, able I about revenue So see strength they're growth, good businesses cost given the very a those of through number of industry -- still the leadership pass fundamental the those it's increases. those businesses and way We of the businesses, the in value positioned. just to

Now but lagged in there a little be of through putting and that increases, few those, a that degradation we've have have terms minority. a margin on would been seen price

Our Finian Wells next line of Securities. O'Shea question from comes with Fargo the

Kyle's of on us remind follow-up And of you if for a there. can Is state a question that Just union on give water? out the applicable? above how the you sort part settle, of to Can that for that MVC. CSA ultimately us plays

Yes. Sure.

just you in you to think were specific, utilized X right? would that the we continue moment, if if future years future -- investment that's of we'd the close payment, fast -- liquidate CSA, Fin, the and be about changed. forward payment given So present value at X fully value would through work right, the everything to of going nothing as to million were So to you this $XX if be where

of right, is support depreciation because rates the present risen, lower have has that rates a see the discounted a back agreement right, of value level essentially future reason to payments, you rates. as value discount However, credit present simply as the rising result and on a

payment strong also managing good as both of of us. And repositioning so fiduciaries capital to a with exit for on being go-forward there and while time, that's really basis, place for over made. in we future, towards manage or exit high the an investments premium credit support support credit degree attractive that we very our But upside investments in a with continue But equity math. we in a remain the you and addition number eye without the confident trust to in existing will

that nothing to value. close of today they present, you back little which see occurred, just If the kind be quarter-over-quarter. were why to it to fair and had down stop the bit you'd is But has million $XX you assume a then discount

Our next question of Alexander with Compass Casey comes Point. from line the

the Yes. for personnel I the qualified that And now somebody knowing let speak we highly take capable in seat. great the changes. analytical we me throw and have in think my community, all on CFO I comfort in congratulations

all So Jon just Congratulations. couple very I messing And Jon, you. think questions. deserved. have I well a Elizabeth. with it's and of

XX, line a with -- of one million Or is that new it, in set That is Going structure? sort a that's XX. to an written How particular number the investment articles equity has in some bank. scientific. that loan Is had just name core term that Slide that $XXX an I noticed of because one a arranged it's in entry kind is news? a that's top up for about been equipment finance structure? a of

be much that tied our outline is an as partnership then I machines, I'll the a of to that But a return. ourselves too as with and structure parent try well strong -- equipment a that very and underlying individual but large going successful don't you're speak investment go know is to nexus lessor with companies the net with And fairly about both have right, amortization done financing. here, I equipment what Sure. group. would schedule that companies, to at portfolio as and we because strong in has been clearly familiar

Can investments going point my those value sleeves would fair movement XX. the the yield was is sense value yield of bespoke-type where more this less of cross-platform look of you I'm and and you would the by of math in nature. a that at slide, Rolling of have each the just X some to of if Slide we sleeves has be give it there, at up than I a you If really be. are favorite to about were couple -- of other rate question. -- which us that quarter, X many what guessing fixed in more That's to the talking end guess it a fair that today investments, at

we want the you'll the on increase if can cross-platform then perhaps you go And for and will of points? floating a bit rate to there to little you Ian quite floating to on to everything investments. increase. the in of Bryan, provide a right, as we as fact it potential The speak Bryan, the also yield result. to color rate that But relates focus on, want those what there has components do cross-platform majority are a do bit a of

Sure.

I debt rate. in a of the portfolio, think of traditional are lot floating instruments sort on the them

their would if you LIBOR of see about And is the effectively. clearly, Eclipse -- a portfolio, some there. in think So floors increase you benefit But away. That's is on that equity there's column. going return

takes of lot puts what I there So as a there's Casey. and say, would

you're think in I So that. right

just other columns much rate floating across the nature more X The board. in are

So platform still percentage. the so probably would investments cross-platform rate But say lower a would of the as just the on well, more side majority move they cross are floating that as I than the whole.

-- MVC X about on much of the move degree You quarter-over-quarter? you have and sleeves, how some middle SIC market, they think the -- would on

much. move wouldn't MVC

of -- rate fixed there. very bit little fixed small. it's a granted, there's more result, But rate a As exposure

so the you'd see predominantly that net rate, on course, floating portfolio benefit Sierra Of there.

the line question of next Robert Our with from Raymond Dodd comes James.

the echo me let And everybody on the new congratulations positions.

bit. with moving much to But a the be this potentially. might he as if calls winner, Eric doesn't think to I on earnings means about anymore question deal have

I was of It's in exposed reduction But $XX or not that again, it So any you do $X.X I in in to fair said, the fast a asset. part quarter. is JV, within you market repayments generated income. that dividend million given repayments give mean expect to have million Sierra, chunk positively their -- that. within i.e., I A to lot rates. this mean, size of a -- a are down Can been as floating wind seems loan there to of it us think you Sierra it that how sales

On some the it's the decent got in potentially prospects hand, other midterm.

with start I'll that. So

our way both a with the than effectively lender efficient partners. JV First, the put was place than was what to Barings it levered, less in was able structure

a So made ability effectively out. backed to perspective it design pull from that you effectively that have collateral structure more by loan all dollars to much then financing the efficient a

they're add buy yield then right? liquid Just better it over that to to really order collateral a to and fairly of Robert, terms In the investments venture And simply diversification, approach reason hope how our profile. the it to why, down, not to because the That's is is will joint pays in things. lever wind we of move and quick. that here expand choose frame to reference do

are And is rapidly generated investment net invest business less there opportunity collateral you and volatility. yield higher to and if to to But to move continue fairly sets then which and X% start the great. redeploy. us to profiles return, tied price expect look return much Bryan's and underlying net an -- business, with X%-plus-ish it's the across it so can you the across Ian's Yes,

to I was well. a either fan internally the QX Sierra still mean looks obviously, average Understood, not mean, down are dividend I those businesses just a almost at and looking marked Eclipse, businesses, we the investments. those income equity been I mean, the from some am brings bit of at from big returns to I these to onetime little XX% dividend, some I benefit which sustainable things Rivers QX? is and kind If XX%. a they benefiting at maybe of those. maybe, quarter, Or up? in but are ticking generating cross-platform on it i.e., very dividend rate high almost potential this Eclipse, of returns Thompson have or mean, currently return be floating to me sustainable for distributions ex other look as the those diversification, with

moment. take for I'll a a Eclipse here

macroeconomic when of uncertainties increase. benefit the have you there, So

So hold outstandings. two, do folks loan to tend

the book high, not and remains The number interest so partner team ability only are only And very, very, ability good, Cap it's their in of is loans team their the holding the Solutions performance with Eclipse has for at growth on of been and the increased. solutions Bryan very credit strong because the because a terms out bespoke transactions partnership of longer. has income to Barings, folks provide very and that their

also occur, And higher, a could when as you -- but both borrow. returns bias through people so stresses only to benefit turn through assets I'd to their say rate an not growth benefit underlying

And so starting you much positive. right? on Across rates, of a network, to with of We net that's substitutes for IG been would liquid have markets. us, spread very, the of increasing result compete increasing which return or rest also the base expect is the to very a what higher as find you're

And both on forward well looking and contribution our as private markets as from so lending interest businesses joint we remain ventures. very income cross-platform direct and positive the the

would end closing to call to question-and-answer and turn I back for have reached Ladies we Mr. the Eric remarks. like of this today's over gentlemen, session. Lloyd

the a done on put very on and who you forth and Please you, today's operator, day. thank success. management stay have great Thank years, the I'm and of promotions and we've you, in confident participate you last of build team the great call. safe, what X that I'm proud we with to Like all will that new

conference. today's concludes This

for time. at of your You Enjoy participation. may day. this the you disconnect Thank your your rest lines